This is the second post in a series of posts that explain the mechanics of a 401(k) plan. As mentioned previously, there are many types of Qualified Retirement Plans (collectively called QRPs) that share common characteristics. Some of these plans are called 401(k), 403(b), and 457. In these articles we’ll simply refer to 401(k) plans to address common characteristics of all of these QRPs. Employer Contributions Many companies provide a matching contribution to the 401(k) plan – and sometimes there is a contribution made to a QRP on your behalf no matter if you have contributed your own deferred salary or not. Most of the time these matching contributions are stated as x% of the first y% of contributions to the account. An example would be “50% of the first 6%”, meaning if you contribute 6% of your salary to the plan, the company will match that contribution with 3% […]
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Mechanics of 401(k) Plans – Saving/Contributing
Many folks have a 401(k) plan or other similar Qualified Retirement Plan (QRP) available from their employer. These plans have many names, including 403(b), 457, and other plans, but for clarity’s sake we’ll refer to them all as 401(k) plans in this article. This sort of retirement savings plan can be very confusing if you’re unfamiliar, but it’s a relatively straightforward savings vehicle. This is the first in a series of articles about the mechanics of your 401(k) plan – Saving/Contributing. Saving/Contributing You are allowed to make contributions to the 401(k) plan, primarily in the form of pre-tax salary deferrals. You fill out a form (online most of the time these days) to designate a particular portion of your salary to be deferred into the 401(k) plan. Then, each payday you’ll see a deduction from your paycheck showing the 401(k) plan contribution. The deduction is before income tax withholding is […]
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How Much Do I Need to Save: Part II
Last week I gave some general indications on how much someone needed to save. We used general percents and some basic numbers but this week I want to actually put those numbers to work. For example – let’s say we have a 30 year old couple that says they would like to have $3,000,000 saved at retirement (assume their both the same age and will both retire at 65). We’ll also assume that they have not started saving yet. Using a 5% compounded annual rate of return this couple would need to save about $2,640 per month for 35 years in order to hit their goal. If we assume they’ve amassed $50,000 by age 30, then they only need to save $2,388 per month. If we use the $2,388 as our savings made at 10% that means our annual income for the couple is about $286,560. Using the same amount […]
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Roth 401(k) Conversions Explained
Earlier in 2013, with the passage of ATRA (American Taxpayer Relief Act) there was a provision to loosen the rules for 401(k) plan participants to convert monies in those “regular” 401(k) accounts to the Roth 401(k) component of the account. Prior to this, there were restrictions on the source of the funds that could be converted, among other restrictions. These looser restrictions apply to 401(k), 403(b) and 457 plans, as well as the federal government Thrift Savings Plan (TSP). Recently, the IRS announced that guidance was available to utilize the new conversion options. As long as the 401(k) plan is amended to allow the conversions, all vested sources of funds can be converted, even if the participant is not otherwise eligible to make a distribution from the account. This means that employee salary deferrals, employer matching funds, and non-elective payins to the 401(k) account can be converted to a Roth […]
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Retirement Plan Contribution Limits for 2014
The IRS recently published the new contribution limits for various retirement plans for 2014. These limits are indexed to inflation, and as such sometimes they do not increase much year over year, and sometimes they don’t increase at all. This year we saw virtually no increases for most all contribution amounts, but as usual the income limits increased for most types of account. IRAs The annual contribution limit for IRAs (both traditional and Roth) remains at $5,500 for 2014. The “catch up” contribution amount, for folks age 50 or over, also remains at $1,000. The income limits for traditional (deductible) IRAs increased slightly from last year: for singles covered by a retirement plan, your Adjusted Gross Income (AGI) must be less than $60,000 for a full deduction; phased deduction is allowed up to an AGI of $70,000. This is an increase of $1,000 over the limits for last year. For […]
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Why Diversify?
Remember Enron? I think we all do. Enron was once a powerhouse company that saw its empire crumble and took the wealth of many of its employees with it. Why was that the case? Many of Enron’s employees had their 401(k) retirement savings in Enron stock. This was the classic example of having all of your eggs in one basket and zero diversification. Let’s say that the employees had half of their retirement in Enron stock and half in a mutual fund. Enron tanks but their mutual fund stays afloat. This means that they lost, but only lost half of their retirement, all else being equal. Imagine if they had only a quarter of their retirement in Enron and the remaining 75% in three separate mutual funds. Enron’s demise is only responsible for a fourth of their retirement evaporating. This could go on and on. The point is that when […]
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Avoid Awkwardness in the Afterlife–Confirm Your Beneficiary Designations
This is a topic that I cover with all clients, and one that I recommend you for everyone with retirement plans and other accounts with beneficiary designations. Too often we think we have the beneficiary designation form filled out just the way we want it, and then (once it’s too late) it is discovered that the form hadn’t been updated recently – and the designation is not what we hoped for. I made this recommendation to a client not long ago. He assured me that he had all of his designations set up just the way he wanted. His wife, sitting next to him in our meeting, asked him to make sure – talk to the IRA custodian and get a copy of the designation as it stands today. A bit miffed about it all, he agreed to do so, and did the next day. Guess what he found – […]
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State Income Tax and Retirement Income
On only a few rare occasions does it make sense to defer money to your 401(k) or other employer sponsored plan instead of a Roth IRA. Those occasions include when your gross income excludes you from contributing directly to a Roth IRA (you can still convert), you are currently at a very high tax rate or the case of when you live in a state where retirement income is excluded from state taxation. Here in Illinois, the current law exempts retirement income from being taxed at the state level. What this means, is that any contributions to a 401(k), 403(b), SEP, SIMPLE and 457 avoid state income taxation. Qualified distributions at retirement are only taxed at the federal level, and then only as income. If you contribute directly to a Roth IRA that money is after-tax money going in. After-tax in this case meaning it’s been already taxed at the […]
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Your Employer’s Retirement Plan
Whether you work as a doctor, teacher, office administrator, attorney, or government employee chances are you have access to your employer’s retirement plan such as a 401(k), 403(b), 457, SEP, or SIMPLE. These plans are a great resource to save money into, and some employers will even pay you to participate! Let’s start with the 401(k). A 401(k) is a savings plan that is started by your employer to encourage both owners of the business and employees to save for retirement. Depending on how much you want to save, you can choose to have a specific dollar amount or percentage of your gross pay directed to your 401(k) account. Your money in your account can be invested tax-deferred in stock or bond mutual funds, company stock (if you work for a publicly traded company), or even a money market account. Your choice of funds will depend on the company that […]
Sterling Raskie, MSFS, CFP®, ChFC®
The latest in our Owner’s Manual series, A 401(k) Owner’s Manual, was published in January 2020 and is available on 
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