Getting Your Financial Ducks In A Row Rotating Header Image

retirement accounts

The Designation Everybody Should Be Aware Of

At some point in your life you have probably started a new job, applied for life insurance, started an IRA or retirement account, or opened a bank account. You may remember when filling out the paperwork that the form asked for a beneficiary – both primary and contingent. This is simply telling the account’s custodian to whom you want your account to go to should you pass away. Your primary beneficiary is the first (hence the name primary) that receives account balance or death benefit. The contingent is who receives the account balance in the event your primary beneficiary predeceases you. When choosing beneficiaries you had the choice of allocating a certain percentage to the primary and some to the contingent if needed. You may have even had two or more primary beneficiaries that you allocated a certain percent of your account to totaling 100% Then you may have forgotten […]

Are Target Date Funds Off Target?

  It seems that an easy fix for saving for retirement for many folks is to simply choose a target date fund. Generally how target date funds work is a fund company will have a set of different funds for an investor to pick from depending on a best guess estimate of when the investor wants to retire. For example, an investor who’s 30 years old and wants to retire at age 65 may choose a 2045 fund or a 2050 fund. In this example since the investor is age 30 in the year 2014, 30 more years gets him to 2044. Most target date funds are dated in 5 year increments. If the investor was age 60 and wanting to retire at age 65, then he may choose a 2020 fund to correspond to his timeline. Generally, the goal of target date funds is to follow a glide path […]

Mechanics of 401(k) Plans – Employer Contributions

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% […]

Bloggers Are Encouraging Adding 1% More to Your Savings Rate

  In November we financially-oriented bloggers have banded together to encourage folks to increase their retirement savings rate by at least 1% more than the current rate.  It’s a small step, but it will pay off for you in the long run.  Given the poor level of savings rate (less than 5%) these days, even this small step will be a big boost for many people’s savings. Below is the list of my fellow bloggers who have written articles showing ways that you can start to increase your savings rate, as well as showing what the benefits can be.  Thanks to everyone who has participated so far – and watch for more articles in the weeks to come! The Journey of $1 Million Dollars Begins with 1% by Richard Feight, @RFeight Give Yourself A Raise by Ben Rugg, @BRRCPA The 1 Percent Solution by John Davis, @MentorCapitalMg Friday Financial Tidbit-What increasing your […]

What You Can Do If Your 401(k) Has High Fees

Now that we’ve all been receiving 401(k) plan statements that include information about the fees associated with our accounts, what should you do with that information?  Some 401(k) plans have fees that are upwards of 2% annually, and these fees can introduce a tremendous drag on your investment returns over a long period of time. There are two components to the overall cost of your 401(k) plan.  The first, and the easiest to find, is the internal expense ratios of the investments in the plan.  Recent information shows that, on average, these investment fees are something on the order of 1% to 1.4% or more.  The second part of the costs is the part that has recently begun to be disclosed: the plan-level fees.  These are the fees that the plan administrator has negotiated with the brokerage or third-party administrator to manage the plan.  These fees can average from 1% […]

Opportunity Cost

Nearly every day in our lives we experience trade-offs and make choices affecting whether or not we’ll do something, buy something or do nothing and buy nothing. Some of us will choose to walk rather than drive, some will choose to pack a lunch rather than dine out, some of us will choose to save money while others will choose to spend it. These trade-offs are what can be referred to as opportunity costs; meaning what we’re giving up in order to take advantage of another availability opportunity. Financially, we make the choices all the time; the choice to dine out versus saving the extra money towards retirement; the choice to not save in our employer’s retirement plan so we can have more money to spend today. These opportunity costs can add up. Here’s why. When a person makes the choice to not save in order to spend for today, […]

Stretching an IRA When There Are Non-Individual Beneficiaries

As we’ve discussed here previously, one of the requirements to enable an inherited IRA to be “stretched” over the lives of the beneficiaries is that all of the beneficiaries must be individuals.  That is to say, none of the beneficiaries can be something other than a person, such as a trust (specifically a trust that is not a see-through trust), a charity, or an estate.  If even one beneficiary is not a person, then all of the beneficiaries must take distribution within five years. But there’s a way around this, and it has to do with the timing of distributions. When an IRA owner dies, there is a key date to know: September 30 of the year following the year of death of the owner.  On that date, the beneficiaries are “set” for the IRA, and if available, the Designated Beneficiary is named.  It is on this date that the […]

The Crystal Ball

Every so often we get asked by our clients or prospective clients which direction the market is going to go. This is always and entertaining question to get – and some of our “regulars” already know the answer. Having a bit of a sense of humor (albeit dry sometimes) I’ll joke with clients and tell them that the day they handed out crystal balls in my investment class, it was the one time I called in sick – and you only get one chance at the coveted crystal ball. Thus, I forever lost the opportunity to predict the future of the markets. Darn. Inevitably, clients laugh and understand the joke – and take away the underlying theme of the jocularity – that we can’t predict the future, especially in securities markets. But this doesn’t mean we can’t plan ahead. So why do we invest? Why do we save for retirement? […]

A Few Facts to Know About Retirement Plan Contributions

As we near the tax filing deadline, there are a few things you need to be aware of as you consider your retirement plan contributions for tax year 2012 (or whatever the prior tax year is, if you’re reading this sometime later). Regular IRA contributions are due by the filing deadline, with no extensions. That means April 15, 2013 for the 2012 tax year. Your contribution for 2012 is considered made “on time” if your payment is postmarked by midnight on April 15, 2013. Perhaps you wish to make a more substantial contribution to a retirement plan – in 2012, you can contribute up to $50,000 to a Keogh plan. That amount is limited to 20% of the net self-employment income, or 25% of wage income if the individual is an employee of the business. Keogh plan contributions can be made by the extended due date of your return – […]

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 […]

Following Up on the 1% More Initiative

As a followup to the 1% More initiative that we had going on in November, I was recently interviewed by one of the participants, Steve Stewart, who blogs over at Money Plan SOS.  Steve recorded the whole thing on a Money Plan SOS podcast, which you can listen to by clicking the link.  He also has a written summary of our conversation for your reading pleasure. Thanks go out to Steve, and all of the other folks who took time to write and record posts in support of the “1% More” initiative!  We reached something on the order of 170,000 blog readers, over 10,000 Twitter followers, and many, many other readers.  Hopefully we have made a dent in the problem!

Once you reach age 70½ – No more IRA contributions

When you reach age 70½, you are no longer eligible to make regular contributions to an IRA account.  A common misconception is that if you are still actively working, this age restriction doesn’t apply.  The reason for this misconception is that this is true for 401(k) accounts and other qualified retirement plans (like a 403(b), 457 plan or other). Another misunderstanding about this rule is that it applies to all IRAs.  Actually, this rule only applies to traditional IRAs – not Roth IRAs.  A Roth IRA has no age restriction for contributions to the account.  As always though, you must have earned income for the tax year in which you are making contributions to the Roth IRA. This age restriction for traditional IRAs applies only to regular contributions – whether deductible or non-deductible.  Rollovers into or out of IRA accounts are not restricted by age.

What is Meant by Half Years of Age?

If you’ve paid much attention to the rules around retirement plans (IRAs, 401(k)s, and others), you’ve probably noticed that there are a couple of rules that refer to ages that include “½”.  So what does this mean?? Well, quite literally, this means 6 months after you reach a certain age.  The two primary ages with “½” included are 59½ and 70½.  So, to be age 59½, means that you reached your 59th birthday six months prior to that date.  Likewise, to be age 70½ means that you reached age 70 six months prior to that date. These two ages are for different purposes and are (naturally) treated differently. Age 59½ The rule using age 59½ is for one of the exceptions to the penalty for early withdrawals from your IRA or 401(k) plan: once you’ve reached that age (and not before that age) you can take withdrawals from your IRA […]

The SEP IRA Explained

(Photo credit: ocean.flynn) One of the more unique types of retirement accounts is the Simplified Employee Pension IRA, or SEP IRA for short.  This plan is designed for self-employed folks, as well as for small businesses of all tax organization, whether a corporation (S corp or C corp), sole proprietorship, LLC, LLP, or partnership. The primary benefit of this plan is that it’s simplified (as the name implies) and very little expense or paperwork is involved in the setup and administration of the plan.  The SEP becomes less beneficial when more employees are added, and there are some additional options available in other plans (such as a 401(k)) that may be more desirable to the business owner. SEP IRAs have a completely different set of contribution limits from the other kinds of IRAs and retirement plans.  For example, in 2012, you can contribute up to $50,000 to a SEP IRA. […]

5 Facts You Need to Know About Your Retirement Plan

Image via Wikipedia Many of us are covered by one or more types of defined contribution retirement plans, such as a 401(k), 403(b), 457, or any of a number of other plans. What many of these plans have in common is that they are referred to as Cash Or Deferred Arrangements (CODA), as designated by the IRS.  These plans are also often referred to as Qualified Retirement Plans (QRPs). Each type of plan has certain characteristics that are a little different from other plans, but most of them have the common characteristic of deductibility from current income and deferred taxation on growth. (Note that this list of plans does not include IRAs. IRAs have certain characteristics that are completely different from QRPs, and vice-versa.) 1. Each dollar you defer is worth more than a dollar. It’s true. As you defer money into your retirement account, each dollar that you defer […]

Which Account to Take your RMDs From

Image via Wikipedia When you’re subject to the Required Minimum Distributions (RMDs) and you have more than one IRA account to take the distributions from, you have a choice to make.  Even though you have to calculate the RMD amount from all of your IRA accounts combined, the IRS provides that you could take the total of all your RMDs from a single account if you wish. With this provision in mind, you could take all of your RMDs from the smallest account, which would provide you the opportunity to eliminate one of the accounts in your list, thereby simplifying things.  By reducing the number of accounts that you have, you could simplify the calculation of RMDs, estate planning, and just general paperwork. However, it might not always work to your best interests to reduce the number of accounts that you have.  You may have multiple accounts in order to […]

Should I Use IRA Funds or Social Security at Age 62?

Image via Wikipedia Folks who have retired or are preparing to retire before the Social Security Full Retirement Age (FRA) face a dilemma if they have IRA assets available.  Specifically, is it better to take an income from the IRA account during the years prior to FRA (or age 70) in order to receive a larger Social Security benefit; or should they preserve IRA assets by taking the reduced Social Security benefits at age 62? At face value, given the nature of IRA assets, it seems like the best method would be to preserve the IRA’s tax-deferral on those assets, even though it means that your Social Security benefit will be reduced. If you look at the taxation of Social Security benefits though, you might discover that delaying receipt of your Social Security will provide a much more tax effective income later in life.  In the tables below I’ll work […]

Calculating RMDs for Various IRA Beneficiaries

There are a few different ways that Required Minimum Distributions are calculated for beneficiaries of IRAs.  The two primary determining factors are: Is the beneficiary the spouse of the original owner? and Did the original owner attain age 70½ prior to death? There are two more factors that also have an impact on the nature of the calculations, although the impact is different: Is there more than one beneficiary? and Is the beneficiary a person or an entity, such as a trust, a charity or the estate of the original owner? Image via Wikipedia Spouse If the beneficiary is the spouse of the original owner of the account, and the original owner died before age 70½, then the rule is that no RMDs are required until the owner would have reached age 70½.  At that time the beneficiary will use the Single Life table to calculate the distribution amount based […]