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% […]
retirement accounts
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 […]
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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% […]
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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, […]
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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 […]
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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? […]
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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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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 – […]
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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 […]
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IRAs and Medicaid
When it comes to IRAs and Medicaid eligibility the question that gets asked is, “How does my IRA affect my eligibility for Medicaid?” Many states share similar guidelines when it comes to exempt and non-exempt assets in IRAs. Essentially, it boils down to this: if the IRA is not in payout status (the IRA owner is not taking required minimum distributions) then the assets in the IRA are included (non-exempt) in the determination of eligibility. However, if the IRA is in payout status and the owner is now taking required minimum distributions (RMDs) the total amount of the IRA is not included, but the annual income from the RMDs is.The same would be true regarding 401(k)s, 403(b), and other qualified plans that may require RMDs after age 70 ½. There are some states (Illinois for example) that treat IRAs, a 401(k), and pensions as exempt. Check your state’s laws to […]
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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!
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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 […]
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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 […]
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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 […]
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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 […]
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2 Good Reasons to Use Direct Rollover From a 401(k) Plan
If you have a 401(k) plan (or any Qualified Retirement Plan (QRP) such as a 403(b) plan), when you leave employment at that job you can rollover the plan funds to an IRA or another QRP at a new job. Listed below are 2 very good reasons that you should use a Direct rollover (also known as a trustee-to-trustee transfer) instead of the 60-day rollover. Image by aloucha via Flickr A 60-day rollover is where the former plan distributes the funds from your account to you, and in order to make the rollover complete you must deposit the entire distributed amount into the new plan or IRA within 60 days. Reasons to Use a Direct Rollover You must complete the rollover to the new account or IRA within 60 days. There is little if any leeway on this 60-day period – and though it seems as if this is a […]
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Re-Converting Your IRA
Image by accent on eclectic via Flickr Okay, so we’ve covered Roth Conversions – where you distribute the funds from your traditional IRA to a Roth IRA. Then we covered Recharacterizations – where you can “undo” the conversion by moving all or part of the converted funds and the earnings associated with it back into a traditional IRA. The end result is that, for those funds converted and recharacterized, from the eyes of the IRS, nothing happened to the account (except that you may have put the money back into a different IRA). So, if you went through a Roth Conversion and then Recharacterized it, the assumption is that you wish to eventually re-convert those funds to a Roth account. When are you allowed to do this? There are two limits on the Re-Conversion of funds to a Roth account once they’ve been through the Conversion/Recharacterization wringer: This first limit […]
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Lifetime Income Disclosure
There is a piece of legislation hanging around in the Senate that makes a good deal of sense, and really shouldn’t cause too much grief to implement in the long run. This particular bill, introduced by Senators Bingaman (D-New Mexico), Isakson (R-Georgia), and Kohl (D-Wisconsin), is called the Lifetime Income Disclosure Act, and it proposes that the administrators of ERISA-approved retirement plans provide for their participants a disclosure of the “annuity equivalent” of the total benefits that each participant or beneficiary has accrued within the retirement plan. What this means is that, for likely the first time for most folks, an estimate would be provided to them with their statement that outlines what that lump sum means in terms of real, annualized income replacement in retirement. Specifically, the government would establish certain assumptions about the annuity value of a lump sum, given the participant’s age, and from those assumptions a […]
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 
A Medicare Owner’s Manual, is updated with 2020 facts and figures. This manual is available on 
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Sterling’s first book, Lose Weight Save Money, can be 
An IRA Owner’s Manual, 2nd Edition is available for purchase on Amazon. Click the link to choose the 
Jim’s book – A Social Security Owner’s Manual, is now available on Amazon. Click this link for the 
And if you’ve come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed “advisor’s advisor”.