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retirement plan

Information on 457(b) Plans

The 457(b) plan, sometimes known as a deferred compensation plan is a retirement plan that is generally set up by states, municipalities, colleges and universities for their employees. These plans have some similarities to their 401(k) and 403(b) counterparts, but they also have some differences that individuals with access to these plans may find advantageous. First, let’s look at the similarities. The 457(b) allows the same deferral limits as a 401(k) or 403(b). These limits for 2016 are $18,000 annually for those under age 50. For those age 50 and over, the deferral limit is $18,000 plus an additional $6,000 catch-up for a total of $24,000 annually. 457(b) plans may allow for pre-tax or Roth contributions. Individuals can choose among a variety of funds that the plan offers. At age 70 ½ the plans will require RMDs (unless still employed). At retirement or separation from service, individuals are generally allowed […]

Taxes and the 401k Withdrawal

If you take a 401k withdrawal and the money in the 401k was deducted from your taxable income, you’ll be taxed on the funds you withdraw. Depending on the circumstances, you may also be subject to a penalty. There’s a lot of confusion about how the taxation works – and the taxation and penalties can be different depending upon the circumstances. Taxation of the 401k Withdrawal When you take a distribution of pre-tax money from a 401k plan, the amount of the 401k withdrawal that is pre-tax will be included in your income and will be taxed at your marginal income tax rate in that year. Unless you meet one of the exceptions noted in the article 16 Ways to Withdraw Money From Your 401k Without Penalty, your 401k withdrawal will also be subject to a 10% early withdrawal penalty. For example – if you have a 401k plan at […]

Your Year End Financial Checklist

As 2015 winds down it may be an ideal time to consider wrapping up (pun intended) some loose ends regarding your finances and getting ready to welcome 2016 financially prepared. Here’s a list of things to consider as 2015 comes to an end. Have you made your maximum IRA contribution for 2015? If you have yet to contribute the maximum to your IRA there’s still time. Individuals under age 50 can contribute $5,500 while those 50 and over can contribute $6,500. Individuals have until they file their 2015 taxes or the 2015 tax deadline (whichever comes first) to make their 2015 IRA contributions. Expecting a Christmas bonus? Your IRA is a good place to put it. Consider increasing the amount you contribute to your 401(k). If you’re not already maxing out your employer plan contributions ($18,000 if you’re under 50 and $24,000 if you’re 50 or older) consider increasing the […]

A Brief Explanation of the Thrift Savings Plan (TSP)

I love the TSP and the fund options it offers. Participants (generally government employees and military) have access to very low cost index fund options and a handful of target date funds (L Funds) that incorporate different combinations of the individual index fund options depending on what stage you’re at in your retirement savings journey. I wish more employer sponsored plans mirrored the TSP’s simplicity, low costs and efficiency. Employees may or may not have access to a match on deferrals, depending on their employment class. The TSP has a number of different fund choices available. The G Fund invests in short-term Treasury securities that are specifically issued for the TSP. The principal and interest are guaranteed by the US Government but they are not inflation protected. That is, these funds may have returns below the inflation rate. The C Fund is the common stock fund designed to replicate the […]

Everything But The Retirement Plan!

Conventional wisdom says that when you leave a job, whether you’ve been “downsized” or you’ve just decided to take the leap, you should always move your retirement plan to a self-directed IRA. (Note: when referring to retirement plans in this article, this could be a 401(k) plan, a 403(b), a 457, or any other qualified savings deferral-type plan). But there are a few instances when it makes sense to leave the money in the former employer’s plan.  You have several options of what to do with the money in your former employer’s plan, such as leaving it, rolling it over into a new employer’s plan, rolling it over to an IRA, or just taking the cash. The last option is usually the worst. If you’re under age 55 you’ll automatically lose 10% via penalty from the IRS (unless you meet one of the exceptions, including first home purchase, healthcare costs, […]

Mandatory Retirement Plans

A few weeks ago I finished a paper arguing for mandatory retirement contributions from both employers and employees. Though arguably the paper will not come close to changing public policy on retirement plans, it did raise some arguments in favor of the United States adopting a mandatory savings plan. In the paper I explained that research has shown that individuals risk not having enough saved for retirement. This could be due to employees not having a retirement plan through work or because employees face an abundance of mutual fund options in the plan that they don’t know where to begin. Some of these employees choose the default option or simply go with what a colleague recommends. Another problem the paper addresses is the declination of defined benefit pensions. Such pensions are employer sponsored and funded, thus removing funding an investment risk from the employee. At retirement the employee receives a […]

Should You Delay Retirement?

The question of delaying retirement may arise as you get closer to your “goal year” of when you want to retire. For some individuals’ fortunate enough to be covered under a company or state pension, it can be tempting to retire as soon as possible and collect the pension benefit. The same may be true for folks wanting to start taking Social Security at age 62. Before making the decision to retire or retire early an individual should consider the effects on delaying retirement and continuing to work. This is assuming that they can accrue extra pension benefits for the extra years of service. For Social Security, this would be delaying past an individual’s normal retirement age as long as to age 70. For example, let’s say an individual has the opportunity to be eligible to retire at age 55 and receive a pension of $5,500 per month. However, if […]

Book Review – Pension Finance

M. Barton Waring does an excellent job in his book Pension Finance. The book essentially covers what’s wrong with the way conventional accountants and actuaries think using conventional math and accounting practices to justify the payments (or lack thereof) funding corporate and municipal pensions. A concept talked about at length in the book is the idea of long-term average returns and how many pension actuaries rely on them to determine funding. Mr. Waring would argue that there is too much reliance on the long term average returns thus allowing pension actuaries to fund their pensions with less money due to assuming higher rates of return. Instead, one of the areas that may help the crippling pension system in the US is to get realistic about long term returns and use a combination of a smaller returns, and bigger contributions (among others). The book is heavy on the analytic side (great […]

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 […]

Avoid the Trap

Eating and dining out all the time can drain our money and potential retirement savings without us even being aware of it. We get asked from friends to go to lunch, coffee or we find ourselves skipping breakfast and getting in the line at the coffee shop for a scone and latte. Before we know it, we’re left asking, “Where did the money go?” Or worse, “I can’t afford to save for retirement.” What’s happened is we’ve fallen into the trap – a habit really, but it can be broken and we can relearn. Here’s how: The first thing you can do is to pass on that latte or scone all together. Instead, make yourself breakfast at home. Invest in a coffee maker if you don’t have one, and make your own coffee. Then make a nice meal of scrambled eggs and whole wheat toast, a cup of cottage cheese with […]

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, […]

The Airplane Analogy

Many parents face the decision during their working years to try to fund both retirement and college education. Some can adequately do both while others are forced to do the best they can with what money they can save. Sometimes parents can get caught up in wanting to save as much as they can for their children’s college education and forgo the need to save for or save more for retirement. When this situation presents itself, I have given my clients my airplane analogy. It goes something like this: Have you ever flown on an airplane before? If you have you know that once you’re scrunched in and belted and the plane makes its way from the gate the flight attendants break radio silence and start with their routine flight instructions. After you’re taught where the exit rows are and how to use your seat as a floatation device they […]

Book Review: Control Your Retirement Destiny

This new book is the first book from my colleague Dana Anspach.  Dana has been writing and blogging for quite some time now, primarily as the voice behind Money Over 55 for About.com (www.moneyover55.about.com).  Dana also is a practicing financial advisor and respected speaker. If you’re looking for a nuts-and-bolts, do-it-yourself primer on all things related to retirement, this is your book.  Ms. Anspach has put together a very complete overview of all of the areas that you need to consider in order to “Control Your Retirement Destiny”.  By following the advice in this book, you can figure out how much money you need to have to retire, where to put it (meaning, what types of accounts to use), how to invest it, and all of the other important topics that you need to know about. Along the way, you’ll learn what’s important to know about Social Security, taxes, investment […]

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? […]

Why Designations Matter

Throughout my career I have had the occasion to talk with several financial advisors, planners, insurance agents, brokers, and other industry professionals about some of the reasons why people choose to pursue or not to pursue designations. I have heard differing views on the topic and thought I’d share some of my insights as to why I chose and still choose to pursue designations and degrees. Before I do, let me start by talking about some of the reasons why the advisors I have spoken to decide not to earn a designation. More often than not, the typical answers that I receive are not having enough time, not sure which designation to pursue, lack of funding to afford the designation, and lack of support on earning the designation – either from their employer or family. On the latter two points, some companies may not be able to “support” the designation […]

Facts About the 72t Early Distribution

Image by wallygrom via Flickr In case you don’t know what a 72t distribution is, this is shorthand for the Internal Revenue Code Section 72 part t, and the most popular provision of this code section is known as a Series of Substantially Equal  Periodic Payments – SOSEPP for short. Enough about the code section already.  What is this thing?  A SOSEPP is a method by which you can access your IRA funds prior to age 59½.  In order to take advantage of this rule, you determine the amount of the annual distribution from your IRA (this is done in a prescribed manner, more on this in a bit) and then begin taking the distributions.  Once you start the SOSEPP, you have to keep it going for the longer of five years or until you reach age 59½. Methods of Distribution There are three ways that you can determine the […]

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