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What’s Up With Medicare Premiums? How Increases Are Determined

Mar 11th, 2019
by jblankenship.
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medicare premiumsIf you are covered by Medicare, you may be wondering how the premium increases are determined. Sometimes there is no increase, and sometimes there’s an increase for some enrollees but not others. And some folks have to pay way more than everybody else.

To understand this quandry, we need to look at the system for determining increases to Social Security benefits first.

Social Security – No COLA Increase for 2015

Let’s look at how it worked the last time there was no COLA. This is how future zero-COLA years will work as well.

For the year 2015 there was no Cost-Of-Living Adjustment (COLA) in Social Security benefits. This occurred because the Consumer Price Index (CPI) had not increased for the prior year (2014). While the COLA figures don’t parallel the CPI exactly, the CPI is a rough guide to follow when determining increases.

This was the third time in seven years that there was no COLA – before that, there was an automatic increase in benefits every year since 1975.

Impact to Medicare Premium

So what does this mean for Medicare premiums? Well, for most folks (about 75%) receiving Social Security, since you are already receiving Medicare Part A for no premium, there is no change. Since your Part B premium is linked to the COLA for Social Security, it remained unchanged for 2015. What isn’t linked to COLA is Part D drug coverage, so this increased for most all beneficiaries.

In the future, if there is another zero-COLA year, Part B premiums will likely enjoy similar treatment (unless the rules are changed).

The Other 25%

How can you know if you’re in the 75% that will have unchanged Medicare Part B premiums or the “other” 25%? One of the following three circumstances puts you into the “other” 25%:

  • You don’t have Medicare Part B premiums deducted from your Social Security checks;
  • Your first year of Medicare benefits is the year when there is no COLA for Social Security; or
  • You make too much money, and are subject to IRMAA rules.

The first one seems pretty simple, but it’s more complicated than it seems. For nearly all Social Security recipients, deduction of Medicare Part B premiums is compulsory.

But there’s another, larger group that is enrolled in Medicare Part B that are not currently receiving Social Security benefits. Therefore, individuals who are not receiving Social Security benefits cannot have Medicare Part B premiums deducted from their checks. So this group is in danger of increased Medicare Part B premiums when most other enrollees are enjoying a premium increase holiday.

When these folks eventually apply for Social Security benefits, Medicare Part B premiums will be deducted from their checks – and they’ll be in the special 75% group that may (depending upon COLAs) enjoy a year or so with no increase to premiums. But this won’t apply to the first year of Social Security benefits – only after you’ve received benefits in one calendar year and received a COLA increase does this rule apply.

The second circumstance is cut-and-dried: since this is your first year of receiving Medicare, there was no previous benefit to apply an increase to. So you just have to accept the current standard premium, with no limitation for you. That is, unless you make too much money, because then the third provision applies to you.

So, what’s too much money? Medicare Part B premiums start to increase when your income is more than $85,000 for single filers, or $170,000 for joint tax filers. At this level, your Part B premium will increase by $54.10 per month, an increase of roughly 40% over the standard 2019 premium of $135.50.

As your income increases, the Part B premium increases as well, up to a maximum premium increase of $325 per month if your income is above $500,000 for single or $750,000 for joint filers.

Summary

For the majority of Social Security recipients, the overall impact is minimal, if not a positive.

This is not to downplay the significance, especially to low-income seniors who rely almost exclusively on Social Security benefits, as many other costs (energy costs, food, housing, etc.) have increased, plus the value of home real estate has decreased dramatically.  These factors taken together can have a devastating impact on folks who have no other “safety net” available to them.  If you’re not presently in the position to have these concerns, you should take this information as a warning:  it is critical to develop additional resources to be ready and available in the case that subsidized sources of income are not available or are limited when in retirement.

Posted on Mar 11th, 2019
by author: jblankenship.

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Posted in: cola increase, cost of living adjustment, Medicare, medicare, medicare costs, medicare part b, medicare part b premiums, Social Security, social security benefits, social security checks.
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Defined Benefit Pensions

Mar 9th, 2019
by sraskie.
3 comments
money for irmaa

A defined benefit pension is a type of retirement plan that your employer may offer as the only plan offered, or in conjunction with a 401(k) plan. If you have access to a defined benefit pension or are currently participating in one, you are in rare company as these types of plans are becoming few and far between.

Defined benefit pensions are different from 401(k)-type plans (called defined contribution plans) in several ways. One of the biggest differences is the fact that the employer is responsible for the funding of the plan in addition to accepting all the investment risk of the plan’s assets. With a 401(k)-type plan, the employee is responsible for funding and the risk in the investment portfolio. Many defined benefit pensions are also backed by the Pension Benefit Guarantee Corporation (PBGC), which protects your pension up to a certain amount in event of plan termination.

Another difference is that at retirement, the defined benefit pension pays the retiree a guaranteed income stream for life (an annuity), and that guaranteed income may or may not have an inflation increase. If you’re married, by law the pension must be paid as a joint and survivor annuity – meaning that if the spouse who has the pension dies, a benefit is still paid to the surviving spouse.

With a 401(k)-type plan, the account balance at retirement is based on the employee’s contributions (and any employer match) and how it was invested. At retirement, the retiree is responsible for taking income from the account. They may choose to take periodic withdrawals, fund an annuity, or leave it invested should they not need the money just yet.

The key point is the employee is responsible for these decisions. With a defined benefit plan, the decisions are already made, and if not, are very simplified.

The amount of the retirement benefit from a defined benefit pension is generally based on length of service, age, and final average salary. Thus, the longer you work and are participating in the pension, the higher the monthly benefit. Usually, companies will cap the years of service credit at some number such as 30 years – which means there’s no increase in the pension based on working longer. Most companies allow employees to become “vested” (the pension is fully the employee’s) after 5 years, sometimes less.

If you work for a company offering a defined benefit pension and are considering changing jobs, see if the new company has a defined benefit pension (among other benefits). Also check to see if you’re vested in the current pension. If not, consider staying until you are. Even a small pension can make a difference in retirement. Naturally, this won’t be your only criteria for staying or leaving but it’s important. Imagine receiving a guaranteed retirement income where no matter what happens, you’ll get the same payment every month. Regardless of how the economy is doing, and regardless of your 401(k) or IRA performance, you’ll get the same monthly amount. This is the beauty of a defined

Posted on Mar 9th, 2019
by author: sraskie.

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Posted in: pension, retirement, retirement plan.

Splitting Inherited IRAs

Mar 6th, 2019
by jblankenship.
2 comments
dusty-splits-some-melon

Photo credit: diedoe

In the case of an inherited IRA, splitting it often is desirable in order to better accommodate a distribution plan after the primary owner dies. This can be done prior to the death of the IRA owner, or it could be done after the death of the IRA owner, as long as it’s accomplished before the end of the year following the year of death.

Why is this important?

When an IRA is inherited by a non-spouse individual, that individual is required to begin taking distribution of that IRA. The required distribution is based either upon the heir’s age or the age of the decedent. In most cases when the beneficiary is younger than the decedent, it is more advantageous to stretch those payments out over the longer period of time by using the heir’s age for the required distribution.

If there is more than one beneficiary, unless the IRA is split, the Required Minimum Distributions (RMDs) will be based upon the attained age of the “designated beneficiary”. This is the oldest living beneficiary as of September 30 of the year following the year of death of the primary IRA’s owner.

You can split the IRA into separate IRAs for each beneficiary, each titled as “John Jones, deceased, FBO Jane Brown” (probably not exactly like that because the names will be different in almost all cases). Then the individual IRAs can be distributed according to the age of each individual beneficiary. Splitting the IRA must be completed by December 31 of the year following the year of death.

Note: you don’t have to split the IRA into separate IRAs by September 30 of the year following the year of death. This is just the administrative date for determination of the designated beneficiary. If you split the IRA into separate inherited IRAs by December 31 of the year following the year of death, then administratively the designated beneficiary of each separate IRA as of September 30 would be the individual heir owner of the account.

Splitting the IRA into separate IRAs for each intended heir before the original owner dies simplifies matters for the heirs. By splitting the IRA before death, the inheritants can simply take RMDs based on their own attained age, and nothing else is required (no account splitting, no deadlines to meet). But if this isn’t (or can’t be) done, splitting the IRA after death is usually best for all involved.

Posted on Mar 6th, 2019
by author: jblankenship.

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Posted in: Early Distribution, IRA.
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You’re Not (necessarily) In Control

Mar 4th, 2019
by Jim.
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So you’ve set up your 401k with your employer’s administrator, made your allocation choices, and everything is set to go. You’ve got this retirement saving thing by the tail, right?

control

Photo credit: jb

Not so, Mona Me. (or maybe that’s mon ami?) Or at least not completely so. You see, way back in 2006, Congress passed the Pension Protection Act, which had a provision in it that allows employers to automatically enroll employees in retirement plans, and make default investment choices for them.

Doesn’t apply to me, right? Since I enrolled on my own and made my own choices for allocation of my investments… right? Once again, Mona, you’re not completely correct.

The Most Common Change

The plan sponsor (your employer) can make changes to the funds available for investment choices at any time. So, instead of that no-load broad market fund that you originally chose, now you have a loaded (yes I know they’re usually waived loads in 401k’s) high expense ratio fund that doesn’t really accurately represent the total domestic equity market very well.

Your employer can make this change any time they want – maybe it’s to get their cousin an additional commission since he sold the plan to your employer. But then again, maybe it’s just because the bossman read an article that said A shares were superior to all other investments, or something equally idiotic.

The Other Kind

Another possible way that your employer could change your allocation in your 401k account is if it was determined that your account wasn’t diversified enough. Seems pretty big-brotherish, but it’s still a possibility, just not very common.

Default investments can be changed on a whim as well – from a basic money market account to, perhaps, a costly stable-value insurance product. When these choices are changed, your money is automatically moved. You can always change to something else (among the available options), but you have to make the change on your own.

The Bottom Line

So – the watchword you should take away from this is that you need to pay close attention to communications that you company sends you regarding your retirement plan. None of these changes can be made without communicating the change to you in advance – but if you are like most folks when you get that pack of paper and the book written on recycled cigarette paper, the last thing you want to do is sit down and study it thoroughly, right Mona?

Particularly pay close attention when your company sends you a letter explaining changes to the plan. These are supposed to be concise and easy-to read, so watch for them. When funds are going to be automatically moved you’ll get a notice in advance so that you can choose something different from the default. This may be helpful, or it may not – but you’ll be in a position to have better control over your funds.

Posted on Mar 4th, 2019
by author: Jim.

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Posted in: 401k, investing, qrp, qualified retirement plan, retirement plan.
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TWO 5-year Rules for Roth IRAs

Feb 27th, 2019
by Jim.
5 comments

In case the rules surrounding Roth IRAs weren’t confusing enough so far, there are actually TWO 5-year rules that can apply to your Roth IRA account.

5-Year Rule #1: The Account’s Age

mollys-5-year-rule

Photo credit: diedoe

The first 5-year period begins on January 1 of the tax year when you established and first funded the account. This 5-year rule is important in determining if any distributions you receive from the account are qualified. In order to be qualified, a withdrawal must occur at least 5 years after the account establishment date (January 1 of the year you first funded the account). In addition to the 5-year rule, one of the following conditions must also apply in order for your distribution to be considered qualified:

See the IRS’ flowchart in Figure 2-1 (page 30) at this link in order to determine if your distribution is qualified.

5-Year Rule #2: Age of a Conversion

The second 5-year rule applies to a 5-year period beginning on January 1 of the year of a conversion to a Roth IRA from a traditional IRA or from a qualified retirement plan such as a 401k. If any amount that was subject to taxation during the conversion is distributed before the 5-year period is complete will be subject to an additional 10% penalty applied to the distribution. This would also include post-conversion earnings on all amounts converted within the prior 5 years.

There are several exceptions to this rule, listed here:

  • You have reached age 59½
  • You are disabled
  • You are the beneficiary of a deceased IRA owner
  • You use the distribution to pay certain qualified first-time homebuyer amounts
  • The distributions are part of a series of substantially equal payments (SOSEPP)
  • You have significant unreimbursed medical expenses
  • You are paying medical insurance premiums after losing your job
  • The distributions are not more than your qualified higher education expenses
  • The distribution is due to an IRS levy of the qualified plan
  • The distribution is a qualified reservist distribution
  • The distribution is a qualified disaster recovery assistance distribution
  • The distribution is a qualified recovery assistance distribution

Why These Rules Are Important: Distribution Ordering Rules

The two 5-year rules come into play when considering the order in which distributions are attributed. The IRS has specific rules determining which money is coming out of your account based on the source. The distribution ordering rules determine how each distribution is to be treated, depending on if it’s qualified or not. The order of distribution is as follows:

  1. Regular contributions (this is your annual contribution amount to the account, not rollovers or conversions)
  2. Conversion and rollover contributions, on a first-in, first-out basis. This means that the total of conversions and rollovers from the earliest year are distributed first. These conversions and rollovers are further sorted as follows:
    1. Taxable portion (that portion that was taxed during the conversion or rollover) is distributed first, followed by the
    2. Non-taxable portion (any amounts that were not taxed during the conversion)
  3. Earnings on all contributions

It should be noted that, in determining the amounts for #2 (conversion and rollover contributions) that certain aggregation rules apply:

  • Add all distributions from all your Roth IRAs during the year together.
  • Add all regular contributions made for the year (including contributions made after the close of the year, but before the due date of your return) together. Add this total to the total undistributed regular contributions made in prior years.
  • Add all conversion and rollover contributions made during the year together. For purposes of the ordering rules, in the case of any conversion or rollover in which the conversion or rollover distribution is made in 2018 and the conversion or rollover contribution is made in 2019, treat the conversion or rollover contribution as contributed before any other conversion or rollover contributions made in 2019.

Of course, the regular contributions can always be taken out of the account tax free (no 5-year rule applies). After that, the two 5-year rules kick in on the rest of the types of funds in your account.

Posted on Feb 27th, 2019
by author: Jim.

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Posted in: Early Distribution, IRA, tax.
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Hidden Costs to 401k Plans and Who Pays These Fees

Feb 25th, 2019
by Jim.
2 comments

hidden fees

Photo credit: jb

It should not come as a shock that there are certain fees involved in maintaining a 401k plan – there is a degree of back office activity, such as signing up participants, tracking accounts, maintaining changes to accounts, distributing statements, and the like.  In addition, the plan administrator must provide certain reports to the government, along with required annual reports for participants (that annual Summary Report, written on cigarette paper, that you get in the mail once a year and promptly toss in the trash), as well as reports to the management of the sponsoring company on plan participation rates and such.

You would likely expect to share in the cost – after all, it’s benefiting your account, right? – and it seems like that sharing should be based on your account balance or at worst evenly distributed among all participants.  However (and there’s always a however in life)… depending upon your fund choices, you may be paying more toward those back office activities than the guy in the cubicle next to you.

Turns out, the more inherent fees in an investment choice, the greater portion of the overhead you’ll be taking on (in general).  If you’re in a money market account or (shockingly) the company stock, you might not pay any overhead.  If you are in a managed mutual fund, you could be paying as much as 0.6% in annualized overhead fees.  As with most things surrounding 401(k) fees, it’s not very clear just how these costs are allocated – and quite likely not very fair in the long run.

These fees are disclosed to you, by law, ever since the fee-disclosure rule went into effect in 2012. Under that rule, plan administrators are required to mail you a quarterly statement showing your investments’ rates of returns, investment-related fees, and expenses, including any amounts the plan deducted from your account to cover administrative expenses.

Like many documents surrounding your 401k plan, these are long-winded and confusing. Most participants in 401k plans don’t even know that this information is disclosed to them, and among the ones that are aware, a paltry few actually take action based on the disclosed information.

Three types of fees

There are three different categories of fees in the typical 401k plan:

  • Administrative fees
  • Investment fees
  • Individual service fees

Of these fees, the Administrative fee is typically a per-account fee, such as $30 per year. This covers all of the back-end paperwork that each account, no matter the size, has to shoulder.

Investment fees are specific to the investments you’ve chosen, and can range quite wide. Depending upon the share class of the investments you have in your portfolio (in your 401k), you might be paying 1-2% annually in marketing and fund management fees. This one is the hardest to find (because it’s buried in a prospectus), but it is also likely the fee that causes the most drag on your account’s returns over time.

Individual service fees are based on actions you’ve taken with your account, such as taking out a loan against your 401k plan balance.

All of these fees cause a drag against your returns, but as mentioned previously, the investment fees are (potentially) the most harmful. Looking into these fees and adjusting your holdings to avoid the highest investment fees can make a huge difference in the long-term results.

For example, if you put $200 every payday ($5,200 a year) into your 401k, with an average return of 8%, you’d anticipate a balance of approximately $324,000 after 30 years. With an expense ratio of 1.2% on your mutual fund, however, the resulting balance would only be approximately $255,000. Changing from a mutual fund with a 1.20% expense ratio (another term for the investment fees) to one with a 0.30% expense ratio could bolster that result up to approximately $305,000 – an increase of $50,000!

You can look up the expense ratios for your 401k holdings pretty readily, most often by going to the plan administrator’s website. There, you should be able to find each offering’s expense ratio with a bit of searching. Swapping out the expensive fund for a less expensive alternative (but keeping the same asset class!) should be a relatively simple activity. It takes some time, but look at it this way: if you spend an hour doing this and the results are similar to the example above, you could be making $50,000 an hour for your work!

Posted on Feb 25th, 2019
by author: Jim.

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Posted in: fiduciary, financial planning, investing.
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The Granddaddy of ’em All: Keogh Plans

Feb 20th, 2019
by Jim.
2 comments

Ah, the poor, misunderstood and neglected Keogh (KEE-og) Plan. You don’t get the press that your fancy relatives 401(k), IRA and Roth, or even SIMPLE achieve… it seems as if the investment discussion world is completely abandoning you.

keogh angels

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First brought into existence in 1962 (yes, it’s a late-boomer like me!) the Keogh or HR10 plan is essentially a vehicle that allows the self-employed to establish pension plans just like the big companies can. A Keogh plan can be either a defined benefit (traditional pension) or a defined contribution (such as a 401(k)) plan.

The Keogh plan has the same attributes as many other qualified plans, including the age 59½ limit for qualified withdrawals, as well as the age 70½ required minimum distribution rules. Depending upon the type of plan established, you can invest in most common investment vehicles within a Keogh plan.

The real benefit of a Keogh plan over a SIMPLE or other types of plans available to small employers is in the higher limit for contributions. In the Keogh plan, up to $56,000 (for 2019) can be contributed and deducted, limited to 25% of the overall compensation of the employee.

Alternative retirement plan vehicles such as the solo 401(k) plan have lessened the need for the Keogh plans in the defined contribution arena. However, for establishment of a defined benefit pension plan or a money purchase pension plan, the Keogh remains a very important piece of the puzzle for sole proprietorships and other unincorporated businesses.

One particular downside to the Keogh plan: If you have no employees, your Keogh plan is not necessarily protected from creditors. If there are employees in the plan (other than owner/partners) then ERISA law protects the accounts from creditors, but without employees, ERISA has no jurisdiction over these accounts, and your assets may be subject to creditor claims, depending upon applicable state laws. Just something to keep in mind with the Keogh.

You’re eligible to participate in a Keogh retirement plan if you are:

  • self-employed, a small business owner, or an active partner in an unincorporated business who performs personal services for the company
  • a sole proprietor who files Schedule C
  • in a partnership whose members file Schedule E (in this case, the partnership, not you, must establish the Keogh plan)
  • working for another company, but working for your own business as well (for example, if you’re a writer with a day job and you’re earning royalties on your first book, the royalties count as self-employment income)

You are not eligible to participate if you are:

  • a salaried worker for an incorporated business, with no other source of income
  • retired and not receiving compensation from a business
  • a volunteer at the business that offers the plan
Posted on Feb 20th, 2019
by author: Jim.

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Posted in: financial planning, investing, retirement plan.
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Why We Include Real Estate in Investment Portfolios

Feb 18th, 2019
by jblankenship.
2 comments

We construct portfolios out of various asset types in order to diversify, or spread out our risk. To spread risk we choose multiple asset types of differing profiles. Most often these asset types include domestic equities (US-based stocks) and domestic fixed income (US-based bonds), which provide for basic diversification. Then, we include additional asset types in order to achieve further diversification. Examples of additional asset types include commodities, foreign equities, foreign-denominated bonds, and real estate.

It is important to keep in mind as we review various asset classes for inclusion in our portfolio, that we must achieve appropriate return for the inherent risk associated with the specific asset class in question.

Why Include Real Estate?

real estate

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It is for that very reason that we choose to include real estate as a component of the well-rounded portfolio: due to real estate’s ability as an asset class to deliver a greater reward-to-risk ratio than most any other asset class. This goes, in general, for both personally-owned real estate and real estate owned via Real Estate Investment Trusts (REITs). REITs are like a mutual fund of real estate holdings, primarily commercial real estate holdings.

During periods of high inflation (as we may experience again soon), residential real estate has always provided a good hedge against rising inflation – even in times when some residential real estate loses value.  The fact remains that, although at times many folks have been hit and hit hard devaluation of real estate, present value of real estate is generally expected to appreciate at a greater pace than inflation in the long run.  On the downside, commercial real estate doesn’t always share residential real estate’s inflation-hedge benefits.

Global commercial real estate tends to provide the opportunity to benefit from currency gains when domestic inflation is higher than that of the countries that you (or your REIT) hold property in.  This is a similar benefit to owning foreign-currency bonds.

In a period of deflation, another similar benefit is found, although it is more related to the appreciation of foreign currencies due to appreciating yields. The greater benefit during deflationary periods is found because commercial property rental rates tend to lag the market, which in turn produces real gains to the owner of commercial property.

As we know, during a normal (not overly inflationary or deflationary) economic period, residential property (directly owned, as in “your own home”) provides both an economic benefit and many emotional ones. Commercial property provides not only a generally more stable return with generally less risk than equities, with generally a higher return than can be found with bonds. In other words, the reward-to-risk ratio that you achieve with real estate is greater than with bonds or real estate, although the risk is different.

Correlation

We use a term – correlation – when describing how various asset types are affected by similar circumstances. If, for example, when one asset increased in value by 10% and a second asset class always increased by the same amount, 10%, then we would indicate that the two asset classes are perfectly correlated. If another asset class only followed the first asset class about half the time, sometimes increasing more, sometimes less, or even decreasing when the first increases (or vice versa), then we might indicate that this third asset class is 50% correlated to the first asset class. (The math is much more complex than this, but I wanted to give you an easy-to-follow example.)

By investing in the first and third asset classes in equal amounts, it stands to reason that we’d benefit by having different sorts and degrees of risk that affect our investments, and not all of our funds would be negatively impacted at any one time. Real estate is just such an asset class, when related to equity or stock investments. Historically speaking, real estate in general is only about 40% correlated with equities, making it a very good diversifier.

Bottom Line

I realize that you may not necessarily agree with all of this in light of what we’ve seen happen not so long ago in the real estate world, but there is reason to believe that the same sorts of returns will continue in the future for commercial real estate. Plus, it is very important to keep in mind that real estate should be only a small part of your overall allocation – in no case have I recommended more than a 5% to 10% allocation to this investment class.

Posted on Feb 18th, 2019
by author: jblankenship.

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Posted in: investing, real estate investment.
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Roth or Pre-Tax 401(k)?

Feb 15th, 2019
by sraskie.
2 comments

delaying_social_security

As an employee of a company you may have access to a 401(k). A 401(k) is an employer-sponsored (offered) retirement plan that allows you to save money for retirement. Sometimes your employer may provide a match based on a percentage of your contributions.

Your employer may give you the option of saving to a pre-tax account or a Roth account. A pre-tax contribution means that your contributions are made to your account before federal and state taxes are applied to your paycheck. A Roth contribution means that taxes are taken first, then the contribution goes to your account. This is also known as an after-tax contribution.

If you make pre-tax contributions, you avoid tax now, but then are taxed when withdrawals are made in retirement. If you make Roth contributions now, you’re taxed today, but withdrawals in retirement are tax-free.

It can make a lot of sense to contribute to your Roth 401(k) for a few reasons.

  1. If you’re in a lower tax bracket now, you’ll pay less tax on your contributions today, and avoid taxes in retirement when taxes rate may be higher, or your income is higher and taxed at a higher rate. This is especially true for young college grads in their first job.
  2. The bulk of your money in your account will eventually be growth of your investments and reinvested dividends. With a Roth account, this will be tax-free when withdrawn at retirement.
  3. Having tax-free income in retirement means that your Social Security benefits may not be subject to taxation; since qualified Roth distributions are not taxable income.
  4. Mentally, not having to pay any (or very little) tax in retirement can be reassuring when it comes to planning for expenses, distributions, and bequeathing.
  5. It may mean that since your Roth distributions are not being taxed, any long-term capital gains may be subject to zero tax.
  6. You may not be able to make Roth IRA contributions (your income may be too high). A Roth 401(k) doesn’t have income restrictions.

Personally, I favor Roth contributions. I like the tax-free benefit of qualified distributions in retirement. It should be noted however, that any employer match to a Roth 401(k) will be made to a pre-tax account (as the employer is allowed a tax deduction for the matching contribution). Your employer match will not be Roth dollars.

This should not be a discouragement from saving to your Roth 401(k).

Posted on Feb 15th, 2019
by author: sraskie.

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Posted in: 401 k, 401k, after-tax, after-tax contributions, retirement, retirement accounts, roth 401 k, Roth 401(k), Roth 401k.

Doing All The Right Things

Feb 13th, 2019
by jblankenship.
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I am diabetic.

right things things right

Photo credit: jb

This is one of those situations we’re dealt in life that requires changes – and paying attention to a lot of stuff we never wanted to pay attention to. Like eating right, exercising, taking appropriate meds, and monitoring and adjusting. It’s a lifestyle change.

What I’ve continued to notice is that, even when I do most of the right things – I exercise regularly, walking for 45 minutes a day, stay away from sweets, take the right meds at the right times, and monitor things closely – I can still wind up with a high blood glucose level.

How can that be?  Well, it turns out that just staying away from sweets and sugars isn’t the whole answer – I also need to refrain from most starchy foods and have more proteins and vegetables in my diet.  Frustrating?  You bet.  Futile?  Not completely – I just need to do ALL of the right things.

So what does all this have to do with financial stuff?

Most folks are or have been in a similar position with their investing and savings activities.  We thought we were doing the right things.  Turns out it was only some of the right things.  We are putting money aside into our 401(k) and IRA plans, taking advantage of tax rules in our favor, spreading our money out among five, seven, nine different mutual funds, and well, keeping debt “in check”.

Unfortunately, saving and investing while just keeping debt in check isn’t the whole answer.  If we’re not prepared for a financial downturn with emergency funds, the debt situation can sneak up and cause lots of problems with our personal cash flow.  Lots of folks who work for the federal government experienced this problem recently. Lots of formerly “in check” debt is coming dangerously close to getting out of check.

Additionally, the idea of diversification needs to be better understood and applied.  Just because you’ve spread out your money among umpteen different funds, it won’t help a bit if all of those funds are subject to the same economic factors correlated in their reaction to changes.  To be properly diversified, a portfolio should include components that are not in any way related to one another. With this diversification, when an economic downturn affects the US domestic large-cap equity market, only that portion of our portfolio that is invested in large-caps is impacted.

The remainder of our portfolio, properly diversified into asset classes such as real estate, foreign and domestic bonds, foreign equity markets, commodities and other sized companies, will have reacted differently to the negative impact in the domestic large-cap equity market and the overall effect is lessened dramatically.

Granted, even the best diversification strategy would not have kept you from experiencing paper losses during the economic downturn we experienced late in 2018. Your overall result would have been much better than most folks (with concentrated positions) saw, and you would be much closer to “whole” at this stage. Frustrating?  You bet.  Futile?  Of course not – we just need to continue to do ALL the right things.

One last parallel with my health situation to our financial situations – continuous monitoring and adjusting is necessary, as is patience.  As I mentioned before, I need to check my blood glucose level regularly and make adjustments to my diet and such to help ensure that I’m staying within manageable levels.  Oftentimes it gets frustrating because I believe I’ve done all the right things and my level is still off.  Then I’ll realize that maybe I didn’t exercise quite as much that particular day or perhaps I ate something I shouldn’t have.  No matter, it’s passed by, the only thing that can be done is to resolve to do it right for the next day.

This is what we’ve got to do, now, in our financial lives.  Continue doing all of the right things we were doing before, and make those changes and adjustments that we need to make (diversify appropriately, eliminate debt, have emergency funds, don’t buy more than you can really afford – of anything), and monitor the outcome.  And be patient.  Too many folks nearing retirement are looking at their account balances and figuring now is the time to make aggressive investment choices in order to “catch up”.  There is another way to catch up, a much more assured way:  put more money into a properly-diversified portfolio.  Work a little longer than you expected.  It’s not fun, and it’s not what you had in mind, but it’s necessary for you to be able to face retirement with a healthy source of income.

If you have additional ideas on this subject, I’d be happy to hear from you – leave a comment!

 

Posted on Feb 13th, 2019
by author: jblankenship.

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Posted in: financial planning.
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Medigap Plan C and Plan F are going away

Feb 11th, 2019
by Jim.
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The following is an expansion of an excerpt from the book A Medicare Owner’s Manual. This book was published in January, 2019 and is available on Amazon.

decision Plan C Plan F

With the passage of the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), Medigap Plan C and Plan F will no longer be available beginning in the year 2020. This is due to the fact that these plans pay for the Medicare Part B deductible, and the MACRA law eliminates Medigap plans that provide this coverage.

If you have enrolled in a Medigap Plan C or Plan F prior to 2020 you may be able to keep the plan, but you will not be able to change to a new policy of Plan C or Plan F with a starting date of January 1, 2020 or later.

Plus, if you were eligible for Medicare, either by virtue of your age (65 before 2020) or by disability or end-stage renal disease (ESRD) before 2020, you can still purchase a Medigap Plan C or Plan F, even if you had another plan previous to 2020.

MACRA

The Medicare Access and CHIP Reauthorization Act had many facets. The primary provisions are:

  • changes to the way providers are reimbursed by Medicare
  • changes to funding provisions
  • an extension of the Children’s Health Insurance Program (CHIP)

So the provision we’re interested in was actually just an add-on, put in place to eliminate a class of benefit that Congress deemed was inappropriate to the way the Medicare system should work. Specifically, under Medigap Plan C and Plan F, even the first dollar of cost (of Medicare Part B) to the enrollee is covered. Plan C and Plan F both have complete coverage of the deductible for Medicare Part B. For 2019, the Medicare Part B deductible is $185.

If you request a Medigap Plan C or Plan F from your insurer and you first became eligible for Medicare in 2020 or later, you will instead get a Medigap Plan D or Plan G, respectively. Plan D is identical to Plan C, except for the Medicare Part B deductible coverage. The same applies for Plan G – it’s identical to Plan F except for the Medicare Part B deductible coverage.

In addition, since there is a high-deductible Medigap Plan F, there will be a new option, a high-deductible Medigap Plan G available in 2020 for new enrollees.

Posted on Feb 11th, 2019
by author: Jim.

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Posted in: Medicare, medicare part b, Medigap.

IRS Private Letter Rulings, Revenue Rulings and Revenue Procedures

Feb 4th, 2019
by Jim.
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private-letter-rulings

Photo credit: jb

The IRS has a couple of different ways to provide guidance, called Private Letter Rulings and Revenue Rulings.  These rulings can be very important when determining if a particular position is valid in the interpretation of the IRS.

Recently the costs for these items has increased – as of February 1, 2019. The information below reflects the new costs.

A Private Letter Ruling (PLR) is a written decision by the IRS in response to a specific individual’s request for guidance, as it relates to that individual’s specific situation.

Private letter rulings are only binding on the IRS and the requesting individual, and as such cannot be cited as precedent for other cases. They do give insight as to what the IRS’ position may be on a particular situation of similar circumstances.  Often, the IRS will take the information from a PLR and redact it for use as a Revenue Ruling, which is guidance for all taxpayers and which may be cited as a precedent.

PLR’s have significant costs associated with them:  generally you must have a tax attorney prepare the request for you, which may cost anywhere from $5,000 to $15,000 depending upon the complexity of your case, and then the IRS charges a fee for delivering the PLR.

The basic user fee from the IRS is $30,000 (up from $28,300), but can be as little as $2,800 if the taxpayer’s income is less than $250,000. If the taxpayer’s income is between $250,000 and $1 million, the fee is $7,600. More details on these user fees can be found in IRS Internal Revenue Bulletin 2019-01, Appendix A.

Revenue Rulings, on the other hand, are administrative rulings that explain how the IRS applies the law to specific factual situations.  As indicated previously, these rulings are for all taxpayers, and are published in the Internal Revenue Bulletin and the Federal Register.

Revenue Procedures are statements of procedure, rather than application of law (as in Rulings) – such as methods for filing and instructions.  An example of the difference between a Revenue Procedure and a Revenue Ruling would be:  A Revenue Ruling provides guidance on what items may be deducted as a part of your itemized deductions on Schedule A, such as the definition of state and local taxes. On the other hand, a Revenue Procedure explains how those deductions are treated, such as the $10,000 cap on state and local tax deductibility on your Schedule A.

Posted on Feb 4th, 2019
by author: Jim.

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Posted in: financial planning, IRA, tax.
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Mutual Funds and ETFs – A Great Choice for Your Portfolio

Feb 1st, 2019
by sraskie.
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Investing in individual stocks* is an option for your portfolio. However, investing in stocks involves a lot of diligence, research, and discipline. Many of us don’t have the time, money, or fortitude to carry through with an investment plan that includes individual stocks.

Additionally, stock picking can lead to additional stress if you find yourself constantly (daily) looking at your stocks and worrying if you should buy, sell, or hold. If you think you’re the type of person who could unemotionally buy and sell stocks for your portfolio and remain consistent in doing so, then you may be the rare investor where this could be a viable option.

Building a portfolio of stocks also means you must purchase enough stocks – and enough different types of stocks – to have adequate diversification to reduce your risk compared to owning just one or a few companies. This can be difficult to do if your money is limited or the prices of the companies you’ve researched are out of your budget (e.g. as of this writing, Berkshire Hathaway A shares are trading at just over $300,000 per share).

Here’s where investing in mutual funds and ETFs (exchange traded funds) can be beneficial. Some of the advantages of investing in mutual funds or ETFs include instant diversification, economies of scale, professional management, and (generally) lower expenses.

Instant Diversification – Unlike investing in several single stocks to achieve diversification, purchasing just one share of a mutual fund or ETF gives you expose to hundreds, if not thousands of different companies.

Depending on the goal of the fund (large, medium, or small company, US, international, bond, etc.) it will hold a sample of the companies that make up the investment allocation the fund is trying to achieve.

Let’s say you want to invest in the S&P 500 – an index of roughly 500 larger US companies. Purchasing a fund replicating the S&P 500 would get you access to over 500 companies with only one share! The same would be true for a bond fund, international fund; you get the point.

Economies of Scale – This means that by using mutual funds or ETFs allows you to have access to many companies for less than the cost of purchasing them separately. Looking at our S&P 500 example, an investor purchasing individual stocks would have to buy over 500 different stocks to replicate this index. Very expensive to do.

Buy purchasing a mutual fund or ETF replicating the S&P 500, the investor gets exposure to over 500 companies, with only 1 share of the fund, for substantially less money.

Professional Management – Investing in mutual funds or ETFs gives you access to professional money managers whose job it is to monitor the portfolio of stocks so you don’t have to. Often fund managers have extensive experience, education, and certifications that qualify them to manage the fund(s) they oversee. The alleviates you from the stress of constantly looking at your investments (which you shouldn’t do anyway).

Depending on the type of fund (actively versus passively managed), the fund may have more than one manager and may have more expenses due to the goal of the fund (e.g. funds that try to beat the market typically charge more).

Lower Expenses – In many cases investing in mutual funds or ETFs carries lower expenses. In additional to requiring less money to invest in more companies, choosing lower expense funds means that more of your money is working for you. You should consider looking for funds that have expense ratios of .5% (one-half of 1 percent) or less. This should be easy to do by choosing index mutual funds or ETFs.

*Or individual bonds

Posted on Feb 1st, 2019
by author: sraskie.

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Posted in: diversification, diversify, etf, expense ratio, mutual fund expenses, mutual funds.
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Fiduciary Standard for All Advisors?

Jan 28th, 2019
by Jim.
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dog-in-suit-by-matt512There has been a debate going on in the financial advisory world for many years.  You see, there are two primary governing bodies for folks in the financial services business:  the Securities Exchange Commission (SEC), which promotes a fiduciary standard, and the Financial Industry Regulatory Authority (FINRA), promoting a suitability standard.  These are the two primary governing bodies (but there are others).

The Players

The SEC, an arm of the US federal government, has regulatory authority over Registered Investment Advisors (RIA) and Investment Advisor Representatives (IAR) who provide investment advice pursuant to the Investment Advisors Act of 1940 (the ’40 Act).  These folks are advice-givers first and foremost, and are held to a fiduciary standard.

FINRA, on the other hand, is a Self-Regulatory Organization (SRO) which regulates Registered Representatives of brokerage companies, among others.  The people in this group are brokers, sellers of products first and foremost.  Members of FINRA are held to a suitability standard.

The SEC was  created in 1934 with the passage of the Securities Exchange Act (the ’34 Act) created in 1934 and FINRA’s predecessor, the National Association of Securities Dealers (NASD), was created in 1939 due to some amendments made to the ’34 Act.  The prime reason I’m giving you this history is to show you just how long the tail can be for legislation passed during times of national economic crisis – these organizations have been operating for 70 and 75 years following their creation in response to situations that developed prior to the (and some believe had direct cause for) the Great Depression.  Legislation that is being considered today could have similar monumental impact.

But enough history for now – there are literally tons of nuances to consider throughout the history of these two organizations, but the question at hand is the standard to which folks in the financial services sector are held.

Definitions

Fiduciary Standard – A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.  A fiduciary duty is the highest standard of care at either equity or law. A fiduciary is expected to be extremely loyal to the person to whom he owes the duty (the “principal”): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents. Further, he must disclose any conflicts of interest, including potential conflicts of interest. The word itself comes originally from the Latin fides, meaning faith, and fiducia, trust. (from Wikipedia)

Suitability Standard – brokers are required to: 1) know their clients’ financial situations well enough to understand their financial needs, and 2) recommend investments that are suitable for them based on that knowledge. Brokers are not required to provide upfront disclosures of the type provided by investment advisers, including, but not limited to their conflicts of interest.

The Debate

Financial planners, financial advisors, etc. (for there are many names by which advisors call themselves) are not per se regulated by one standard or another, but rather it depends upon the situation.  Certified Financial Planner™ practicioners (CFP®) are held to a fiduciary standard by the Certified Financial Planner Board of Standards, while most other credentials do not carry such a standard requirement.

It is apparent that the suitability standard is a portion of the fiduciary standard: if a person is operating as a fiduciary, putting the client’s interests first, then investments recommended are by definition suitable to the client’s situation.  The industry recognizes that there is a lot of confusion in the way things are presently laid out, and are working toward a single standard for both types of advisors.

Folks presently held to the suitability standard argue that the fiduciary (often referring to this as the “f-word”) standard is aspirational in nature, where the suitability standard is very clear and direct.  On the other side of the spectrum, those held to the fiduciary standard believe that the inclusion of the FINRA brokers in this standard would serve to dilute the standard – that there would be “degrees” of fiduciary standard to which some folks would be held, while still claiming the mantle.

This is particularly newsworthy as recently the head of FINRA indicated that he thought there should be a single standard, and that he thought the fiduciary standard was the appropriate direction.

The Real Question

The burning question in my mind is this: from the consumer point of view, do you care?  Did you even know about these two standards in the first place?  Did you know that when you go to a brokerage and ask for advice, that the primary standard to which the advisor is held is to ensure that whatever they have for sale is in some way suitable to your situation even if it’s not necessarily in your best interest?  For example, it is entirely possible for a broker to consider a high-cost annuity suitable to your situation, even though it’s not necessarily in your best interest.

This debate means a lot to folks in this industry, and I think it’s pretty clear what you’d probably like, but I just wondered if you care enough to comment on it.

Posted on Jan 28th, 2019
by author: Jim.

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Posted in: #noTOP, fiduciary.
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Focus On The Future

Jan 25th, 2019
by sraskie.
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This post was inspired by a recent conversation I had with a former student. As is customary in my classes, I encourage students to contact me if they have questions while in the “real world” after graduation.

The student was contemplating contributing the maximum to a Roth IRA for 2018 – which is $5,500, and then potentially doing the same for 2019 – which would be $6,000.

His concern was market volatility. He was afraid of contributing to the IRA, then seeing is lump sums of $5,500 and $6,000 respectively plummeting if the market were to drop substantially.

I told him to look at it from this perspective. The middle letter in the acronym IRA stands for retirement. This young man is 22 years old, planning to retire in 30 to 40 years.

I told him that he could consider contributing the maximum to his Roth IRA every year, regardless of what he thoughts the market might do. In other words, if his retirement is 30 to 40 years away, why be concerned with what the market is going to do in 1, 2, or even 5 years.

To help ease his worries about the market volatility and subjecting the entire annual, lump sum IRA contribution to volatility all at once, I told him he could simply dollar cost average $500 monthly for his 2019 contribution. This seemed to put him at ease.

And that’s my advice to readers, particularly young readers, but even those with a long-time horizon for retirement. Focus on the future, stick to your savings plan, and let your investments and compound interest work for you.

Posted on Jan 25th, 2019
by author: sraskie.

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Posted in: financial planning.
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Problems and (proposed) Solutions for 401k Plan

Jan 21st, 2019
by Jim.
5 comments

The 401k plan has been under a great deal of scrutiny lately, with quite a few proposals being offered to “fix” the system.  Granted there are a few problems with the system that is in place, but the overall concept is still good.  What follows is strictly my opinion of some of the real “problems” followed by a look at the presently proposed solutions that are being dallied about.

solutions

Photo credit: Diedoe

The Problems With 401k Plan

Note: for the purpose of this discussion (and most discussions here) the term 401k is used to refer to all CODA (Cash Or Deferred Arrangements) such as 403b, 457, etc.. In my opinion all these plans should be treated equally.

Problem: To start with, it makes so very little sense to strictly tie the plan to the employer.  Of course, this made a lot of sense when employer matches could be solely in company stock (a la Enron), but these days the whole concept is outdated.

Solution: Do away with the present system of tying the plan to the employer.  Instead, simply increase the annual limits on IRAs to the same limits for 401ks – let all folks take part in these plans.  Employers could still have the tax benefit for matching funds, but the “portability” issue would be gone, as would the need for all these rollover activities.  Level the playing field, making the rules that are currently IRA- or 401k-specific apply to the new IRA plan.

Problem: 401k plans have limited investment choices, many of which are inappropriate or inadequate for the investor’s situation and goals.

Solution: Under the “new IRA” option I mentioned above, the field would be open to all investments available from your custodian.  Custodians would soon learn to allow investments in virtually all available securities, as the investor can easily “vote with his feet” and move elsewhere with better choices.

Problem: There is no “guaranteed income” choice available in the 401k. Since the original intent of the 401k plan was to replace the defined benefit pension plans – you know, the kind of pension where you’re guaranteed an income, often inflation-indexed, for life – it seems like you should be able to emulate that in a 401k plan.

Solution: There have been a few suggestions on the table in Congressional committee where annuity products would be made available for 401k plan investments.  The problem here is that, unless we’re talking about the lowest of low-cost providers (and there are a few out there), annuities are traditionally a very costly way to save and invest for the future.

I can’t argue with the sentiment, a guaranteed income choice would be perfect for a high percentage of folks – unfortunately this whole concept sounds too much like Social Security, and I don’t think we want to have two systems like that going in parallel. This option is still open for debate, in my opinion.

Problem: Most folks who have a 401k plan don’t have a clue about investing, and don’t have access to affordable, unbiased, professional advice.

Solution: This was actually addressed to a degree with the Pension Protection Act, but apparently the legislation’s carrot wasn’t enticing enough to get the ball rolling.  In addition, the previous legislation did not go far enough and label the advisor as a fiduciary – a step that I believe is critical to the long-term success of the investor.

Some of the proposals on the table now have taken the step to require fiduciary advisors.  The problem now is to get companies to implement this option.  Mandating is it probably going too far, but offering tax cuts or other benefits may be useful in giving this some traction.

Conclusion

This wasn’t intended to be an exhaustive list of the issues and solutions, just a list of the top things I’d been thinking about lately.  As I indicated before, I don’t think we need to toss out the baby with the bathwater; the 401k plan isn’t broken, it just needs a few adjustments.  Maybe you’ve got a few additional ideas, or suggestions to improve what I’ve tossed out here – I’d love to hear them.  Leave your ideas as comments below.  Thanks!

 

Posted on Jan 21st, 2019
by author: Jim.

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Posted in: 401k, fiduciary, investing, IRA, Social Security.
Tagged: · ·

Life Insurance: Protect Your Most Important Asset

Jan 18th, 2019
by sraskie.
2 comments

You may think that your most important asset is your home, your nest egg, your priceless collection of Etruscan snoods. Your most important asset is you – your human capital. Your human capital is your current and future economic contributions to your family.

Perhaps you’ve gone to college and majored in a profession to pursue a career. You may have earned advanced degrees and designations to increase your knowledge, professionalism, and income.

All of this increases your human capital – your ability to earn, substantially, over your lifetime.

Now that you have a family, a spouse and kids to support, you need to hedge your human capital, you need to protect it in the event it’s lost – should you die unexpectedly.

No one likes talking about death. Even writing these words, it’s hard to type them. But it’s necessary to convey the importance of life insurance. Life insurance protects your human capital, the income you receive because of your human capital, and the support your human capital provides for your family.

Without life insurance, should you die, so does the financial support you’re providing to your family. In other words, life insurance isn’t for you, it’s for those you leave behind.

Having life insurance, and enough if it, means your survivors, your family being able to continue paying the mortgage, bills, tuition, buying groceries, and continue saving for retirement and or college educations. It also allows them enough time to grieve without having to worry about financial obligations.

So how much life insurance should you have? A general rule of thumb is approximately 10 to 16 times your gross income. Of course, this is a general guideline. You may need more depending on your circumstances.

Posted on Jan 18th, 2019
by author: sraskie.

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Posted in: financial planning, life insurance.

The Equity-Indexed Annuity

Jan 14th, 2019
by Jim.
2 comments
annuity engine

Photo credit: jb

If you’re anywhere near retirement age, or if you’re in retirement, chances are you’ve had an Equity-Indexed Annuity (EIA) pitched to you.

Now, if for some reason you’ve missed out on these pitches (Maybe you’ve been out the country? Don’t have a phone? Don’t read your mail?) here’s the gist:  Insurance salesman tells you about this wonderful product that allows you to participate in the stock market’s upside, while not experiencing any of the market downside.  In today’s stock market climate, sounds pretty good, huh?

A couple of things come into play that the salesguy doesn’t highlight for you:

First, your “participation” in market upside is limited. Typically there is a cap on the amount of market upside that the account will pay out, and in this market climate, the upside potential is tremendous, which will primarily benefit the insurance company, not you.  In other words, given that the market has experienced a significant drop, there is high potential for significant increases in the coming months and years.  If there is a cap on your upside “participation” of say, 6% or 8%, the rest of the account’s upswing goes to the insurance company’s bottom line.

Now, you might say – that’s a small price to pay for not having to endure a downswing in the market like we have experienced recently.  And I would agree with you on that score. However: this is a hindsight statement, because again, the chance is quite small that the market will continue trending continually lower after its performance of late. There often are minimum guaranteed rates of return that can help on the downside as well, but the end result can be that you get back less from the contract than you originally deposited.

And so – the downside protection that you receive comes at the cost of limited upside. The limited upside throttles back your performance in the bull market periods, leaving you with dismal returns overall.  But that’s not the biggest issue you face with these accounts…

The second issue is the overall cost of these accounts. Annually, there is a fee charged against the value of the account of between 2% and 3% annually.  Doesn’t seem like much, until you think back to the caps that are placed on your account’s participation in the market.  Suddenly, that 8% cap becomes 5% when you remove the annual fees.  And what about if the market just goes sideways?  You still lose 3% to fees every year.

The third issue is the annuity term. As with all annuities, there is a term during which you are not free to withdraw the balance without penalty. The penalty varies but can be steep, as much as 20% depending on the contract. This can cause a liquidity problem – if you need money right away, you might not have ready access to it without paying the penalty.

I just thought I’d give you a brief rundown on these accounts since they’re getting a lot of “push” these days – since the market decline has highlighted their selling points, plus there is a lot of upside potential benefit to the companies pushing them.

There’s a reason equity-indexed annuities are popular: market drops are scary. And sometimes we’ll overlook the downsides to get some protection against scary things.

There’s also a reason equity-indexed annuities are popular with insurance companies: historically, the market returns negative overall results one out of every four years. Plus, the average annualized return of the S&P 500 over the past 50 years has been approximately 11%. So the insurance company has to pay the guarantee only 25% of the time, and the rest of the time (on average) they are able to glean 3% off the top of the contract.

Finally, equity-indexed annuity is one of the only types of investment that FINRA has seen fit to produce an investor alert about. It’s important to have your eyes wide open if you’re considering one of these contracts.

 

Posted on Jan 14th, 2019
by author: Jim.

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Posted in: Insurance, investing, IRA.
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Are Resolutions Worth It?

Jan 11th, 2019
by sraskie.
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After the first of the years it’s common of individuals to aspire to change their lives for the better. Many individuals come up with New Year’s resolutions – with aspirations of accomplishing certain goals or tasks that have eluded them in the past.

eating healthy

But do resolutions really work? In other words, what good is a resolution without action?

Granted, I am being nitpicky. But think of it this way. If I were to write down a handful of resolutions that I wanted to achieve in 2019 and beyond – they would simply be words on paper.

Don’t get me wrong, having the resolutions or goals listed is an excellent start, but again, until they’re acted upon, nothing will happen. All the words and intentions in the world are nothing without action.

So how can we convert resolutions into measurable acts?

First, do one thing today that is an action toward accomplishing your resolution. For example, this could be filling out the form to start saving into your retirement plan. It may mean a few keystrokes to increase your savings by 1%.

Perhaps it’s a weight loss goal. The simply act today could mean stepping outside of your door and walking. Or it could mean grocery shopping and only buying healthy, nutritious food.

If your resolution includes decluttering, it could mean simply cleaning your workspace, home office, etc.

The resolution could be to write more. Start today with just a sentence, then move to a paragraph, then a page.

The point is to simply start. And start small. It’s easier (and motivating) to accomplish small tasks. Accomplishing these small tasks will give you energy and motivate you to act on other things.

Finally, be consistent. Commit to carrying out one or a few of the acts needed to accomplish your resolutions. In no timer (generally 30 days) you’ll have made them a part of your routine, your habits, and they’ll no longer feel like tasks. They’ll be second nature.

Posted on Jan 11th, 2019
by author: sraskie.

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Posted in: financial planning.

The 457(b) Special Catch-Up

Jan 11th, 2019
by sraskie.
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If you’re a governmental employee, you may be aware that your employer offers a 457(b) retirement plan. Additionally, you likely know that like a 401(k), the 457(b) allows you to contribute $19,000 annually to the plan with an additional $6,000 catch-up for those aged 50 or older.

What you may not be aware of is the special catch-up provision the 457(b) offers. This special catch-up provision allows a governmental employee that is within 3 years of the normal retirement age (as dictated in the plan) to contribute up to twice the annual amount ($38,000 for 2019).

To take advantage of this special contribution the plan sponsor (employer) must allow it in the verbiage of the plan. Additionally, the employee must have unused contribution amounts from prior years. In other words, an employee can contribute twice the amount normally allowed if that employee has unused contributions from prior years; they didn’t contribute the maximum in previous years.

In addition, for an employee to take advantage of the special catch-up the employee must not also be making age-based (age 50 and over) catch-ups in the year the special catch-up contributions are being made.

Finally, the IRS states that the special contribution must be the lesser of twice the annual limit ($38,000 in 2019) or the normal annual limit ($19,000 in 2019) plus any unused basic limit from previous years. However, employees taking advantage of unused basic limit contributions from previous cannot make age-based catch-up contributions and unused basic deferrals from previous years.

Posted on Jan 11th, 2019
by author: sraskie.

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Posted in: 457, qrp, qualified retirement plan, retirement accounts.

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