How can you save big-time if you have no 401k available? There are several very good alternatives you can choose from, or to add to your 401k savings.
Roth IRA
Your 401k and IRA in 2018
Recently, the IRS just announced the contribution limits for 401k plans (including 403b and 457 plans) as well as IRAs. Additionally, the IRS also announced changes to the income phase-outs for traditional IRA deductibility and Roth IRA eligibility. Let’s start with the 401k plans. For 2018, the IRS increased the contribution limits to $18,500, up $500 from $18,000 last year. The catch-up contribution for those age 50 or over remains unchanged at $6,000. $500 may not seem like much, but think of it this way – you get to give yourself a $500 raise! For those interested in maxing out their 401k plans in 2018, here’s the breakdown depending on whether you’re paid monthly, 24 weeks per year or 26 weeks per year. If you’re paid monthly, the contribution is $1,541.66. This brings you just eight cents under the $18,500 max annually. If you’re paid 24 weeks per year, then […]
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Roth 401k – Is It Right for You?
Many employers are now offering a Roth 401k option in addition to the traditional 401k option. And with this new choice comes many questions: What is the benefit? Is a Roth 401k a good idea for me? How can I choose between the traditional 401k and the Roth? Benefits of Roth 401k Much like a Roth IRA, the Roth 401k can provide you with tax-free income when you retire. This benefit comes to you in exchange for no tax deduction when you contribute your funds to the Roth account. Contributing money to a traditional 401k account results in a reduction from your income for the year. Then when you withdraw money from the account in your retirement, you will have to pay tax on the money withdrawn. This is the primary difference between the traditional 401k and the Roth. Another benefit of the Roth 401k is that when you retire […]
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Asset Location
Diversification and asset allocation are important components to any investment plan. Additionally, where assets such as stocks and bonds are held, also called asset location, should also be considered. Asset location refers to the type of account that asset classes are held. Such accounts are generally traditional and Roth IRAs, employer-sponsored plans such as 401ks, etc., and after-tax, non-qualified investment accounts. The reason asset location becomes important is to help make use of tax efficiency in an investment portfolio. For example, stocks held in after-tax, non-qualified accounts for longer than one year as well as qualified dividends are taxed at much more favorable rates. These favorable rates can range from as little as zero to 20%. Bond interest, however, is taxed as ordinary income, leaving an investor being taxed at potentially higher amount. As many readers know, amounts contributed to qualified, pre-tax accounts such as deductible IRAs, 401ks, etc., are […]
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Traditional or Roth IRA?
If you’re thinking on starting and contributing to an IRA, you may be wondering which IRA is right for you. Generally, an individual has two IRAs to choose from – the traditional IRA and Roth IRA. This post provides some guidelines and information to help you make your decision. In some cases, based on your income, the decision is already made. In all cases, to contribute to an IRA an individual must have earned income. This is generally W2 wages, Schedule C income, and even alimony received. Let’s start with the traditional IRA. For 2016, the maximum annual contribution amounts is $5,500 for individuals under age 50 and those 50 and over are allowed an additional $1,000 catch-up for a total of $6,500 annually. This is also true for Roth IRAs. Also, the annual maximums are the total among all IRAs. That is, if an individual is under age 50, […]
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Three Year-End Financial Moves
As 2015 comes to a close here are a few things to consider so you can make the most of your money for 2015. Take full advantage of your IRA contributions. For those age 50 and over, you’re allowed $6,500 and if you’re under age 50, $5,500. It may also be of benefit to see if you qualify for a deductible IRA contribution or if contributing to a Roth IRA makes sense. Make the maximum contribution to your employer sponsored retirement plan. Granted, there may not be much time left in the year to do this, but there is plenty of time to do so for 2016. Many companies have access to their plans online and employees can change contribution amounts when necessary. If you’re not already doing so, consider saving at least 10 percent of your gross income. Aim for 15 to 20 percent if you can. Pay yourself […]
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Buy Term and Invest the Difference?
A topic often argued in the financial service world, especially in the life insurance sector, is whether or not an individual should buy term and invest the difference or buy a cash value life insurance policy. How this argument generally goes is on one side you’ll have someone arguing that an individual should buy a cash value life insurance policy. This individual (generally a commissioned salesperson) will argue that buying a cash value life insurance policy (such as whole life) is a better option for a client since it generates cash value over time and “forces” the client to save. Often they’ll argue that the client wouldn’t save for retirement otherwise. On the flip side of that argument you’ll have someone (perhaps from our office) suggest the client should buy term life insurance and invest the difference in price from the whole life policy and the term life policy in […]
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Spousal IRAs for Stay at Home Parents
Many parents make the decision that after their child is born one parent will stay at home to be with the child. Some of the reasons include saving on daycare expenses, and wanting at least one parent to bond and be with the child during those precious first few years of development. Whatever the reason, the stay at home parent may leave a job and lose access to certain benefits – mainly their employer sponsored retirement savings plan. Although the stay at home parent has lost this benefit, it doesn’t mean that they have to stop saving for retirement. One benefit the stay at home parent can take advantage of is the spousal IRA. Spousal IRAs aren’t a specifically titled IRA. In other words, the IRA needn’t be titled “Spousal IRA”. It’s simply an IRA in the stay at home parent’s name – no different than if they had an […]
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IRAs: Roth or Traditional?
The question comes up pretty often: when contributing to an IRA, should you choose the Roth or Traditional? I often approach this question in general with my recommended “Order of Contributions”: Contribute enough to your employer-provided retirement plan to get the company matching funds. So if your employer matches, for example, 50% of your first 5% of contributions to the plan, you should at least contribute 5% of your income to the plan in order to receive the matching funds. Maximize your contribution to a Roth IRA. For 2015 that is $5,500, or $6,500 if you are age 50 or older. Continue increasing your contribution to your employer-provided plan up to the annual maximum. So if you have more capacity to save after you’ve put 5% into your employer plan to get the matching dollars, and you’ve also contributed $5,500 (or $6,500) to your Roth IRA, you should increase the amount going into […]
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Where to Start With Retirement Savings
Today, we have so many choices for our retirement savings that it can be difficult to choose which sort of account to contribute to. If you are fortunate enough (as many are) to have more than one type of retirement plan available to you, in what order should you contribute to the accounts? Right now, at the beginning of a new year, is an excellent time to start with retirement savings. Qualified Retirement Plans First of all, many folks who are employed by a company have some sort of tax-deferred, qualified, retirement savings account available. These accounts go by many names – 401(k), 403(b), 457, and deferred compensation. These accounts are collectively referred to as qualified retirement plans, or QRPs. QRPs do not include IRAs – this is another type if retirement savings account with some different rules. A QRP account is a good place to start when contributing to […]
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Five Things You Need to Know About Retirement Plans
Listen to this post: Most of you have one or more types of defined contribution retirement plans, such as a 401(k), 403(b), 457, IRA, SEP-IRA, or any of a number of other plans. 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. 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 could be worth as much as $1.66. How, you might ask? Since you are not taxed on the dollar that has been deferred into the retirement account, your “take home” pay only reduces by the amount that is left over after taxation. For example, if you’re in the 25% bracket, generally your income will only reduce by […]
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An Exception to the RMD Rule
For many folks, attaining age 70 ½ means the beginning of required minimum distributions (RMDs) from their 401k, 403b as well as traditional IRAs. There are however, some individuals that will continue to work because they want to or (unfortunately) have to and still want to save some of their income. At age 70 ½ individuals can no longer make traditional IRA contributions. They are allowed to make contributions to a Roth IRA as long as they still have earned income. Earned income is generally W2 wages or self-employment income. It is not pension income, annuity income or RMD income.
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A new way to fund your Roth IRA
As you plan and save for your retirement, it’s nice to have multiple types of taxation for your income sources. You may have a pension, Social Security, and a traditional IRA, all of which are taxed to some degree or another. Adding to this list you might have a Roth IRA which generally will provide you with tax-free income in retirement. The problem with the Roth IRA is that you have some strict limits on the amounts that you can contribute, and typical Roth Conversion strategies are costly and complicated. With the recent pronouncement from the IRS in Notice 2014-54, there is a brand new, sanctioned method, to fund your Roth IRA.
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Happy 40th Anniversary, IRA!
This year marks the 40th anniversary of the Individual Retirement Arrangement (IRA). In 1974 via the ERISA law, Congress made this new type of retirement plan available for employees whose employers who could not provide them with the traditional type of retirement plan. In 1981, the plans were made generally available to all taxpayers. The Tax Reform Act of 1986 limited the deductibility of IRAs by income. 1997 saw the launch of the Roth IRA, as a part of the Taxpayer Relief Act of 1997. This type of IRA came with no deductibility, but earnings (and contributions) would be tax free upon distribution, following the rules associated with the accounts. With the exception of changes to limits of contributions, income limits, and catch-up provisions, little has changed for these accounts since 1997, with the exception of the introduction of the Roth-IRA-like myRA account that was established in 2014 for the […]
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Have a HEART
Yes, I am organizing this writing around Valentine’s Day as a clever way to introduce a benefit military service members and their families can take advantage of as well as tie it into the title itself. The Heroes Earnings Assistance and Relief Tax Act or HEART Act provides service members and their families with certain pension and tax benefits while living or in the event of the service member’s death. According to http://myarmybenefits.us.army.mil/ these are some of the benefits that can be taken advantage of due to the HEART ACT: Accelerated vesting in the retirement plan (but not any imputed additional benefit accruals for the period of military service) Additional life insurance benefits Other survivor’s benefits depending on the benefits of the employer Employers also have the choice of treating the disabled or deceased service member as if they had returned to work the day before the disability or death occurred. […]
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myRA? What’s the point?
After the President’s state of the union announcement of the new myRA account, my first reaction was: Did we need this? What’s so “out of reach” about a regular Roth IRA? And if there was a great hue and cry for this, why hasn’t the marketplace provided it already? After all, there are custodians who will provide a no-fee Roth IRA with no account minimum already (TD Ameritrade comes to mind). Plus, there are plenty of ways to get a bond-like return with no costs or account minimums as well. All that I can find that is different about the myRA accounts is that the bond investment (same as the TSP “G” fund) has downside protection – meaning that the funds in the myRA account will never reduce in value, only grow or stay the same. As with any gift (and downside protection is indeed a valuable gift), there is […]
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2014 IRA MAGI Limits – Married Filing Separately
Note: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately, who did not live with his or her spouse during the tax year, is considered Single and will use the information on that page to determine eligibility. For a Traditional IRA (Filing Status Married Filing Separately): If you are not covered by a retirement plan at your job and your spouse is not covered by a retirement plan, there is no MAGI limitation on your deductible contributions. If you are covered by a retirement plan at your job and your MAGI is less than $10,000, you are entitled to a partial deduction, reduced by 55% for every dollar (or 65% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200. If you are covered by a retirement […]
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