Are you aware of the downside to the age 55 rule for 401k plans? It may not apply in your case, but you will want to check!
401k
Tax Bill Too High? Try This Trick
Some individuals get the nice surprise of a big tax refund every tax year (if this is you, don’t be too happy – you’ve been lending Uncle Sam money interest free). Other folks get the unpleasant surprise of having to write a big check to Uncle Sam. For the latter individuals, there may be a way to lower their tax bill and save more for retirement. Let’s look at an example. Assume an individual has a tax bill of $4,000 and they want to reduce this. Naturally, there are other deductions they may qualify for, but in this case, they’ve exhausted all other options except this one: saving to their 401k. Let’s also assume this individual’s marginal tax rate is 25%. The individual can take their tax rate and divide it into their tax liability for the year – in this case $4,000 divided by 25%. This comes to $16,000. […]
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After-Tax Investment Considerations
Some individuals have the ability to contribute after-tax amounts to their employer-sponsored plans such as a tax-deferred 401k or a defined benefit pension. Generally, since these amounts are after-tax, the contributions start adding up to a sizable amount known as basis. Basis is simply the amount of after-tax money put into these accounts that is not taxed when it’s withdrawn. However, any earnings on the basis are taxable. Individuals considering contributing after-tax amounts to the above plans may also consider if it makes sense to contribute to a non-qualified brokerage account. Like the aforementioned employer-sponsored plans, contributions to a non-qualified brokerage account are made with after-tax dollars, thus they can build a sizable basis – which is not taxed when withdrawn. Also, like the above employer-sponsored accounts, any earnings are subject to taxation. The major difference is in the way the earnings from the non-qualified account are taxed. Earnings on […]
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How to Make Your Saving Automatic
Sometimes it can be difficult to save for emergencies or for retirement. While physically not demanding, the mental strain can be a hump that is hard to get over. In other words, we experience a little bit of “pain” or mental anguish if we have to physically hand over money or write a check. So how can we overcome this anguish? Automate. First, determine how much you need for an emergency. This can either be to start the fund or to replenish amounts that have been used. Generally, it’s a good idea to have 3 to 6 months of non-discretionary expenses (expenses that don’t go away if you lose your job or become disabled) set aside in an FDIC insured bank account. Some individuals may find it more comforting to have 6 to 9 months or 9 to 12 months. It’s up to you. For retirement, I recommend saving 15 […]
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6 Year End Tips for a Financially Productive 2017
As 2016 comes to a close in a few weeks and we start into 2017, here are some good tips to consider to start 2017 off with some good strategies that will hopefully become habits. If you’re not doing so already, set up your payroll deductions to save the maximum to your 401k. There’s plenty of time to your payroll allocated so your deductions start coming out on the first paycheck in January. The 2017 maximum contributions are $18,000 for those under age 50 and $24,000 for those age 50 or older. To deduct the max, simply take the number of pay periods you have annually and divide it into your maximum contribution amount. This will allow you to save the maximum amount over 2017. Consider doing the same to maximize your IRA contribution. Those limits are $5,500 (under 50) and $6,500 (over 50) respectively. Check your allowances on your […]
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Should I Pay Off Debt or Save for Retirement?
Over the last few weeks I’ve gotten quite a few questions from individuals ready to graduate college and start embarking on their first job. As is often the case, many of these individuals have varying amounts of student debt but also understand the importance of saving for retirement. Naturally, a common question is should they pay off student loans or save for retirement. Here’s my take. As I’ve mentioned in previous posts, there are few ways to receive guaranteed returns. One of those ways is by paying down debt. This is an example of a guaranteed rate of return that is also risk free. By paying off a loan early, the interest that would have normally gone to the lender ends up in your own pocket. The good news is that the debt is retired faster, and the individual experienced zero volatility exposure compared to investing in the market. On […]
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Remember Your 2016 RMD
It’s hard to believe that 2016 is coming closer to an end. For some individuals that are required to take required minimum distributions (RMDs) from their retirement plans, it may be a good idea to double check to make sure that happens. If it doesn’t the penalties are harsh. According to the IRS the penalty for not taking and RMD or not taking the full RMD is 50% of the amount not withdrawn. This can lead to significant losses to a retiree that must take RMDs. Generally, most financial planners and or custodians we’ll be able to help the individual and remind them that they have and RMD and how much that amount needs to be. If an individual finds themselves in the precarious position of having forgotten to take the RMD or did not take out enough, there is a remedy. The IRS allows an individual to file form […]
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Investing Your 401k – a 2-step plan
If you’re like most folks, when you look at a 401k plan’s options you’re completely overwhelmed. Where to start? Of course, the starting point is to sign up to participate – begin sending a bit of your paycheck over to the 401k plan. A good place to start on that is at least enough to get your employer’s matching funds, however much that might be. In this article though, we’re looking at investing your 401k money. It’s not as tough as you think. In fact, it can be done in just two steps – taking no more than 30-45 minutes of your time. Step 1 – Look at your options When you’ve signed up for the 401k plan, review your options for investing your 401k. Look at the list of investments available – and from here you can take a shortcut if you like. If your plan has a “target […]
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Early Withdrawal of an IRA – 72t Exceptions
If you have done much studying about IRAs and 401k plans, you probably know that there are several exceptions in the Internal Revenue Code that allow an early withdrawal from your IRA or 401k plan without the 10% penalty being imposed. The section of the IRC that deals with quite a few of these exceptions is called Section 72t (referred to as 72t for short), and there are several subsections in this piece of the Code. Each subsection, listed below, has specific circumstances that must be met in order to provide exception to the 10% penalty. Clicking on the link for each subsection will provide you with additional details about that exception. §72(t)(2)(A)(i) – age 59½ – this is the standard age allowing for penalty-free withdrawals from your IRA or 401k. In some cases there is an exception allowing for penalty-free withdrawals from a 401k at or after age 55; and […]
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5 Options for Your Old 401k
When you move from one job to another, often there is an old 401k plan at the former employer. You have several choices for what you can do with the old 401k plan, and some options are better than others. Some of the options are dependent upon the balance in your old 401k account, as well. Cash it out. This is typically the worst option. You took advantage of tax-deferral (and company matching) when you contributed the funds to the account. If you simply cash out the old 401k, you’ll have to pay tax on the funds, and if you were under age 55 when you left the employer you will also likely be hit with a 10% penalty for the early withdrawal. In addition to the tax and penalty, when you take a withdrawal from your 401k plan there is an automatic 20% withholding requirement. You will have credit […]
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Qualified Plan Rollovers
Combining and rolling over various retirement accounts is a decision that many individuals will face during their working career and in retirement. For individuals that are already retired, they may consider combining accounts to make required minimum distributions a bit easier (less paperwork, companies to deal with, etc.). Individuals that are still working may consider combining accounts as they switch jobs in an effort to consolidate plans from various employers to their IRA, Roth IRA or current employer plan. What follows are some considerations as well as a handy guide form the IRS regarding what rollovers and consolidations are allowed and specifics for each plan type. Be sure to check the fees of the plan you’re coming from to the plan you’re considering moving to. While consolidation may make sense, it may be a bad idea if the expenses of the plan and funds are higher in the plan you’re […]
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5 Secrets About Your 401k Plan
Many folks have a 401k plan – it’s the most common sort of retirement savings vehicle that employers offer these days. But there are things about your 401k plan that you probably don’t know – and these secrets can be important to know! The 401k plan is, for many, the only retirement savings you’ll have when you reach your golden years. Used properly, with steady contributions over time, a 401k plan can generate a much-needed addition to your Social Security benefits. But you have to make contributions to the 401k plan for it to work, and invest those contributions wisely. So how much do you know about your 401k plan? Below are 5 secrets that you probably don’t know about your 401k plan. Check with your 401k plan administrator to see if these provisions are available – some plans are more restrictive than others. Secrets You Don’t Know About Your […]
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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 […]
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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 […]
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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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How to Take a Loan from Your 401k
You have this 401k account that you’ve been contributing to over the years, and now you’ve found yourself in need of a bit of extra cash. Maybe you need to cover the cost of a new furnace, or possibly you have some extra medical bills that need attention, and you don’t have the extra cash to cover. Whatever the reason, a loan from your 401k might be just the ticket. A 401k (or other employer-based plan like a 403b, 457, etc.) is unique from an IRA in that you are allowed to borrow against the account. An IRA can never be borrowed against, any withdrawals are immediately taxable. Before we go into the specifics of taking a loan from your 401k, since I’m a financial planner I have to put a word of warning out: Borrowing from your 401k should be considered a “last resort” option, when you’ve exhausted all […]
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SOSEPP – Fixed Annuitization method
When calculating your Series of Substantially Equal Periodic Payments (SOSEPP), provided for under §72(t)(2)(A)(iv) of the Internal Revenue Code, one of your choices is the Fixed Annuitization method. Calculating your annual payment under this method requires you to have the balance of your IRA or 401(k) account and an annuity factor, which is found in Appendix B of Rev. Ruling 2002-62 using the age you have reached (or will reach) for that calendar year. You will then specify a rate of interest of your choice that is not more than 120% of the federal mid-term rate published by regularly the IRS in an Internal Revenue Bulletin (IRB). Once you’ve calculated your annual payment under the Fixed Annuitization method, your future payments will be exactly the same until the SOSEPP is no longer in effect. There is a one-time opportunity to change to the Required Minimum Distribution method. For more details on […]
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SOSEPP – Fixed Amortization Method
When calculating your Series of Substantially Equal Periodic Payments (SOSEPP), provided for under §72(t)(2)(A)(iv) of the Internal Revenue Code, one of your choices is the Fixed Amortization method. Calculating your annual payment under this method requires you to have the balance of your IRA account. With this balance you then create an amortization schedule over a specified number of years equal to your life expectancy factor from either the Single Life Expectancy table or the Joint Life and Last Survivor Expectancy table, using the age(s) you have reached (or will reach) for that calendar year. The amortization table must use a rate of interest of your choice, but the chosen rate cannot be more than 120% of the federal mid-term rate published by regularly the IRS in an Internal Revenue Bulletin (IRB). Which table you use is based upon your circumstances. If you are single, or married and your spouse is less than […]
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SOSEPP – RMD Method
The Required Minimum Distribution method for calculating your Series of Substantially Equal Periodic Payments (under §72(t)(2)(A)(iv)) calculates the specific amount that you must withdraw from your IRA, 401k, or other retirement plan each year, based upon your account balance at the end of the previous year. The balance is then divided by the life expectancy factor from either the Single Life Expectancy table or the Joint Life and Last Survivor Expectancy table, using the age(s) you have reached (or will reach) by the end of the current calendar year. This annual amount will be different each year, since the balance at the end of the previous year will be different, and your age factor will be different as well. Which table you use is based upon your circumstances. If you are single, or married and your spouse is less than 10 years younger than you, you will use the Single Life Expectancy […]
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Separation From Service On or After Age 55
You can listen to this article by using the podcast player below if you’re on the blog; if you’re reading this via RSS, there should be a “Play Now” link just below the title to access the audio. If you’re receiving this article via email, there should be a “Download Now” link within the text of the message to retrieve the audio file. Did you realize that there is a provision within the Internal Revenue Code that allows you to start taking distributions from your 401(k) plan before you reach age 59½? This little-known section of the code, §72(t)(2)(A)(v), can be a real dandy if you happen to fit the requirements. The primary requirement is that you separate from service with the employer at or after age 55. Note: although we will refer to the 401(k) throughout this article, this code provision applies to all ERISA-qualified, employer-established defined contribution plans, […]
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The latest in our Owner’s Manual series, A 401(k) Owner’s Manual, was published in January 2020 and is available on 
A Medicare Owner’s Manual, is updated with 2020 facts and figures. This manual is available on 
Social Security for the Suddenly Single can be found on Amazon at 
Sterling’s first book, Lose Weight Save Money, can be 
An IRA Owner’s Manual, 2nd Edition is available for purchase on Amazon. Click the link to choose the 
Jim’s book – A Social Security Owner’s Manual, is now available on Amazon. Click this link for the 
And if you’ve come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed “advisor’s advisor”.