In a previous article we discussed the changes to the IRA One-Rollover-Per-Year rule. There are certain types of rollovers that are not included in that restriction, detailed below. As mentioned in the earlier article, trustee-to-trustee transfers are not considered “rollovers” by the IRS regarding this rule. So you are allowed to make as many trustee-to-trustee transfers in a year as you like – no restrictions on these kinds of transfers at all. This includes trustee-to-trustee transfers from or to IRAs, 401(k)s, 403(b)s, or any eligible plan. In addition, a rollover from an IRA into a 401(k) or other Qualified Retirement Plan (QRP) is not impacted by this rule. This means that you can roll funds out of your IRA and into your employer’s 401(k) plan with no restriction – regardless of whether or not you have already made an IRA-to-IRA rollover in the previous 12 months. Similarly, a rollover from […]
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Be Careful When Converting
When converting from a 401(k), traditional IRA, 403(b), SIMPLE IRA, SEP or 457(b) to a Roth IRA there are some important tax considerations to keep in mind. First, converting from a tax deferred plan to a tax free plan it’s not always the best idea. Generally, it’s going to make sense to convert if the tax payer believes that he or she will be in a higher income tax bracket in retirement. For example, John, age 28 has a 401(k) and recently left his employer. He’s currently in the 15% bracket but expects to be in the 28% bracket or higher in retirement. It may make sense for John to convert his 401(k) to his Roth IRA. This makes sense for John because when he converts from a pre-tax, employer sponsored plan like the 401(k) it’s money that has not yet been taxed. If he converts while in the 15% […]
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November is “Add 1% More to Your Savings” Month
That’s right, we unofficially declared November to be “Add 1% More to Your Savings” month. So you can add that to the month-long observances like: No-shave November International Drum Month Sweet Potato Awareness Month and many more (see the list at Wikipedia) In November we encourage folks to increase their retirement savings rate by at least 1% more than the current rate. It’s a small step, but it will pay off for you in the long run. Below is the list of my fellow bloggers who have written articles showing ways that you can start to increase your savings rate, as well as showing what the benefits can be. Thanks to everyone who has participated so far – and watch for more articles in the weeks to come! The 1 Percent Solution by John Davis, @MentorCapitalMg Friday Financial Tidbit-What increasing your retirement contributions 1% can do for your retirement account by Jonathan White, […]
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Retirement Plan Contribution Limits for 2014
The IRS recently published the new contribution limits for various retirement plans for 2014. These limits are indexed to inflation, and as such sometimes they do not increase much year over year, and sometimes they don’t increase at all. This year we saw virtually no increases for most all contribution amounts, but as usual the income limits increased for most types of account. IRAs The annual contribution limit for IRAs (both traditional and Roth) remains at $5,500 for 2014. The “catch up” contribution amount, for folks age 50 or over, also remains at $1,000. The income limits for traditional (deductible) IRAs increased slightly from last year: for singles covered by a retirement plan, your Adjusted Gross Income (AGI) must be less than $60,000 for a full deduction; phased deduction is allowed up to an AGI of $70,000. This is an increase of $1,000 over the limits for last year. For […]
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Why Diversify?
Remember Enron? I think we all do. Enron was once a powerhouse company that saw its empire crumble and took the wealth of many of its employees with it. Why was that the case? Many of Enron’s employees had their 401(k) retirement savings in Enron stock. This was the classic example of having all of your eggs in one basket and zero diversification. Let’s say that the employees had half of their retirement in Enron stock and half in a mutual fund. Enron tanks but their mutual fund stays afloat. This means that they lost, but only lost half of their retirement, all else being equal. Imagine if they had only a quarter of their retirement in Enron and the remaining 75% in three separate mutual funds. Enron’s demise is only responsible for a fourth of their retirement evaporating. This could go on and on. The point is that when […]
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The Airplane Analogy
Many parents face the decision during their working years to try to fund both retirement and college education. Some can adequately do both while others are forced to do the best they can with what money they can save. Sometimes parents can get caught up in wanting to save as much as they can for their children’s college education and forgo the need to save for or save more for retirement. When this situation presents itself, I have given my clients my airplane analogy. It goes something like this: Have you ever flown on an airplane before? If you have you know that once you’re scrunched in and belted and the plane makes its way from the gate the flight attendants break radio silence and start with their routine flight instructions. After you’re taught where the exit rows are and how to use your seat as a floatation device they […]
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Book Review: A Random Walk Down Wall Street
Right from the start this book will be an excellent read for both financial advisors as well as their clients. Dr. Malkiel provides academic insight on the reasons why passive management works and some great commentary on the use of index funds as part of someone’s overall portfolio. This was the second time I read this book and certainly not the last. It’s great reinforcement on why we invest our clients’ money the way we do and provides solid academic evidence that doing anything to the contrary is counterproductive, more expensive and simply playing a loser’s game. Some of the bigger takeaways from the book are Dr. Malkiel’s thoughts and research on the different part of the Efficient Market Hypothesis or EMH. The EMH consists of three parts – the strong form, the semi-strong form and the weak form. The EMH essential admits that markets are efficient – meaning that current […]
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Don’t Just Walk by That Dime on the Ground!
Have you ever been walking along the street and saw a dime on the ground? Did you just walk right by, or did you stop to pick it up? Heck, it’s only a dime, it’s not hardly worth the effort to bend over, right? But what if it was a dollar? Or a hundred dollars? You wouldn’t just walk by that, would you? What about $1,200? Unfortunately, many folks do this very thing with their 401(k) plan employer matching funds. Most employers that sponsor 401(k) plans provide a matching contribution when you defer money into the plan. Often this is expressed as a certain percentage of your own contribution, such as 50% of your first 6% of contributions to the plan. So if you make $40,000 a year and you contribute 6% to the 401(k) plan, that means you’ll be contributing $2,400 to the plan from your own funds, pre-tax. […]
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Avoid Awkwardness in the Afterlife–Confirm Your Beneficiary Designations
This is a topic that I cover with all clients, and one that I recommend you for everyone with retirement plans and other accounts with beneficiary designations. Too often we think we have the beneficiary designation form filled out just the way we want it, and then (once it’s too late) it is discovered that the form hadn’t been updated recently – and the designation is not what we hoped for. I made this recommendation to a client not long ago. He assured me that he had all of his designations set up just the way he wanted. His wife, sitting next to him in our meeting, asked him to make sure – talk to the IRA custodian and get a copy of the designation as it stands today. A bit miffed about it all, he agreed to do so, and did the next day. Guess what he found – […]
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State Income Tax and Retirement Income
On only a few rare occasions does it make sense to defer money to your 401(k) or other employer sponsored plan instead of a Roth IRA. Those occasions include when your gross income excludes you from contributing directly to a Roth IRA (you can still convert), you are currently at a very high tax rate or the case of when you live in a state where retirement income is excluded from state taxation. Here in Illinois, the current law exempts retirement income from being taxed at the state level. What this means, is that any contributions to a 401(k), 403(b), SEP, SIMPLE and 457 avoid state income taxation. Qualified distributions at retirement are only taxed at the federal level, and then only as income. If you contribute directly to a Roth IRA that money is after-tax money going in. After-tax in this case meaning it’s been already taxed at the […]
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How Dollar-Cost-Averaging Can Work to Your Advantage for Your 401(k)
When you invest in your 401(k) plan with salary deferrals from each and every paycheck, you are taking part in a process known as Dollar-Cost-Averaging (DCA). This process can be advantageous when investing periodically over a long span of time, by smoothing out the volatility of the market and giving you an average cost of your investment shares over time. How does this work, and how can it be advantageous? Dollar-Cost-Averaging When deferring income with each paycheck, typically you will be investing in your 401(k) plan each pay period, whether monthly, bi-weekly, or weekly. Each pay period the same amount is deferred and invested, no matter what the price of the underlying investments are at the time. Since you’re always putting the same amount into the investment, when the price of the shares is higher, you purchase fewer shares; when the price is lower, you are purchasing more shares. Note: […]
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Add Your First 1% to Your 401(k)
Many of my fellow bloggers and I have become concerned about how low the rate of savings has been for Americans in general. To see a list of all of the articles in the 1% More Movement, check out the article at this link. Since November is traditionally the time when corporate employees make elections for all other benefits, including health insurance, life insurance, and other employee benefits, now is a good time to also consider increasing your 401(k) contributions. For my article, I’m focusing on the employee who hasn’t been participating in a 401(k) plan at all. Your First 1% in Your 401(k) If you haven’t been putting anything at all into your 401(k) plan at all, putting that first 1% into the 401(k) plan can be a little scary. But you need to know that this is a monumental action. Getting started with savings is the most important […]
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Calling All Bloggers – Let’s Increase America’s Savings Rate in November!
I’m sure that I’m not alone in the financial planning world with my concern about the rate of saving toward retirement across this great land. Recent figures have shown that we Americans are doing a little bit better of late, at a 5% savings rate versus around 1% back in 2005 – but this is a dismal figure when you consider how most folks are coming up short when they want to retire. Rather than sitting by idly and wringing my hands, I thought maybe something could be done to encourage an increase in savings – if only by 1%, this can be a significant step for lots of folks. And now, in November, is the perfect time to do this, as most corporations are going through the annual benefit election cycle, so the 401(k) (or 403(b), 457, or other savings plan) is right at the forefront for many folks. […]
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Retirement Plan Contribution Limits for 2013
The IRS recently published the new contribution limits for various retirement plans for 2013. These limits are indexed to inflation, and as such sometimes they do not increase much year over year, and sometimes they don’t increase at all. This year we saw across-the-board increases for most all contribution amounts, and as usual the income limits increased as well. This provides increased opportunity for savings via these tax-preferred vehicles. IRAs The annual contribution limit for IRAs (both traditional and Roth) increased from $5,000 in 2012 to $5,500 in 2013. The “catch up” amount, for folks age 50 or over, remains at $1,000. The income limits for traditional (deductible) IRAs increased slightly from last year: for singles covered by a retirement plan, your Adjusted Gross Income (AGI) must be less than $59,000 for a full deduction; phased deduction is allowed up to an AGI of $69,000. This is an increase of […]
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What If My Employer Doesn’t Match My 401(k) Contributions?
Should I continue to make contributions to my 401(k)? Is there something else that I should make contributions to instead? As you may recall, the recommended order for retirement savings contributions is normally as follows: 401(k) contributions up to the amount that the company matches max out your Roth or traditional IRA contributions for the year (as applicable) max out the remainder of the available 401(k) contributions make taxable investment contributions In the situation where your employer doesn’t match your contributions to a 401(k) plan, the order of contributions is more appropriate if you bump up the Roth or traditional IRA contributions. In other words, just eliminate the first bulletpoint. Now, the choice of Roth IRA versus the traditional IRA for your contributions is dependent upon your income and the tax impacts. For example, you would not be eligible to make a deductible traditional IRA contribution if your Modified Adjusted […]
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What is Meant by Half Years of Age?
If you’ve paid much attention to the rules around retirement plans (IRAs, 401(k)s, and others), you’ve probably noticed that there are a couple of rules that refer to ages that include “½”. So what does this mean?? Well, quite literally, this means 6 months after you reach a certain age. The two primary ages with “½” included are 59½ and 70½. So, to be age 59½, means that you reached your 59th birthday six months prior to that date. Likewise, to be age 70½ means that you reached age 70 six months prior to that date. These two ages are for different purposes and are (naturally) treated differently. Age 59½ The rule using age 59½ is for one of the exceptions to the penalty for early withdrawals from your IRA or 401(k) plan: once you’ve reached that age (and not before that age) you can take withdrawals from your IRA […]
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About to Graduate? Learn How to Save!
Hey, soon-to-be-graduates: as you begin to make your way out into the world of full-time employment, you’ll soon be faced with many, many “grown up” ways to spend the money you’ll be earning. You’ll of course have rent, insurance, food and clothing, maybe a car payment, and you’ll want to use some of that new-found money to blow off steam, however you choose to do that – maybe fulfilling a lifetime dream of getting “beaked” by Fredbird, for example. If you’re on top of your game, you’ll may also be thinking about saving some of your earnings. Here, you’ll have a bundle of options to choose from – regular “bank” savings accounts, 401(k) plan (or something similar) from your employer, and IRA accounts, both the traditional deductible kind and the Roth kind (hint: the Roth kind is what I want you to pay particular attention to). Side note: even if […]
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5 Facts You Need to Know About Your Retirement Plan
Image via Wikipedia Many of us are covered by one or more types of defined contribution retirement plans, such as a 401(k), 403(b), 457, or any of a number of other plans. What many of these plans have in common is that they are referred to as Cash Or Deferred Arrangements (CODA), as designated by the IRS. These plans are also often referred to as Qualified Retirement Plans (QRPs). Each type of plan has certain characteristics that are a little different from other plans, but most of them have the common characteristic of deductibility from current income and deferred taxation on growth. (Note that this list of plans does not include IRAs. IRAs have certain characteristics that are completely different from QRPs, and vice-versa.) 1. Each dollar you defer is worth more than a dollar. It’s true. As you defer money into your retirement account, each dollar that you defer […]
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The latest in our Owner’s Manual series, A 401(k) Owner’s Manual, was published in January 2020 and is available on 
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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”.