There was an article in Boomer magazine this month about prospective retirees who may be thinking twice about their retirement plans in light of the recently sour economy. It sounds like a reasonable concern to me. If your investment portfolio is off 15% over the past three months and your home price is steadily declining, your confidence about retiring is probably lower today than it was last year. How can you handle this situation?
Not all corporate employees realize that Roth 401k deferrals have been allowed since January 1st of 2006. The Roth 401k, like a Roth IRA, allows accounts to grow tax-free and allows for tax-free withdrawal of contributions, earnings, and interest. Funds are eligible for withdrawal at age 59 1/2 assuming you’ve held the account for at least 5 years. The ‘drawback’ is that you can’t take a tax deduction at the time of deferral the way you can with a traditional 401k. Many financial advisors feel that Roth plans, if you qualify for them, are more valuable than traditional plans. Technically, it depends on a few different factors including your current tax bracket, your retirement tax bracket, and which direction marginal tax rates are headed for in the future.
My last post asked the question “Are Corporate Retirement Plans a Bad Deal?” My response, as in most of my posts, is not simply yes or no. I prefer to break down the question such that plan sponsors and business owners can better reach their own conclusions. In my experience, the costs associated with corporate retirement plans seem to be a “don’t ask, don’t tell” type of issue. Unlike most, I always ask and gladly tell all.
Continue reading "Part II: Costs, Fees, and Expenses in Corporate Retirement Plans" »
This is my first post in a new series which will analyze the retirement planning industry. I will cover 401(k), 403(b), and other (less popular) vehicles in my discussions. My hope is to unravel to some extent the cost structure of these plans and help corporate executives, business developers, and plan participants to gain a stronger understanding of how their retirement funds are being handled. It’s no secret that retirement plans are a huge mystery, even to those who administer them and preach about their benefits. Much of my research is my own, and stems from reading hundreds of retirement plan documents and speaking to people who invest their hard earned money in these plans. The other portion of my research comes from Matthew Hutcheson, an authority in the field of unmasking qualified retirement plans. I’d like to thank him in advance for his extensive knowledge and research in this area. His paper on hidden fees in qualified retirement plans is outstanding and can be found, along with other interesting materials, at the 401k Help Center.
Continue reading "Are Corporate Retirement Plans a Bad Deal?" »
“Roth” is a provision which allows distributions from qualified plans to be withdrawn free of income tax forever. What you sacrifice with a Roth plan is the ability to take a tax deduction in the amount of your contribution. However, you gain the comfort of knowing that money won’t be subject to tax ever again. Take the following example: you’re a teacher who earns $100,000 per year. With a traditional 403b, a salary deferral of $15,000 would result in taxable income of $85,000. The $15,000 contribution would grow on a tax-deferred basis. At age 59 ½, you’d be able to withdraw money from the plan without penalty. When you eventually decide to retire and take distributions from your account, they would be taxed at your income bracket for that year. The big question is whether marginal tax brackets will be higher or lower when you retire than they are today. The answer to that is obviously a pure guess. However, for the purposes of financial planning, we generally assume our personal tax brackets will be lower during retirement because, well, you're retired!
Continue reading "Roth 403b vs. Traditional 403b - Which is Better?" »
Although several savings vehicles exist to fund a college education, 529 plans may be one of the best. 529 plans combine the advantages of other college savings vehicles but avoid some of the common drawbacks. The primary advantage is that earnings within the account are tax-exempt when used for qualified higher education expenses. This may be even more beneficial than a traditional IRA or 401k where the money is tax-deferred, but is still taxed as income when distributions are taken. The essence is- if you are going to pay for higher education expenses at some point, you might want to consider a 529 plan as a funding option.
Continue reading "College Funding - Opening a 529 Savings Plan" »
Ever since making financial planning a career, I’ve developed this habit of listening carefully when people discuss how they save money. One of my observations has been that many people don’t save enough money to warrant any real concern about good investment practices. I don’t criticize these people. I try to switch their focus from past mistakes to improving future habits and developing a realistic strategy going forward. I’ve noticed that even those who have a good discipline about saving money tend to accumulate large balances in checking and savings accounts before looking for better returns. The problem with this isn’t really the extra percentage points that you may earn in a bond fund over a CD or savings account. Tax benefits are the primary reason self-employed individuals and small business owners should utilize retirement plans. Most of these plans provide for tax-deductible contributions and tax-deferred growth on investment earnings. Passing up on these benefits can truly hinder a financial plan. The best way to think of retirement plans is as protection for your money: you go to work each day and put in the time and effort necessary to earn money. Once you have some, it should go to work the same way you do. Why should money sit around, perhaps even losing purchasing power to inflation? If I decided to spend $3,000 on the Babe Ruth baseball card which I’ve drooled over since I was a child, you wouldn’t find it sitting on my kitchen table. It’d be locked in a protective case which could withstand harsh weather, children playing, natural disasters, or anything else. My focus today is on small business owners and the retirement plans which are available to them.
Continue reading "Retirement Plans for Small Business Owners" »
I read a statistic in the Journal of Financial Planning last month which stated that 19% of today’s workers know with accuracy when they’ll be eligible for social security benefits.* This statistic is of particular concern to me after similar findings in a recent study I conducted to determine just how much (or how little) people ages 18-30 really know about social security. I asked each of 30 people the same three questions, the answers from which tell us a lot about how younger audiences think and why. The first question I asked was where they had learned about social security issues in their lifetime. The next question was whether or not they ever worry about the current status of the system. Finally, I asked if they had any feelings about the idea of privatizing a portion of social security taxes. The people were chosen at random and range from friends and family to co-workers and strangers, most living in or around New York City.
Continue reading "Social Security: A Youthful Perspective" »
I field a lot of questions regarding the various rules that govern 401k and 403b plans. Not only is it a confusing topic for the average investor, but the issue has been gaining in importance recently as these plans become more popular. The reason why they have similar names which often confuse people is that both reference the section of tax code which defines how they are organized. It may be easier to refer to them as “for-profit” and “not-for-profit” plans because therein lies the primary distinction.
If you work at a for-profit corporation, you probably have a 401k plan available to you at work. If you don’t, well, that’s an issue you may wish to raise with human resources. Most financial advisors would agree that funds accumulated through company retirement plans will be essential in light of future uncertainty regarding government benefits. A 403b is only available to tax-exempt organizations, the most common of which are schools, hospitals, and religious groups. Section 501(c)(3) of the tax code goes into considerable detail about the rules regarding organizing your business as tax-exempt. As for what the benefits are to contributing to either a 401k or 403b plan, here is the short list:
• Participants set aside money on a pre-tax basis through payroll. Let me explain what that means: If $100,000 is your taxable income in 2006, and you defer $10,000 through payroll into either plan, your taxable income is now $90,000. This is the primary benefit to contributing on a “pre-tax” basis.
• The deferral amount, $10,000 in our example, is directed to the authorized vendors working with your organization. I will discuss the vendor issue in the next paragraph as there are things to know about where you are sending your money. If you get paid monthly and you have twelve pay cycles per year, $833 would be taken out of each cycle and sent to the vendor managing your plan.
Continue reading "The differences between 401k and 403b plans" »
Pat yourself on the back if you’re leaving a job and have questions about your 401k. If you do, at some point you took the time to establish a 401k account at work. By doing so, a portion of your pay was directed into a tax-deferred vehicle which allowed you to accumulate funds, presumably for retirement. You didn’t have to save through the 401k, but you did because you either understood its benefits, or heard it was a good idea.
