Benefits of Investing in a 401k versus an IRA
Many people open an IRA account in their early twenties in hopes of saving a significant amount of money for their retirement and cashing in on the tax-free benefits. IRA accounts do offer several benefits, but so do 401k plans. Company 401k plans are very similar in scope to traditional IRA accounts because the contributions are invested before any taxes are taken out.
This lowers the account holder’s adjusted gross income, which means the account holder pays less taxes each year without any penalties. However, there are a number of benefits of shifting contributions to a 401k plan. Here’s a close look at the benefits of investing in a 401k when compared to an IRA:
Understanding Types of IRA Accounts
Individual Retirement Accounts (IRAs) are a popular investment strategy for many people. These are individual investment accounts, so there are no company matches involved. The two types of IRA accounts available are Traditional IRA and Roth IRA accounts. The biggest benefit of having a traditional IRA account is that the funds can be deductible and any money invested before taxes will give you an immediate tax break.
Roth IRAs are non-deductible, but the distributions made during retirement are exempt from taxes. This is one of the key reasons why people choose a Roth IRA instead of a traditional IRA. If you are interested in becoming an IRA account holder, you need to meet certain tax and income requirements, and eligibility is based on your overall income, marital status and filing status.
Choosing Between 401k and IRA Accounts
One of the key reasons why people choose a 401k plan is because many employers will be able to match contributions throughout the individual’s career. However, some company 401k plans have several limitations and may end up costing you more in the long run. IRAs are attractive investment accounts for others, because they are individually-owned and controlled. The account holder gets to choose how much they want to invest each month, and where their investments are going. For example, IRA account holders decide whether they want to invest their money in ETFs, stocks, bonds, or other types of funds. Roth IRA plans have the added benefit of allowing for tax-free withdrawals.
If the company you are working for doesn’t offer a company 401k plan or contribution match, your best option may be to open a Roth IRA account. Roth IRA accounts give you a lot of flexibility and allow you to withdraw your money without paying taxes during retirement.
There are a number of benefits of investing in a 401k, instead of a traditional IRA or Roth IRA. However, 401k plans may have some limitations. Talk to your financial advisor or human resources department at your company to discuss the benefits and drawbacks of these accounts, and make the most informed financial decisions for your future.
Tags: 401k advice, 401k plans, retirement plans, roth ira
Tips for Protecting Your 401K During a Recession
If you’re one of the millions of people with a 401k account during tough economic times, you may have considered withdrawing funds or reducing your monthly contributions just to stay ahead of the financial game. Unfortunately, both of these strategies can work against you when you trying to maximize your funds.
Even when the Dow Jones Industrial Average drops and the economic climate is looking bleak, it is in your best interest to continue making the largest contributions possible to your 401k account and do whatever it takes to protect your investment. Here are some important tips for protecting your 401k during a recession:
1. Keep on contributing. The people who remain invested will generate the biggest returns in the long-term, according to the financial experts. Even when money is tight, make a habit of contributing as much as possible towards your 401k so that you can keep building your account. Even when the economy is experiencing a financial meltdown, you can secure your tax-free contributions and look forward to a high return on investment during your retirement.
2. Consider diversifying your portfolio. Even though you want to keep things steady during the rough economy, you also want to take the time to assess your risk tolerance and consider diversifying your portfolio for a better return. If you are comfortable with changing your lineup of accounts and investing in funds that will generate a higher return, don’t be afraid to do so. Sit down with a financial advisor and revisit your accounts to see what your options are.
3. Keep buying even when the market’s going down. One of the key principals of investing is to buy when prices are low, and during an economic recession, you can find record-low prices. If you are in a position to do so, consider investing more than usual to reap greater rewards when the market recovers. This can put you in a position to look forward to a healthier savings account that can reach up to 15% savings rates on your income.
4. Don’t cash out your entire account. One of the worst things you can do during a recession is to cash out your account entirely. If you do this before your retirement age, you will be paying high penalties and will also be paying taxes on the total value of the account. Do whatever you can to keep your account in good standing so that you don’t have to pay high penalties and fees.
5. Ask your employer for assistance. Some employers provide investment advice free of charge to their employees. Get some professional advice for managing your account so that you can earn the highest possible annual returns.
Tags: 401k, 401k tips, retirement planning
Understanding 401k Asset Allocation
When you have a company-sponsored 401k plan, you have several options for asset allocation, a process that divides your money between different asset classes to help you get the highest return. The most conservative approach to managing your 401k plan is to invest in a Treasury bill or bond, or any other type of investment that is guaranteed by the United States government.
A less conservative approach is to invest in international stock funds or by investing in companies that are headquartered outside of the United States, because these types of investments typically carry more risk. Here’s a close look at the risks and rewards associated with various types of asset allocation classes and categories:
International Stock Funds
This is considered to be the highest risk of all asset class categories, but also has the highest rewards. These types of investments usually experience more volatility but do have a higher potential for high return than other investment options, especially those that are based in the United States.
Small or Mid-Cap Stock Funds
These types of fund are invested in U.S.-based companies and have market caps between $300 million and $10 billion. These types of investments also typically carry a higher degree of risk and return, and may be an attractive addition to your portfolio.
Large-Cap Stock Funds
If you are investing in U.S. based companies that have market caps above $10 billion, you may be positioning yourself to receive a high rate of return on your investment. However, these types of investments also carry a higher degree or risk.
Bond Funds
If you are investing in loans made to companies or government entities, you may be investing in accounts where values fluctuate over time, but generally provide a steady rate on your return. These types of investments typically do carry more risk than their cash equivalents, but usually less than equity accounts.
Short-Term Fixed Income
This type of asset class includes Certificates of Deposits (CDs), Treasury Bills and Money Market instruments. These are the least risky of all investments, and generally provide a very low yield on investment. Most people with limited funds or little experience in investing will focus on these types of investments.
If you are looking for a more aggressive asset allocation, you may consider investing over half of your 401k in large cap stock funds, and approximately a quarter in small or mid cap stock funds. Over ten years, you could potentially generate a very high return on your investments. A more conservative asset allocation would be a 40 percent investment of cash and short-term fixed income, and investing about 25 percent of your 401k in bonds.
Tags: 401k advice, 401k tips, retirement plans
How to Make the Most of Your 401k
Investing in a 401k is an important financial decision and it’s in your best interest to start making contributions as early as possible. The American Savings Education Council reports that almost 25 percent of people with access to a 401k don’t even participate, so it’s important that you take control of your finances and take advantage of a 401k plan when it’s available.
Here are some essential tips for making the most of your 401k:
1. Contribute as much as you can, as often as you can. Plan limits change by year, but you will be helping yourself by contributing as much as you can as frequently as possible. Put in the maximum amount each year if you can afford it.
2. Diversify your portfolio. If you want to enjoy the fruits of your labor during retirement, take the time to meet with a financial advisor so that you can spread your assets. It’s usually a good idea to invest in your own company’s stock, but you should also branch out to other investments if you want to maximize the return on your investment.
3. Consider investing in equity mutual funds as part of your 401k plan. Even though the stock market fluctuates a lot in the short term, you can still get a solid return on your investments when you invest in equity mutual funds as part of your 401k plan. Discuss your options with a financial advisor so that you can make the best financial decisions.
4. Find out about employer contributions. Many employers will match your 401k contribution each year that you are building up your retirement fund. Make sure you have submitted all the paperwork and have a copy of all contributions each year so that you know what your 401k looks like at any given time. Make the employee contribution a part of your asset allocation strategy.
5. Don’t withdraw before the withdrawal period. The only way you will be able to get the best return from your lifelong 401k contributions is to leave it there until you reach retirement age. If you withdraw from your 401k early, you will have to pay a penalty and pay taxes on all of your funds. Financial experts recommend making changes to your spending habits and turning to other sources of cash if you need to so that you can leave your 401k fund intact.
There are several ways to maximize the return your 401k, and working with a financial planner or financial advisor can help. Use these tips to make the most of your 401k investment.
Tags: 401k advice, 401k investments, 401k planning
How to Manage Your 401k and Protect Your Investment
Contributing to your 401k regularly puts you in an attractive financial position and may help you look forward to a comfortable retirement. However, not everyone is able to manage their 401k successfully and protect their investment for the long term.
If your 401k account was set up by your employer, you may be like many employees who don’t have any knowledge of investing, and you may be vulnerable to making some financial mistakes. Here are some tips for managing and protecting your 401k investment:
1. Get help from a financial advisor. Many people overlook the benefit of speaking with a financial advisor about their 401k plans. Even though this type of retirement plan is self-managed, you don’t have to make all the financial decisions on your own. Seek help from a certified financial planner or investment advisor so that they can help you plan your investment decisions for the oncoming years.
2. Review your investments at the end of each quarter. Get into the habit of meeting with your financial advisor to take a close look at your investment portfolio, and see how your investments are performing at least once each quarter. Some people get caught up in monitoring their stocks on a daily basis, but those daily fluctuations won’t have much of a long-term impact. Checking in a few times per year will help you make the best decisions about reallocating your funds to stocks and other investments if needed.
3. Don’t put off your contributions. It can be tempting to avoid making contributions to your 401k, but you need to keep making contributions and avoid putting it off for an extended period of time. There really is no ‘ideal’ time to invest, so you just need to make sure you are investing as much as possible with each paycheck – or on a monthly basis.
4. Avoid borrowing money from your 401k. Protect your 401k investment for the long term so that you can earn the highest possible return when you retire. If you withdraw from your 401k early, you will be responsible for paying high fees for the withdrawal and taxes on the amount of the withdrawal. Avoid the high costs and penalties by keeping the funds in your account for the full length of the investment. Congress mandates that everyone pays a 10 percent penalty if they withdraw from a 401k before they reach the age of 59 ½.
5. Remember that it’s a long-term investment. Your 401k is a long-term investment, not a stock fund or money market account. The only way you are going to reap the rewards of your investment is to leave it untouched and keep making frequent contributions. Keep that in mind as you make your financial decisions.
Tags: 401k, 401k advice, 401k basics, retirement plans
Tips for 401k Investing During a Recession
When the economy is in a recession, it may be difficult to plan for long-term savings and find ways to secure your financial future. For many people, the 401k plan is a primary and only source of retirement savings, and it can be distressing to think that these funds will not be available when the economy slides.
However, there are several things you can do to secure your 401k funds for the long term. Here are some important tips for 401k investing during a recession:
1. Keep making contributions to your 401k. It can be tempting to cut off your 401k contributions when the economy reaches its low points, but you need to make your investments a priority. Keep on making contributions to your account so that it can grow, even if it’s a small amount. Your investments will continue to grow, even at a slower rate.
2. Don’t cash out your retirement account. When the economy reaches a low point, many people panic and become pessimistic about their financial future. It’s at this point that some people begin to withdraw money from their 401k. Doing this will cost you, and you will be putting yourself at a financial disadvantage for the long-term. Do whatever you can to leave your 401k untouched!
3. Consider reallocating your investments. It’s important to take a close look at your accounts and review market performance on a regular basis. During a recession, consider sitting down with your investment advisor or financial consultant to determine how your funds are currently allocated. You may be able to reallocate your funds to less risky stocks and invest more in secure bonds, and protect your account.
4. Consider the risks. Determine the level of risk you are most comfortable with, and evaluate the total monetary value of your retirement fund as it stands today. The return on certain types of stocks will vary considerably depending on how long they remain in your investment portfolio. Sit down with your financial advisor to take a close look at what type of return you can expect, and consider what your risk tolerance is for each type of account.
Contributing to your 401k when the economy is in a recession is still a top priority, but it can be tempting to withdraw money from your retirement accounts. Consider these important tips when you are evaluating your financial status during a recession, so that you can make the most informed decision and protect your investments.
Tags: 401k advice, 401k tips, roth 401k
Easy Ways to Rollover Your 401k When Changing Jobs
When you change employers, you will need to take advantage of your previous and future employer’s 401k rollover options to successfully move your funds from each account. You may have the option to stay with the same type of 401k retirement plan as your previous company, move everything to an IRA account, or transfer the funds to another type of qualified retirement account, such as a Roth IRA.
There are several things you can do to make this transition as smooth as possible. Here are some easy ways to roll over your 401k account when changing jobs:
1. Determine what your new employer’s roll over process is. If you plan on staying with the same type of account, you may be able to simply sign documentation that authorizes your new employer to make the switch. In other cases, the process may be a little more complicated. Find out what you new employer’s roll over process is by contacting the Human Resources department.
2. Consult with a financial advisor. It may be in your best interest to meet with a financial advisor to discuss your options before making the move. A professional financial advisor may be able to review your accounts and explain what the benefits are of changing to a different retirement plan or account.
3. Don’t withdraw any funds during the transition. Withdrawing from your 401k will cost you a significant amount in penalties and fees. Don’t agree to accept a withdrawal check from your employer or you risk heavy taxes and high penalties. The best thing you can do is to simply initiate a transfer.
4. Shop around for rates and options. When you are going to initiate a roll over, consider the best value for your investment. Review your options in Roth IRAs and other qualified retirement accounts so that you can make the most informed financial decisions.
5. Learn all the details about your new employer’s sponsored 401k plan. Meet with the company’s Human Resources department so that they can go over all the intricacies of their sponsored plan, and explain how and when your contributions are made. Obtain a copy of this benefit in writing so that you can discuss your options with your own personal financial advisor or accountant.
Changing jobs can be stressful, and you will need to make some informed decisions about your existing 401k account. Use these tips so that you can easily manage the roll over process during the transition.
Tags: 401k account, 401k rollover, retirement plans, roth 401k
Roth 401k Limits for 2010
The Roth IRA account is a type of qualified retirement account that has a slightly different structure than a traditional individual retirement account (IRA). Roth 401k limits change from year to year, and in 2010, the contribution limits have changed only slightly since the previous year. Roth 401k limits are determined by several factors, including your annual income, current age and your filing status. Here’s what you need to know about the Roth 401k limits for 2010:
2010 Roth 401k Contribution Limits
The contribution limits for a Roth 401k account have not changed from 2009. This means that you can make an annual contribution of $5,000 if you are under the age of fifty, and an additional contribution of up to $1,000 per year if you are over fifty years of age.
2010 Roth 401k Income Limits
Single individuals contributing to a Roth 401k account in 2010 are subject to an income limit upwards of $120,000 per year. Married individuals who are filing their taxes jointly can contribute $5,000 to a Roth IRA if they have a modified adjusted gross income that is below $167,000. If the married couple’s modified gross income is between $167,000 to $177,000, they can contribute an amount less than their full 401k income limit. Couples who have an income that exceeds $177,000 are not eligible to contribute to a Roth 401k in 2010.
2010 Roth 401k Catch Up Limits
In 2009, the annual contribution limit was $5,000 and the catch up limit was $1,000 for all account holders. In 2010, the annual contribution limit and catch-up limits are the same, but the limits are expected to increase by $500 to $1,000 for the following year because of inflation.
2010 Roth 401k Withdrawal Policies
Individuals who wish to make a withdrawal from their Roth 401k account in 2010 can do so without penalty at the age of 59 ½. They can also withdraw from their account and not pay any taxes on the income if they are 59 ½ years of age and/or meet some other qualifications. Roth 401k account holders who withdraw before the age of 59 ½ will be subject to withdrawal fees, high penalties and will be responsible for paying taxes on the income.
Many Roth 401k withdrawal policies and account limits change from year to year, while others stay the same. If you are considering making changes to your 401k account in 2010, make sure you are aware of all of these limits and requirements so that you can make the most informed financial decisions.
Tags: 401k advice, 401k tips, roth 401k
Tips to Avoid the Most Common 401K Planning Mistakes
Planning your 401k is a responsibility you can’t take lightly. Even though 401k planning can feel a little intimidating, there are several things you can do to navigate your way through the process with ease. Many people make the mistake of simply not bothering about 401k planning until it’s too late – you don’t have to be one of them. Here are some ways to avoid the most common 401k planning mistakes:
1. Overlooking your company’s 401K policy. Does your employer offer a 100% or 50% employer match? What paperwork do you need to file to create your 401K plan? Do you get tax benefits? It’s important to learn about what your employer is providing, because 401k benefits vary significantly from company to company. Sit down with HR so you can learn about everything you are eligible for.
2. Borrowing from your 401k. It’s tempting to dip into your 401k when you need some extra money, but you’ll be losing a very valuable investment. Not only will you end up paying penalties and fees, but you will miss out on some tax advantages. Leave the 401k account alone and figure out other ways to obtain the funds you need.
3. Forgetting to rollover your 401k. When you leave a job, it’s critical that you rollover your 401k account to your new employer as soon as possible. Messing up this process can cost you, and you may end up paying a fee just because your previous employer had to ‘hold’ your account. Get in touch with the HR department at both companies to make sure this transition is as smooth as possible.
4. Waiting too long to make a withdrawal. While it doesn’t pay to withdraw too early, you can also make the mistake of withdrawing too late. The IRS demands that all 401k account holders withdraw from their account the year they turn 70 ½. If you don’t make the required withdrawal by this time, you will end up paying a penalty of as much as 50% of your balance. Talk to your financial advisor to find out exactly what you need to do to initiate the withdrawal.
5. Failing to pay a 401k loan. If you do end up borrowing from your 401k, you have to make the repayment schedule a top priority. Missing a loan payment will result in a penalty and you may end up paying extra taxes.
Tags: 401k planning, 401k tips, financial planning
How to Handle 401k Contributions during Tax Season
If you have a standard 401k retirement plan, you can relax during tax season. You will not be declaring this as a deduction because it has already been counted as pre-tax dollars, meaning it was deducted from your taxable income throughout the year. This can get a little trickier if you elected a different retirement option or withdrew funds during this year.
If you withdrew funds …
And are over 59 1/2: You will pay taxes on your 401k withdrawal at your current tax rate. You are over the minimum age for withdrawing funds, so you will pay no further penalty
And are under 59 1/2: You will pay taxes on your 401k withdrawal at your current tax rate. You will also need to pay the 10% penalty for taking funds out of the account prior to reaching the minimum age for withdrawing.
If you elected the Roth option …
And have a 401k: You paid post-tax dollars into your 401k. However, you cannot declare these funds as a deduction. Instead, the tax incentive is offered on the back end. You will be able to withdraw the funds tax free at a later date in life.
And have an IRA: You paid post-tax dollars into your IRA. Just like the Roth 401k, the tax benefits are on the back end, and you will not have to pay taxes later down the line when you withdraw.
If you have a traditional IRA …
You will be able to deduct the contributions. Unlike a 401k, an IRA is paid with post-tax dollars and then listed as an itemized deduction on a tax schedule. Speak with your accountant about this deduction to avoid any misreporting.
If you have alternative retirement accounts …
In private sector companies: Today, it is common for some people to place funds intended for retirement with independent investment groups. You may have purchased corporate bonds or stocks through an investment portfolio, and you will need to pay taxes on earnings in these accounts. Your investment house will send you an earnings statement at the end of the year to be used for tax purposes.
In public sector companies: Many government bonds are tax-free at both the state and federal level. The yields you earn each term may or may not be taxed, but the ultimate repaying of the bond is typically done without tax penalties. However, you should be careful about putting these tax-deferred or tax-free bond options into a traditional retirement account. They may lose their tax-exempt status if you do so.
If you are not sure what you have …
You will need to consult with an accountant. This is especially important the first few years you hold a retirement account and are not yet accustomed to how the filing works. For those new to the retirement savings crowd, start by asking your accountant about tax implications before you elect the type of retirement account you would like to use. Then, make sure you ask about whether you should be making regular contributions, regular tax payments or just filing everything at the end of the fiscal year.
Tags: 401k during tax season, 401k taxes, deducting an ira contribution, handling my 401k in tax season