Posts Tagged ‘retirement plans’
Tips for Managing Your 401k in the New Year
If you’re trying to save money for retirement and build your 401k, the New Year is a great time to evaluate your financial plan and make some important decisions about your finances. Many people don’t even take steps to participate in a 401k retirement plan for several years and miss out on saving a significant amount of tax-deferred deposit money. One of the keys to building a 401k is to start as early as possible and to keep contributing no matter what the economic climate may look like.
Use some of these important tips for managing your 401k in the New Year:
Do an Annual Review
If you have been diligent about contributing to your 401k over the past few years, the New Year is a good time to do an annual checkup. Take a good look at how your account is performing and consider the state of the stock market. If you think you may have more money available to contribute to your 401k in the oncoming year, talk to a financial advisor about your options. Your advisor may be able to restructure your account and recommend other investment products that will help you maximize your investments.
Make a Commitment Not to Withdraw Early
401k withdrawal rules and penalties are fairly strict and stay relatively the same from year to year. If you withdraw from your 401k this year, you will probably have to pay a 10% early withdrawal penalty and those funds will be considered income on your tax return. Withdrawing early can take away from the value of your investment that you’ve worked so hard to build, so make a commitment not to touch your 401k this year. Letting your funds grow is still the best personal financial strategy.
Transfer Funds if You Change Jobs
If you end up changing jobs this year, make sure you are able to just transfer the funds from your account instead of rolling over to an IRA. People who leave their jobs and do a rollover usually end up paying fees and taxes that equate to up to 20% of their investment. This can be a high price to pay for your own saving account, so find a way to simply transfer your investments to another account. Transferring your account instead of rolling it over will help you avoid those extra fees, taxes and other charges, leaving you with much more money in your account.
Roth 401k Versus Traditional 401k Plans
The Roth 401k became available to employees interested in a retirement plan in January 2006. Since then, thousands of employers have added the Roth 401k to their list of employee benefits, and many employees are enjoying the value of tax-free withdrawals and the flexibility of this type retirement account.
The Roth 401k plan has many similarities to a traditional 401k, and can help you to increase your savings potential as you work towards retirement. Here’s a close look at the Roth 401k and its similarities and differences to traditional 401k plans:
How Roth 401k Plans Work
As long as you follow IRS rules, having a Roth 401k account allows you to enjoy tax-free income upon retirement. Roth 401k plans are investment accounts and is now offered as a benefit by many employers. The plan allows account holders to defer a certain amount of their after-tax income to build up a solid savings account for retirement. The contribution limits for Roth 401k are the same as those for traditional 401k plans, and this limit changes from year to year.
The Roth 401k is only available for employee deferrals, which means that any employer contributions, such as profit sharing, employer matching are not included.
Anyone who chooses to participate in an employer’s 401k or 403b plan is eligible for a Roth IRA account, and you will not lose eligibility if your income increases to a certain level. Employers simply provide a form where you can designate whether all or some of your contributions should go to a Roth 401k account.
Roth 401k Plans vs. Traditional 401k Plans
The simplest reason to choose a Roth 401k plan is that you will be able to maximize your tax-free income received after retirement. Roth accounts are typically more valuable because distributions from these types of accounts are not taxable. Building up savings in a Roth account can make you much wealthier than traditional savings accounts during retirement. Many financial experts emphasize that the Roth 401k plan will make you wealthier in the long run.
Some of the similarities between the Roth 401k and a traditional 401k plan are:
- Rollovers allowed
- Account holders can begin withdrawing funds after 59 ½ and are required to withdraw funds after 70 ½
- An early withdrawal penalty of 10% plus taxes is imposed
- Account holders can withdraw funds if they experience financial hardship, early retirement or termination of service
Making some sound investment decisions well before retirement can help you grow your savings within a few short years, and ensure that you will be paying less taxes on your income, no matter what your tax bracket ends up being.
Choosing a Roth plan may mean paying more tax in the year of the contribution, but this won’t reduce your taxable income. The main difference will be in the total amount you end up saving, so there is a very positive cumulative effect from this investment approach.
Tags: 401k, 401k advice, retirement plans, roth plans
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
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 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
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