Should your 401k plan be adding annuities as alternative investments?
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Not doing your homework can cost you a lot of money
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Merriman advisor Aaron Spencer joins Paul to discuss Fidelity’s BrokerageLink
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Merriman advisor Lowell Parker joins Paul to discuss 401khelp.com
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Traditional vs Roth 401(k)
Do you have the Roth 401(k) option available to you? If so, it may be worth looking into. The following table compares the features of a Roth 401(k) to those of a traditional 401(k).
Traditional 401(k) Roth 401(k) Annual contribution limit $16,500 ($22,000 for participants age 50 and above) $16,500 ($22,000 for participants age 50 and above) Matching contributions Allowed. May be combined with employee contributions Deposited separately in a Traditional 401(k) account. Taxed when withdrawn Tax status – employee contributions Made with pre-tax dollars; deductible from current income Made with after-tax dollars; not deductible from current income Tax status – withdrawals after age 59½ Taxable as ordinary income Not taxable Mandatory withdrawals Required minimum distributions start at age 70½ Required minimum distributions start at age 70½ Best for
Employees who need the current tax deduction, who will make withdrawals within five years, or who will be in same or lower tax bracket in retirement Employees who do not need the current tax deduction, who will not make withdrawals for five years or more, or who will be in higher tax bracket in retirement Concerns All growth in the account, including capital gains on equity investments that would qualify for favorable capital-gains treatment if earned outside a retirement account, are taxed at ordinary income rates If tax rates decline, early payment of taxes will have been counter-productive; requires giving up more current income to maximize employer match
What is a REIT?
Real Estate Investment Trusts are a collection of properties such as apartments, office buildings and shopping malls that are bundled together and sold as a security. Their income is derived from rents on those properties. One of their defining characteristics is the requirement to distribute 90% of their income to investors. Doing so allows them to reduce corporate income taxes by passing the taxation through to investors. It is this characteristic that makes REITs better suited for tax-deferred accounts. REITs greatly reduce the monetary barrier to invest in real estate. They also create liquidity and when sold through a mutual fund diversify your real estate investment holdings.
Enron: The Musical. Another chance to revisit company stock in 401(k) plans
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What happens to your 401(k) when you leave your job?
Whenever you leave a job, whether it’s your choice or not, there are many details and changes competing for your attention, and it’s easy to overlook the disposition of your employer-sponsored retirement plan such as a 401(k), 403(b) or 457.
You don’t actually have to do anything, but doing nothing is usually not your best choice. Making the right choice can let you add many thousands of dollars to your retirement nest egg. Making the wrong choice can unnecessarily squander some of your savings to the tax man and deprive you of future earning power.
You may get some very general guidance from your employer. But employers are prohibited by law from giving you specific advice. The custodian of your retirement plan (Vanguard or Fidelity, for example) has little incentive to overcome a basic conflict of interest: Even though your investment options will be restricted if you leave your money where it is, that’s exactly what your custodian hopes you will do.
This is a choice you need to make on your own. Fortunately it’s neither complicated nor difficult. In addition, you don’t have to do it immediately (although the lack of a deadline is a mixed bag if it leads you to procrastinate and then become complacent). (more…)
Who gets your assets when you’re gone?
I want to tell you a story about how a woman’s simple negligence cost her kids nearly $500,000. After 30 years of marriage, a woman I will call Mary Smith found herself in a failing marriage that was heading for divorce court.
Her only major financial asset was a rollover IRA that had started as a 401(k) account shortly after she graduated from college and started a career in sales. As she advanced, she was able to put more and more money into the account; by the time of her impending divorce, her IRA was worth about $500,000.
As she contemplated her divorce, she was fairly confident that she’d walk away with at least her IRA. Her two children, Sarah and James, had recently graduated from medical school; each of them had substantial student loans. Mary told them she would help with the loans by using some of her IRA to pay down their loan balances at the rate of $12,000 per year for each of them. She made good on her promise by making the first payment.
Then tragedy struck. Early in the divorce proceedings, she was killed in an automobile accident. Mary’s lawyer had given her a list of documents to bring to their second meeting, including beneficiary designations for her IRA. But she never made it to that second meeting. (more…)
The Roth 401(k): Is it right for you?
Tax season has started in earnest, and some clients are asking whether or not they should switch their 401(k) accounts at work to the new Roth 401(k). They are hoping, I’m sure, for a simple answer. However, “It’s simple” is one thing you’ll almost never hear me say about a tax issue.
The Roth 401(k) is new for 2006 and reportedly is being offered or seriously considered by about 30 percent of the employers who have traditional 401(k) plans. If you are given the choice, should you stick with the traditional plan or switch to a Roth?
Sometimes – and this seems to be one of those times – I conclude that “fence sitting” is the best strategy.
The new Roth 401(k) offers a new flavor of retirement savings. With it, employees can save for retirement with no tax deduction at the time of savings, no tax on the growth in the account and no tax due at the time of withdrawal.
In the standard 401(k), you get a deduction at the time of savings, and there’s no pay-as-you-go tax on the growth (as there is if you own mutual funds in non-sheltered accounts). But you’ll pay tax on the contributions and the growth when you withdraw the money. (more…)
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