401(k) Decisions — You Can Take It With You

If you are preparing to change jobs, do you know what your choices are for managing the money in your current employer’s retirement plan? Although many people choose to take a cash distribution, there are other options that may benefit you more.

Uncle Sam Loves Cash Distributions

Taking a lump-sum cash distribution may trigger an immediate 20% federal withholding tax. In addition, a 10% additional tax may apply if you are younger than age 59½.* Taking your money in cash also means that you’ll no longer enjoy the potential benefits of tax deferral that a qualified retirement plan offers.

Depending on your circumstances, you may have several options that will allow you to maintain the tax-deferred status of your retirement plan assets:

  • Leave the money in your former employer’s plan. Your former employer must allow you to leave the money where it is as long as the balance exceeds $5,000. You’ll no longer be able to contribute to the account, but you’ll still decide how the existing assets are invested.
  • Roll over the money to your new employer’s plan. By “rolling” the money directly to your new plan, you’ll avoid the taxes that could eat away at a cash distribution. You’ll also only have one set of investments to monitor. Even if you’re not immediately eligible to contribute to the plan at your new job, you may still be able to roll over the money right away.
  • Roll over the money to an IRA. If your new employer doesn’t offer a retirement plan or you aren’t yet eligible to participate, you can roll over the money directly to a traditional IRA. Again, you’ll avoid taxes that you’d incur if you took a cash distribution and still enjoy the potential benefits of tax deferral. Experts advise against commingling your retirement plan assets with other IRAs you may have set up. Instead, open a separate IRA account, known as a “conduit IRA,” which may allow you to move the funds to a new employer’s retirement plan at a later date.

Research Your Options

If you plan to change jobs, don’t just take the money and run. Since rules vary from company to company, find the time to explore your alternatives. If you have specific questions about your retirement plan distribution options, contact your employer’s benefits coordinator or a qualified financial consultant.

Source/Disclaimer:

*If you’re age 55 or older and separate from service, the 10% additional tax may not apply for certain periodic withdrawals taken from an employer-sponsored retirement plan. Keep in mind that the 10% additional tax may be incurred on distributions taken from an IRA prior to age 59½.

Required Attribution

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

Balancing Act: Saving for Both Retirement and College

Linda and Peter are worried about their financial future. “We want our one-year-old son, Raymond, to go to college, but we’re concerned that in 17 years, the cost might be more than we can afford,” says Peter. “We also need to save for our retirement,” adds Linda. “Can we reach both of these goals?”

Linda and Peter aren’t alone. Millions of Americans are finding it a struggle to balance the high cost of higher education while saving for their own retirement. If you’re one of them or would like to help someone faced with this situation, put your worries aside. Fortunately, there are steps you can take to help overcome this double-sided planning hurdle.

For example, because Linda and Peter won’t need their money for 17 years, they decided to begin investing now and often. Starting a regular investment program long before needing the money can potentially work in their favor. That’s because of compounding — which is what happens when previous earnings from an investment remain invested and, in turn, earn more money.

They also decided to make the most of their contributions by investing in vehicles that would generate important tax benefits. They chose to funnel $100 each month into a 529 College Savings Plan, which would allow their contributions to benefit from tax-deferred growth and tax-free withdrawals. Meanwhile, they also set aside $200 a month into an IRA. When they receive raises, Linda and Peter will increase their contributions to both accounts.

Getting a Late Start

Sandy and Paul have a different issue. “We don’t want to be a financial burden on our kids when we’re older, so we’ve always opted to max out our 401(k)s and IRAs, which limited the amount left to contribute to a college fund,” says Sandy. “Now our twins are 16, and we’ve only managed to save $8,000 for their college expenses.”

“Fortunately, my parents have helped out by investing $22,000 in UGMA custodial accounts,” says Paul. “We should be eligible for loans and maybe the girls will receive scholarships. It won’t be a cake walk, but at least we should be able to get them through college without sacrificing our retirement.”

Planning Is Key

If you’re feeling overwhelmed while investing for long-term financial goals, why not create a workable financial plan and begin to invest regularly? Over time, even small sums of money invested could potentially add up. And by all means, don’t forgo investing for your own Golden Years. After all, there are no retirement scholarships. Investing in an IRA has many benefits. For example, assets held in an IRA will not affect your eligibility for financial aid, and if need be, usually you can make penalty-free withdrawals for qualified higher education expenses.1 With a traditional IRA, you may benefit from a tax deduction now while your earnings grow tax-deferred. With a Roth IRA, you make contributions with after-tax dollars, but qualified withdrawals will be tax-free.

Don’t Go It Alone

These are just some ideas for stashing away money for both college and retirement, but don’t make important financial decisions in a vacuum. Remember the role that your financial consultant can play in helping you solidify your financial future. He or she has the experience and the resources to help you evaluate your situation and may be able to help you maintain your financial equilibrium.

Source/Disclaimer:

1Nonqualified withdrawals may be subject to a 20% withholding and a 10% federal penalty tax in addition to ordinary income tax.

Required Attribution

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

Maintain a Good Credit Rating

Installment debt, in itself, is not a bad thing. It enables us to make major purchases that would be nearly impossible to finance up front. In this consumer society, however, we’re bombarded with advertisements for literally thousands of “must-have” products. The result is that while our parents tended to pay with cash and buy only what they could afford, many of us have a “buy now, pay later” mentality.

Unfortunately, our massive appetite for credit may be eroding our financial security, as more Americans continue to rely on borrowed money to maintain their existing lifestyles.

Why Credit Is Important

It is important to establish credit if you plan to buy a home or automobile some day. Credit cards also provide a means of reserving a hotel room or obtaining cash while you’re traveling.

If you are a college student, recent graduate, or a nonworking spouse, you can begin to establish credit by opening a savings or checking account in your own name. You can then apply for a department store and/or oil company credit card. Having someone else cosign a loan for you will also get you started.

Creating a positive credit history for yourself requires using your credit card intelligently. Following are some dos and don’ts to help you manage credit effectively:

  • DO NOT charge more than you can easily pay off in a month or two.
  • DO NOT be fooled into paying just the low minimum amount listed on a bill. Credit card issuers make money on interest; there’s nothing they’d like more than to have you stretch out payments.
  • DO consistently pay your bills by the due date.
  • DO use credit for larger, durable purchases you really need, rather than non-durables, such as restaurant meals that are better paid in cash.

Missing Payments

When you miss a payment, the information immediately goes into your credit report and affects your credit rating. If you’re judged a poor credit risk, you may be refused a home mortgage or rejected for an apartment rental. In addition, a prospective employer looking for clues to your character may dismiss your job application if your credit report reflects an inability to manage your finances. In most states, an auto insurer may put you into its high-risk group and charge you 50% to 100% more if your credit record has been seriously blemished within the last five years. Many property insurers also review credit histories before they issue policies.

How Credit Reporting Works

Credit reporting agencies, also known as credit bureaus, gather detailed information about how consumers use credit. Businesses that grant credit regularly supply credit information to credit bureaus. Credit bureaus then compile this information into credit reports, which are sold to banks, credit card companies, retailers, and others who grant credit.

Your credit report helps others decide if you are a good credit risk. This information should be supplied only to those parties who have a legitimate interest in your credit affairs, including prospective employers, landlords, or insurance underwriters, as well as others who grant credit. The Fair Credit Reporting Act (FCRA), the federal statute that regulates credit bureaus, requires anyone who acquires your credit report to use it in a confidential manner.

The following information is most likely to appear in your credit report:

  • Your name, address, social security number, and marital status
  • Your employer’s name and address, and potentially an estimate of your income
  • A list of parties who have requested your credit history in the last six months
  • A list of the charge cards and mortgages you have, how long you’ve had them, and their repayment terms
  • The maximum you’re allowed to charge on each account; what you currently owe and when you last paid; how much is paid by the due date; the latest you’ve ever paid; and how many times you’ve been delinquent
  • Past accounts, paid in full, but are now closed
  • Repossessions, charge-offs for bills never paid, liens, bankruptcies, foreclosures, and court judgments against you for money owed
  • Who owes the debt — you alone, you and a joint borrower, or you as cosigner
  • All debts cosigned by you
  • Bill disputes

Negative information can be kept in your file only for a limited time. Under the law, delinquent payments can be reported for no more than seven years and bankruptcies for no longer than 10 years.

Signs of Credit Overextension

1.    You don’t know how much you owe.

2.    You borrow to buy items you used to purchase with cash.

3.    You have to juggle other bills just to pay the minimum charges on your cards each month.

4.    Each monthly credit balance is higher than the last, and you keep applying for more credit, using the cash advances to pay bills.

5.    You pay bills using money intended for other needs.

6.    Creditors are sending overdue notices.

7.    You have no savings or emergency funds to cover three to six months of living expenses.

 

Free Credit Reports

Under federal law, you are entitled to receive a free credit report from each of the three national credit reporting companies (Equifax, Experian, and TransUnion) once every 12 months. To get yours, visit www.annualcreditreport.com

Be Credit-Smart

Your credit history requires maintenance, just like other areas of your life. Even if you pay your debts on time, don’t assume that your credit rating is flawless. Mistakes do occur.

The FCRA entitles you to review information in your credit file. If you have been denied credit, the company denying credit must let you know and give you the name and address of the credit agency making the report. Once you have this information, you can send a letter to the agency and you will receive the information in your credit file, at no cost, within 30 days.

It’s a good idea to obtain a copy of your credit report to check it for accuracy. A new law entitles all consumers in the United States to one free online credit report every 12 months from each credit reporting agency. To do so, log on to www.annualcreditreport.com. (Keep in mind that other websites claiming to offer “free” credit reports may charge you for another product or service if you accept a “free” report.) If you wish to dispute any information in your file, simply write the agency and ask them to verify it. Under the law, they are required to do so within a “reasonable time,” usually 30 days. If the agency cannot verify the information, it must be deleted from your file.

Required Attribution

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2017 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

How Inflation Threatens Retirees

Its effect is subtle, yet significant.

In retirement, you face a quiet financial threat. Over time, inflation may erode your purchasing power.

Even mild inflation eventually reduces the value of a dollar. If consumer prices rise just 2% a year for the next 25 years, $50,000 will buy the equivalent of $30,477 by the end of 2041. Or to put it another way, a car that costs $50,000 today will cost $82,030 by then. If inflation approaches levels seen before the Great Recession, there will be more to worry about: after 10 years of 5% inflation, it would take $163 to buy the groceries $100 could today.1,2

Extremely conservative investments may not yield enough to keep pace with inflation. If you favor such investments, you may effectively end up “living on less” as your buying power dwindles. In recent years, some costs have risen much faster than the inflation rate, such as prescription drug prices and the expense of a college education.

This is why growth investing matters in retirement. While investors commonly want less risk in their portfolios as they age, accepting some risk (and staying invested in equities) may be necessary. In a good year, equities may post much greater returns than fixed-income investments. Social Security income merely increases in proportion to inflation; it keeps pace with it, but never outruns it.

If you want to maintain your quality of life in retirement, investing to beat inflation may be essential.

Sources/Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

1 – fidelity.com/viewpoints/retirement/retirement-income-strategies [4/6/16]

2 – ing.com/Newsroom/All-news/Features/Feature/What-is…-inflation.htm [9/26/16]

Snowball or Avalanche?

Manageable debt is something that in the modern world you are going to be faced with.  If like myself you were lucky enough to have parents pay for your education, you could’ve avoided that student debt bill, but the days of paying for your first home with a check are long gone.  That’s not a bad thing though.  Financing allows us to purchase items without dedicating a large amount of capital up front.  Yes the bank takes a cut for providing the upfront cost in the form of interest, but saving enough cash to even pay for a used car in one swoop can be an expensive proposition.  However, as a society sometimes with the number of different payments we have to make, debt can become a headache.  This article is meant to help an individual lay out a plan to help tackle that mountain, and put you in a better place.

The Avalanche

green pine trees covered with fogs under white sky during daytime

Avalanche debt payments are really simple.  Sit down and look at all your loans and figure out the largest interest rate.  From there you make the minimum payments to your other loans and put all you can towards the loan with the largest interest rate.  Once this loan is paid off you move onto the second highest and so on.  This method minimizes the amount of interest you would have to pay and has your loans paid off the fastest.  However, if this large interest loan has a high balance it may be frustrating to see that the balance only slightly changes…

The Snowball

The snowball method is again really simple.  However, this method focuses on your loan carrying the smallest balance.  Again make a list of all your loans.  This time though list them in order from the smallest balance.  Next pay the minimums to all your loans except your smallest loan which you put whatever you can towards.  While you may pay more in interest and it may take longer, there are studies of the human psyche that hint that this method may be more effective.  Paying off that first loan has a positive effect on your mentality encouraging you to pay off the next one and so on.

Conclusion

Much like saving for retirement, paying off debt isn’t complicated, its just not easy.  I’m sure there are a lot of other methods out there, or you may have your own way.  The key is to set yourself rules and continue to work and build.  If you feel overwhelmed sometimes its ok.  It happens to everyone.  However, setting up a system can relieve a lot of this stress and hopefully this article introduced you to a few new ideas.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.