What to Do If Your Company Doesn’t Offer a Retirement Plan

Working for a company with no retirement plans doesn't mean you can't create your own.

The ability to divert part of your paycheck to an investment account and build a nest egg is a huge advantage in the grand scheme of life. In fact, much of the American workforce relies on employer-sponsored retirement plans to do so.

But while we think of retirement accounts as part of a standard workplace benefits package, the reality is that not every employer offers a tax-advantaged retirement plan. The good news is that it’s possible to save for retirement on your own. Here’s how:

Start with an Individual Retirement Account (IRA)

If you have earned income, you are eligible to open an IRA. It’s possible to contribute up to $5,500 to an IRA in 2017. Individuals over the age of 50 can contribute an extra $1,000 each year to “catch up” on their retirement savings. There are two main types of IRAs to choose from:

Traditional IRA

When you contribute to a traditional IRA, you receive a tax deduction. Your investment broker will send you a statement at the end of the year so you know how much to deduct.

Because you receive a tax deduction now, you will have to pay taxes later when you withdraw money from your retirement account. You can start withdrawing money at age 59 and a half, and pay taxes on it at your marginal rate.

Note that if you or your spouse has a retirement plan through work, or if you have a higher income, your deduction eligibility phases out with a traditional IRA.

Roth IRA

With a Roth IRA, you make contributions with after-tax money, and the investments grow tax-free. So, you don’t get a tax advantage today, but you don’t have to worry about paying taxes on your future withdrawals.

Although this sounds pretty great, it’s important to note the income restrictions on the Roth IRA. Your ability to contribute phases out starting at $118,000 a year as a single filer in 2017. Once you reach $133,000 in income for the year, you can’t contribute to a Roth IRA at all. Instead, you might need to switch to a traditional IRA.

Choosing Between a Traditional & Roth IRA

Making this decision mainly focuses on your expected tax situation. If you think your taxes will be higher in the future, you can save money by paying taxes now at a lower rate and using a Roth IRA. However, if you think your tax bill will decrease later, try to avoid paying taxes today with the help of a traditional IRA contribution tax deduction.

Other IRA Options

Do you have a side gig on top of your full-time job? If so, use that as a reason to access some of the self-employed IRA options, such as SIMPLE IRA and SEP IRA accounts.

These IRA accounts often allow a higher yearly contribution than a traditional or Roth IRA. For 2017, the SIMPLE allows up to $12,500 in contributions each year with a $3,000 potential catch-up contribution. The SEP IRA has a limit of the lesser of 25 percent of your compensation or $54,000 for 2017.

Open Your IRA

Opening an IRA is relatively simple. You can open an IRA account with most online brokers and investors. Some even allow you to open an account with no minimum or opening balance. Other brokers might require a regular monthly contribution of $100 to create an account.

Many brokers offer access to low-cost index funds and ETFs for instant diversity and a reduction in fees. Set up an automatic transfer from your checking account into your investment account.

Consider talking to your human resources department to see if you can have part of your paycheck diverted to your IRA. Even if you don’t have an employee retirement plan, you can still passively generate savings for your future self.

See how debt affects your ability to save with a free credit report snapshot on Credit.com.

Consider the myRA

A few years ago, the government started an IRA alternative called the myRA. If you have a small amount to contribute, this can be ideal. You contribute as little as $5 per paycheck. Your tax-deductible contribution is invested in the Government Securities Fund. Your annual contribution limit and tax benefit is in line with a traditional IRA.

Once your account balance reaches $15,000, or after 30 years, you have to move the money into a private IRA. Plus, you don’t have as many choices for investing with the myRA. Your money has to go into the specified fund. Because the barrier to entry is so low, it’s a good starter retirement account as long as you plan to upgrade later.

Open a Health Savings Account (HSA)

Health care costs can present a challenge during retirement. One way to address this issue, especially if your employer doesn’t offer a retirement plan, is with the HSA.

Not only do you receive a tax deduction for your contributions, but also the money grows tax-free as long as you use it for qualified health-related costs. While you can use the money now, it’s a good strategy to let the money grow. Plan to use the HSA for health care costs during retirement to capitalize on long-term, tax-free growth.

Once you reach 65, you can treat your HSA like a traditional IRA (with most of the same rules). However, integrating the HSA into your overall plan by using it in conjunction with an IRA can help you maximize your assets during retirement.

Are You Eligible for a Solo 401(k)?

Another option for those with side gigs is the solo 401(k). If you have a side business on top of your work, and you don’t have any employees, you can take advantage of higher 401(k) limits by opening a solo 401(k). One advantage to the Roth solo 401(k) is that it doesn’t come with the income restrictions you see with a Roth.

A solo 401(k) comes with a very generous contribution limit. On the employee side, you can contribute up to $18,000 for 2017. Your business can also contribute a percentage of income (20% or 25%, depending on your type of business). For those 50 and over, contributions to a participant’s account, not counting catch-up contributions, can’t exceed $54,000

These accounts are harder to find than IRAs. You might need to speak with a specialty brokerage or your bank to open a solo 401(k).

Taxable Investment Accounts

Finally, you don’t have to limit yourself to tax-advantaged retirement accounts. Any regular brokerage account can help you save for retirement. Brokers such as Acorns and Robinhood can help you invest pocket change for the future.

When investing through taxable investment accounts, though, you need the discipline to avoid withdrawing the money before you retire. Taxable investment accounts don’t restrict your access in the same way, so it can be tempting to raid your retirement fund for today’s expenses.

Get Started Now

Regardless of your employer’s involvement, you need to make room in your budget for retirement savings. No matter how you go about it, the important thing is to start investing with retirement in mind. The earlier you start, the more time your money has to grow.

Image: Portra

The post What to Do If Your Company Doesn’t Offer a Retirement Plan appeared first on Credit.com.

I’m About to Retire. What Accounts Do I Withdraw From First?

It can vary, but there are a few rules of thumb to consider when it comes to paying taxes on your retirement funds.

Q. I’m confused about how to decide which accounts to take money from when I retire next year. I’m 61. I have $730,000 in my 401K, $129,000 in a Roth, $200,000 in taxable mutual funds and about $50,000 in cash accounts. I will have about $24,000 a year in Social Security but not until age 65.
— Almost there

A. Congratulations on your upcoming retirement.

The good news is that you are permitted to start taking distributions from your 401K without penalties once you reach age 59 1/2. So next year when you retire, you are permitted to take money out of all of these accounts without any tax penalties, said Marnie Aznar, a certified financial planner with Aznar Financial Advisors in Morris Plains, N.J.

She said you should keep in mind that distributions from your 401K will be subject to ordinary income taxes, while distributions from your Roth IRA will not be subject to income taxes upon distribution.

The money that you have accumulated in taxable funds is also available, but if there are embedded capital gains in these holdings, you will incur taxable capital gains upon sale of the funds, Aznar said. If you have any capital loss carry-forwards, you could use them to offset future capital gains on your tax returns.

If your taxable account is generating some interest and dividends that you could have transferred into your checking account automatically each month, Aznar suggests you start with that in terms of covering your basic living expenses.

“The longer that you are able to leave the money within your 401K plan or IRA rollover — if you choose to roll it over — the longer it will remain invested on a tax-deferred basis,” Aznar said. “This means that you can avoid paying taxes for longer which will result in accumulating more funds.”

She said you may want to consider withdrawing just enough from your 401K plan to keep your tax burden as low as possible.

Without knowing more about your situation, Aznar made some assumptions to give a more detailed example.

Let’s assume you file your tax return “married filing jointly” and have no other income starting next year.

If you then hypothetically earned $100 of interest income and $4,000 of dividend income annually and claimed the standard deduction, and if you were to withdraw $30,000 from your 401K you would be subject to a total federal and New Jersey tax bill of less than $1,500 for the year, she said. (Calculations can vary by state; consult a local tax accountant for a better understanding of the taxes you’ll be subject to.)

If you were to withdraw $20,000 from the 401K plan, this would result in avoiding federal taxes completely and paying less than $400 in New Jersey state taxes, she said.

And once you start taking Social Security, your tax situation will change.

“Determine how much you need to withdraw to live on each month and then ideally, pull from the various buckets in the most tax-efficient manner,” she said.

For more on taxes, visit out tax learning center.

Image: Rawpixel

The post I’m About to Retire. What Accounts Do I Withdraw From First? appeared first on Credit.com.

How to Set Up Your First 401K

There's a lot to consider when saving for retirement. Here's what you need to know to get started with a 401K.

So you’ve decided to save for your retirement using your company’s 401K plan. Congratulations! It’s a great way to save. But now what? Which funds do you choose? How much should you contribute? Are there limits? How do your employer’s matching funds actually work? Can you access the money if you need it before retirement?

Obviously, there are a lot of questions that can arise when it comes time to set up your retirement savings, but we’re here to help. Here’s what you need to know to set up your 401K.

What Is a 401K?

The section of the U.S. tax code that describes these retirement savings plans is Section 401(k), thus the name. These plans let you invest pre-tax dollars directly from your salary, along with any additional investment made by your employer. Unlike an Investment Retirement Account (IRA), 401Ks are sponsored by employers, and, if offered at all, they must be made available to all employees of the company sponsoring the 401K.

Your employer does have the right to impose a couple of restrictions, however. 1. They can require that you work full-time for a period of time before eligibility, and 2., can also stipulate that you be at least 21 years old before enrolling. That’s why it’s always good to ask about eligibility when interviewing for a new job.

You Choose Your Investments

Most 401Ks are self-directed. That means you choose where to put your money from a list of funds made available through your 401K plan provider (Vanguard and Fidelity are two of the larger firms providing 401K funds). This can get tricky. Do you choose the safest investments that offer little risk but less reward? Do you opt for high growth? Targeted funds? Emerging market funds? What about bonds?

Obviously, you’re going to want to do some research, perhaps even talk to someone with some expertise. Most plan providers share details about the individual funds they offer on their websites, or at least have links to more details. Some even offer tools to help you choose which funds fit your needs, while others make real live people available for limited consultations. Seek out the assistance you need to fully understand what you’re doing with your savings.

You Also Choose How Much to Save …

There’s really no correct answer when it comes to how much to save, but certainly, saving as much as you can for retirement is a good idea. And if your employer offers matching funds (free money!) for your investments, you’ll at least want to invest the full amount they match. So, for example, if your employer matches up to 3% of your salary, you’ll want to invest at least 3%, though certainly you can invest more. Here are some tips on how to maximize your 401K.

… But There Are Limits

Federal law allows investors to put up to $18,000 into a 401K each year unless you’re over age 50, when you’re allowed to make an additional $6,000 in “catch-up” contributions.

If you’re in the lucky position of being able to save more than these limits, there are investing alternatives to your 401K that you may want to consider. These include IRAs, certificates of deposit (CDs) and even individual stocks if you’re familiar enough with the markets.

You Can’t Use Your Money …

Keep in mind that a 401K isn’t like a savings account. But for a few exceptions, you can’t withdraw your money before age 59½ without paying early withdrawal penalties and taxes. You can take a loan against your 401K if your employer’s plan allows for that, but only for specific purposes like education, medical reasons or first-time home purchases. Your repayments will come right out of your paycheck, making the process simple, but there are some dangers you’ll want to consider before borrowing against your 401K.

If you’re just starting out in the investing/saving world, you may want to consider putting a portion of your income toward an emergency fund that is easily accessed, carries no penalties and can get you out of a jam, like a giant car repair bill, when you need it.

… But You Can Take It With You

To another job, that is. When you leave, you won’t lose your investments, though you could lose contributions made by your employer. That’s because some employers require a “vesting period” for their contributions to your 401K. Essentially, it means you have to work for the company for a predetermined period of time before you can claim what they’ve given you.

When you leave, you simply set up a rollover IRA with your plan provider. Those funds can then either stay put in the IRA or be rolled over to your 401K with your new employer. You’ll want to compare the income history for the funds before deciding where the money will best serve you.

Retirement may feel eons away, but it pays (quite literally) to start early. Fortunately, we’ve got a full list of 50 things millennials can do now to retire at 65.  

Image: AJ_Watt

The post How to Set Up Your First 401K appeared first on Credit.com.

6 Tips for Gen-Xers Who Haven’t Prepared for Retirement

Here's how you can start saving for your future today.

An actor in New York City for most of his 20s, Aaron Norris got a late start on saving for retirement. It wasn’t until he became a 30-something that Norris finally began setting aside money, and he has spent the past decade playing catch up.

“I wasn’t even really cognizant of retirement,” said Norris of his thinking in his 20s. “I was just trying to make it work, and live, and stay out of debt.”

Norris’ story is not unique.

A study from the Transamerica Center for Retirement Studies found the median household retirement savings for Generation X (those born between 1965 and 1978) is $69,000. The same study found 40% of Generation X agrees with the statement: “I prefer not to think about or concern myself with retirement investing until I get closer to my retirement date.”

But that attitude could have serious consequences.

Those who wait until they’re around 45 years old to begin saving for retirement are likely to end up with a retirement portfolio at age 65 of about $285,000, according to a report from Edward Jones. But those who start around age 30 and save about $550 per month while realizing a 7% average return will end up with about $990,000 — which let’s face it, would make many people feel a whole lot more confident about sailing off into their golden years.

The question then becomes what to do if you’ve started late. What’s the best approach for gaining ground as quickly as possible? Here are tips from experts.

1. Don’t Delay Any Further

This may sound like obvious advice, but start saving now.

“Don’t view it as ‘I’m so far behind what’s the point?’ or ‘I have to save so much it’s unrealistic to even bother,’” said Scott Thoma, principal and investment strategist for Edward Jones.

Starting now is the most important thing you can do and the obvious first step.

2. Get Financial Therapy (i.e. Develop a Strategy)

Generation X, Generation Y and Millennials start building wealth later in life. Often that’s because they opt for experiences over settling down and accumulating money, said Norris, now a California-based real estate investor.

“We don’t buy houses so that we have the freedom to move,” said Norris. “But we certainly don’t have access to the same golden parachute retirement plans our parents enjoyed. So sit down with a good CPA and look at what you want your financials to look like when you retire…Some good financial therapy will go a long way toward helping set goals and priorities.”

Thoma, from Edward Jones agrees. He refers to it as “developing a strategy.”

People often settle on a random number they think is a good amount of money to have for retirement, without any idea how they’ll reach that number or how long that money will last.

Pro tip: You’ll be able to save more for retirement if you’re not paying a lot in interest on auto loans, mortgages or credit cards. You can get the lowest interest rates possible by having solid credit scores. (Want to check your scores? You can view two free, updated every 14 days, on Credit.com.) If you don’t, here are some tips for getting your credit back on track.

3. Max Out Your 401K Contributions

Contributing large sums to a retirement account can often be a challenge for a generation whose members face both raising children and caring for aging parents, but here are some basic rules of thumb to keep in mind.

If your employer offers a match for your 401K contributions, contribute at least up to the match amount. If you don’t, you’re leaving free money on the table.

If you’re in your 40s and have zero saved for retirement, and you’re aiming to replace 80% of a $60,000 annual salary upon retirement, it will require setting aside 25% of your pay right now, said Thoma. This scenario assumes retirement at 65 years old.

While 25% may seem like a lot, this percentage includes any employer contributions to retirement, said Thoma. It’s also based on the assumption that the individual is not supplementing their income in retirement with other sources of income, like working part-time.

Keep in mind: If you make more than $72,000 you won’t be able to put that total 25% into your 401K because annual contributions are capped at $18,000. If that’s your situation, you need to look into other investment vehicles like individual retirement accounts, certificates of deposit or buying shares directly. Talk to a financial professional to help decide the best option.

4. Consider Switching Jobs

Generation X is famous for living in the “now.” That approach to life even impacts the job choices, says Norris.

The gig economy, which provides the freedom to work from anywhere in the world, and work only when you want to, has become a popular option among this generation. But when it comes to preparing for retirement, the gig economy is probably not the best career choice.

Norris advised asking whether taking a more stable job might pay off more in the long run.

Roslyn Lash, a North Carolina-based accredited financial counselor, suggested seeking out companies that offer a pension. Options include government entities and school systems, she said.

5. Move

If you’re spending 50% to 60% of your take-home pay on rent, you’re wasting a lot of money, said Norris.

“You get nothing but the benefit of a roof over your head when you’re renting,” Norris said. “Consider moving to a location that will allow you to save more.”

6. Have a Flexible End Point

Delaying retirement even just a few years could have a considerable impact on your potential income. For instance, every year you continue to work adds 8% to your Social Security income, said Thoma.

“Not only will it provide you with more years to save, it also provides more years to earn Social Security credit,” said Thoma. “Doing this also means you will have fewer years of retirement to provide funding for.”

Image: PeopleImages

The post 6 Tips for Gen-Xers Who Haven’t Prepared for Retirement appeared first on Credit.com.

This Is Not Your Father’s 401K: The Retirement Product You Should Know About

Want guaranteed income for life? Here's how you can get it.

Chances are you’re like most Americans and, regardless of your age, you aren’t saving enough for retirement, if you’re actually saving anything at all.

Nearly 40 million U.S. households (45%) have no retirement assets, according to a recent report by the National Institute on Retirement Security, and half of those households are headed by someone aged between 45 and 65. In fact, savings rates are so bad that many Americans are dying with an average of $62,000 in debt.

Even if you are saving enough for retirement, you might still wonder if that money will last your entire lifetime. Defined contribution plans like 401Ks are great at helping employees save for retirement, but they provide no guarantee of income as pensions do. On top of that, most 401Ks are self-directed, meaning those who do a poor job handling their investments could end up with significantly less money than they need in retirement.

But what if you could guarantee yourself income for life, just like ubiquitous company pension plans used to provide (and government pension plans still do)?

Well, you can. Here’s how.

Back in 2014, the Treasury Department started an initiative focused on “putting the pension back” into 401K retirement savings. (Need to brush up on retirement lingo? Here’s a handy guide.) Through loosened restrictions and some tax-law changes, the Treasury made it easier to convert funds from retirement savings into plans known as longevity income annuities, or LIAs, that provide guaranteed lifetime income.

Income for Life

LIAs are deferred annuities and, while they’ve been for a while, they’ve only recently become a part of mainstream retirement planning. The Treasury initiative could even cause them to become an integral part of 401K target funds. Here’s how they work: Say you have $100,000 in retirement savings. At age 65, you use $10,000 of that money to purchase an LIA. “Even in the current low-interest-rate environment, a deferred single-life annuity purchased at age 65 for a male costing $10,000 can generate an annual benefit flow from age 85 onward of $4,830 ($3,866 for a female) per year for life,” a recent National Bureau of Economic Research working paper concluded.

It’s easy to see how helpful this kind of guaranteed income could be, particularly given larger investment amounts. Of course, it’s a hedge that you’ll live long enough to take advantage of those funds, but some programs provide for reimbursement should you die before accessing all of your money. More on that in a minute.

According to Olivia S. Mitchell, a professor at the Wharton School of the University of Pennsylvania and a co-author of the working paper mentioned above, LIAs are available to investors but are not yet tied to defined-contribution plans.

“There has been discussion about including them in the target-date suite of funds, and some employers are actively looking for options,” she said in an email. “Relatively few insurers have them available as yet.”

“One reason annuities or lifetime income streams are not a standard feature of 401K plans is that many people don’t understand these products,” she wrote in an article for Forbes. “For instance, some older individuals tend to underestimate their chances of living a long time, so they don’t take proper precautions against outliving their assets. Others don’t understand financial concepts, and so they’re reluctant to take unfamiliar financial decisions. After all, retirement is usually a once-in-a-lifetime event!”

Just because they aren’t directly tied to defined-contribution plans just yet doesn’t mean LIAs aren’t easily accessed. AARP, for example, has been offering its Lifetime Income Program through New York Life since 2006. AARP’s plan has a cash refund feature so, as we mentioned earlier, if you die before your payments equal your annuity purchase price, your beneficiary will be paid the difference.

Is an LIA Right for Me?

As with most financial tools, some people will benefit from an LIA more than others. “People in poor health might not want to elect deferred annuities, particularly if they have a poor survival prognosis,” Mitchell said. “Some very wealthy people will not need the LIA as they can self-insure against outliving their assets. Retirees with a (well-funded) defined benefit pension probably don’t need additional annuitization. And people with a very small nest egg might not find it worthwhile to annuitize, say, $10,000. But much of the middle class could benefit.”

In considering LIA plans, Mitchell recommends asking how highly rated the insurer is who provides it. She also suggests knowing how well the state insurance guarantee fund is being run and the maximum amount you’d recover should the insurer go bankrupt. (As you’re planning your retirement, you should also make sure you have a full picture of your finances, including your credit. You can get a free snapshot of your credit report on Credit.com.)

So how much should you consider putting into an LIA? “Older individuals would optimally commit 8% to 15% of their plan balances at age 65 to a LIA, which begins payouts at age 85,” Mitchell, et al, wrote in their working paper.

As for timing, it doesn’t really make sense for someone who isn’t at or near retirement age to purchase an LIA. For one thing, you can’t access your retirement funds without penalty until age 60.

“It makes sense to decide how much to devote to the LIA in your mid-60s, since that gives 20 years over which the annuity value can build up,” so you can begin taking payments at age 85, Mitchell said.

Of course, there are a variety of annuity products to suit different personal needs, such as earlier payout options, so it’s a good idea to speak with a financial professional who can help you decide what product might be best for your financial situation.

Image: wundervisuals

The post This Is Not Your Father’s 401K: The Retirement Product You Should Know About appeared first on Credit.com.

Self-Employed? Here’s How to Plan for Retirement

Don't forget to include retirement savings in your plan to build a successful business.

When you’re hard at work as a self-employed entrepreneur or freelancer, retirement can seem like something that’s miles away. It can not only feel less important than getting your business or trade off the ground, but also seem like you won’t have spare money to set aside for a good, long time. You can save for your future, however. Here are some steps self-employed individuals can take to plan for their retirement.

1. Enroll in a Retirement Plan

Yes, there are retirement plan options out there for self-employed people like you. These include:

One-Participant 401K Plan: The one-participant or “solo” 401K is essentially the same as a traditional 401K designed to cover a business owner with no employees. (Note: You can hire your spouse and include them in this plan as well.) According to the IRS, you can contribute elective deferrals up to 100% of your earned income and employer non-elective contributions (determined by a special computation). Contributions are made pre-tax (you’ll be taxed when you withdraw the money, which you typically can’t do without a penalty until age 59½) and give you great flexibility in how much (or how little) you contribute. The contribution limits for 2017 are $18,000 and 25% of compensation up to the amount that’s defined in your plan, respectively, according to the IRS.

Traditional Individual Retirement Account (IRA): Many self-employed people can see immediate rewards from contributing to a traditional IRA, as these are tax-deductible in certain situations, giving you an immediate break on your taxable income. For example, if your income is $60,000, and you contribute $4,000 to a traditional IRA, you’ll only be taxed on $56,000 for that year. Keep in mind, however, that you’ll have to pay taxes when withdrawing the money and tax penalties can arise if you withdraw your retirement dollars early.

Simplified Employee Pension (SEP) IRA: To set this plan up, you simply fill out a form — no annual reporting to the IRS is required. The IRS notes that you can open a SEP IRA through your bank or other financial institution and can contribute up to 25% of your net earnings from self-employment. This type of plan is generally best if your business has no employees, or very few, because you have to include all employees in the plan — and everyone has to receive the same amount, which can get pricey if you have a lot of people working for you.

Savings Incentive Match Plan for Employees (SIMPLE) IRA: Per the IRS, a SIMPLE IRA plan is best suited as a start-up retirement savings plan for small employers. Under this plan, both employees and employers can contribute to traditional IRAs.

You can read more about the retirement plan options available to self-employed individuals on the IRS’s website and check out our glossary of common retirement terms you’ll want to know.

2. Budget By Percentages, Not Dollars

As a self-employed person, your income likely fluctuates from month to month, meaning you can’t budget the same way that a non-self-employed person would. It can help to think about budgeting for non-fixed expenses in percentages, instead of dollars, personal finance expert AJ Smith suggested in a blog post on Credit.com.

“If, for example, you want to save for retirement, try putting aside a certain percentage of your income rather than a certain dollar amount,” Smith wrote. “A dollar amount can lead you to save too little in high-income months and more than you can realistically afford in low-income ones.”

3. Be Vigilant About Your Taxes

Paying taxes can be a lot more complicated when you’re self-employed. For instance, throughout the year, you’ll have to estimate how much you owe for Medicare, Social Security and income tax and pay it in quarterly installments — and face penalties if you do so incorrectly. Plus, you’ll have to a pay a self-employment (SE) tax, which is essentially a combination of the Social Security and Medicare tax.

It’s important to properly work your tax payments into your budget, so you don’t wind up spending dollars you don’t really have. You may also want to consult with a tax accountant or other financial expert about your taxes, so you don’t miss out on important deductions or credits that could drive more money to your bottom line — and subsequently your retirement plans.

4. Stay on Top of Your Credit

Similarly, you’ll want to monitor your credit scores to make sure they’re in good shape and that you don’t wind up paying extra in interest on personal and business financing. Those dollars can severely hamper your ability to save for your eventual happy golden years. (You can see how your credit is doing by getting two free credit scores every 14 days on Credit.com.)

Remember, too, many business lines of credit require a personal guarantee, meaning you’ll be personally liable for any debts your business has that go unpaid. As such, you’ll want to carefully consider all loans you’re thinking of taking on to finance your business. Overextending yourself can make it harder to save not just for retirement, but also for future bills and/or emergencies that may come your way.

Image: julief514 

The post Self-Employed? Here’s How to Plan for Retirement appeared first on Credit.com.

4 Ways to Boost Your 401K

boost-your-401K

Millions of Americans are having difficulty saving for retirement. Student loan debt, increased food and housing costs, and stagnant wages are contributing factors.

If you have an employer-sponsored retirement plan, there are several steps you can take to boost your 401K.

1. Maximize Your Contributions

Once you establish your 401K account, you may want to increase your contributions. Usually the default contribution rate is between 3% and 5%. It is recommended that you should save at least 10% of your income. If you can afford to do so, I would recommend maximizing your contributions. In 2016, you can make a maximum contribution of $18,000. If you are 50 or older, the IRS allows you to make a catch-up contribution of $6,000 for a total of $24,000.

2. Take Advantage of Your Employer Match

Many employers offer to match your 401K contributions by a percentage or dollar amount. An employer may offer a 100% match up to 5% of your contribution. For example, if you contribute 5% of your salary to your 401K, the employer will match your 5% for a total of 10%. The employer may or may not offer additional matching beyond this 5% but it is an incentive for you to save. If you do not take advantage of the match, it is money that you are leaving on the table.

3. Minimize Expenses

While a 401K plan allows you to defer taxes, there may be fees associated with the investment vehicles offered by the plan. Choosing an index fund or an exchange-traded fund with low expense ratios will minimize your expenses while adding to your long-term returns. Sales loads can also take a bite out of your returns. Sales charges are paid to the broker who sold you the mutual fund. Consider choosing a no-load mutual fund as an alternative. Another set of fees that you may notice are commissions or transaction fees. If your plan offers a brokerage account, you may be paying a commission on each trade.

4. Consolidate Your 401K Plans

Nowadays, it is not uncommon for someone to have had several jobs. We may have contributed to several different 401K plans with our former employers. Rolling over these balances into your existing employer’s plan would give you full control over your retirement assets. If you are in transition or self-employed, you can consolidate your retirement plans at a brokerage firm or a bank.

The federal government has developed a retirement vehicle, myRA, to help people without a retirement plan save for their future. Several states are planning or implementing their own retirement plans. Although these efforts are commendable, they are limited in their scope. Ultimately, we must be responsible for our own retirement planning.

[Editor’s Note: You can monitor your financial goals, like building a good credit score, for free every 14 days on Credit.com.]

Image: AleksandarNakic

The post 4 Ways to Boost Your 401K appeared first on Credit.com.

How to Get the Most From Your 401K

how-to-build-your-401k

Perhaps you’ve heard of 401Ks or already contribute to one, and you’re intrigued about how you can use them to fund your retirement. These employer-sponsored plans are there to help you do just that, so it’s in your best interest to take advantage of one, especially if your company offers saving incentives, like a company match. We asked Robert Dowling, a financial planner with Modera Wealth Management in Westwood, New Jersey, who’s worked with high net worth individuals for 18 years, for tips on getting the most from your 401K. Here’s what he said.

1. Contribute More Than 3%

Most people who sign up for a 401K start out by contributing 3% of their salary, Dowling said. But if your budget can handle it, it wouldn’t hurt to raise that percentage, even just a bit. “Try to participate as much as you can without putting yourself in dire straits,” he said, noting the danger of overspending. Over time, your savings will thank you. (Concerned that your spending is out of control? You can get a sense of where your debts stand by viewing two of your free credit scores on Credit.com.) “We suggest every year to work it into your expectations to increase your contributions by 1%,” Dowling said. Some plans even allow you to fill out paperwork so your contributions rise automatically.

2. Enroll in Your Company’s Match 

“Take advantage of your company match to maximize company contributions,” said Dowling. “It can be quite powerful.” And besides, it’s free money!

3. Know Your Company’s Vesting Schedule 

While taking advantage of your company match can help you boost contributions, you won’t get far if you leave the company before they’ve vested — i.e., the company’s given you ownership. “What a company will say is, We will reward you with matching contributions, however, we want you to work for us for a certain period of time,” Dowling explained. So it’s important to know what that schedule is, especially if you’ve got one foot out the door. With the schedule in mind, you’ll be able to ask yourself if it makes sense to forfeit the company’s share of your savings rather than stick it out.

4. Play Catch-Up With Your Contributions

Those under 50 can contribute a maximum amount of $18,000 to their 401K every year, said Dowling. However, if you’re 50 or older, that maximum jumps to $24,000, meaning you can contribute an extra $6,000. “Sometimes folks aren’t aware of that,” he said, so “we remind clients to start their catch-up contributions,” as the provision is called, “early.”

5. Sock Away Your Bonus  

When someone says “bonus,” we can’t help but think of steak and fancy nights on the town. But the fact is, the more you can contribute to your 401K early on, the better prepared you’ll be for whatever life throws your way later, Dowling said. Also, if you’re having a hard time making those weekly, bi-weekly or monthly contributions, what better way to get a leg up than by throwing your bonus right into retirement savings? Bonus points if you tell HR that’s your plan, Dowling said, since companies tend to view this as a longterm benefit. You can even ask to have the bonus direct deposited into your account.

6. Take Out a Loan 

Though we’d never recommend borrowing money you can’t afford to pay back, it is helpful to know you have the option to borrow against your 401K. According to Dowling, some programs allow this, and you can take out up to $50,000. Rather than pay interest to a creditor, with a 401K you pay it back to yourself by putting the money in the plan, Dowling said. There can be penalties for defaulting on these loans, so make sure to do your research before choosing this option.

Image: Xavier Arnau

The post How to Get the Most From Your 401K appeared first on Credit.com.

The Critical Money Choices You Should Make in Your 70s

money-choices-in-your-70s

You’ve reached 70, and you’ve got it all figured out. You’ve finally said goodbye to having to work for income, you’re in an easy routine and everything is going well. Then you hit 70½, and the IRS requires you to start taking distributions from your retirement plan, even if you don’t need the money. The agency slaps a hefty penalty on any amount not taken. So, no matter how comfortable you feel, your 70s are not the decade to take your eye off the ball.

Required minimum distributions, or RMDs, begin in the year you turn 70½. Technically, you have until April 1 of the year following the year you turn 70½ to take your first distribution. This is the point at which the federal government no longer lets you kick the tax can down the road. Pushing your first distribution into the following year means you’ll have to take two RMDs in one year, which may have adverse tax consequences. You’ll be responsible for adding the values of your retirement accounts and dividing them by your age factor on what’s called the “uniform lifetime table.” Essentially you are required to take 3.65% of your retirement account balances as of December 31 of the previous year. Each year, that percentage will increase slightly.

As always, there are exceptions to the rules. Often, the way you take RMDs from IRAs will differ from how you take them from employer-based plans. With IRAs you are in complete control of when during the year you take your RMD. You also can choose which account you take it from, as long as the total distribution is the correct percentage for your age. With employer-based plans, you typically must choose between a monthly and annual distribution schedule. The checks come automatically. While this can help you avoid missing the deadline, it usually prevents you from controlling what you sell.

There are exceptions for those still working. If you are employed at 70½ and don’t own 5% or more of the company, you are not required to take a distribution from that employer’s retirement account.

What if you’re sitting on a beach and miss your distribution? The IRS can slap you with a heavy penalty: 50% of the amount you were supposed to take. Let’s say you have $1 million in your various IRAs. Your first RMD will be 3.65% ($36,500). If you miss that distribution, the IRS penalty will be $18,250. You read that right: $18,250.

The good news is that the IRS may let you slide once. If you’re reading this a little too late, you should take the distribution, file Form 5329 and beg for forgiveness. I’d also recommend bringing on a Certified Public Accountant (CPA) for assistance. By the way, the beach may not be a good enough excuse.

How to Avoid Mistakes 

Now that we have outlined a few of the mistakes you can make, let’s highlight some of the ways to avoid those mistakes. The first is consolidation. If you’re 70 years old with five traditional IRAs, it’s time to consider consolidation. Not only will this make it easier for you to figure out your RMDs, it will also make your money easier to manage. If you want to adjust your portfolio, you can do it in one shot rather than riding around town or spending all day on hold with fund companies to make sure all accounts have been adjusted. The final benefit of consolidation is more of a benefit to your heirs because the more accounts you have, the longer and, usually the more expensive, it is for your personal representatives to sort everything out.

I believe, as do most estate planning attorneys, that everyone over the age of 18 should have at least a basic estate plan. Once you have kids, it’s time to get serious with a will or trust package. Unfortunately, half of the folks I meet with (who are all 55 or older) have not adjusted their estate plan since their children were born. You should be checking with your attorney at least every five years to make sure your documents are sound. If you’ve moved to a different state, you’ll almost certainly have to have your documents redrafted by a local attorney.

Part of that estate plan is making sure your accounts are properly titled and your named beneficiaries are aligned with your goals. In order to minimize your probate estate and pass assets directly to beneficiaries at your death, you should consider trust ownership, certain types of joint ownership or Pay On Death/ Transfer On Death designations. You should update your beneficiaries annually as part of your financial plan.

Gifting, whether it be to a charity you care about or to a younger generation, can be one of the most fulfilling financial moves you make. Remember (I know you weren’t paying attention) when the flight attendant told you to secure your own oxygen mask before assisting others? The advice is the same for gifting. You must be absolutely sure that your own financial needs are taken care of before you start distribution. You can accomplish this through a financial plan. Federal law allows you to give $14,000 a year to anyone you want to without filing a gift tax return. If you’re married, you can do twice that through what’s called a split gift. Section 529 plans are a great way to help fund education, and they come with many tax advantages. Charitable giving is a great way not only to fulfill philanthropic goals but to lessen the tax sting. Have your financial planner, CPA and estate attorney work together if you have complex goals. (Full disclosure: I am a CFP.)

Now that you’ve checked your planning boxes, it’s time to start talking about them. The sad reality is that every day you come closer to your life expectancy and someone else taking over your financial affairs. Being private about your money is no longer wise. I urge you to talk to your spouse, children and anyone else who may handle your estate when your time comes. Introduce them to your planner, attorney and accountant if there is complexity. Oh yeah, and enjoy your retirement; 70 is the new 40!

Image: Geber86

The post The Critical Money Choices You Should Make in Your 70s appeared first on Credit.com.