Roth 401k rules increase value of after-tax contributions

Posted by on Jan 27, 2015 in Uncategorized | 0 comments

Advisors and their clients are becoming accustomed to reading and hearing about the problems with the American retirement system. Social Security faces a significant long-term deficit. The majority of private sector workers do not participate in defined benefit pension plans. Not enough people save in defined contribution plans, such as a 401k, and those who do usually save too little because they have no idea how much they should save. Often, current consumption is favored over saving for retirement. Those who do save find when they reach retirement, all of the income from either a 401k plan or a rollover IRA is fully taxable. In 2015, there is an increasingly widespread availability of a 401k option inside an existing plan. The in-plan option to Roth 401k allows clients to maximize their contributions with after tax dollars. The rules are complicated and tricky. There are three ways to fund a 401k plan. Typically, many clients review the annual pre-tax contribution limit ($18,000 in 2015, and $24,000 age 55 and older) without any idea how to benefit from the total provision limit. If deferring compensation up to the contribution limit is the only goal, then it is possible to take advantage of the non-Roth non-deductible contribution limit that permits a client to defer more than the annual pre-tax limit (for a total of $53,000 or 100 percent of compensation in 2015). Until 2015, the non-Roth, after-tax contribution limit was unattractive because these contributions did not reduce current tax liability and, unlike the currently after-tax Roth contribution, earnings on the non-Roth after-tax contributions also was taxable. Small business owners and employees have the alternative of allowing in-plan Roth rollovers that maximize the value of the non-Roth after-tax contribution. To maximize the value of the non-Roth after-tax dollars can be contributed to a 401k and then quickly convert those dollars to a Roth 401k where earnings can grow tax free. There are no early distribution penalties as long as the funds stay in the Roth for a minimum of five years. For those clients who have not benefited from the conversion of a non-Roth after-tax contributions to a Roth 401k, there are new IRS rules which serve to simplify the separating of pre- and after-tax contributions into separate accounts. The new IRS rules allow a 401k contribution to be treated as a single distribution even if it contains both pre- and after-tax contributions, and even if those contributions are put into separate accounts provided the amounts are distributed at the same time. The IRS also allows the taxpayer to allocate both pre- and post-tax contributions among different types of accounts to maximize their future earnings potential even when exiting the 401k plan. What...

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Retirement challenges in a volatile market

Posted by on Jan 15, 2015 in Uncategorized | 0 comments

Jack Bogle, the doyen of low-cost index-fund investing and a name virtually synonymous withVanguard Funds, recently cautioned investors. His caveats: •What’s done well in the past probably won’t do well in the future •Searching for better returns and higher yields encourages investors to take risks without fully understanding the implications of new products and strategies •Don’t let your behavior get in the way of prudent choices, thinking you must do something that will cost you money now and harm your portfolio in the long run. Bogle’s observations are well aimed. Many consumers believe they can do it all on their own with low-cost providers present on every virtual corner. These entities or programs will be unable to address impulsive investor behavior in today’s volatile markets. More by Saide All the more so as Boomers continually report they are not confident about having enough money to maintain their standard of living throughout retirement. Assets need to work smarter to produce both income and real returns over more than a 30-year retirement. Many consumers fear market volatility and so they search for market strategies, which look great on a spreadsheet with back tested “proofs” of success that will somehow work the next time in a crisis, but are misguided at best and irrational at worst. A financial adviser becomes indispensable here. Retirees are losing purchasing power with products that pay low interest rates worsened by inflation. Inflation will continue throughout retirement and widen the income gap to erode purchasing power. Consumers are inclined to ignore real rates of return adjusted for inflation as they are unfamiliar with the notion of how an actual interest rate is calculated. That is the amount by which the nominal interest rate is higher than the inflation rate. While a consumer cannot control inflation, an adviser can suggest alternatives that have the potential to protect against inflation. How to address longevity over one or two lifetimes is the greatest performance challenge during the retirement income drawdown or distribution phase. Some retirees are invested in target date funds. These funds automatically reset the asset mix of stocks, bonds and cash equivalents in a portfolio according to a selected time frame that is appropriate for a particular investor. Target funds lack a fixed allocation between stocks and intermediate term bonds. We really do not know if target funds work over the long term in contrast to fixed allocations. As more investors start to realize that things are not working out it is up to financial advisors to produce positive outcomes and where possible reduce negative, do-it -yourself behavior. The greatest threat to a comfortable retirement is withdrawing too much money from a reducing portfolio and not having sufficient...

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The Market is Up & I am not…Why?

Posted by on Jan 12, 2015 in 401k, 403b, Fixed Income Investing, insurance, Investing, IRA, Retirement, tax returns, TSA | 0 comments

The Market Is Up & I Am Not … Why?   Remember that the major indices don’t represent the entirety of Wall Street.   Provided by Frederick Saide, Ph.D.   The S&P 500 is up about 10% YTD, why aren’t I? If your investments are lagging the broad benchmark, you may be asking that very question. The short answer is that the S&P is not the overall market (and vice versa). Each year, there are money managers, day traders and retirement savers whose portfolios wind up underperforming it.1    Keep in mind that the S&P serves as a kind of “Wall Street shorthand.” The media watches it constantly because it does provide a good gauge of how things are going during a trading day, week or year. It is cap-weighted (larger firms account for a greater proportion of its value, smaller firms a smaller proportion) and includes companies from many sectors. Its 500-odd components represent roughly 70% of the aggregate value of the American stock markets.2   Still, the S&P is not the whole stock market – just a portion of it.       You can say the same thing about the Dow Jones Industrial Average, which includes only 30 companies and isn’t even cap-weighted like the S&P is. It stands for about 25% of U.S. stock market value, but it is devoted to the blue chips.2     How about the Nasdaq Composite or the Russell 2000? The same thing applies.   Yes, the Nasdaq is large (3,000+ members), and yes, it consists of insurance, industrial, transportation and financial firms as well as tech companies. It is still undeniably tech-heavy, however, and includes a whole bunch of speculative small-cap firms. So on many days, its performance may not correspond to that of the broad market.2,3   That also holds true for the Russell, which is a vast index but all about the small caps. (It is actually a portion of the Russell 3000, which also contains large-cap firms.)2   If you really want a broad view of the market, your search will lead you to the behemoth Wilshire 5000, which some investors call the “total market index.” You could argue that the Wilshire is the real barometer of the U.S. market, as it is several times the size of the S&P 500 (it includes about 3,700 firms at the moment, encompassing just about every publicly-traded company based in this country. In mid-December, the Wilshire was up about 9% for 2014.4,5   One benchmark doesn’t equal the entire market. There are all manner of indices out there, tracking everything from utility firms to Internet and biotech companies to emerging markets. As wonderful or dismal as their performance may be...

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Pension Plans & Derisking

Posted by on Jan 9, 2015 in 401k, 403b, Fixed Income Investing, insurance, Investing, IRA, IRS, Retirement, tax returns, TSA | 0 comments

Corporations are transferring pension liabilities to third parties. Where does this leave retirees?   Provided by Frederick Saide, Ph.D.   A new phrase has made its way into the contemporary financial jargon: derisking. Anyone with assets in an old-school pension plan should know what that phrase signifies.    The derisking trend began in 2012. In that year, Ford Motor Co. made a controversial offer to its retirees and ex-employees: it asked them if they wanted to take their pensions as lump sums rather than monthly payments. Basically, Ford realized it could someday owe these former workers more than its pension plan could pay out. The move was clearly motivated by the bottom line, and other corporations quickly imitated it.1     If you work for a major employer that sponsors a pension plan, you may soon face this choice if you haven’t already. By handing over longstanding pension liabilities to a third party (i.e., a major insurance company), the pension plan sponsor unloads a risky financial obligation.    In theory, retired employees tended this kind of offer gain added flexibility when it comes to their pension: a lot of money now, or monthly payments from the insurer for years to come. Does the lump sum constitute a sweet deal for the retiree? Not necessarily.   If you are offered a lump sum pension payment, should you accept it? Making this kind of pension decision is akin to deciding when to claim Social Security – you’ve got to look at many variables beforehand. Whatever choice you make will likely be irrevocable.2   What’s the case for rejecting a lump sum offer? You can express it in three words: lifetime income stream. Do you really want to forego decades of scheduled pension payments to take (potentially) less money now? You could possibly create an income stream off of the lump sum, of course – but why go through the rigmarole of that if you’re already getting monthly checks to begin with?    As American longevity is increasing, you may spend 20, 30, or even 40 years retired. If you are risk-averse and healthy, turning down decades of consistent income may have little appeal. Moreover, if you are female you have a decent chance of living into your nineties – and an income stream intended to last as long as you do sounds pretty nice, doesn’t it? If you are single or your spouse has very little in the way of assets, this too reinforces the argument for keeping the payment stream in place.   Also, maybe you just like the way things are going. If you don’t want the responsibility that goes with reinvesting a huge sum of money, you aren’t alone....

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