Feed on
Posts
Comments

Retirement Investing - 401(a) Plans

November 15th, 2006 by Papabear

Much has been written about 401(k) retirement plans because they are available to so many people. However, there are other “numbered” retirement plans, although they are restricted to special groups.

401(a) plans, also called Teacher Incentive and Teacher Matching plans, are designed specifically for school employees.

The rules covering 401(a) plans vary from state to state and can vary within a school district so that, say, teachers get one benefit while custodians or paraprofessionals can get quite a different one. Distributions can take several forms, including lump sum, rollover or an annuity type payment.

If you change jobs, you have the flexibility to consolidate your savings in another public sector employer’s 401(a) plan or 401(k) plan, a tax-sheltered 403(b) annuity plan, a 457 plan, or a traditional Individual Retirement Account or IRA.

Probably the 401(a) most people are familiar with is from TIAA-CREF. Fidelity is another major player.

403(b) plans are very similar to a 401(k) plan. The biggest difference is who is eligible to participate. While a 401(k) plan covers private-sector workers, only employees of public schools and 501(c)(3) tax-exempt organizations can participate in a 403(b) plan.

Also, unlike the 401(k), 403(b) plan members can’t invest in individual stocks. They have money taken out of their paychecks on a pretax basis, which is then handled by a financial institution chosen by their employer. Like in a 401(k) plan, the money grows tax-deferred until retirement and is then taxed as ordinary income when withdrawn.

Generally, the maximum contribution is $10,500 or 20% of salary, whichever is less, but they do allow for a catch-up in contributions. If you did not max out your contributions in previous years, you can contribute more than the maximum with certain annual and total restrictions.

You may have heard 403(b) plans referred to as Tax Deferred Annuities or Tax-Sheltered Annuities. Those names come from back when the only investment options offered were for annuities, but investment options have been expanded for decades to include mutual funds.

If you’re eligible, all these plans can make a worthwhile addition to your retirement investing options.

    • Posted in Retirement Investing | No Comments »

    Retirement Investing - Which Self-Employed Retirement Plan Is Best For You

    November 10th, 2006 by Papabear

    When you’re self-employed, choosing the right retirement plan for yourself can be a real pain in the neck. You want to choose the retirement investing plan that brings you the best benefits with the least costs, both financial and in paperwork.

    People with small or significantly variable self-employment earnings may be better off looking at retirement investment plans that also allow them the flexibility of whether or not to make a contribution at any given time.

    For self-employed people in that situation, the best choices include SEPs and self-employed 401(k) plans.

    A SEP (Simplified Employee Pension) lets you contribute up to 20% of your self-employment income (and that percentage increases to 25% of your salary if you’re an employee of your own corporation), up to a current maximum of $44,000 a year.

    If you have employees, you can still have a SEP, and you can set up a SEP any time up to the time you file your taxes. In addition, you can vary the amount of contribution as needed since you are not locked into a specific contribution amount or percentage. This obviously can be a big plus if your income fluctuates

    However, if you make a contribution for yourself, you have to make it for all your employees. Also, be aware that you can’t take out loans against your SEP.

    On the other hand, a self-employed 401(k) plan - also called a solo and individual 401(k) - does allow loans to be taken out against it. Indeed, you can transfer your IRAs, regular 401(k), or any other pretax-retirement funds, whatever the amount, to your self-employed 401(k) account and then borrow from it.

    However, self-employed 401(k) plans are only available if you have no employees, although they can be used for multiple owners, as well as for spouses who are employees.

    Like the SEP, a self-employed 401(k) plan also allows annual contributions of up to $44,000. (By the way, maximum contributions for both SEP’s and self-employed 401(k)s can be affected by whether or not you participate in any other retirement plan. Check with your retirement investment planner or tax advisor before making your decision.)

    • Posted in Retirement Investing | No Comments »

    Retirement Investing - Borrowing From Your 401k - Part 1

    October 31st, 2006 by Papabear

    For most people saving for retirement, our retirement savings account, whether it’s in a 401k account or an Individual Retirement Account or IRA, is our biggest or second biggest asset, next to our home. And unlike the equity in our home, the money in our 401k account or IRA is exactly that – our money. Liquid Assets. It’s tangible and does not go up and down with the value of the real estate market.

    Most of us have our 401k account or IRA in a plan that allows us to borrow a portion of the money. This can be a great idea and a ready source of money, but there are positives and negatives to borrowing from your retirement savings account. Here’s a list of 8 things to consider before taking out a loan from your retirement account. Since the list is long, I’ll post it over 4 days. Let’s start with 4 good reasons:

    1. Most plans allow you to borrow up to 50% of the vested balance in your account, up to $50,000.

    2. Interest rates are usually competitive and are often lower than your could get from a bank on a signature loan. Borrowing your own money is not technically a signature loan, because you are pledging the money in the account to back up the loan, but because it’s so quick and simple, it’s more like getting a signature loan on a note at the bank than the longer process of pledging assets for a loan guarantee.

    3. Because your are borrowing your own money, you don’t have to “qualify” for a loan, like you would for a signature or other loan from a bank, so you don’t have to worry about your credit rating.

    4. Since you’re borrowing your own money, the interest you pay on the loan goes back into your own pocket and not the banker’s, since it goes into your account. If your 401k account is primarily invested in your company stock or even in a mutual fund that has a low or falling rate of return at the moment, you might actually earn more money from the interest you pay on your loan, even if it’s only 5 or 6%.

    So – 4 good reasons to consider borrowing from your retirement account when you need some extra money. Tomorrow, we’ll look at 2 reasons you might want to reconsider.

    • Posted in Retirement Investing | No Comments »

    Retirement Investing - The Starbucks Investing Plan

    October 22nd, 2006 by Papabear

    No - this is not a post about investing in Starbucks. If you or I had done that 10 years ago, we would already be retired by now. This is a little more practical.

    Many articles on retirement planning and investing for retirement focus on what is the best investment if you have an extra $10,000 or $100,000 lying around. That’s a good thing to know if you really have an extra $10,000 or $100,000. But what about the rest of us?

    Sometimes simple changes in our habits can make a tremendous difference in our future. We all know we need to save for the future - and to save on a consistent basis. That’s the cornerstone of retirement planning. But where do we find the money for investments or retirement planning?

    Let me show you something that hopefully inspires you to get started investing if you haven’t already. Starbucks charges about $3.75 plus tax for a mocha latte frappachino.

    A visit to Starbucks, often daily, has become a habit for many of us. But what would happen if you used that $3.75 a day for retirement planning?

    If you begin when you’re 25 and saved $3.75 a day, 5 days a week, that’s about $81.25 you’d have to invest in an Individual Retirement Account (IRA) or other tax deferred account every month. If you earned 8% interest in your IRA, you would have over $285,000 at Age 65.

    If you’re already past Age 25, the same principle still applies. There will just be less time to invest and less time for the miracle of compound interest to multiply your money. If you began at Age 35, you would have $187,000 at age 65. Even if you began at Age 45, you would still have nearly $78,000 in your Individual Retirement Account or IRA at Age 65.

    This post is not a criticism of Starbucks. They make great coffee. If you don’t buy it there, you can always make it at home or the office for less than 15 cents a cup. You don’t have to give up coffee to begin saving for retirement. The point is that saving even a small amount of money on a consistent basis can pay huge dividends in the future.

    Retirement investing requires some discipline, and yes, maybe a little sacrifice. If it’s not Starbucks, find some other expense you can cut back on, and begin your retirement planning by making regular contributions into your IRA or 401(k) plan today.

    • Posted in Retirement Investing | No Comments »