For Folks with no Free Time
If you focus on identifying the best opportunities to affect your personal finance, you can profoundly improve your life without wasting time. And those best opportunities are…?
If you focus on identifying the best opportunities to affect your personal finance, you can profoundly improve your life without wasting time. And those best opportunities are…?
On Saturday evening, I had a chance to chat with my friends Wally and Jodie. You might remember them from a reader case study from last August. They’re the couple that wants to get their finances in order but they’re worried because they’re starting with less than zero.
When we chatted in August, Wally and Jodie had over $35,000 in debt. They had variable incomes, but somehow seemed to spend exactly what they earned — about $3000 per month after taxes. Worst of all, they were behind on some payments.
Now, eight months later, their situation has improved.
A 401(k) retirement plan is one of the most powerful savings vehicles on the planet. If you’re fortunate enough to work for a company that offers one (or its sister for non-profits, a 403(b)), it’s a valuable benefit that you should take advantage of.
But many people ignore their retirement plan at work because they don’t understand the rules, which may seem confusing at first. Or they worry about what happens to their account after they leave the company or mistakenly believe you must be an investing expert to use a retirement plan.
Let's talk about seven primary pros and cons of using a 401(k). You’ll learn some lesser-known benefits and get tips to save quickly so you have plenty of money when you’re ready to kick back and enjoy retirement.
Traditional retirement accounts give you an immediate benefit by making contributions on a pre-tax basis.
A 401(k) is a type of retirement plan that can be offered by an employer. And if you’re self-employed with no employees, you can have a similar account called a solo 401(k). These accounts allow you to contribute a portion of your paycheck or self-employment income and choose various savings and investment options such as CDs, stock funds, bond funds, and money market funds, to accelerate your account growth.
Traditional retirement accounts give you an immediate benefit by making contributions on a pre-tax basis, which reduces your annual taxable income and your tax liability. You defer paying income tax on contributions and account earnings until you take withdrawals in the future.
Roth retirement accounts require you to pay tax upfront on your contributions. However, your future withdrawals of contributions and investment earnings are entirely tax-free. A Roth 401(k) or 403(b) is similar to a Roth IRA; however, unlike a Roth IRA there isn’t an income limit to qualify. That means even high earners can participate in a Roth at work and reap the benefits.
RELATED: How the COVID-19 CARES Act Affects Your Retirement
When I was in my 20s and started my first job that offered a 401(k), I didn’t enroll in it. I was nervous about having investments with an employer because I didn’t understand what would happen if I left the company, or it went out of business.
I want to put your mind at ease about using a 401(k) because there are many more advantages than disadvantages.
I want to put your mind at ease about using a 401(k) because there are many more advantages than disadvantages. Here are four primary pros for using a retirement plan at work.
Qualified workplace retirement plans are protected by the Employee Retirement Income Security Act of 1974 (ERISA), a federal law. It sets minimum standards for employers that offer retirement plans, and the administrators who manage them.
ERISA offers workplace retirement plans a powerful but lesser-known benefit—protection from creditors.
ERISA was enacted to protect your and your beneficiaries’ interests in workplace retirement plans. Here are some of the protections they give you:
Additionally, ERISA offers workplace retirement plans a powerful but lesser-known benefit—protection from creditors. Let’s say you have money in a qualified account but lose your job and can’t pay your car loan. If the car lender gets a judgment against you, they can attempt to get repayment from you in various ways, but not by tapping your 401(k) or 403(b). There are exceptions when an ERISA plan is at risk, such as when you owe federal tax debts, criminal penalties, or an ex-spouse under a Qualified Domestic Relations Order.
When you leave an employer, you have the option to take your vested retirement funds with you. You can do a tax-free rollover to a new employer's retirement plan or into your own IRA. However, be aware that depending on your home state, assets in an IRA may not have the same legal protections as a workplace plan.
RELATED: 5 Options for Your Retirement Account When Leaving a Job
Many employers that offer a retirement plan also pay matching contributions. Those are additional funds that boost your account value.
Always set your 401(k) contributions to maximize an employer’s match so you never leave easy money on the table.
For example, your company might match 100% of what you contribute to your retirement plan up to 3% of your income. If you earn $50,000 per year and contribute 3% or $1,500, your employer would also contribute $1,500 on your behalf. You’d have $3,000 in total contributions and receive a 100% return on your $1,500 investment, which is fantastic!
Always set your 401(k) contributions to maximize an employer’s match, so you never leave easy money on the table.
Once you contribute enough to take advantage of any 401(k) matching, consider setting your sights higher by raising your savings rate every year. For 2021, the allowable limit remains $19,500, or $26,000 if you’re over age 50. A good rule of thumb is to save at least 10% to 15% of your gross income for retirement.
Most retirement plans have an automatic escalation feature that kicks up your contribution percentage at the beginning of each year. You might set it to increase your contributions by 1% per year until you reach 15%. That’s a simple way to set yourself up for a happy and secure retirement.
After you enroll in a workplace retirement plan, you must choose from a menu of savings and investment options. Most plan providers are major brokerages (such as Fidelity or Vanguard) and have helpful resources, such as online assessments and free advisors. Take advantage of the opportunity to get customized advice for choosing the best investments for your financial situation, age, and risk tolerance.
In general, the more time you have until retirement, or the higher your risk tolerance, the more stock funds you should own. Likewise, having less time or a low tolerance for risk means you should own more conservative and stable investments, such as bonds or money market funds.
RELATED: A Beginner's Guide to Investing in Stocks
While there are terrific advantages of investing in a retirement plan at work, here are three cons to consider.
Compared to other types of retirement accounts, such as an IRA, or a taxable brokerage account, your 401(k) or 403 (b) may have fewer investment options. You won’t find any exotic choices, just basic asset classes, including stock, bond, and cash funds.
However, having a limited investment menu streamlines your investment choices and minimizes complexity.
Due to the administrative responsibilities required by employer-sponsored retirement plans, they may charge high fees. And as a plan participant, you have little control over the fees you must pay.
One way to keep your workplace retirement account fees as low as possible is selecting low-cost index funds or exchange-traded funds (ETFs) when possible.
One way to keep your workplace retirement account fees as low as possible is selecting low-cost index funds or exchange-traded funds (ETFs) when possible.
One of the inherent disadvantages of putting money in a retirement account is that you’re typically penalized 10% for early withdrawals before the official retirement age of 59½. Plus, you typically can’t tap a 401(k) or 403(b) unless you have a qualifying hardship. That discourages participants from tapping accounts, so they keep growing.
The takeaway is that you should only contribute funds to a retirement account that you won’t need for everyday living expenses. If you avoid expensive early withdrawals, the advantages of using a workplace retirement account far outweigh the downsides.
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The post How to Navigate the Airport Rush During the Holidays appeared first on MintLife Blog.
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