Archives for May 31, 2019

Since its debut nearly 40 years ago, the 401(k) has emerged as one of the premier tools to save for retirement in America. In fact, when we poll 401(k) participants across the country, the majority of them consistently say it’s their largest — or only — source of retirement savings.*

One of the main reasons 401(k) accounts are so popular and effective is their tax treatment. A traditional 401(k) is funded from your pretax paycheck, so the money you put into your plan, and any potential gains on your investments, are not taxed until you ultimately withdraw the money. Importantly, contributions lower your taxable income, and contributing enough could even move you into a lower tax bracket in a given year.

The flip side is that when you eventually withdraw money from a traditional 401(k) in retirement, those withdrawals are subject to ordinary income tax. That’s why it’s referred to as a “tax-deferred” vehicle — taxes are deferred until you begin to take the cash out.

Those of us who work in the retirement industry tend to assume that people who are utilizing a 401(k) plan understand this basic tenet, but that isn’t necessarily the case, and it’s something that’s been on my mind as we’ve reached the end of another tax season.

On the eve of retirement, a diligent saver might see a million-dollar account balance and assume that’s the amount they have to work with to cover their expenses in their golden years. If so, they are in for a rude awakening. Realistically, today that million dollars is probably closer to $700,000, assuming they are paying federal, state and local income taxes. The same principle is true for those with lower balances. Simply put, a sizable chunk of the money in your 401(k) will be paid to the government.

With that in mind, it’s important for those saving in a traditional 401(k) — especially if they’re relying heavily on it for the money they’ll need in retirement — to keep their tax obligation in mind when they are setting and working toward a specific savings target. We don’t know where tax rates will be in the future, but you should probably plan on at least 20% in federal tax, and maybe another 2% to 10% in state and local tax, depending upon where you live.

And if you are using a retirement calculator to help you plan and estimate what you’ll have in retirement, make sure you understand whether or not it takes taxes into account. Let’s say an online calculator shows you might have $5,000 a month in income from your 401(k). Is that $5,000 a month after you pay taxes, or before? For example, that $5,000 may only be $3,500 to spend, plus $1,500 you’ll owe in income tax.

Everyone’s strategy for building a “retirement paycheck” will be different, but there are certain rules that apply based on age. For instance, once you turn 59½, you are able to take money from your 401(k) without an extra tax penalty, but again you likely will still pay at least 20% in federal income tax (or more if you’re at a higher income-tax rate), plus any state and local income tax. Keep in mind, if you withdraw at this age but are still working and taking home a regular paycheck, you could very well be putting yourself into a higher tax bracket, as the money you took out of your 401(k) will be factored into your taxable income along with your salary. And once you hit age 65, withdrawing enough to cross into a higher income bracket might also leave you paying higher Medicare premiums.

If you continue to work into your 60s or 70s, you may wish to preserve your 401(k) balance for as long as possible. You are not obligated to take money out of your traditional 401(k) until the year you turn age 70.5, at which point required minimum distributions (RMDs) come into play. RMDs are a minimum amount you must withdraw from your 401(k) each year once you reach that age — or else face a very steep IRS penalty. Those withdrawals are, once again, taxed as ordinary income.

Some retirees may be tempted to dip into their 401(k) to make a big one-time purchase, like a child’s wedding, or to pay off a mortgage or other large debt. But it’s important to keep in mind that that, too, is a taxable withdrawal.

To help streamline this process for workers, many 401(k) plan administrators will include tax withholding options on the withdrawal paperwork. Some might automatically withhold 20% and allow you to elect a percentage over and above that, as well as a certain percentage for state and local tax, if applicable. It’s important to pay attention to whether your plan administrator follows this practice so you’re not faced with a huge surprise come tax time.

In addition to traditional 401(k) plans, many companies offer what’s called a Roth 401(k). Unlike its traditional counterpart, the Roth is funded with after-tax money and then withdrawals you make in retirement are tax-free. A Roth often makes sense for those who anticipate retiring in a higher tax bracket — that is, they’ll bear the tax burden upfront and then not have to worry about it in retirement when it might be significantly larger. Some savers may devise a strategy wherein they split money between traditional and Roth accounts to give themselves various tax options. Consulting with a tax or other financial professional is a great way to come up with a plan suited to your situation.

To that point, working with a financial professional to figure out how much you should save, set retirement goals and make investment choices can help you become more educated about the nuances of 401(k) investing — and help you avoid surprises by the time you reach retirement. For now, remember that “tax-deferred” does not mean “tax-free” and prepare in the present for your obligations down the road.

When Michael Bloch’s wife graduated from law school with more than $300,000 in student loans, the couple sat down to come up with a plan.

After reading blogs and articles, drafting spreadsheets and consulting a financial advisor, they still didn’t have an answer.

“We really struggled with what is the right way to pay those loans back,” Bloch said. “We found that there is no easy way to figure out what is the right thing for an individual to do.”

The dilemma inspired Bloch to drop out of Stanford Business School, where he would have racked up another $250,000 in student loans, to help others who are confronting the same problem.

About 44.7 million Americans had student loan debt, which totaled $1.47 trillion, at the end of 2018, according to the Federal Reserve Bank of New York.

Today, the company Bloch co-founded, Pillar, is formally launching its platform to consumers, who can sign up via iOS or Android on mobile devices.

Separately, the company also announced it has raised $5.5 million in seed funding. That includes lead investor Kleiner Perkins. Other venture capital investors who participated include Day One Ventures, Financial Venture Studio, Great Oaks VC and Rainfall Ventures.

The platform works to help individuals manage and pay off their student loans.

First, you input your student loan and bank account information. Then, Pillar tracks your income, spending and debt to come up with the best way to pay down your balances.

It will send you push notifications or texts and suggest the best moves to make. For example, if you attend a friend’s wedding one month and your spending is up, the app may tell you just to make your minimum payment. But if you’ve just received a bonus or overtime pay, it will recommend how much to sock away toward those debts.

Based on the experience of initial users of the platform, Pillar estimates that the average person can save $6,200 on their student loans. That can mean reducing their repayments by four years.

“Extra payments could save thousands and thousands of dollars over the life of your loan,” said Bloch, who serves as CEO of the company. “These small actions really have a huge impact on your financial future.”

Pillar’s app is currently free for consumers, although there is a wait list to participate. Users will be on boarded on a first come, first serve basis, according to the company.

The company built its platform with millennial women in mind, as they tend to carry the most debt coming out of college. In the pilot phase, however, Pillar’s users have ranged in age from 22 to 50, including parents who are looking to help their children manage their debts.

The company also plans to add a premium subscription — targeted at $1 per month — that will help debtors through more complicated transactions, such as refinancing or loan forgiveness.

Pillar plans to expand its services to tackle other kinds of debt — including auto loans, credit cards and mortgages. The company plans to begin adding other types of debt early next year.

“The long-term vision of the company is to be an automated debt manager, no matter what type of loans you might have,” Bloch said.

While the layoffs at Ford Motor Co. are the latest to grab headlines, the automaker isn’t alone in trimming its payrolls. Retailers, snack foods companies, manufacturers and others are cutting costs across the country, too.

This year, Michigan has seen or is expected to see layoffs at General Motors, the Detroit Medical Center, Concerto of Michigan, as well as job cuts when a variety of retailers, including the Dressbarn, eventually shut their doors.

Many times employees are caught totally off guard.

“When it’s unexpected, there tends to be a panic,” said Kelley Long, a certified public accountant and a financial education advocate for the American Institute of CPAs.

Jobs relating to the auto industry may be particularly vulnerable in the future, too.

Bank of America Merrill Lynch analyst John Murphy said in a speech in May: “The industry is right now staring down the barrel of what we think is going to be a significant downturn.”

Even though the U.S. unemployment rate hit 3.6% in April — the lowest point in nearly 50 years — the reality is that there can be big job cuts at specific companies. BY DIGITALOCEAN The cloud for today’s developer

Here are financial tips to consider if looking at a job loss. 

Figure out how to stretch your dollars

“I always tell people you’ve got to hoard cash until you have a little bit more certainty in the next 90 days,” Long said. 

“Paying a little interest for a couple months is better than not being able to pay the mortgage if things don’t look up quickly.”STORY FROM NEMOURS CHILDREN’S HEALTH SYSTEMPoison ivy or poison oak rashes are not contagious, but the plant oil is

She even recommends contacting your credit card issuers and finding out your options. You don’t have to exercise them, but knowing can provide comfort. Is it possible to get approval in advance to skip a payment for a month due to a financial hardship? 

“You don’t have to say ‘I lost my job,’ ” she said. 

Or would you be willing to pay only the minimum for a month or two, if you always pay off the bill in full, in order to hold onto some cash? It’s thought to consider. 

Put spending on hold

Stop spending money on things that you really can live without — take-out meals, premium cable, rounds of golf. Now is not the time to use your extra time to remodel the bathroom. 

Review options for tuition and student loans

“If you’ve been laid off and have a child in college, you should appeal for more financial aid,” said Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com.

“Provide the college financial aid office with a copy of the layoff notice or a letter showing the receipt of unemployment benefits within the last 90 days,” he said.

“Most colleges will make an adjustment to the financial aid package corresponding to the change in income.”

If you’re paying off student loans, he said, look into submitting a request to your loan servicer for a forbearance to temporarily stop or reduce payments.

“Interest continues to accrue and will be capitalized at the end of the forbearance period,” he said.

Parents are eligible for forbearances and deferments on Federal Parent PLUS loans, just as students are eligible on federal student loans.

Forbearances can be up to one year for private student loans and up to three years for federal education loans.

“Some private lenders offer a partial forbearance as an option, where the borrower makes interest-only payments,” Kantrowitz said.

With federal loans, an income-driven repayment plan or extended repayment plan might be a better option for many, as well.

Try not to touch that 401(k)

“Lots of Americans cash out according to the National Retirement Savings Cash Out Clock,” said Leon LaBrecque, a certified public accountant and chief growth officer for the Sequoia Financial Group in Troy.

The total retirement savings cashed out through May 28 was $27.46 billion, according to that clock, which puts Americans on pace to prematurely cash out $68 billion in 2019.

Neal Ringquist, executive vice president for the Retirement Clearinghouse, said many times people aren’t even using money from cashing out of a 401(k) for emergencies. Instead, many may use it to pay down debt or even take a vacation. 

While it may sound harsh, he said it may be better to take on a bit more low-cost credit card debt if needed to get through an emergency. 

“You can’t borrow for retirement once you retire,” Ringquist said. 

Experts say to avoid raiding tax-deferred accounts, such as a 401(k) plan or traditional IRA, which could drive up your tax bill. Withdrawals are typically taxable. Also, you could face some penalties if you withdraw money from a traditional IRA or 401(k) if you take out money before hitting age 59½. 

You’re subject to ordinary income tax rates on the withdrawal. 

“They paid taxes and likely penalties as well on their withdrawal,” LaBrecque said. “Add up federal taxes, any penalty and Michigan tax, and you could can have 36% or more in taxes and penalties.”

Consider lump sum or regular pension check

Think hard about whether it makes sense to trade in steady pension checks that offer income for life for a one-time, lump sum payment.

If you’re laid off or taking a buyout from Ford, for example, you’d typically have to make a decision requesting a lump sum pension distribution within 180 days of leaving that job, said David Kudla, the CEO of Mainstay Capital Management. 

Do nothing, and you’d receive your monthly pension check when you decide to retire.

There is one caveat: If you’ve not started taking a pension check before age 65, he said, the window opens up again to make that lump sum decision when you’re 65. You must have 30 years of service or be at least 55 with 10 years of service to qualify.

Rules vary by company. So double check with your company if you want a lump sump. 

A lump sum distribution could make sense if someone is in poor health and would like to leave a lump sum to their children. 

But proceed cautiously, as you’re taking on more risk and possibly extra costs.

It may not make sense to buy a high-cost annuity, which offers a stream of payments but may include high surrender charges for cashing out too early and other fees. If you need to take out more money than expected in some years, you might face much higher fees. You need to dig deep into the details. 

While a lump sum can make sense in certain situations, be aware that some financial advisers may have an inherent conflict of interest in suggesting that you take a lump sum, said Sam G. Huszczo, a chartered financial analyst in Southfield. 

“Taking the lump sum carries the serious risk of outliving your assets,” he said, given that people have been living longer and stock market returns are not guaranteed. 

Long said she’s concerned that many people in their late 40s or 50s may be tempted to take a lump sum to pay ongoing bills. But that’s the wrong move.

“Don’t just use it to maintain that current lifestyle,” she said. 

Be careful before rolling a 401(k) over into an Individual Retirement Account, too. If you leave the company between the ages of 55 and 59½, for example, you can avoid the 10% penalty if you take money of your current company’s 401(k) and follow the requirements under the IRS Rule of 55. The Rule of 55 does not apply to IRAs.

Find a way to grab a little more cash 

Move quickly to do what you can to plug any gaps in your crisis budget. Many times, Long said, people don’t realize how quickly they can run through their savings when there is a job loss. 

Could you pick up extra money by signing up to be a part-time Shipt Shopper — who shops and delivers groceries and household essentials? Job requirements include having a driver’s license; your own reliable vehicle (defined as a 1997 model or newer); owning a smartphone, and being able to lift 40 pounds. 

An average order takes Shipt Shoppers one hour to complete (accept, shop, deliver), and Shipt Shoppers select the areas they wish to cover, according to a company spokesperson. 

Or could you pet sit, sell used books or other items? 

Remember, it can take longer than expected for someone who held a top-paying middle management job to find a job with comparable compensation. Yet some don’t want to take a temporary low-paying job because they fear gossipy neighbors or they worry that they won’t have time to job search if they’re working retail.

Long has talked with laid-off workers who find jobs like driving for Uber Eats or Shipt to be a good middle ground, compared to working as a barista in the neighborhood coffee shop where all the soccer moms go before work. 

When it comes to preparing for a financially comfortable retirement Opens a New Window. , you’re going to have to plan ahead Opens a New Window. .

It’s important to take advantage of your Social Security benefits Opens a New Window. , specifically. In order to boost your retirement income Opens a New Window. , you don’t want to collect too early or make any major life decisions without considering the potential financial toll it could have on your savings.

“Social Security is largely a pay-as-you-go program. This means that today’s workers pay Social Security taxes into the program and money flows back out as monthly income to beneficiaries,” the National Academy of Social Insurance explains online Opens a New Window. , adding that roughly 170 million Americans pay Social Security taxes and more than 60 million individuals collect benefits each month.

In 2017, an average retired worker reportedly received nearly $1,400 per month in Social Security benefits. That number fluctuates based on a person’s status (i.e. a disabled employee, widow or widower, etc.).

Social Security is different than a traditional pension — a costly company plan that provides guaranteed income for life. Those types of packages are scarce nowadays — only about 20 percent of the full-time private sector workforce still has traditional pensions, according to 2018 data collected by Forbes Opens a New Window. .

“Given today’s longevity, it is more important than ever to maximize your Social Security benefit. Think of this as an annuity for your lifetime,” Charlotte A. Dougherty, founder of Dougherty & Associates in Cincinnati, previously told Investopedia Opens a New Window.

It’s especially important to stay educated about Social Security, as programs have increasingly been facing the threat of long-term insolvency. An official forecast Opens a New Window. released in late April projects the 84-year-old Social Security Opens a New Window. program will only be able to pay about 80 percent of the benefits promised in 2035.

“At or around 2034, you’re either going to have to cut Social Security benefits very sharply or you’re going to have raised taxes to basically keep benefits as they were,” MarketWatch columnist Brett Arends told FOX Business’ Neil Cavuto Opens a New Window. at the time.

Social Security and Medicare currently account for 45 percent of federal spending in the U.S. Economists have also projected that the cost of the entitlement programs is estimated to be nearly 8.7 percent of GDP in 2019.

“The population is getting older, older people vote more … I don’t think anyone is going to be able to run for office on a promise to cut people’s Social Security when so many people depend on it,” Arends added.

For those who are planning to retire in the near future, here are five ways to take advantage of the Social Security benefits you’re offered.

Work at least 35 years

The age you officially stop working impacts the amount of money you receive. So, many financial experts recommend working a full 35 years — if not more.

Social Security “calculates your average indexed monthly earnings during the 35 years in which you earned the most,” the Social Security Administration (SSA) explained in a 2019 reportOpens a New Window.. “We apply a formula to these earnings and arrive at your basic benefit, or ‘primary insurance amount.’”

In this case, time is your friend. It gives you a chance to boost your average earnings, which will replace periods of lower income in SSA’s calculation.

“If you stop work before you have 35 years of earnings, we use a zero for each year without earnings when we do our calculations to determine the amount of retirement benefits you are due,” the SSA noted on its websiteOpens a New Window..

Delay, delay, delay

If you choose to delay retirement past the age of 65, then you could actually see a noticeable increase in benefits. The SSA says it will increase the benefit amount until you start accepting checks or until you’re 70 years old.

According to InvestopediaOpens a New Window., the benefit amount increases by about 8 percent each year you postpone until that 70-mark.

Those who don’t retire as soon as they hit 65 should still apply for Medicare benefits “within three months” of their 65th birthday to avoid paying more in the long-run, the SSA recommendsOpens a New Window..

Don’t take benefits before 65

Technically, you can start receiving benefits by age 62, but the SSA advises against this option.

“If you start benefits early, your benefits are reduced a fraction of a percent for each month before your full retirement age,” the SSA says.

Think about your spouse

If you’re married, then you may be able to reap your spouse’s benefits — even if you’ve never worked under Social Security.

According to NerdWalletOpens a New Window., a spouse (born before 1954) can earn up to 50 percent what the highest earner in the household receives at 65.

“If you qualify and apply for your own retirement benefits and for benefits as a spouse, we always pay your own benefits first. If your benefits as a spouse are higher than your own retirement benefits, you will get a combination of benefits equaling the higher spouse benefit,” the SSA says.

Consider moving

Retirement age is a great time to consider a big move, especially if you live in a state that taxes your Social Security benefits.

So far, at least 13 states impose taxes on Social Security benefits. They include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. In February, a 14th state — Illinois — reportedlyOpens a New Window. said it was mulling a state income tax on Social Security benefits.

While it may sound cliché, The Motley Fool says Opens a New Window. Florida and Nevada are very tax-friendly options for retirees.