KNOW
WHERE YOUR MONEY IS & HOW IT'S DOING!
"WHAT ABOUT MY 401(k)
PLAN?"
Employees' Pension Plans have largely been replaced
by 401(k) plans which often have the employer-matching of funds
benefit which most Pension Plans did not have. Other appealing
features ignited their burgeoning growth over the last 20 years.
As such, it is surprising that even though this employer "gift"
to your retirement option is readily available, the ASEC says
that up to 25% of workers do not participate, with less than 10%
contributing the maximum allowed.
What does the term "401(k)" mean?
Its everyday use came from the prolific annals of the Internal
Revenue Service Code in the early 1980's when the fledgling plan
emerged in private industry.
Over half of America's employers have 401(k)
programs in place for their workers and match their contributions
@ approximately 50 cents for every dollar invested. Further, as
of 2002, you can set aside up to $11,000.00 annually and the mandate
that catch-up provisions of $1,000.00 ($12,000.00 total) applies
if you are 50+. Your taxable income is reduced by this amount,
and it is tax-free until you withdraw it.
The management of 401(k) plans has received
considerable scrutiny, which has led some employees to take greater
control in the management of their funds. Too often, employees
have left their investment choices to word-of-mouth recommendations
or blind selection. IT'S YOUR MONEY. HAVE AN INFORMED SAY IN
WHERE IT GOES.
Here's some 401(k) plan management questions
to discuss with your Human Resources Administrator in working
out your own optimum strategy. Never lose sight of the fact that
YOU are ultimately responsible for your investment choices
in your plan; you reap the benefits or bear the consequences.
Our brief comments after each question is for general information
only. Please discuss in detail each question with your Human Resources
department, coupled with your diligent research. Time with a financial
adviser could well be money spent most wisely, and is essential
if you have not fully analyzed your position.
- What amount
should I be contributing?
- To take full advantage of your employer's
matching contribution, many employees contribute as much
as possible.
- Does my plan
offer investment diversification?
- Your plan most likely has a mix of cash,
stocks, bonds, GICs (Guaranteed Investment Contracts) with
a fixed interest rate, & perhaps company stock. Although
most plans offer 6-12 choices, historically many employees
select only 3 or 4, which does not provide full diversification.
Research investment Returns on a regular basis.
- Can my investment
choices be changed?
- "Asset" allocation allows
you to "balance" your portfolio, by allocating
(changing) your choices based on performance of the financial
instruments in your plan. Keep in mind the uniqueness of
each company plan! Let your Human Resources department provide
you with materials in developing a balance between conservative
vs. aggressive investment approaches.
- What types of
investment are best?
- It has been said that the younger you
start, the less conservative you should be; however, as
your 401(k) is a long-term commitment, do not create unnecessary
worry for yourself. Keep up-to-date on overall fund performance,
& never hesitate to ask questions of your Plan Administrator.
Asking questions gets you answers!
- If I need to
withdraw some funds, what is the impact?
- Although you MUST begin to withdraw
funds by age 70 1/2, there are instances when you may feel
you must withdraw early. It is commonly reported that there
is a 10% penalty in doing so, and you must pay income taxes
on the amount withdrawn NOW.
- Are there any
charges to me I need to know about?
- The cost to you for management of 401(k)s
generally start @ 1.5%, although larger plans with more
enrollees traditionally do not cost as much as small company
plan administration. Clarify with your Plan Administrator
what applies to you.
- What do I do
when I receive the money in my 401(k) fund?
- Immediately roll it into (transfer it)
to an Individual Retirement Account to continue your tax-deferred
basis. Cashing-out does your retirement in!
- Review your
investment statements for accurate reporting.
- When it comes to your nest egg, crunch
your own numbers. Inadvertent errors do happen; however,
your own responsible monitoring of your money is essential
in this data entry era in which we live.
A new Labor Department booklet provides
information to help workers analyze their plan fees. Call 800-998-7542
or check out www.dol.gov/dol/pwba.
"IRAs, IRAs, IRAs…"
If you made your IRA (Individual Retirement
Account) contribution on January 1, 2002 for tax year 2002, rather
than waiting until April 15, 2003, you've wisely experienced 15
1/2 additional months of compounded interest! Further, you won't
have to pay taxes on the interest you earned by not transferring
from savings into your IRA!
Just can't do it on January 1 of each year?
You may want to set up an automatic checking account debit monthly
to get your contributions in…the earlier the better! Don't
forget: If you do not have $3,000.00; contribute what you can!
It is a too common belief that you can't have an IRA account unless
you contribute $3,000.00 in one lump sum. NOT SO! Talk
with the institution where you have your IRA and find out all
of your options so that your investment really works for you.
The IRA Law Changed January 1,
2002!
Two common types of IRA accounts, the Traditional
and the Roth IRA now have $3,000.00 (up from $2,000.00!) annual
contribution limits! The new law also allows what are termed "catch-up
contributions" up to $500.00 per year under specific guidelines.
Ask your IRA account representative should you have any questions.
A third type of IRA, historically known as the
Education IRA, is now called Education Savings Accounts, is also
affected by the new law. Check with your IRA representative regarding
details on this…especially if your "old" Education
IRA was established for the benefit of special needs students.
April 15 of each year is your deadline to contribute
to or open an IRA for the previous calendar year under these new
parameters.
Again, the Internal Revenue Website details
these new laws and the tax law changes related to them. Visit
them at http://www.irs.gov.
Keep This in Mind…IRA
Oversights!
It is NEVER too late…Take
Charge!
- Be direct about your beneficiary! Your tax
advisor can map out the consequences of whether or not to name
minors and the possible adverse affect of a spouse's inheritance
being set up in a trust or estate.
- Take out that required minimal withdrawal
before you reach 70 1/2, or (currently) pay a 50% tax rate to
the Internal Revenue Service!
- If you inadvertently get into the "wrong"
IRA for you, The IRS is kind…no penalties for getting into
the "right" one! Get professional help…the transfer
must be done correctly!
- Keep an eye on your diversification! Ask
questions about your account! The key word is balance…balance…balance
in your investments.
- IRS Form #8606 MUST be filed to annually
track nondeductibe IRAs which are designed to not be taxable
upon withdrawal or you'll be penalized! Your tax advisor can
assist you with the technicalities related to this.
- ROLL IT OVER! The EBRS (Employee Benefits
Research Institute) in Washington, D.C. estimates that over
60% of distributions from "qualified" retirement plans
do not get reinvested into IRAs or other retirement instruments.
- Keep that future nest egg healthy and avoid
the temptation of making the choice of spending over saving!
Get to know your tax consultant or C.P.A. well,
in addition to your own "take charge" attitude to your
investments!
"What's an ANNUITY?"
A WHAT????
In hearing this term for the first time, the
only familiar concept discernable is that somehow it must have
something to do with "Annual." Actually, the concept
of "annutizing" (or, "to annutize") means
that the insurer of your funds gives you a fixed monthly payment
for life (or, a survivor's life) in exchange for you waiving your
right to the principal you invest. You can also arrange to withdraw
a certain percentage of your annuity on an annual basis, which
gives rise to the term itself.
"What Kinds are There &
How Do I Get One?"
This product is actually a contractual agreement
between you and an insurance company which provides for predictable
monthly income throughout your retirement when a deferred annuity
is purchased. In this annuity type, you either pay premiums for
a specified period, or deposit a lump sum investment which accrues
in value over time, with your "payout" postponed until
a later date.
An immediate annuity is one where the lump sum
investment is deposited in entirety at one time, and an immediate
stream of income is realized.
Annuities can puzzle even seasoned investors.
The choices are many and fraught with complexities. A trusted
financial adviser is an excellent ally to have in sorting out
what type of annuity may apply to you in your financial planning.
You will find that annuity products are sold by banks, credit
unions, insurance agents, and yes, even your financial planner.
"How Much Income Do I Get?"
Income is contingent upon the follow:
"What's the Difference
Between Fixed & Variable?"
You will not lose the premiums you paid for your annuity and it
guarantees you a fixed return; however, after the first year in
most instances the fixed annuity is determined by the insurer
and/or market conditions. You do have a minimum set rate of return,
usually 3% - 4%. Keep in mind that your return is not government-backed,
but based exclusively on the financial strength of the issuing
insurer & their management ability and investment strategy.
In contrast, variable annuities allow you to
control your yield and you choose your strategy. Your money is
deposited with the insurer in what insurer's call a "sub-account"
and your annuity is impacted positively or negatively with stock
market fluctuations.
In annuities, we recommend that all product selections be recommended
and/or reviewed by your financial adviser.
"What
are the Pluses of an Annuity?"
- There are no limits to your contributing
to an annuity. This may appeal to you if you're doing some
"late stage" planning. Many individuals elect an annuity
when they find themselves not fully invested in a 401(k) or
do not wish to be limited in their contribution(s) by IRA restrictions.
- Your contributions are taxed upon withdrawal,
usually at a lower tax rate; however, please review these considerations
with your financial adviser.
TIAA-CREF is the primary pension system for
educators here in the United States. Their position is that Annuities
are long-term investment instruments, which are excellent for
retirement. They offer an income for life on a tax-deferred basis.
"Anything Negative About
an Annuity?"
- Plan on over 10 years to recapture the fees
charged by the insurer, usually 1% - 1 1/2% annually on a fixed
product; slightly over 2% per year on a variable one.
- Withdrawals prior to age 59 1/2 have a 10%
penalty over the taxes due at that time. See your financial
adviser and/or tax adviser for the additional tax and monetary
consequences which may impact you.
- "Surrender fees" for premature
withdrawal apply, and these fees vary widely from insurer to
insurer, so do your homework and discuss fully with knowledgable
independent financial and tax advisory.
"Annuity Alternatives?"
- An annuity is wisely a follow-up approach
AFTER 401(k)s, IRAs, Keoghs, and a Roth IRA, if applicable
to your overall retirement plan.
- Consider real estate investment if 80%+
of your investments are already tax-deferred.
- Contemplate alternative wealth accumulation
possibilities, and enjoy life…watching your investments
is one thing, but a very wise anonymous quip that has been around
for years is "LIFE IS WHAT HAPPENS WHILE
YOU'RE MAKING OTHER PLANS." Make this time of your
life truly the Times of your Life!
E-MAIL: SeniorsManagement@1stopmortgage.net
