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The Biggest Dos and Don’ts of A 401(k)

golden egg with moneyFor most people who are trying to save for their retirements an employer-sponsored 401(k) can be an incredibly great deal. The premise of a 401(k) is reasonably easy to understand. You take pretax dollars out of your paycheck, invest them over a number of years and ultimately wind up with a really nice nest egg come retirement. On the downside, 401(k)s have some rules that can be difficult to understand. So the important thing is to know the dos and don’ts of a 401(k) so you’ll know how to get the most out of yours.

Do begin saving early even if you don’t earn much

One of the most powerful forces in the known universe is compound interest. If you save just a little cash and give it a lot of time to grow this will be better than saving a lot of cash but for a short period of time.

Don’t be afraid of growth

If you start early you have a fair amount of time to offset any losses. Stop worrying about things and keep that 401(k) in growth mode. This means investing in US and international stocks. These will carry more risk in the short term but over many years they will be a much better wealth creation tool. You should even consider investing in stocks if you’re in your 40s or 50s because you could easily live to 80 or 90.

Do take advantage of your employer’s match

If your employer matches your contribution to some percentage take full advantage of it. This is basically free money. Your employer puts it in your 401(k) account as a reward for saving, which is something you should be doing anyway.

Don’t treat your 401(k) as if it were a checking account

You can borrow from your 401(k) but you need to be careful because it can be very costly. You’ll not only pay a penalty for any withdrawals you make before age 59 ½ you’ll also be short of that cash when it comes time to retire or in an emergency. The bottom line is that you should exhaust every other option for borrowing money before you dip into your retirement funds.

Do contribute from your bonuses

When you get a bonus it can be very tempting to use it for a beach vacation and there is nothing wrong with using part of it for that or for a pair of special shoes. But put the rest into your 401(k) account to help feed your long-term savings.

man balancing a checkbookDon’t forget catch-up contributions

If you’re getting close to retirement, are behind on your saving and are 50 or older remember that you’re allowed by the IRS if to contribute an additional $6000 for the tax year 2015 and that’s above the normal $18,000 limit. That makes a total of $24,000 you could invest in your 401(k). This can be a powerful catch-up tool.

Do increase your contributions when you get raises

There are a huge number of studies showing that when you make your saving automatic you don’t notice that missing money as much. Make arrangements with your HR department to adjust your 401(k) contributions each year when your salary increases. You’ll never miss the money and you’ll be glad you did this come retirement time.

Don’t ignore those taxes

The sad fact is that you don’t really have as much money in your 401(k) as you think. The reason for this is that it’s a tax-deferred account meaning that when you begin withdrawing funds the money will be taxed as ordinary income. If you don’t think this can hurt think about this. If you have $1 million in your 401(k) and withdraw the full amount you would pay the top tax rate, which as of this writing is 39.6% meaning it would cost you $396,000. Ouch!

Do learn if there’s a vesting schedule

While you may be getting a nice matching contribution from your employer do understand that it may have put strings on it through what’s called a vesting schedule. What this translates into is whatever money you contribute into your 401(k) will always be yours. However, some employers can and do reserve the right to get back its matching funds if you quit before you become vested. While federal law limits vesting schedules the terms can still be nasty. As an example of this, your employer might require you to work a minimum of three years or lose every single penny of what it matched. Check out your vesting schedule and make sure you understand its terms. This could actually help you decided when to – or not to – get a new job.

Don’t forget about your RMDs

RMDs are those required minimum distributions the government makes you take out of your 401(k) when you reach age 70 1/2 if you’re no longer working. How much you’ll be required to take out of your 401(k) involves a lot of math based on your account balances, age and marital status. This means that once you reach that 70 ½ and are required to start taking money out of your 401(k) you should consult with a tax professional or check out the RMD worksheets available on IRS.gov. This is important because if you don’t take out the required amount you can expect the government to penalize you so it will get its share regardless.

Do think long-term and diversify

The retirement giant Fidelity Investments made the astounding discovery that it’s best-performing accounts were those of people that didn’t even realize they had accounts. This is proof positive of the power of sticking with investments and not being influenced by day-to-day changes. What you need to do is diversify across asset classes including bonds and stocks and think both domestically and internationally.

Don’t be afraid to ask for assistance

When you reach that golden age where you’ve paid off your mortgage and paid for your kids’ college educations you need to think about the kind of retirement you want and the type of legacy you want to leave your heirs. And most importantly you need to think about when and how do you start moving money around to get there. These are critical questions and there’s nothing wrong with looking for help. An accredited financial advisor could help you navigate the various tax laws and figure out a long-term plan that would help keep those golden years golden. You don’t want to make an expensive mistake late in life and paying a smart person to help you could be an excellent investment.

If you’d like to know more about 401K)s, here’s a video courtesy of National Debt Relief with details.

 

4 Financial Tips Before Quitting Your Job

lose jobFinancial tips abound for almost every aspect of your life. From how to make do with a low income budget to valuable tips when you suddenly get your hands on windfall money. Just like when your account suddenly gets credited with a tax refund. That is an unexpected amount and you suddenly  find yourself with a happy problem.

But those financial tips are easy to read through when you are trying to figure out how to use money that you have. But what if you are looking at a major financial decision that has the tendency to lower down your income? If you are trying to look at quitting your job, the financial ramifications will be severe in case you cannot replace that income in your budget.

Statisticbrain.com shares that in 2014, unemployment rate was at 6.1% leaving about 18 million Americans jobless. And if you are quitting your job, you then become part of the statistic of people trying to make do with little to no income. There are about 10 million consumers collecting unemployment benefits and you do not want to be one of them .

Of course, if you are quitting your job, it sounds like it was a personal decision. No one wants to be jobless in this consumer driven economy – unless you have something lined up like another job waiting for you. It can also be because you are looking to start up your own business and need to put in all your effort in realizing your entrepreneurial venture.

It is definitely a different ballgame when you are looking for ways to make ends meet. When you are having to live by a shoestring budget, everything becomes a lot harder. And quitting your job which is the main source of income can leave you in financial distraught.

Tips in handling your finances

When you quit your job it is a major financial decision that you need to plan for. The income that sustains your whole budget will now be almost non-existent. Here are some things you can consider when preparing your finances when in light of quitting your job.

  • Consider talking to a financial advisor. Investopedia.com defines a financial advisor as a qualified person who can dispense financial pieces of advice or guidance. This is the holy grail of financial tips for almost all aspects of your financial need. When you want to quit your job, you are putting in danger your household budget. But a financial advisor might be able to point out other areas of your financial life that will be affected your decision to quit your job. They can also give you more tips on how to prepare your finances before letting go of  your job.
  • Strengthen your emergency fund. Your emergency fund is meant to be your safety net when you encounter financial challenges in life. On top of the list is usually losing your job and quitting one definitely fits the bill. Your reserve fund should be able to cover your expenses for as low as six months to a year. There are several rules about how much of an emergency fund you need to have. The bottom line is that your emergency fund can be as big as you want it to be. In truth, the bigger, the better. When you are quitting your job, you need to have a plan on what you want to do next. This timeline should be your target in building up your emergency fund.
  • Do not forget your 401(k). When you are in a hurry, you tend to forget a few things just like when you are rushed in packing so you can catch a flight. You later realize that you forgot to pack shirts in your bag because you were pressed for time. The same can happen when you are quick to decide in quitting your job but you might lose more than just a shirt. Think of your 401(k) that you have been contributing in your past job. But before you decide to just take out your 401(k) to pay for debt, you need to know that you can rollover your contributions to benefit your retirement. You can choose to do two things with our 401(k) – you can either put it in an Individual Retirement Account (IRA) or you can even put it in your new employer’s 401(k) if you have another job waiting.
  • Settle bills with advance payments. This is one of those financial tips that can benefit your cash flow greatly in case you plans to say goodbye to your job.  If you already know ahead of time that you are resigning from your post, try to make payments on your bills in advance before the date of your resignation. With all the chaos and confusion that can happen on the month that you leave work, you might overlook some of your payments which can hurt your budget even more not to mention your credit score.

Handling your finances after you quit your job

Your financial planning will be different when you are just about to quit your job and when you have actually taken the plunge and left the company. You can look into all the financial tips that you can find prior to leaving your job but all those planning can go down the drain if you blow your after-resignation finances.  Here are some tips to consider when managing an income-less budget.

  • Take a frugal lifestyle. Living below your means  can do wonders for your budget. And it does not even mean dumpster diving or living off noodles for months on end. There are actually fun ways to a frugal lifestyle that you can consider even if you already have kids of your own. It actually becomes more important to consider a frugal lifestyle when you are managing a budget for a big family. The more you can save, the more it can benefit your budget in the long run.
  • Do not blow your emergency fund. You might have been able to build up a solid amount for your emergency fund in preparation for leaving your job but you need to make sure that you use it for its intended purpose. Define the instances wherein you can dip your finger in your reserve fund. Is it only for expenses that spell the difference between life and death? That sale in the mall does not constitute as an emergency and must not be satisfied  by pinching on your fund.
  • Monitor your household budget. This is actually something that you need to do, regardless of your financial situation. It is not a sexy chore but you need to monitor your budget more than ever when you quit your job.  You need to make sure that all the expenses are on track and you are not overspending at a time when your income is essentially non-existent.
  • Look for an alternative source of income. If you know that it will take you a while to regain a steady source of income, one great financial tip you can use is to look for alternative sources of income while you do not have a job. One idea is to use your hobby and transform it into a money making venture. If you love baking, you can take orders and deliveries starting with friends and relatives. If you have a talent in taking pictures, you can look market yourself as a photographer and book events.

There are a lot of financial tips that you will come across when you are planning to quit your job. You just have to remember that whatever you set your sights on financially, you keep at it and continue to learn and evolve.

Which is better – A 401(k) Or A Roth IRA?

If you’re worried about saving for retirement, you may be asking which would be better a 401(k) or Roth IRA. If you don’t have an emergency fund, the answer is “none of the above”. It’s really important to have the equivalent of five to six months of earnings saved up before you begin saving for retirement. The reason for this is simple. If you don’t have an emergency fund and you’re suddenly faced with a big auto repair or medical bill, you would have to either dip into your retirement account or use credit, neither of which is a good alternative.Egg labeled 401k in nest as next egg

Does your company offer a 401(k)?

If your company offers a 401(k) plan, this is a much better option than starting a Roth or traditional IRA. This is because with a 401(k) plan, your employer will probably match a percentage of your contribution. The contributions you make to the plan will be salary reduction contributions on a post-tax or pre-tax basis. The plan may even include a profit-sharing feature. Any money earned in the plan accrues on a tax-deferred basis. Your plan may even allow you to direct your own investments with a group of investment products from which to choose.

Your employer’s contribution

If your employer contributes to your 401(k) plan it will be at the rate of fifty cents for every dollar you contribute up to a certain percentage of your salary. This will be either 3% or 5%. As an example of what this means if you were to contribute $3,000 over the course of a year, your employer would kick in an additional $1,500.

If there is no 401(k) plan

Unfortunately, some companies do not offer 401(k) plans. If your company is one of them, the true question isn’t which is better a 401(k) plan or a Roth IRA. The real question is which is better a Roth IRA or a traditional IRA as these will be your choices.

The difference

The biggest difference between a traditional and a Roth IRA is that the contributions you make to a standard IRA are tax deductible, while those you would make to a Roth are not. In other words, you can deduct the money you put in a traditional IRA but will pay taxes on it when you withdraw the money. In comparison, with a Roth IRA you cannot deduct your contribution but you pay no taxes on the money when you withdraw it, assuming you’ve had your Roth IRA for five years or more.

Maximum contributions

With either a traditional or Roth IRA, the most you can put into the plan each year is governed by law. For example, this year the maximum amount you can donate to a traditional IRA is $5,500 ($6,500 if you’re 50 or older) and ditto a Roth IRA.

Choose a 401(k) if possible

If your company does offer a 401(k), it’s a much better option than either a traditional or Roth IRA. However, if it does not have a 401(k) plan you’ll have to check out the details of both a traditional and Roth IRA and then make a decision based on which one makes the most sense for you. given your tax situation and retirement goals.

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