A 401(k) plan allows you to put a certain amount of your salary into a retirement account in which your investment gains are tax-free until you start withdrawing from it. You also get to earn free income when your employer matches the amount of money you put into your retirement plan, up to a certain limit.
However, when you need money due to an unexpected large expense or an emergency, you might wonder – can I cash out my 401(k)? In this article, we’ll look at the eligibility, consequences and the process to cash out your 401(k) early.
Eligibility to cash out your 401(k)
You need to meet certain criteria before you can cash out your 401(k). Have a look at these prerequisites to avoid making costly mistakes.
If you’re still working for the employer that sponsors your 401(k) plan, you are not eligible to cash in your plan and savings. However, you can check whether your plan allows you to take a 401(k) loan or hardship withdrawals to get you out of the situation you are in.
If you’re no longer employed with the company that sponsored your 401(k) plan, you can access the funds. You can either consider to cash out your 401(k) or roll over the balance into an IRA or a private self-directed 401 k plan.
If you wish to cash out all or part of a 401(k) fund without being penalized, then you need to be either: -> of age 59½ or above or -> Disabled, or -> Undergoing some sort of financial “hardship”(if your plan allows)
Consequences of cashing out a 401(k) or 401(k) early withdrawal
If you choose to withdraw funds early, you should prepare yourself for these consequences:
A 20% of a 401(k) early withdrawal will be withheld for taxes.
If you withdraw $10,000 from your 401(k) at age 45, you may get only about $8,000. You might get this money back as a tax refund if the withholding exceeds your actual tax liability.
You’ll be charged a 401(k) early withdrawal penalty of 10% if you withdraw before age 59½.
This means you are giving away an additional $1,000 of that $10,000 withdrawal to the government. After taxes and penalty, you could be taking home just $7,000 from your original amount of $10,000.
You’ll have less money for your future.
Cashing out 401(k) early means you’ll have less money to use when you retire. This can severely disrupt your entire retirement plan.
You’ll receive no credit protection.
Funds in 401(k) plans are protected. In case of bankruptcy, your creditors cannot seize your funds. When you withdraw money from your 401(k), you lose this protection, which may make you vulnerable to hidden expenses in the long run.
Are you still contemplating taking a 401(k) early withdrawal or cashing out a 401(k)?
After knowing the consequences of early withdrawal of funds from your 410(k), if you are still considering cashing it out, then do the following:
See if you are eligible for a hardship withdrawal
Check whether you qualify for an exception to the 10% tax penalty
Follow these three steps to withdraw money early from your 401(k):
Check with the HR department to find out whether you can withdraw funds early. If yes, then find out whether you are eligible for it.
Get in touch with your 401(k) plan provider. Ask for information, and submit the required paperwork to cash out your plan.
Obtain the required signatures from your HR representatives or plan administrators at your former employer as an acknowledgement that you have filed the documentation to execute the process of cashing out your 401(k) early and is authorized to so.
How long does it take to receive money after you cash out a 401(k)?
You may have to wait for several weeks until you receive your funds. A 401(k) plan is a highly regulated retirement account subject to strict governance. Therefore, it may take a significant amount of time for the funds to be released.
Some plans may have rules that restrict them from giving out funds more than once a quarter or year. If your plan follows this rule, the time horizon can be extended to 30 – 90 days or more.
If you are contemplating cashing out your 401(k), but are concerned about its implications, be sure to consult a financial expert.
If you’re thinking of Converting 401k to IRA, you might be doing the right thing. Roth IRAs allow you to invest your funds in investments similar to traditional IRAs, but Roth IRAs offer additional benefits that can help you save more money in the long run.
3 Signs That tell you That a Roth IRA could be the Best for You:
You anticipate paying higher taxes when you reach retirement.Roth IRAs are funded with after-tax dollars. It means that you pay tax upfront on funds you are planning to rollover. And the distributions you take from your Roth IRA are tax-free. This feature can be extremely beneficial if you expect to be taxed at a higher rate at retirement.
You don’t want to make withdrawals early.With traditional IRAs, you have to make the required minimum withdrawals when you reach 70 ½. Roth IRAs do not have this compulsion. This means that you can keep your funds in the Roth IRA until you are ready to use them.
You want to increase your tax diversification.The contributions made to traditional IRAs are tax-free. This means you don’t pay taxes on the invested funds until you start withdrawing from it at retirement. However, with a Roth IRA, your contributions are taxed upfront, but after age 59 ½, you can make tax-free withdrawals. Rolling over your traditional IRA into Roth IRA can help diversify your future tax exposure. If you are unsure of how your income and tax will pan out in the future, you can have both these types of accounts for tax diversification.
How To Roll Over Your 401(k) to a Roth IRA
Roth IRA is funded with after-tax dollars (taxes on your contributions are paid upfront, and earnings are tax-free). This means your withdrawals at retirement are free of taxes. Plus, with a Roth IRA, you don’t have to take required minimum distributions (RMDs) like its traditional counterpart. You can leave your money uninterrupted for as long as you want.
Rolling over your 401(k) money to a Roth IRA is a smart decision but a taxable event. Taxes are applied to your contributions and that of your employer and on your earnings (capital gains and dividends). This boost in income pushes you to a higher income bracket, making you liable to pay more tax than if you left the money as it is in your traditional IRA.
Since the rollover changes the taxation of your money, the switch from a traditional IRA to a Roth is called a conversion instead of a rollover.
How To Roll Roll Over Your 401(k) to a Traditional IRA
The 401(k) contributions (employers and employees) are pre-tax. This means you are yet to pay taxes on any contributions and earnings.
However, there is a difference. In the traditional IRA, the individuals and not employers send their contributions to their financial institutions. They claim a deduction when they file their taxes.
Paying Taxes on Your Contributions
The contributions in a Roth IRA are taxed upfront;then,the money grows tax-free. But when the money was in your 401(k), it was protected from the taxes. So, to qualify for a Roth, you’ll need to pay tax on the money that’s in your 401(k).
The rollover funds are added to the total taxable income for the year you carry out the rollover. Your IRA’s income isn’t from a paycheck, and therefore the tax on it is not withheld and has to be paid from your pocket.
If you want to avoid a penalty, you can consider making an estimated tax payment before filing the taxes for the year. When you know your estimated tax payment, you can decide whether to pay it in full or split the amount into quarterly payments. Estimated quarterly tax payments are due on or before April 15, June 15, September 15, and January 15 of the next year.If you overestimate your tax payment and end up paying more than you owe, you’ll get a refund.
If you’re considering to roll over a large balance to Roth, your tax bill for the year could be high, pushing you into a higher tax bracket. To avoid getting into this situation, consider converting only part of the traditional IRA over two or more years.
The process of a rollover from a Roth 401(k) to a Roth IRA is pretty straightforward, and in fact, optimal. The fact that the transferred funds have the same tax implications and no intermediate steps makes the process even simpler.
However, you may need to handle any employer matching contributions in your regular 401(k) account that may have taxes liable on them. You can either set up a Roth IRA for your 401(k) funds or roll them over into an existing Roth.
The Five-Year Rule
Rolling over your 401(k) to a new Roth IRA is a long term strategy. If you anticipate money withdrawal in the near future (within five years), then rolling over your 401(k) to a Roth IRA is not a good choice.
The five-year rule governs Roth IRAs. The rule states that if you want to withdraw the earning (interest or profits) from a Roth without any tax or penalty, you need to have held the account for at least 5 years. The same goes for the withdrawal of converted funds (from traditional 401(k) to a traditional IRA and then to a Roth IRA).
If the rollover is from a traditional 401(k) to a Roth IRA, the five-year period begins from the date the funds were transferred to the Roth. If you withdraw your earnings early, you may incur taxes and a 10% penalty. You can withdraw contributions, but not earnings, from your Roth at any time.
The early withdrawal rules can be confusing. So, if you are considering an early withdrawal of funds from your Roth IRA, it is wise to consult a qualified tax expert.
vNote: For 2020, as a part of coronavirus relief legislation, the early withdrawal penalty was eliminated.
The Bottom Line
Rolling your 401(k) into a Roth IRA is a smart decision. But, it may not be the right one for everyone. Before you sign the dotted line, make sure you investigate all your options. You should consider speaking to a tax professional for guidance because you may not know what can hurt you when it comes to complex investment vehicles and taxes.
The growth of individual retirement account (IRA) relies heavily on the amount of money you invest and how much risk you can take. These factors shape the types of investments you can include in your IRA account.
And if you continue to make regular contributions to your IRA, you’ll see a dramatic effect on the performance of your account.
Which is a better strategy for growing your wealth? Investing in real estate or stocks? Or a bit of both like most Americans do? The answer isn’t simple. However, understanding each type of investment will enable you to choose the best strategy to grow your money and create financial security.
Both real estate and stocks have their own set of pros and cons. Remember, many investors invest in both. If you like the idea of investing in real estate, 401(k) real estate investment might be worth a second look.
Let’s take a look at how real estate and stocks stack up against each other.
Real Estate vs Stocks
Real Estate: You are buying physical property, a piece of land, apartment, home, etc. If your property is vacant, it costs you money in terms of taxes and maintenance. But if your property is on rent, it generates rental income which you can spend on taxes and maintenance, and the rest can be considered as profit.
Stocks: When you invest in stocks, you buy the shares of a company. It’s like owning a small percentage of the company. As the company grows, the value of your shares grows too. Money is made in the stock market by buying low and selling high.
The returns of both these investments cannot be practically compared because the factors that affect values, prices and returns are very distinct. However, if we compare the total returns of the SPDR S&P 500 ETF (SPY) and the Vanguard Real Estate ETF Total Return (VNQ) over the last 20 years, we can get a fair idea of how they perform
The chart above indicates that both real estate and stocks take big hits during economic recessions. Notice the drop that occurred during the great recession (2008) and COVID-19 (2020).
The chart above indicates that both real estate and stocks take big hits during economic recessions. Notice the drop that occurred during the great recession (2008) and COVID-19 (2020).
Real Estate: When it comes to real estate, the most important risk is investing in it without doing thorough research. Also, you cannot easily liquidate your real estate when you are in a bind. If you own rental properties, the risks usually involve handling repairs or managing rentals.
Stocks: The value of the stocks is extremely volatile, and the prices can go up and down due to market fluctuations. The stock market involves economic, market and inflationary risks. If you have an undiversified investment portfolio, you attract greater risks.
Pros and Cons
Easy to understand: While the process of investing in real estate is complicated, the basic rules are simple – buy, maintain/manage, and resell at a higher price.
Tax advantages: Real estate investors can take advantage of substantial tax benefits in terms of tax reduction or tax breaks.
Hedge against investment: As the value of homes and rents typically increase with inflation, owning a real estate is generally considered a hedge against inflation.
More work than buying stocks: While the process of purchasing real estate is easy to understand, it demands more hard work.
ROI isn’t guaranteed: Although the price of property rises over time, you could be at risk of selling the property at a loss; the great recession is a reminder of that.
Expensive and liquidity-challenged: Real estate is expensive and highly illiquid. Buying real estate requires a large amount of cash as an upfront investment. It has high transaction costs. Getting money through reselling the property is also difficult. Although an asset, it’s not easy to liquidate it.
Highly liquid: It’s easier to know the value of the stocks. And if you decide to act (buy or sell), you can do it almost instantly.
Easy to add to a tax-advantaged account: Your investment can go tax-deferred or tax-free if you purchase shares through an employer-sponsored retirement account like a 401(k) or through an IRA.
Fewer transaction fees: You need a brokerage account to buy and sell stocks. Most brokers offer no-transaction-fee or zero trading costs.
Easy to diversify: You can build a broad portfolio of industries and companies at a fraction of the cost and time of owning a diverse range of real estate.
More volatile: Stock prices are volatile. They move up and down faster than real estate prices. This volatility can be risky unless you have a plan.
Potential for emotion-driven investing: Majority of the stock selling and buying decisions are made when the market fluctuates. If emotion, and not the strategy is the trigger, it becomes risky.
Selling stocks can trigger big taxes: Selling stocks may attract capital gains tax. Owning stocks for more than a year also attracts taxes, but at a lower rate. When your stock portfolio pays out any stock dividends, you may have to pay taxes.
Both real estate and stocks offer long-term financial gain, but they also come with potential risks. While choosing the best investment strategy to grow your wealth, the best way to hedge against the risks is to diversify as much as possible.
Institutional-quality, private real estate investments used to be nearly impossible for the self-directed investor to access. Since the JOBS Act of 2012, and thanks to the advent of web-based investing platforms, professionally managed real estate and other alternative assets are now much more attainable for individuals seeking greater diversification. Meanwhile, a number of forward-looking self-directed IRA custodians have adopted more efficient processes, embraced technology, and prioritized integrating with the “platform investing” model.
What types of alternative investments can I access with a SDIRA?
Self-directed IRA investors are legally permitted to invest in real estate, precious metals, hedge funds, or alternative assets. The only investment restrictions for IRAs are collectible items, life insurance, S-corporation stock, and prohibited party transaction (such as with family members). An IRA may leverage its investment with debt by using a nonrecourse loan to fund the balance of the investment. Online investment platforms that can accept self-directed IRA investments allow investors to passively invest in non-traded, alternative assets. Through EquityMultiple, for example, investors can access passive investments into debt, preferred equity, or equity positions in individual properties. This affords SDIRA investors a range of risk/return profiles and target hold periods.
When selecting real estate investments to allocate to via a SDIRA, many investors primarily consider their risk tolerance and time horizon with respect to retirement. Some SDIRA investors opt for payment priority — offered by debt or preferred equity investments — in advance of, or concurrent with, their target retirement date. Others seek longer-dated equity investments that will offer stabilized cash flow over a longer time horizon.
What are the best SDIRA custodians for passive real estate investing
Our more active investors typically choose a SDIRA custodian based on the following criteria:
● Fee structure ● Lack of red tape: how easy is it to obtain necessary approvals and fund investments? ● Tech integration: can the custodian interface with investing platforms to more efficiently complete investments and transfer funds?
There are a wide variety of fee structures among SDIRA custodians, so our investors will consider how frequently they plan on participating in EquityMultiple investment offerings and at what volume, seeking to minimize their aggregate transaction fee burden. The pros at Self Directed Retirement Plans, LLC can help you determine which custodian will be best given your investment objectives. Self Directed Retirement Plans LLC uses only “passive” custodians.
We also take the process a step further. We have been creating self directed IRA’s for over 15 years and ALL of our IRA clients benefit from “the next step. SDIRA’s are allowed to invest in LLC’s. We create underlying LLC’s for every SDIRA client. We structure the LLC’s as follows: they are manager managed LLC’s and our clients are the managers. The passive custodian is the member of the LLC FBO the IRA. We assist our IRA clients to establish a checking account in the name of the LLC. We then help our clients transfer all but $500 from the IRA account to the new LLC checking account. Our clients enjoy complete checkbook control, the passive custodian is truly passive and has no say on the day to day activities. This eliminates the above mentions aggregate transaction fees, asset based fees and saves time.The LLC basically has one purpose – to be the investment arm of the IRA.
How do investors use their SDIRA to invest in professionally managed R E investments such as EquityMultiple real estate offerings?
EquityMultiple facilitates investing in any of our investment offerings through a self-directed IRA: a custodian that allows real estate held in custody. With EquityMultiple and some other investing platforms, investors can rollover funds or fund this SDIRA directly. You will typically be required to instruct the custodian of your IRA to complete a written instruction, often known as a “buy direction” form attesting your (the beneficiary’s) intent to purchase an interest in this investment by the custodian (trust). The custodian will subsequently review the offering material or purchase agreement so that it doesn’t constitute a prohibited transaction. Lastly, the custodian countersigns the documents and wires proceed to the entity formed. Income, rental expenses, and sale from the asset are directed to the SDIRA and not directly to the beneficiary. The above is very true for most SDIRA’s. However, taking our “extra step” dramtically reduces the custodial expense and interference!
Tax Implications of SDIRA Real Estate Investing
A SDIRA account that invests passively in certain types of real estate asset can be subject to Unrelated Business Income Tax (UBIT). UBIT tax typically applies only when an IRA receives ordinary income as opposed to passive income from the investment held in custody. Passive income such as interest, rental income, dividends, or capital gain income is generally exempt and not subject to UBIT. There are two main instances where UBIT may apply:
If the real estate constitutes an income-producing business: UBIT tax is due if the real estate produces a service or product (for example a car wash, a hotel, or a restaurant.) If the intent was to sell immediately after purchase, then the investment can be subject to UBIT tax. Typically this timeframe is defined as less than one year.
Development: If the real estate activity is a ground-up development or a value-add investment that entails significant property improvements. In this case, a property that goes from land to structure and is sold will be required to pay UBIT tax.
When using the self-directed IRA in a transaction that will trigger the UBIT tax, the IRA is taxed at the trust tax of 10% – 37%. We encourage investors to consult with a tax advisor or IRA tax specialist to determine the tax implications of any particular real estate investment.
At Self Directed Retirement Plans LLC we also create self directed checkbook controlled 401 k plans. In fact we do 20 times more SD Plans the SDIRA’s. Ninety percent of our new clients wish to invest in RE using their retirement dollars. We ask two simple questions, Do you have any type of self employed income AND Do you have any fulltime employees. Self employed income can be consulting, Mary Kay, cleaning swimming pools etc. It is very easy to create self employed income.
We steer almost all IRA “callers” into SD 401 k clients. There are many reasons but a big difference is”. Real Estate investments using leverage (non recourse loans) in a SD 401 k DO NOT attract UBIT. This is absolutely HUGE. As stated above this eliminates the trust tax of 10% to 37%. When you combine using a ROTH sub account in the SD 401 K and leverage for R E investments you basically eliminate all taxes.
The effect of the COVID-19 pandemic lockdown is felt far and beyond. The lockdowns and quarantines that were necessary to curb the spread of the virus slowed the economy with unprecedented force and speed. Businesses racked up losses, and layoffs and pay cuts followed. With increasing rate of unemployment, many families are struggling to meet their day to day expenses. If you are facing financial hardship due to COVID-19, you may have considered making a 401(K) withdrawal early to cover your expenses.
Financial experts do not recommend taking money out of your retirement accounts early, but now taking into consideration the present economic scenario, most of them say that if you must, you should, as alast resort.
In the wake of the coronavirus pandemic, President Donald Trump signed the CARES Act on March 27, 2020, providing more than $ 2 trillion in financial relief for businesses and workers affected by the pandemic. If you are considering a 401(k) withdrawal, there are certain things you need to know.
Withdraw money of up to $100,000 without penalty.
Under normal circumstances, if you’re under 59 1/2, withdrawing from a 401(k) is a costly proposition because you are charged a 10% penalty on withdrawn funds. The recently introduced CARES Act changes that. This means you can make COVID-19 related withdrawals of up to $100,000 from your retirement account without incurring this penalty on early withdrawals.
Although the removal of this penalty takes off one of the substantial burdens of taking out the money from a 401(k) early, raiding your retirement accounts is still be a costly proposition because you lose out on the compound interest your money would’ve earned if it had stayed invested.
So, early 401(k) withdrawal is now penalty-free, but is it completely tax-free? No.
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Income taxes apply to the withdrawal amount, but the repayment can be stretched out over three years.
Withdrawing money from your 401(k) will still have tax consequences. Regardless of how old you are, when you take out money from your retirement account, you will be taxed as normal. But the CARES Act allows you to stretch the repayment of the taxes over three years instead of paying the entire amount this year. This arrangement provides some financial relief as the taxes can be substantially large, even without penalties.
Can you put back the withdrawn money over the next three years?
Yes. If you’ve taken a coronavirus-related distribution, the CARES Act allows you to put the money withdrawn back into the account over the next three years. The money that you put back will not be counted against your annual contribution limits, and hence you will not be liable to pay any income taxes on that. But, if you are unable to repay the borrowed amount due to financial constraints over the next three years, income taxes will be applied.
You may have the option to make an early 401(k) withdrawal, but should you do it?
The best way to determine whether you should take an early retirement distribution is to check if you have enough money to cover your living expense for the next 3 to 6 months. If you don’t and you find it difficult to manage these costs, then you should consider taking advantage of this.
However, before you decide to take this step, think of the bigger picture. You are raiding into your retirement savings and losing out on money that would have accumulated due to compound interest if you would have let it stayed into your account.
So, before taking this drastic step, always look at other sources of income or options. You can also consider taking help from a tax professional or financial planner to weigh the pros and cons of withdrawing from retirement accounts. For expert help,Contact Self Directed Retirement Plans LLC at (866) 639-0066.
In the wake of the latest economic crisis, there's no such thing as true job security.With more than 10% of Americans unemployed, the last few months has seen a drastic fall in the employment rate. If you're one of the millions of Americans, currently unemployed and wondering how to manage your finances, one question is likely to linger on: Should you keep saving for retirement when you no longer have a job?
How to decide whether to continue saving for retirement when unemployed?
It’s simple. Can you afford it?
If you do not have the money to pay your essential bills, such as housing, food, insurance, home and car repairs, debt payments, etc. saving for retirement should be the least of your worries. You need to use whatever money you have to cover these expenses.
If you do not have an emergency fund, at least six months of living expenses, you cannot afford to save for retirement. Emergencies can strike anytime, and if you have no money to cover it, you will be forced to sell investments, withdraw from your retirement account or borrow at a high-interest rate – and none of these options are good financial decisions when unemployed. So, focus on putting extra money toward your emergency fund instead of saving for retirement.
How to save for retirement when unemployed?
Get acquainted with IRAs
An individual retirement account (IRA) is a great option for people who do not have access to an employer-sponsored retirement plan such as a 401(k) account. In a traditional IRA, the contributions are deducted from whatever taxable income you have, much similar to a 401(k). However, in a Roth IRA, earnings are taxed upfront, but your withdrawals in retirement are not taxed. So if you’re not employed full-time, but have some earned income, IRAs can help save for retirement.
Rollover your old 401(k)
If you are unemployed, you will not be able to contribute to your employer-sponsored 401(k). However, the account is still yours, and the money in it is also yours. You have two options: let the money in your 401(k) lie as it is or roll it over to a traditional retirement account (IRA). Rolling over your 401(k) into an IRA could be a better option because you will have more flexibility and better investment options. And you can begin contributing to it once you start earning income.
Focus on optimizing your investment portfolio
If you no longer have a job, you may not be able to add to your retirement accounts, but you can definitely make sure that your portfolio is optimized. Make sure you have the right mix of investments and stocks in various asset classes and industries. Examine your investment portfolio to ensure that you are not under or over-invested in any area.
Consider reinvesting dividend income, if your finances allow
If you own dividend stocks, you may be tempted to redirect the dividend income towards paying your bills and get through the rough phase of unemployment. But if you can get by without doing it, consider redirecting your dividend income to buy more stocks and other investments. These small contributions to your retirement portfolio can add up to significant savings over time.
Focus on long-term growth, if you can
If you have some investments in a taxable brokerage account, you may be tempted to move them to dividend stocks or other income-generating investments for the extra income that you could use for covering your expenses. However, making this change can provide you the temporary relief, especially if you are unemployed, but it can harm you in the long run. Rather than making such adjustments in your portfolio, find some other sources of generating income or reduce your spending.
Losing your job after being gainfully employed for years can be a nasty shock. But the steps mentioned above can help you manage money and come out on the other side, financially stable and much in control of your life.
If you have recently lost your job, and need advice on the best way to manage retirement accounts at this time, call Rick at (866) 639-0066.
Retirement planning is a daunting process, and with COVID-19 playing havoc on the stock market, causing 401(k) and IRA balances to plunge, it doesn’t make the process any easier. Due to the coronavirus outbreak, experts predict that another recession might be around the corner.
If you want the coronavirus situation to have a minimal impact on your retirement plans, here are some thoughts and ideas, depending upon where you are in your retirement schedule:
You are already retired.
Allow the income planning and generation process to run its course. If you have planned your retirement well and if you have a strategy for retirement income in place, keep the strategy. Your income strategy is designed to withstand the market fluctuations.
However, if you don’t have an income strategy or not sure where you are heading, it’s a good time to talk to your financial advisor.
You plan to retire in the next 10 years.
By now, you probably have assets arranged for future income. If you haven’t, please think twice before selling any of your assets, especially stocks. It’s not a good time. However, at this point, use the time to review the retirement planning you have already done.
You plan to retire in more than 10 years.
Take this as an opportunity to keep doing what you are doing – hopefully, making regular contributions to your retirement accounts. If you continue to make regular contributions, you are actually using dollar cost averaging to your advantage. Your contribution today will buy more shares than it did a month ago. Ride the curve back up.
Here are a few tips that will help you navigate these uncertain times:
1. Flexibility is the key.
The recent stock market crash may have changed your thougts about your retirement plan. If you were hoping to retire this year or next year, you might have to rethink your decision until the market recovers. However, it’s too early to tell when the full recovery might happen, but you need to be flexible. This situation may be an opportunity in disguise. For example, delaying your retirement may give you another year to boost your benefit and lock in a higher payment for life.
2. Think twice about selling your stocks.
At a time like this, it may be tempting to sell your stocks. Unloading your stocks when they’re down is a sure way of locking in losses. While it may be heart-wrenching to see the numbers dropping, you need to keep calm and not make rash decisions.
With the uncertainties that are prevailing in the world today, mapping out your retirement can be a stressful situation. The best thing you could do right now is to not panic and be flexible to make changes as the situation demands. Be mindful of the fact that this situation, too, shall pass. And when the market recovers, you’ll be in a stronger position to retire than before.
3. Keep cash reserves.
The recent market crash has taught us how important it is to have cash reserves at all times. Ideally, if you’re close to your retirement, you should have cash in your savings account, large enough to cover a year of your living expenses. Apart from that, you should ideally have emergency savings to cover your unexpected expenses.
4. Keep your future in focus.
Currently, the stock market is in pretty bad shape. But, it has a strong history of recovering. So, don’t panic or keep checking your IRA or 401(k) balance almost every day. Rather, focus on excelling at your job and plan the things you can control and things you’ll do once you retire. And don’t forget to continue funding your IRA or 401(k) retirement accounts.
Due to the market downturns, now is also a good time to invest on the cheap while sticking with your scheduled retirement plan contributions. So, when the situation becomes normal, you are in a better place financially.
Whether you are 25, 45, or 65, you should have a retirement plan that’s designed to withstand market volatility. If you don’t have a plan, the current market scenario has taught us that the time to get serious about retirement plans is NOW. Call (866) 639-0066 for retirement advice during coronavirus pandemic now!
Congress wants to force your heirs to take out your IRA within 10 years.
I want to give you at least 30 years. . . maybe even more.
Hi everyone, my name is Rick Pendykoski. For over 20 years I’ve been helping people learn the best ways to manage their retirement money. That is why when I read the latest tax law changes in the SECURE ACT. I was mad. Really mad.
Once again Congress has created a new law that forces people to overpay their taxes. Instead of incentivizing people to save money and build for their future, Congress wants to make sure they can tax your retirement plan within 5 or 10 years of your death.
That means those of you who planned on your family being able to stretch out the distribution of your retirement assets over their lifetimes, they are going to have to take much larger distributions each year. Because the distributions are going to be larger, the tax brackets are going to be higher as well. No one wins here except our do-nothing Congress!
Well, I have a secret for you. There is a way that you can use a trust to stretch out the payments for another 20 years at least. Now instead of your retirement money coming out in large clumps, just to be decimated by taxes, your kids can take over 30 years to spend down your earnings.
The Secure Act came into effect since January 1, 2020, and it includes significant provisions that will prevent older Americans from outliving their assets.
How Will Secure Act Affect Your Retirement?
The Secure Act will inevitably affect many retirement account holders; the most immediate impact will be felt by those who have retired or nearing it. If you’re a saver or investor in your 50s or 60s, here are a few of the most significant provisions that you should be aware of:
1. Required Minimum Distribution Age Increased
Previously, 401(k) or IRA account holders had to withdraw required minimum distributions (RMD), when they turn age 70½.
With the implementation of the Secure Act, the RMD age has increased to age 72. However, this rule is only applicable to people who have not yet reached the age of 70½ by the end of 2019. People who already are 70½ years by the end of 2019 must withdraw their required minimum distributions this year; otherwise, they’ll attract a 50% penalty of their RMD.
2. Age limit for making Traditional IRA contributions eliminated
As life expectancies have increased, and more and more people continue employment beyond traditional retirement age, the Secure Act eliminates the maximum age for traditional IRA contributions. It also allows people of any age to continue contributing for as long as they are working (which previously prohibited people from contributing after they’ve reached age 70½, even if they were still working), thus enhancing their long-term retirement financial security.
3. Additional Roth IRA Planning Opportunities
With the increase in RMD age, the account holders have an additional two years to carry out Roth IRA conversions without worrying about the impact of required distributions. Converting to Roth allows the account holder to convert taxable money in an IRA into a Roth IRA by paying lower taxes than what they would be paying in the future.
4. “Stretch IRA” technique is eliminated
The term “Stretch IRA” describes a technique that a beneficiary uses to extend distributions from an inherited IRA over his or her lifetime. While stretch IRA allowed young beneficiaries to extend the payout over the decades, it also enabled them to spread out the payment of income taxes over a long period of time.
The Secure Act effectively eliminated stretch IRAs. For any deaths occurring after December 31, 2019, the beneficiaries must fully withdraw the funds from inherited IRAs within ten years of the account owner’s death.
However, the Act exempts certain kinds of beneficiaries from this rule: a surviving spouse, minor children, beneficiaries who are not more than ten years younger than the account owner, and those who are chronically ill and disabled. However, grandchildren of the account holder are not included among these exemptions.
5. Annuities as investment options in 401(k) plans
Considering the fact that Americans now live longer lives in retirement, annuities provide a guaranteed income over the course of a retiree’s lifetime.
The Secure Act allows more employers to provide annuities as investment options within 401(k) plans. Previously, the employer held the fiduciary responsibility to ensure the investment products are appropriate for employees’ portfolios, but under Secure Act, the responsibility of providing proper investment choices is now on the insurance companies, which sell annuities.
6. Encourages auto-enrollment
Auto-enrollment is effective in making people save more for their future. The Secure Act offers a tax credit to small employers (on top of the start-up credit they already receive) to offset the costs of auto-enrolling their workers into a 401(k) plan or SIMPLE IRA plan.
7. Easier for small businesses to form Multiple Employer Plans (MEPs)
Many small businesses are hesitant to offer a retirement plan to their employees because of compliance issues and high administrative costs. Multiple Employer Plan (MEP) allows small firms to collaborate and offer a retirement plan by sharing a plan administrator and administrative duties and reducing the costs. However, for businesses to join together, it requires them to have a common connection — for example, being in the same industry. So, many small businesses cannot collaborate with other businesses because of the lack of connection or similarity. With the Secure Act in effect, these rules are relaxed, making it easier for unrelated businesses to form an MEP.
8. Part-time workers can participate in 401(k) plans
Previously, employers excluded part-time employees from participating in 401(k) plans. But now, under the new rule, people who have been working for the employer for three consecutive years investing at least 500 hours or worked for at least 1,000 hours in one year is eligible to participate in retirement plans.
401k retirement plans began almost by accident in 1978. Yet today for many of us 401k plans play an important part of our retirement plans. According to the Investment Company Institute as of March 2019 there were $5.7 trillion invested in 401k plans.
A 401k retirement plan like every investment requires proper planning and management. That includes understanding 401k word definitions, determining investments and selection of plan beneficiaries.
Who you choose to be a beneficiary is often an afterthought. We don’t plan on dying any time soon so who we select as a beneficiary is probably just academic. But there are a number of good reasons to choose carefully. Let’s examine some common questions about the subject.
Author Bio: Gary Foreman is a former financial planner and the editor of TheDollarStretcher.com and After50Finances.com. His After50Finances email newsletter shares ways to make the money you worked hard for work harder for you!