Do you know that the thrift savings plan is the world’s biggest retirement plan? Let’s explore this popular retirement plan in greater detail.
What is Thrift Savings Plan (TSP)?
For those working for the federal government, there is a retirement saving and investing account called the Thrift Savings Plan, also known as TSP. It provides government employees with features and advantages that are comparable to those of a 401(k) plan used in the private sector.
The significant features of the TSP retirement plan include matching contributions by the employee, tax advantage, and automatic deductions from payroll for contributions. Federal employees can direct a portion of their monthly income toward long-term savings through the tax-preferred federal thrift savings plan.
Who is Eligible for TSP?
The three most frequent methods to qualify for the TSP are to work for the Federal Employees Retirement System, the Civil Service Retirement System, or to be a member of one of the U.S. armed services, such as the Army or Marine Corps.
What Will the TSP Contribution Caps Be in 2023?
For 2023, the maximum TSP contribution for federal employees and active-duty service members is $22,500. This represents a $2,000 increase from 2022. Your plan might let you make an extra $7,500 “catch-up” contribution if you’re 50 or older. Therefore, you are able to make a total contribution of $30,000 In 2023.
Active military personnel deployed to combat areas and receiving tax-free income are eligible to make contributions up to $66,000. From 2022, this has grown by $5,000.
What Sets Traditional TSP Contributions Apart from Roth TSP Contributions?
The standard TSP contribution and the Roth TSP contribution have many distinctions. Let’s understand through this table in a better way:-
Criteria
Traditional
Roth
Contributions
Pretax
After-tax
Take-home Pay
Less money is taken out of your paycheck as taxes are deferred.
More money comes out of your paycheck as taxes are paid up front.
Transfers In
Transfers from regular IRAs and qualifying workplace plans are permitted.
Transfers are permitted from accounts that are Roth 401(k), Roth 403(b), and Roth 457(b).
Transfers Out
After separation, transfers are permitted to regular IRAs and Roth IRAs as well as to qualifying employment plans.
After separation, transfers are permitted to Roth 401(k), Roth 403(b), Roth 457(b), and Roth IRA accounts.
Withdrawals After Separation
It is taxable when withdrawn. If you are younger than 59½ and certain requirements are not met, a 10% penalty could also be imposed.
When withdrawn, contributions are tax-free. If you are permanently disabled, have passed away, are older than 59½, and it has been five years since you made your first Roth investment, you can withdraw your earnings tax-free. If you are younger than 59½ and certain requirements are not met, a 10% penalty could also be imposed.
What Options are There for Investing in TSP?
Following are the 6 popular TSP investment options, each invests in various assets and has its own level of risk.
1. Specific lifecycle (L) funds
Target-date funds and L Funds are also known as life funds. They both operate on the premise that investors won’t need their money for a while. The funds automatically change to reflect risk reductions based on age and the anticipated number of withdrawals from the account. Thus, the L income fund is advised if you’re close to retiring.
2. The Government Securities Investment (G) Fund
The G Fund invests in U.S. Treasury securities with a short maturity. You have a low-risk chance to earn interest rates that are comparable to those on long-term government securities. Their payment is guaranteed by the U.S. government’s full faith and credit, as is the case with all government securities.
3. The Fixed Income Index Investment (F) Fund
The F Fund invests in U.S. government, mortgage-backed, corporate, and foreign government bonds because it is managed to follow the Bloomberg Barclays U.S. Aggregate Bond Index. Although it has a lower to moderate risk profile than the G Fund, this fund is regarded as having a higher level of risk.
4. The International Stock Index Investment (I) Fund
The I Fund invests in an index that closely mirrors the MSCI EAFE Index, exposing it to a wide variety of foreign stocks. As a result, it exposes your account to global equity markets and is generally composed of significant corporations in more than 20 industrialized nations.
5. The Small Cap Stock Index Investment (S) Fund
The Dow Jones U.S. Completion Total Stock Market Index is tracked by the S Fund assets. This fund has a higher risk threshold than the C Fund because it invests in both small- and mid-cap stocks.
6. The Common Stock Index Investment (C) Fund
This medium-risk fund replicates the S&P 500 Index’s performance. Your money is invested in securities provided by large and medium-sized businesses through this fund. If you also invest in an F Fund, investing in this type of fund can assist in reducing risk.
Call us now at (866) 639-0066 to gain chequebook control over your funds.
FAQs
Is TSP the same as 401(k)?
Although tax laws, restrictions, and contribution plans are identical, TSP and 401(k) investing alternatives are considerably different (K).
Does a TSP outperform an IRA?
Both TSP and IRA provide excellent tax benefits for retirement savings. To decide which plan is perfect for you, consider your individual circumstances. Keep in mind that you might be able to save a little in each to benefit from both.
If I leave my job, what happens to my Thrift Savings Plan?
The TSP fund permits you to take your funds with you when you decide to leave your employment.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
An Individual’s financial future significantly depends on creating or taking part in a retirement plan. Knowing all the options for designating a beneficiary is also crucial to the planning.
When picking beneficiaries for retirement benefits, one must take into account the impact of 401(K) inheritance tax and rules, which makes this process distinct from choosing beneficiaries for other assets like life insurance.
This blog post is here to educate you about inheriting an IRA (Individual Retirement Account) or a 401(K) plan. This information is useful to both beneficiary and the person who needs to appoint the beneficiary of their plan.
What Do You Mean by Beneficiary of a Retirement Account?
Your 401(k) beneficiary is the person or organization you designate to receive your account’s profits in the event of your passing. You may specify two beneficiary types:
Primary Beneficiary: He/she is the person you want to inherit your 401(k) assets first when you pass away.
Contingent Beneficiary: If your primary beneficiary is unable or unwilling to accept the assets, your contingent beneficiary, or secondary beneficiary, will.
Who Can Be the Beneficiary?
These people/organizations can be appointed as a beneficiary:
Spouse
When compared to other retirement account beneficiaries, a spouse has the most flexibility. You can generally use the inherited 401(k) from your spouse as your account or take annual distributions (RMDs) in accordance with IRS regulations.
Family Member/Friend/Children
Inheritance of IRA by children or other family members is also common. What you should be aware of and remember is that the money of 401(k) inherited from a parent, close friend, or a family member must be taken out within 10 years.
Trust
The most complicated scenario is this one. The way of inheritance will depend on the kind and conditions of the trust.
What Transpires if a 401(k) is Inherited?
On a 401(k) beneficiary designation form, the account owner designates their beneficiaries. If the primary beneficiary is no longer alive or does not wish to receive the money, it is given to the contingent or secondary beneficiaries.
You must choose how you want to receive your inherited 401(k) funds as the recipient. The choices are determined by some elements, such as:
The relationship you have with the account owner
Age of the account owner at death
When did the account holder pass away
Your age as compared to the account owner’s age at the time of death
Your wellbeing
What is permitted by the 401(k)
What are the Different Ways to Inherit a 401K?
The following options are available to you when taking money out of your inherited 401(k):
Take the Lump Sum
You can take a lump-sum distribution if you want to take out your whole inherited 401(k) at once. This is straightforward and provides you with a sizable infusion of cash, but you have to pay taxes on it all at once. This is not the best strategy if you want to save taxes. The other alternatives in this list allow you to do so.
Transfer the Funds to Your Retirement Account
If you are sure you wouldn’t need the money sooner, you can transfer the funds to your personal retirement account. This is typically the spouse’s preferred method since it allows them to postpone paying taxes on inherited 401(k) earnings until they withdraw the funds on retirement.
Follow the 5 or 10 year Rule
You can use the five and 10 year regulations. They allow you to withdraw funds whenever you need to, provided that the entire inherited 401(k) is depleted before the end of the fifth or tenth year following the account owner’s passing, respectively.If the account owner passed away in 2020 or earlier, the five-year rule would apply, and if they passed away in 2021 or after, the ten-year rule would apply.
Take the RMD
You also have the choice of spreading the withdrawals out over your lifetime by taking annual required minimum distributions (RMD). However, this facility is limited to certain eligible beneficiaries if the account owner died in 2021 or later. In special scenarios, you can take more than your RMD.
How Are Withdrawals From an Inherited 401(k) Taxed?
The payouts from an inherited 401(k) are typically counted as ordinary taxable income for the beneficiary. This would be the case if your parent contributed to a 401(k) before taxes, which is what most people do. Large withdrawals may result in you moving into a higher tax rate, being subject to the 3.8% Medicare surtax, or losing other income-based tax deductions.
However, if your parent first started contributing to their “designated Roth account” at least five years before you start your withdrawals, dividends from a Roth 401(k) you inherit could be tax-free.
What is the Ideal Time to Withdraw Money From an Inherited 401(K)?
There is no one answer or thumb rule for that. When you should withdraw the funds from your inherited 401(k) depends on many factors, such as current tax rate, account size, your medical needs & financial situation, and any life changes you expect in the upcoming 10 years.
Here are some model strategies which you can apply to save tax. However, you should first discuss them with your financial advisor:
If your tax rate is about to increase, you can either take out a lump sum and reinvest the after-tax funds in a brokerage account or convert the inherited 401(k) to Roth IRA.
Are you sure your tax rates will stay flat? In that case, you must let a small account grow and take out the RMD over 10 years from a bigger account.
If the tax rates are expected to go down, the obvious thing is to wait for them to go down before making any withdrawals.
How Does Inheriting an IRA or 401(K) Work for Different Beneficiaries?
Inheriting an IRA as a Spouse
You have many alternatives if you are inheriting an IRA from your spouse. You can transfer it to your IRA, take RMDs, or you can open your inherited IRA. You also have the option to withdraw the lump sum amount or convert the IRA to Roth.
Inheriting an IRA as a Family Member
You must take all the money from a retirement account you inherited from someone other than a spouse who passed away after December 31, 2019, before the end of the tenth year after the year of death. Exceptions can be made to this rule depending on your age and health condition.
Inheriting an IRA as a Trust
The IRS regulations (depending on the type of trust) and the provisions of the trust (based on the intentions of the account owner) will both apply to distributions. Each situation’s outcome will be different. Therefore it’s crucial to talk with the trustee and your financial and legal advisors.
According to the 5-year rule, by December 31 of the fifth year after the initial IRA owner’s passing, you can withdraw money as you like without incurring any penalties.
What is the tax rate on an inherited IRA? Can I avoid tax on an inherited IRA?
You are not subject to taxes if you inherit a Roth IRA. However, any withdrawal from a traditional IRA is subject to ordinary income taxes.
What are the rules for distributions from an inherited IRA?
There are different rules for different kinds of withdrawals. It depends on whether you are taking a 10 year, a 5 year route, or a lump sum. Each scenario implies different rules.
Does an inherited IRA have to be distributed in 10 years?
Yes. By the end of the tenth year after the IRA owner’s passing, the designated beneficiary must liquidate the account.
What happens if I cash out an inherited IRA?
A lump sum distribution is typically not thought of as the best approach to disperse money from an inherited IRA. This is because you will generally be subject to federal or possibly state income tax on a lump sum withdrawal for the tax year in which it is taken.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
Do you want to save money on taxes and boost your retirement savings? If yes, you’ve come to the right place. Mega backdoor Roth is the perfect tool for getting around the tax rules preventing you from accessing the benefits of a Roth account due to falling into the high-income group.
This post explains all the necessary details associated with the working and advantages of mega backdoor Roth.
So, without further ado, let’s get into it!
What is a Mega Backdoor Roth?
The mega backdoor Roth is a contribution method that allows you to contribute after-tax dollars to a Roth IRA. Mega backdoor Roth strategy can be a great way to get more money into a Roth IRA, but there are some things you need to know before you try it.
What’s the Process of a Mega Backdoor Roth?
Pre-tax contributions to 401(k) plans are limited to $19,500 for those under 50 and $26,000 for those over 50. The IRS’s overall contribution cap is $58,000 ($64,500 for those over 50), nevertheless. The average person is unaware that they can make contributions to their 401(k) accounts of up to $64,500.
If your 401(k) plan permits it, you can contribute an extra $38,500 in after-tax contributions after you’ve made the maximum tax-deductible contribution of $19,500 (or $26,000 if you’re 50 or older). If your plan permits in-service distributions or rollovers, you can then move that $38,500 to a Roth IRA.
However, if your employer matches your contribution, that amount is deducted from your overall contribution cap of $58,000 ($64,500 if you’re 50 or older). For instance, if you contribute $26,000 to a 401(k) plan and receive $14,000 in matching funds from your employer, it counts as $40,000 of your total $64,500 contribution.
You are therefore limited to making an additional after-tax contribution of $24,500 that can be converted to a Roth IRA.
What are the Benefits of a Mega Backdoor Roth?
If you invest $38,500 in your 401(k) after-taxes and it increases by $30,000 by the time you retire, you won’t be required to pay taxes on the $38,500 you first deposited because it was done so. However, since the money does not grow tax-free in a conventional 401(k) plan, you will have to pay taxes on the $30,000 in investment growth.
However, if you transfer that $38,500 to a Roth IRA in the same year that you contribute to your 401(k) after taxes, you won’t have to pay income tax on the $30,000 in investment growth and would be able to withdraw money tax-free when you retire.
This is a means to significantly increase the amount of money in that Roth. That’s why it is called the mega backdoor Roth!
What is the Contribution Limit for a Mega Backdoor Roth?
The contribution limit for a mega backdoor Roth is $40,500 after-tax dollars in the year 2022. However, this is apart from the pre-tax $20,500 401(k) contribution limit, which stays in your 401(k) account. Thus, your total contribution limit comes to $61,000.
How Much Can You Convert in a Mega Backdoor Roth?
In a workplace 401(k), the maximum amount that can be saved in 2022 is $61,000, or $67,500 for those who are over 50. How much of that can be a contribution after taxes? The amount fluctuates according to each person’s circumstances. Here’s how to figure it out:
Start with the $20,500 elective deferral cap in 2022 ($27,000 when catch-up contributions for people over 50 are included). Add any employer contributions or non-elective contributions after that.
This is deducted from the overall cap of $61,000 or $67,500. The amount an individual can contribute with after-tax money is the balance.
What is the Process of the Mega Backdoor Roth?
If you already have Roth IRA or Roth 401 (k), you need to complete the following process for obtaining the mega backdoor Roth:
Maximize your employee’s 401(k), 403(b), 457, or Solo 401(k) plan contribution – Pre-tax contributions up to $20,500 would be the maximum (or $27,000 for individuals over 50).
Contribute to the retirement plan after-taxes – Depending on what the 401(k) allows and whether the employer matches contributions, there are restrictions on how much you can put in.
Ask for a quick in-service contribution withdrawal of the after-tax amount – This would be made possible by the administrator of the 401(k). The IRS allows investors to divide the withdrawal, sending the investment earnings to a traditional IRA on a tax-deferred basis while solely sending the after-tax contributions to the Roth IRA.
Transfer the funds to a Roth IRA or Roth 401(k) – Tax-free growth is possible after the funds are in a Roth.
What are the Alternatives to Mega Backdoor Roth?
Not everyone should invest in the massive backdoor Roth. To achieve it, many requirements must be satisfied. There are additional Roth options to think about if those circumstances don’t hold true.
An individual could be allowed to use the mega backdoor after leaving their work if the retirement plan restricts in-service withdrawals or in-plan rollovers.
A high earner can be eligible to make direct after-tax contributions to a Roth IRA through the Roth front door.
Individuals may contribute directly to a Roth 401(k), up to the permitted limitations, if their employer offers one.
If a high earner doesn’t have access to a retirement plan that permits after-tax contributions or in-service withdrawals, they may want to think about converting their traditional IRA to a backdoor Roth IRA.
FAQs
Will the Roth backdoor be stopped?
The backdoor Roth technique has come under fire for unjustly favoring highly compensated workers in businesses that create their benefit plans to enable these tax shelters.
Mega backdoor Roth IRAs would eventually be banned under the conditions of the Build Back Better plan, which President Biden stated. The law has been adopted by the House, but as of May 2022, the Senate has not done so.
Is a mega backdoor Roth worth it?
If you have additional money to put away for retirement after maxing out your 401(k) and you aren’t eligible for direct Roth IRA contributions, it can be worthwhile to open a massive backdoor Roth. It’s generally a good idea to discuss your specific position with a financial counselor because this method can have complex tax ramifications.
Who is eligible for a mega backdoor Roth?
If you have the standard 401(k) with your employer and your plan permits post-tax contributions and in-service pay-outs, you might be qualified for a giant backdoor Roth. As part of your massive backdoor Roth approach, you could also make post-tax contributions of up to $40,500 in addition to pre-tax ones that are limited to $20,500 in 2022.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
Most people wish for the success of their family, while others go about creating it together. With the stock market fall wiping out the savings of millions, it sounds like the perfect time to build wealth with the people you trust the most. However, running a business with your close relatives comes with its unique can of worms.
If you’re currently investing or are considering taking up a venture with members of your kin, there are some things you should consider. What are the benefits and drawbacks of running a family business? Do you know what business essentials to cover or how to divide responsibilities evenly? For answers to these pressing questions, stick around till the end.
Advantages and Disadvantages of Investing with Family
A family business or investment is a complex system that creates room for intricate relationships. In other words, you don’t only view your spouse, parent, or child as someone close to you. They could also be your investment venture’s treasurer, marketing lead, or president. Thus, those interwoven relationships create room for many pros and cons to consider.
Advantages of Investing with Family
Better Stability
For many people, family is a source of stability, and it extends to business as well. In most instances, individuals tend to stick to family-run enterprises in the long run, and roles also remain the same. Often, it takes a massive trigger such as a death to shake things up and cause a realignment.
Improved Commitment
People tend to have a greater incentive to work when they know they’re doing so not only for financial compensation but for the progression of the entire family. Besides the needs of the business, individuals often have to consider the approval of their kin which can spur them to action.
Long-Term Planning
Family businesses tend to have a more long-term outlook for their investments. Non-family investors would likely plan to stick around for a limited time frame, especially when things aren’t looking profitable. However, assets that primarily remain a family affair foster long-term planning that could go on for multiple decades or generations.
Lower Expenditure
Inflation and economic downturns could spell disaster for many businesses. However, with a family investment, it is easier to explain and make sacrifices to keep the business afloat. Instead of cutting staff, many family members wouldn’t mind bearing some financial pullback to stabilize the company again.
Disadvantages of Investing with Family
Family Conflicts can Escalate
There’s a reason many people abstain from mixing business with blood. For several families, it’s hard to draw the line between work and family affairs. Thus, there’s always the potential of familial tension spilling into the workplace and vice versa. As a result, relationships and productivity can suffer. That’s why some investors prefer to work with a property manager to discuss business goals and avoid conflicts.
Lack of Interest
Continuity is often a problem for family-owned businesses. The enterprise could end if the children aren’t interested in managing properties or dealing with tenants. Besides, even if the next generation felt compelled to continue in the family, their apathy could compromise their decision-making. As a result, the investments would suffer either way.
Increased Chances of Mismanagement
There are higher chances of nepotism becoming a problem in a family-owned business. After all, it’s expected that ownership will continue for generations. However, that increases the chances of mismanagement. In most families, the eldest child often assumes the highest position. It could be a problem if such an individual is incapable of executing their duties properly.
Lack of a Structure
Despite the improved flexibility that family investments offer their members, they tend to lack structure. For the most part, these entities operate on trust. Thus, that often leaves room for violating internal and external rules without appropriate repercussions. As a result, lacking structure could compromise the stability of the business and lead to severe losses.
Business Essentials to Consider
Due Diligence
Although real estate is one of the most stable forms of investment available, investors must still beware of pitfalls. Experts call real estate due diligence to perform research, inspections, and follow-up to avoid mistakes. In short, it is essentially doing your homework before committing to any decision.
In a family business, where the success or failure of the entire clan rests on the same income, it is even more crucial to get it right. In assessing potential real estate investments, due diligence should involve:
Location analysis of the prospective property.
Estimation of potential financial gain.
Expense report including taxes, wages, and management fees.
Legal repercussions.
Review of various options.
With the results of this analysis, you should have a good idea of whether an investment is worth it. It would also be best if you considered using a more detailed due diligence checklist to help you.
Set up LLC
LLC is short for Limited Liability Company. The state recognizes it as a legal entity that allows real estate owners to absolve themselves from personal liability associated with their property. In other words, it is a way to separate your asset from your business.
For example, if a disgruntled tenant decides to sue you for a mold infestation, the chances of a win would most likely be in their forever. As a result, the court could award them reimbursement for any property damage, lost wages, or medical bills caused by the infestation. You might have to pay out of pocket to cover such expenses as an individual entity. On the other hand, payment for such damages can only come out of the business under a registered LLC.
Thus, for family investors setting up a real estate LLC is especially important because a lost suit could mean ruin for the entire family. Hence, consulting with a lawyer about creating an LLC would be wise.
Besides limiting your liability, there are other benefits to creating a real estate LLC. They reduce your tax load while eliminating the need to file corporate tax. Also, they make it easier for you to draw other partners to invest without compromising ownership.
Have an Exit Plan
Whether you plan or break out on your own or encourage a smooth transition for the family, it’s essential to have an exit plan. In business, an exit plan is the entrepreneur’s strategy to sell off or transfer ownership to someone else. For business owners, it could be a way to cash out on a fat portfolio or limit losses in times of turbulence.
A real estate exit plan is crucial for a family business because it guides your decision-making at a vital crux. Some circumstances call for quick action, which is often better when you have a preconceived solution.
Most experts recommend having short and long-term goals to guide your decision-making. For instance, if you’re investing in real estate for a profit, selling your property under certain market conditions would make sense. During a seller’s market, when houses are in high demand, you could earn maximum profit from a sale. On the other hand, if you’re using your rental properties as a retirement plan, it would be better to keep holding.
Tips for Dividing Responsibilities
Work to Your Strengths
For many family businesses, dividing responsibilities reasonably can be a challenging task. However, that is often because many people decide to assign an automatic role. For example, a family investment group might decide the oldest child should be the successor, even when they’re not well-equipped for the position. As a result, the business would suffer and could even end. Instead, it would be best to determine which family member assumes a particular role in the company based on their strengths and suitability.
Outline Clear Roles
In family businesses, there’s always the tendency for roles to overlap. Everyone could involve themselves at one point or the other in purchasing, leasing, and selling a property. However, this method often breeds room for conflict. Thus, it would be wise to outline clear roles for each individual. One family member could be in charge of dealing with tenant complaints and repairs, while the other focuses on attracting new renters.
Work with a Professional
If you’re finding it difficult to manage and divide your responsibilities fairly, you could always consult an external professional. A property manager from a reputable company could step in as an unbiased third party to settle disputes. They could also act as a seasoned advisor that can help the family navigate real estate pitfalls and maximize returns.
Conclusion
Unfortunately, there is no clear-cut answer when it comes to whether you should invest with your family. For some, it is a blessing and an opportunity to build a dynasty, while for others, it is a continuous source of conflict. Thus, you should weigh the pros and cons carefully before trying it out. On the one hand, it means more job stability, commitment, and flexibility. On the other hand, mismanagement can be an issue, and personal fights could interfere with the business.
Although, if you decide to go ahead with a family investment plan, it would be best to consider the crucial business essentials. Ensure you perform your due diligence through research, set up an LLC to limit your liability, and make an exit plan.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
Retirement planning for women looks different than it does for men. It accounts for several factors that affect women more. These may include career years lost to becoming a stay-at-home mother or the additional years women live.
Read this article to find out how you can take control of your financial wealth and plan a successful retirement.
Is Retirement Planning for Women Different?
Yes, retirement planning differs for men and women. Several factors contribute to why this happens. The major one relies on their lifespan.
On average, women are known to live longer than men. People aged 65 and above 57% are women, and by the age of 85, 67% are women. Moreover, in the USA, the average lifespan of a woman is five years longer than men!
However, lifespan is not the only reason behind women’s retirement planning. They are often seen prioritizing attributes like family, real estate, debt, and not outliving their their retirement savings.
Another reason why retirement planning for women tends to be different than it is the age-old pay gap. Women in the workforce undergo major challenges, and one of the most prominent ones is pay disparity. The pay gap occurs due to several reasons. Many women have to leave the workforce early to raise kids and many years can pass before they re-enter the workforce. Although it is getting better in many places there still is a difference in pay scales for doing the same work.
Since retirement planning is different for you compared to men, how can you take control of your finances? Read on to find out.
Women Taking Control of Their Retirement Planning
Taking charge of your monetary needs may seem daunting, but you can take control with confidence through proper financial knowledge and a solid retirement plan. Look at these valuable tips to help you get started with your retirement plans.
Be Financially Knowledgeable According to a 2021 study, people with higher financial literacy display increased financial wealth. They are known to participate actively in the stock market, prove to have a better provision for their retirement, and have lesser economic anxiety. This data exhibits the importance of financial knowledge and how it enables you to navigate the complexities of modern financial life.It is evident that the core of financial literacy lies in your ability to manage your money in a way that benefits you.Historically speaking, the financial domain has been dominated by men and is perceived to be more man-driven, even though women are increasingly becoming a larger part of the finance sector. It is high time for women to take the reins of their finances. Start equipping yourself with financial knowledge through books, podcasts, and financial experts.
Use Labor Shortage to Your Advantage During the height of the pandemic, businesses started shutting down, and more than 30 million U.S. workers were unemployed. As the economy started getting back on track, job openings increased. It resulted in employers adding up to 3.8 million job listings in 2021. By the time this happened, 2.2 million Americans had already left the labor force.Since there is a gap between the vacancy of jobs and difficulty finding labor to fill those posts, employers struggle to get employees for their vacant job roles. This is the perfect opportunity to re-enter the workplace and enhance your cash flow.If you are already employed, you can still take advantage of this and perhaps land yourself a better part time job!
Set Up a Retirement Account Opening a retirement account does not depend on your marital status. You can open one at any stage of your earning life.Typically, workplaces have an employer-sponsored retirement program like the 401(k) plan. If you are self-employed or your employer does not have a retirement plan, you are free to open a Roth, Traditional ir /SEP IRAMarried couples can open spousal IRAs to save for their retirement. This is beneficial for couples where one spouse earns less or has no income. Here the working spouse contributes to the IRA for themselves and their spouse.
Decrease Your Spending Facing cash flow issues in retirement is common. You need to identify ways in which you can trim costs.Begin by canceling services you do not use anymore. If there are services you use, shop around. Today, you can get several deals and discounts to save you from additional costs on everything! Prioritize what you use and reduce expenses by eliminating extra costs.
Make Use of Passive Income and Self-Employment
Passive income and self-employment are the two best ways to boost your retirement savings. Moreover, they give you complete control over your finances and schedule.The entire idea behind passive income lies in doing the front end’s work (saving money) and and then take advantage of the benefits with no extra effort. Some examples of passive income include: money from rental properties, sales from an online course, e-books, stock photos, and digital files, dividend stocks, or cashback from rewards.Apart from passive income, you can make use of self-employment. It does not necessarily mean owning a business. Self-employment ranges anywhere from side hustle to a hobby you plan on monetizing. Here, you can decide how much effort and time you will put into the work and take advantage of tax deductions not generally available to “employees”.
Keep Going Strong
Sometimes the best decision you can make is to stay on the course. The stock market is quite volatilve, and you may have the urge to get out of it. But if you bury your head in the sand with patience, you can mitigage losses – one important lesson learned during the COVID-19 pandemic and the Great Recession of 2008 and 2009. The people who stuck to their financial plan during the entire course of uncertainty were able to recover from their losses.Retirement can last for more than 20 years or more, and inflation will always be there. Simple 3% inflation over 20 years would slice 60% of your buying power. Women are more at risk due to their longevity. Inflation is the silent but most unprepared for burden in retirement planning.
Retirement Regrets Women Should Avoid
It is easy to look back on the past and regret your decisions or think about ways you could have improved them. So, if you have these common retirement regrets, look at how you can avoid them.
Not Being Involved With Your Spouse in Retirement Planning: Many women let their partners take control of finances. To avoid this, involve yourself in your retirement planning.
Not Asking Questions to Professionals: Working with professionals always helps you gain the upper hand in forming financial decisions. Moreover, when you speak to field experts, do not hesitate to ask questions!
Not Saving Until the Debt is Paid Off: Paying your debt on time is essential, but pausing your savings process for it is not practical. A professional can help you maintain the balance between debt payments and retirement savings. Try to pay down “bad debt” (credid cards), negotiate “good debt” (home mortgage) and use
Bottom Line
The first step to great retirement planning and financial health control is understanding your unique challenges. Take a step forward and become financially literate (this can’t be stressed enough, learn to negotiate, and stay strong in the workforce!
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
If you are considering quitting or changing jobs, you’ll need to think about what you will do with your old 401(k) plan. Below are some options but these options depend upon the plan documents of your current plan and any new employer plan you may join.
In this article, we’ll discuss all these options in detail to help you decide which option may be better than the others.
Key Takeaways
If you change your employer, you can choose to roll over your old 401(k) plan into your new employer’s plan.
You also have the option to roll over your 401(k) into an IRA.
Another option is to leave the 401(k) with your former employer.
Although not recommended because of severe tax implications, you also have a choice of cashing out your 401(k).
You can also consider taking contributions from your 401(k).
What Happens to a 401(k) After You Leave Your Job?
After you leave your job, you cannot make contributions to your 401(k) plan. However, the money you’ve contributed during your employment is still your money, and you have the right to decide what to do with it.
What Can You Do With Your 401(K) After You Leave Your Job?
When you quit your job, you have these five options for your 401(k):
Keep your 401(k) with your old employer In most plans you have the option of keeping your 401(K) with your old employer if you have at least $5,000 in the plan when you leave the job. If the account balance is $1,000 and $5,000, the employer has the choice to either allow you to keep the money as it is or roll the 401(k) funds into an IRA for you.However, if you have less than $1,000 in the plan when you leave the job, the employer can allow you to leave your money in the plan, but they can also write a check for the full amount and force you to exit the plan. In such a situation, it’s important that you transfer the funds into another retirement account within 60 days to avoid penalties and taxes once you receive the check.If the fees are low and investment options are good, you may want to consider keeping your money where it is. In the meantime, you can start contributing to your new employer plan and allow the money in your old 401(k) plan to grow.
Roll your 401(k) over to your new employer’s 401(k) This is the a common route people take. Make sure you do a direct transfer of funds and not a rollover. If it’s a rollover, your employer sends you a check of the 401(k) amount, which you have to deposit manually into your new 401(k) within 60 days to avoid income tax on the entire amount and an early withdrawal penalty of 10%.This option makes sense when your new 401(k) has lower fees and better investment options than your previous employer’s 401(k) plan. Or if you don’t like to have multiple 401(k) plans and prefer having your money in one place.
Rollover your 401(k) into an IRA This is also a common choice for people who are leaving an employer, but their new employer does not offer a 401(k) plan. Rolling a 401(k) plan into an IRA requires you to do it through a brokerage firm or a bank separate from your employer. The most prominent benefit of a rollover to an IRA is that it offers more investment options with better control over your investments.Ensure that you choose direct transfer of funds instead of a rollover for the same reasons mentioned in option 2. If the IRA has lower fees and access to better investment opportunities, this move makes sense.
Take distributions If you are 59 ½ and above, you can take qualified distributions from your 401(k) without being charged a 10% early penalty fee. However, these distributions will be treated as income and taxed at your normal income tax rate.If you are over age 55 but not yet 59 ½, you may take penalty-free distributions from your 401(k). This is only applicable if you are accessing the 401(k) from your current employer. If your 401(k) is left with your ex-employer, you’ll have to wait until you are 59 ½ to take penalty-free distributions.If you are not yet retired but have turned 59 ½, check with your employer if you can make withdrawals without getting penalized.
If you retire before age 55 or change job before age 59½, you can take distributions from your 401(k), but you will have to pay a 10% penalty, plus income tax. If you retire after age 55, but before 59½, the penalty does not apply.
If you have a designated Roth account, you have more options. You can take a distribution of principle any time . You can take tax-free distributions after age 59½ of earnings but you must have held the account for at least five years. If you do not meet the 5-year requirement, the earning portion of your distribution is taxable.
Cash out You also have the option to cash out your 401(k) when you leave your job. However, this is not advised because:
If you cash out before age 59 ½, you’ll have to pay income tax on the full balance plus a 10% penalty on the withdrawal and relevant state tax if applicable.
Your funds in your 401(k) are creditor-protected. It means that your money is safe even when you file for bankruptcy. But when you cash out your 401(k), your money can be seized by your creditors or bankruptcy courts. So, if you think you might need to file for bankruptcy, don’t cash out.
You rob your future self of compounding interest potential on investments.
When you leave your job, you have these five options for your 401(k) plan. The best option for you will depend on your unique situation. Look at all the pros and cons of each option before you decide what to do with your 401(k) when you leave your job.
What Happens If You Don’t Roll Over Your 401(k) Within 60 Days?
With indirect rollovers, you have 60 days to move the money from one 401(k) plan or Individual Retirement Account (IRA) to another. The funds will be taxed and potentially subject to an additional 10% early withdrawal penalty if the transfer is not finished within this time frame. This rule is commonly known as the 60-day rollover rule.
How fast can you get your 401(k) money out?
Those who withdraw money from their 401(k) accounts typically receive it within a few days.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
Get Immediate Access to Our TOP RATED Retirement Videos
Learn all about self-directed IRAs and personal 401(k)s in these featured videos from our exclusive collection. Complete the form below to gain immediate access.
