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Money Coach

October 2010 - Posts

  • Why you should have a 401(k)

    Gifts from Uncle Sam are rare. But there is one gift he gives that keeps on giving, and you should take advantage of it – a 401(k).

    If someone offered you free money, would you refuse it? Probably not. But that's just what you are doing if you don't contribute to your 401(k). The more you contribute, the more free money you get. 

    Here's why: Contributing part of your salary to a 401(k) gives you three compelling benefits: you get an immediate tax break, possible matching contribution from your employer and tax-deferred growth. The federal limit on annual contributions has been increasing gradually, and is $16,500 for the 2010 tax year. If you're 50 or older, you can contribute an additional $5,500.

    Keep in mind, however, that while federal law sets the guidelines for what's permissible in 401(k) plans, your employer may set tighter restrictions. What's more, there are other federal non-discrimination tests a 401(k) plan must meet, one of which applies to highly-compensated employees. So if you make more than $110,000 a year, you may not be permitted to contribute as high a percentage of your salary as some of your lower paid colleagues.

    For all of its tax advantages, the 401(k) is not a penalty-free ride. Pull money from your account before age 59 1/2, and with a few exceptions, you'll owe income taxes on the amount withdrawn, plus an additional 10 percent penalty. 

    Also, be aware of your plans vesting schedule – the time you're required to be at the company before you're allowed to walk away with 100 percent of our employer matches. Of course, any money you contribute to a 401(k) is yours.

    How much should you contribute to your 401(k)? For starters, figure out how much you need to save. If you're just starting to plan for retirement at age 40, you'll need to put away more than if you were 25. Typically, experts recommend you save at least 10 percent of your income. Check to see if your employer will match your contributions if your 401(k) is through your employer.

    Posted Oct 28 2010, 01:01 PM by moneycoach with no comments
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  • Understanding 401(k) plans and what they can do for you

    Lots of people have 401(k) plans through their employers – but not a lot of people really understand them and the benefits they offer.

    A 401(k) represents a way to reduce your taxable income since contributions may come out of your pay before taxes are withheld; many plans include a matching contribution from your employer; and the money you save benefits from tax-deferred growth, which lets your money compound more quickly than it would if it were taxed yearly.

    The federal lit on annual pre-tax 401(k) contributions is on the rise. In 2010, the maximum contribution is $16,500, or $22,000 if you're 50 or older.

    Matching contributions are "free" money. If you can't afford to max out your 401(k), contribute at least enough of the matching contribution, or "free" money. The typical match is 50 cents on the dollar, up to 6 percent of your salary.

    Taking money out of a 401(k) before retirement is expensive. Loans must be repaid  with after-tax money plus interest. And, with few exceptions, if you withdraw money before age 59 1/2, you must pay income taxes plus a 10 percent penalty. What's more, lost time for compounding will substantially shrink your nest egg.

    When setting up your 401(k) investments, figure out what your mix of stocks and bonds should be. Two factors influence this decision: your time horizon until retirement and your risk tolerance.

    You're limited to the investments your employer chooses for your 401(k) plan. If you don't like many of the selections, keep your choices simple by investing, for example, in a broad-based index fund. Don't boycott the plan altogether. If you do, you lose out on tax-advantaged compounding and matching contribution.

    When you change jobs, you'll often have three choices: leave your 401(k) money where it is, roll it into an IRA or another 401(k), or cash out. If your account balance is less than $5,000, your employer may insist you take it out of the plan, but cashing out is like shooting yourself in the foot financially. Even small amounts can grow large with time and tax-deferred compounding. You'd be better off rolling the money into another retirement account.

    When you do roll money into an IRA or 401(k), make it a trustee-to-trustee transfer. That is, have the check made out to the custodian of your new account, not you. Otherwise, you risk possible penalties if you fail to execute the rollover properly.

    IRS rule 72(t) provides one way to take early 401(k) withdrawals without penalty. You must take a fixed amount of money out for five years or until you reach 59 1/2, whichever is longer. The annual withdrawal amount is based on your life expectancy.

    Some employers let you leave your money in your 401(k) account when you retire. Find out what rules, if any, the employer imposes on when and how you must start taking distributions. If there are none, you may leave the money untouched until you're 70 1/2. That's the age when Uncle Sam insists all retirees begin withdrawing money from traditional IRAs and 401(k)s.

    Posted Oct 21 2010, 01:37 PM by moneycoach with no comments
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  • Couples must communicate to keep marriage, finances healthy

    It's not a surprise that disagreements over finances is one of the main reasons couples find themselves seeking to dissolve their marriage. Financial advice is always readily available, but married couples are still fighting over money. Why?

    For a variety of reasons, couples appear to not want to hear financial advice, and what advice they do take in is filtered; there is important advice that they often ignore.

    When a couple first gets married, they must decide whether to keep their finances separate, make them joint, or some combination. Having your own money to spend can lessen arguments about money. If you choose to have joint accounts, remember to keep the communication lines open, and discuss everything you spend – even the smaller amounts.

    Tracking your spending is not a way to point fingers at one another as to who is spending what. Tracking your spending is not having someone look over your shoulder every time you buy something. Tracking your spending is critical to being financially secure. Unless you know where your moon is going, it is impossible to set up a budget and set financial goals you are both comfortable with.

    Talking about money isn't easy because money means different things to different people. One may view money as security while the other partner may see it as power. If the topic of debt, bills, savings and goals makes either of you uncomfortable or defensive, seek the help of a financial counselor or planner. It's important that both of you know where you stand financially and have common financial goals.

    Couples living month to month often rationalize that they just don't have enough money to save. Make the decision to save at least 10 percent of your income. After saving enough cash as an emergency fund, invest in a retirement account. The earlier you start saving money for your retirement, the easier it will be to have a retirement lifestyle that you both want. 

    Make a plan to pay off existing debt. Drawing a line in the sand and saying that your spouse's debt isn't your problem won't work even if the debt existed before you were married. Your credit can be negatively affected as well as your bottom line as a couple.

    Couples often don't want to wait to have a new television, car or other gadgets. They rationalize that people just don't live without credit cards and debt. Although it may be true that many are heavily in debt, that doesn't mean it is a healthy way to handle your finances.

    As a couple, it's important that you don't keep financial secrets. Not being honest about the cost of a large financial purchase or keeping debts hidden is considered financial infidelity by a lot of people. Such secrets can destroy your marriage.

    So keep the lines of communication open, and discuss your finances, including the good, the bad and the ugly. In the long run, your bank account will be fuller, you'll both be saner and your marriage will be healthier.

    Posted Oct 14 2010, 01:49 PM by moneycoach with no comments
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  • Is an HSA right for me?

    Many employers are now offering health savings accounts instead of or in addition to the traditional health plans we're all used to. This type of health plan allows you to stash cash away in order to cover your medical bills – it includes a high deductible plus a tax advantage. Here's what you need to know about them before you sign up.

    Some 45 percent of large companies will provide this option. The appeal for you is lower premiums, typically 10 to 40 percent less than those of a traditional plan. Employers like HSAs because they give you an economic stake in your own wellness.

    While you'll save on premiums over a traditional plan, the deductible is a lot higher. You'll pay for all of your medical costs, usually excluding preventive care, up to that amount. To cover costs, you put pretax money in your HSA, up to $3,050 for individuals and $6,150 for families, plus $1,000 more if you're 55 or older. Your employer may also contribute. Withdrawals for medical bills are tax free, and your money rolls over each year, growing without being taxed.

    This works for some because they may actually save money by choosing the high deductible plan. Young and healthy people, for example, can fare better because they pay low premiums and don't use much care.

    If you have a particularly costly medical condition, such as cancer, you can also benefit. Once you hit the plan's out of pocket maximum, you pay nothing. Comparatively, in traditional plans, you never stop owing co-pays.

    If you have cash to pay health bills out of pocket, you might want to use an HSA to supplement your nest egg. Even in retirement, you can tap the funds tax-free for medical needs. And starting at age 65, you can withdraw penalty-free for any reason, although you'll owe income taxes.

    The details on these plans vary widely. You'll want to do the math to see if enrolling in an HSA is worth your while.

    Posted Oct 07 2010, 01:31 PM by moneycoach with no comments
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