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New Job? Four Choices for Your Existing 401(k)

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Changing jobs and companies can be an exciting opportunity, but you have a choice to make. What will you do with the retirement savings you have built in your 401(k)? Consider these four options:

  1. Withdraw the money and don’t reinvest it. This is usually the worst choice you can make. Generally, you’ll owe taxes on the distribution at ordinary income rates. (Special rules may apply if you own company stock in the plan.) Unless you’re over age 59½, you’ll pay a 10 percent penalty tax, too. More importantly, you’ll lose the opportunity for future tax-deferred growth of your retirement savings. And once you have the funds readily available, it’s all too easy to spend the money instead of saving for your retirement.
  2. Roll the money into an IRA. You can avoid immediate taxes and preserve the tax-favored status of your savings by rolling the money into an IRA. This option also gives you full control over how you invest the balances in the future. You have a 60-day window to complete the rollover from the time you close out your 401(k). However, you should always ask for a “trustee-to-trustee” rollover to avoid potential problems.
  3. Roll the balance into your new employer’s plan. If your new employer allows it, you can roll the balance into your new plan and invest it according to your new investment choices. However, there may be a waiting period before you can join your new plan.
  4. Leave the money in your old employer’s plan. You may be able to leave the balance in your old plan, at least temporarily. Then you can do a rollover to an IRA or a new plan later. Check with your employer to see if this is an option.

Call if you need help making the right choice for your particular circumstances.

How Much Do You Need to Retire?

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The statistics are staggering. The majority of Americans do not save for retirement or have not saved enough for retirement. Make sure you’re taking these three steps to be financially prepared for your retirement. Nearly half (45 percent) of working-age households don’t have any retirement assets, according to the National Institute on Retirement Security. Of those working-age households close to retirement (age 55 and older) nearly two-thirds have less than one year’s worth of their annual salary in retirement savings.

The goal

So how much do you actually need to retire comfortably? There are many variables to consider, including retirement age, available pensions, and investment return assumptions. Mutual fund broker, Fidelity, estimates you need enough savings to replace roughly 85 percent of your pre-retirement income. Many experts estimate you will have to save between 8 and 12 times your pre-retirement annual income to reach this goal.

But the amount you need depends on when you plan to retire. For example, Fidelity estimates a person planning on retiring at age 65 will need to save 12 times their pre-retirement income. By delaying retirement by just five years, to age 70, your savings estimate lowers to 8 times your annual income.

This may be why an increasing number of Americans plan on delaying retirement or working during retirement. A majority (51 percent) of workers surveyed in 2016 by the Transamerica Center for Retirement Studies said they plan on working during retirement.

Some ideas to consider now

These are sobering realities, but there are actions you can take to be in a better position during your golden years.

  1. Contribute as much as possible every year to your employer provided retirement plans. With a 401(k) pretax retirement plan, for instance, up to $18,000 can be contributed each year, or $24,000 if you are age 50 or older.
  2. Contribute as much as possible to a Traditional or Roth IRA every year, up to the $5,500 maximum, or $6,500 if you are age 50 or older.
  3. If available, contribute as much as possible to a health savings account (HSA), which can be used to offset medical expenses, up to $3,400 a year, or $4,400 if you are age 55 or older.

If you’d like to review your tax-advantaged retirement strategy, call to schedule an appointment.

Considering Paying for Your Child’s College Education?

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Should you pay for your child’s college education? Or should your child find the financing? There are compelling arguments for both sides, but ultimately, your family needs to do what’s best for your financial situation. Most families find that a combination of both works the best.

Parents should pay.

Arguments in favor of shelling out your hard-earned cash for a son’s or daughter’s higher education can be compelling. For one thing, college is a very expensive proposition these days. A year of undergraduate study at a private university can easily top $30,000 and public in-state schools can run over $12,000. Of course, if your student decides to get an advanced degree or go to medical or law school, he or she can run up a bill exceeding the cost of your home mortgage. Advocates of this point of view ask, “Do you really want to saddle your kid with that kind of debt so early in life?”

They add that if your child ends up working to pay for college, that’s less time available for study and making friends. And, of course, friendships built in college can generate a wealth of opportunities for a future career. Also, by investing in tax-deferred 529 plans, parents can withdraw funds free from federal and some state income taxes when it’s time for college.

The child should take the responsibility.

Others argue that covering the cost of your child’s college education should not be your priority. After all, they reason, your kid has a lifetime to pay back student loans, and making loan payments can generate a positive credit history. Advocates of this position also argue that kids who have to pay for their own tuition, books, and living expenses learn responsibility and value the investment that college represents. They also point to available tuition reimbursement plans provided by some companies or the military service option as a way to get a college education without breaking the bank.

Those on this side of the debate often argue that 529 plans are overrated as a savings vehicle because investment options can be limited and tax rules are likely to change, undermining future tax benefits. Finally, they reason that a parent’s own retirement savings should take precedence over saving for a child’s education.

Making the decision.

Of course, your family’s dynamics, the importance you place on a college education, and your personal financial priorities will factor into this decision. If you’d like help looking at the pros and cons of this important issue, give us a call.

How Social Security Benefits Are Taxed

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Are you wondering if your social security retirement, survivor, and disability benefits will be subject to federal income tax on your 2016 return? Generally, when these benefits are taxed is determined by your “provisional income.”

Provisional income (PI) is the product of a formula used for no other purpose than figuring out the taxable percentage of social security benefits. To compute your provisional income, total your adjusted gross income, any tax-exempt interest or similar nontaxable revenue, and one-half of your social security retirement benefits for the year. How much of your benefits are taxed depends on this “base amount.”

– Joint filers with PI below $32,000 ($25,000 for single filers) owe no tax on benefits.

– Joint filers with PI between $32,000 and $44,000 ($25,000 and $34,000 for single filers) are taxed on a sliding scale that tops out at 50% of benefits received.

– Joint filers with PI over $44,000 ($34,000 for single filers) are taxed on more than 50% and up to 85% of benefits.

Note that supplemental security income payments (SSI) are not taxable. For answers to questions about your benefits, contact us.

Don’t Be Forced Out of a 401(k) From Your Former Job

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When you change jobs and abandon vested amounts in your 401(k), your former employer has to follow IRS rules and plan provisions for dealing with your account balance. Pursuant to these guidelines, the 401(k) plan may have a “force-out” provision. That means when your vested balance is less than $5,000, you can be forced to take your money out of the plan.

Your former employer is required to give you advance notice of this rule so you can decide what to do with the money. Your choices are to cash out your account and receive a check, or roll your account balance into an IRA or your new employer’s plan.

What happens if you fail to respond to the notice? If your vested balance is more than $1,000, your former employer must transfer the money to an IRA. For balances under $1,000, you will either get a check or your former employer will open an IRA on your behalf.

Neither outcome is optimal, according to a report by the U.S. Government Accountability Office. If you receive the money, you’ll owe federal income tax. When the balance is transferred to an IRA, account fees may outpace investment returns and your balance will be eroded over time.

Protecting assets you worked for and earned is always a smart move. Call us for assistance.

Is Your Child Ready for a Summer Job?

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If your child is planning to work this summer, make sure you know the tax basics.

Tax returns. Assuming no other sources of income, your child will be able to earn up to $6,300 in 2016 before a federal income tax return has to be filed. However, if income tax is withheld from paychecks, your child will have to file a return to claim a refund.

Federal income tax withholding. When hired, your child will have to fill out Form W-4, Employee’s Withholding Allowance Certificate. This form tells the employer how much federal income tax to withhold. If the job involves tips, remember that tips are taxable income. Have your child maintain records of amounts received.

Financial aid. Summer earnings can affect eligibility for college financial aid. If you’re counting on financial aid, check out the earnings limit ahead of time.

Retirement saving. Consider encouraging your child to open a Roth IRA. Amounts invested in a Roth can grow tremendously due to tax-free compounding over many years. As an incentive, you might match any amounts your child is willing to save.

For assistance with the tax issues relating to summer employment, contact us.

Making an IRA Change Could Be Tax-Smart

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Did you convert all or part of a retirement account to a Roth during 2014? And do you now wish you hadn’t? Here’s some good news: You have until October 15, 2015, to change your mind, even if you already filed your federal income tax return. Read more

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Your Social Security Benefits May Be Taxable

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Did you sign up for social security benefits last year? If so, you may have questions about how those payments are taxed on your federal income tax return. Read more

Study Reveals Retirement Concerns

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A recent study conducted by Harris Interactive of 1,000 middle class individuals aged 25 to 75 revealed some interesting statistics about retirement attitudes. Read more

RMDs Require Careful Planning

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After all the advice you’ve received about saving for retirement, taking money out of your traditional IRAs and other qualified retirement plans may feel strange. Yet once you reach age 70½, the required minimum distribution (RMD) rules say you have to do just that. Read more