Secure Act Summary

In the closing months of 2019 Congress Passed the Secure Act and it has some relatively large impacts on retirement savings and retirement plans going forward. I have read several articles digesting the impact of the act but I think Fidelity has put together the best article that details the impacts fairly well.

Secure Act – Fidelity’s Article here

https://www.fidelity.com/learning-center/personal-finance/retirement/understanding-the-secure-act-and-retirement

Secure Act – High Level points:

  • Require Minimum Distribution Age has been changed to 72 from 70.5
    • This only impacts those that have not started RMDs. Those who started RMD’s in 2019 will need to continue to do so even if they are younger than 72
    • As a reminder this is the age you MUST start taking distributions from your retirement accounts that are tax deferred (Roth’s are post tax and are not subject to RMD’s as of the time of this article).
  • Removed the age limit on Traditional IRA contributions (still required earned income)
  • If you worked part time > 1000 hours in one year or > 500 hours over 3 years, you are now eligible for your employers 401k.
  • Parents can withdraw Penalty free up to $5k from retirement accounts the year of a child’s birth or adoption
    • NOTE – This will still be subject to income taxes
  • Basically killed the “stretch” IRA. If someone inherits an IRA that is a non-spouse, funds must be distributed and pay tax with 10 years
  • Added a tax credit for small businesses starting a retirement plan
  • Allows up to 10k to be distributed from a 529 plan to pay down student debt.

If you have any questions on how this may apply to you, please do not hesitate contact me. Please note that the information from this post is meant to be educational and should not be considered advice. Clients should contact me to receive specific advice on your situation.

Lauren Zangardi Haynes, CFP(R) Guest Article on How Entrepreneurs Can Quickly Maximize RetirementsSavings

How Entrepreneurs can quickly maximize their retirement savings

Are you a small business owner who needs to save quickly for retirement?

 

Many small business owners are so focused on the success of their business that they forget to protect themselves and their families by planning for retirement. In fact, if you love your work it can be hard to even imagine yourself no longer working! Yet, the hard truth of it is, one day you may not be able to work or may not want to work. And, not all small businesses are easily marketable, so relying on a large windfall from the sale of your business isn’t wise.

 

Different types of retirement plans work well for different types of employers. A small business owner could be best served using a SEP IRA, a SIMPLE IRA or even a 401(k) plan. Let’s focus on the SEP IRA today, as it can be an extremely powerful savings tool for the right small business owner.

What Is a SEP IRA?

A SEP IRA or Simplified Employee Pension IRA is a retirement account that can be set up by any business, regardless of size. They can be particularly favorable for a solo-entrepreneur or a business with just a few employees. SEP IRAs are funded by the employer only.

 

A SEP IRA is essentially a turbocharged traditional IRA. With a traditional IRA you can save just $5,500 in 2017 ($6,500 if you are 50+ and eligible for a “catch-up” contribution). Yet with a SEP IRA an employer can contribute up to 25% of your pay — up to $54,000 in 2017.

 

An important caveat: whatever rate you choose to contribute to your own account is the same rate you will need to contribute as a percentage of pay to all of your employee’s accounts. Also, employees can not contribute into their SEP IRA, only employer contributions are permitted.

 

If you are a solo-preneur this is an easy retirement savings win-win. If you have a few employees this can still make sense for you in terms of creating a competitive benefits package for your employees and building wealth for yourself on a tax-deferred basis.

Let’s run through a quick example:

 

Sarah runs a consulting firm and has an office manager named Tom.

 

Sarah will make $210,000 this year. This puts her in the 28% tax bracket because she is married and will file a joint return.

 

Tom earns $55,000 a year as Sarah’s office manager.

 

Sarah wants to save 10% of her pay. Since Sarah is in the 28% Federal Income Tax bracket this means she would need over $29,000 in income to save $21,000 after-tax ($29,000 x 28% = $8,120 taxes owed). For simplicity’s sake we won’t get into self-employment tax savings.

 

Instead, Sarah decides to reduce her take home pay to $189,000 and have the business make a SEP IRA contribution equal to 11% of her pay to equate to just shy of that $21,000 annual target Sarah was aiming for.

 

Sarah must also contributes 11% of Tom’s pay to a SEP IRA for Tom. This will equal a $6,050 contribution for Tom.

 

Now, Sarah saved a huge chunk of money for retirement, she looks like a hero because she just put 11% of Tom’s pay into an IRA for him AND Sarah still netted positive on taxes vs. trying to save after-tax!

 

Let’s frame it another way, looking solely at federal income tax at 28%, Sarah would have to pay herself over $29,000 to save $21,000 after-tax. In our example Sarah spends $27,050 in contributions to SEP IRAs for herself and Tom, and accomplished some serious savings for retirement at the same time!

 

WIN-WIN-WIN

Who has to be included in a SEP IRA plan?

An employee must be included in a SEP IRA plan if they have met the following requirements:

 

Worked for you in 3 of the last 5 years

Are over the age of 21

Earned more than $600 in compensation from your business over the year

 

However, you can use less restrictive requirements if you want. An important point to consider for the serial entrepreneur – if you have multiple businesses, they may constitute a controlled group. If you are a member of a controlled group, the SEP IRA will have to cover all of your employees under the SEP IRA. Check with your CPA to find out if this rule applies to you.

Great, but what if I have an off year?

Don’t worry, a SEP IRA has got you covered. With a SEP IRA you can contribute different amounts year to year. Some year’s you might contribute the maximum 25% of pay and other years you might contribute nothing. In fact, you don’t have to make a contribution until the deadline to file your business taxes. So you can wait and see how things turn out before deciding to make a SEP IRA contribution. What matters here is that you contribute at the same rate to all employee accounts.

How is a SEP IRA taxed?

Like a traditional IRA, this money is tax-deferred until you take it out at retirement. While the money is in your qualified SEP IRA you do not have to pay any taxes on capital gains, interest or dividends. This allows your money to potentially compound and grow much faster compared to a taxable account.

 

Also like a traditional IRA, if you withdraw money from the SEP IRA before you are 59 and ½ you will owe an additional 10% penalty tax on that withdrawal.

Pros and Cons

 

On the positive side SEP IRAs are:

 

Flexible contribution levels year-to-year

Easy to set-up

Easy to administer (most SEP IRAs do not require any annual filings)

Low cost

You can work with your existing adviser to coordinate it with your financial plan

Large annual savings limit (up to $54,000 in 2017 or 25% of your pay)

 

Quirks/Cons

 

Your contributions are capped at 25% of your net earnings from Self Employment

Loans are not available from a SEP IRA

There is no Roth option

Depending on your income, a solo-401k may allow a greater annual contribution

You have to make the same contribution amount as a percentage of pay to all employees

 

A SEP IRA can be a great option for a small business owner looking to save for their retirement. It’s flexible, inexpensive, and can allow you to sock away a ton of money really quickly on a tax-deferred basis. I highly recommend you speak with your financial advisor and CPA to determine if a SEP IRA makes sense for you!

About the Author

Lauren Zangardi Haynes, CFP®, CIMA® is the founder of Spark Financial Advisors a Fee-Only, NAPFA-registered financial planning firm in Richmond and Williamsburg, VA. Lauren has a blog for young professionals who are ready to create their own version of financial freedom and align their money with their values called Words on Wealth.

Guest Blog – Gregory A. Johnston, CFA®, CFP®- 401(k) After-Tax Contributions

401(k) After-Tax Contributions

 

Background

If you work at a company offering a 401(k) plan, you could defer $18,000 of pre-tax wages to the 401(k) plan ($24,000 if you are 50 or older).  The advantage is that contributions are not included in your current income and, therefore, not taxed.

 

Let’s say you are a heavy saver and have deferred $18,000 of pre-tax income to your employer’s 401k.  Many employers have a matching formula, meaning the employer will also contribute to your account.  Based on a hypothetical matching formula, let’s assume your employer’s contribution is $10,000.  In total, you now have $28,000 deposited to your 401(k) account for the year.

 

Did you know that the maximum amount of money that can be contributed to most 401(k) plans for 2017 is $54,000?  In our hypothetical example, that means the employee could still put in an additional $26,000.  This type of contribution is known as an after-tax contribution.

 

As a quick aside, an after-tax contribution is somewhat similar to a Roth 401(k) contribution, but there are important differences.  The similarity between Roth 401(k) and an after-tax contribution is that the amount of the contribution is included in your income and you will pay taxes, today, on the contribution amount.  The Roth 401(k) contribution will grow tax free, whereas after-tax contributions grow tax deferred (similar to your pre-tax contributions).

 

In the case of a 401(k) plan, tax free means you will never pay tax on the growth or the distribution.  If growth is tax deferred, you will pay ordinary income tax once the money is withdrawn from the account.

 

After-tax contributions are not as popular because you have to pay tax on the contribution amount as it is included your gross income.  There is also no employer match.  And remember, that while your contributions are after-tax, the earnings of those contributions grow tax-deferred, not tax free like a Roth 401(k) contribution.  Lastly, not all employer plans even allow for after-tax contributions.  But, due to a recent IRS ruling, we may begin to see more plans allowing for after-tax contributions.

 

So what is the big advantage of after-tax contributions?  After all, an investor could choose a regular taxable account instead of making an after-tax contribution.  Tax-deferred earnings growth is the major reason, whereas you will probably receive a tax bill each year for the taxable account.

 

Another advantage is due to the recent IRS regulation.  Let’s assume you separate from service (retire or quit) and decide to roll your 401(k) account balance to an IRA.  You can now roll your after-tax contributions to a Roth IRA.  From that point forward, the earnings growth and any future withdrawals will be tax free.

 

Implications

While having the availability of after-tax contributions is nice, it is not a panacea.  Many investors’ will have a variety of accounts they can fund and must choose in what order to fund them.

 

For each person, based on their specific facts and circumstances, there is likely a preferred funding order they should choose.  For example, if their employer matches contributions, the investor should likely contribute (either on a pre-tax or Roth basis) up to the employer matching limits.  They may also choose to fully fund their 401(k) – even above what the employer will match.

 

Next, perhaps Roth IRA contributions would be appropriate since they would have both tax-free withdrawals and tax-free growth from day one.  We generally think after-tax contributions should be one of the last components of an investor’s total savings contribution.

 

In our mobile society, where staying with a single employer is not common, using after-tax contributions could be a powerful way to get a higher level of Roth monies.

 

For example, a high-income younger person maxes out their 401k contribution, IRA’s, and also makes after-tax contributions.  Assume that in three years they leave their employer to join another firm.  At that point in time is when the after-tax contribution could become “full-fledged” Roth monies — assuming they are rolled to a Roth IRA.  In this situation, the effect is a “delayed Roth” – you do not get the full benefit of tax-free growth until the funds have been rolled to the Roth IRA.  But delayed Roth is better than no Roth.

 

Considerations

Be aware that many employer plans do not accept after-tax 401(k) contributions.  You will have to check with HR to determine if it is even available.  If not, ask why not, and enlist your friends to lobby HR.  Plan documents can be changed.

 

While making after-tax contributions may sound intriguing, most investors should also have taxable accounts to maintain sufficient short- and medium-term liquidity – that can be quickly and easily accessed.

 

Remember, the after-tax contributions are being deposited to a 401(k) plan and, as a result, are not easily accessible and should be viewed as retirement monies.  In short, the assets cannot generally be converted to “quick cash”.  That is one reason why a sufficient reserve fund (in a taxable account) needs to be available.

 

About the Author

Gregory A. Johnston, CFA®, CFP®, CPWA®, QPFC, AIF® has over 25 years of investment and comprehensive finanical planning experience.  He started Johnston Investment Counsel in 1997 as an independent,  fee-only investment management and comprehensive planning firm located in Peoria, Illinois.  His clients include individuals, retirement plans, and endowments / foundations.

Guest Post by Dave Fernandez, CFP® 401(k) Options When You Leave Your Employer

“I would to Thank Dave Fernandez, CFP® of http://www.wealth-engineering.com/ for contributing his expertise on 401(k) and the options you have when you leave your employer” -Steve Reh 

401(k) Options When You Leave Your Employer

Guest Blog Article by Dave Fernandez about your 401k Options when you leave your employer.
Guest Blog Article by Dave Fernandez about your 401k Options when you leave your employer.

Regardless if you are retiring or moving to a new employer, once you leave your current job you will need to decide what to do with your 401(k).  You have a handful of choices.  I have outlined the benefits and disadvantages of each option below.  Your personal circumstances may favor one option over the other.  You should discuss your options with a fee-only financial advisor whenever you transition employment so he/she can help you determine which pathway provides the best choice for your unique financial situation.

 

1) If you have a balance of $5,000 or greater you can likely leave it in your current plan as most 401(k)’s provide a deferral option.

Benefits –

  1. This is the easiest decision and likely no action is required on your part. Although, I am always amazed how many investors choose this default option when there are better choices as described below.

Disadvantages –

  1. Every 401(k) plan has its own unique set of investment options. Your current plan may have a limited choice of investment options such as being overly U.S. centric.  We live in a global economy and most financial advisors recommend that portfolios should provide a decent amount of international options on both the stock and bond side of investment choices.
  2. Many 401(k)’s have incredibly high internal expenses. It is not uncommon to see mutual fund choices with expense ratios north of 1.5%.  It is very important to keep an eye on your overall investment expense exposure.  The more you can lower your investment expenses, the higher probability you can keep returns compounding for your long-term financial benefit.

Be aware that if your balance is less than $5,000, you will want to take action on one of the below choices as your employer may have the option to automatically cash your 401(k) account out or transfer you to an IRA.  Cashing your 401(k) account out can have large tax consequences as outlined later in this article.

 

2) Rollover your balance to your new employer’s 401(k) plan.

Benefits –

  1. This is a good way to consolidate financial assets, especially if you have more than one 401(k) from past employment. I always favor consolidation and simplification where possible.
  2. This could be a great choice if you have an excellent set of diversified investment options that are low cost.

Disadvantages –

  1. It is not uncommon for your benefits department at work to occasionally choose a new custodian or a new set of investment options in your 401(k) every few years. You have less control in this situation as you are forced to invest in whatever options are provided.  What may look great today could easily change unexpectedly.
  2. Your new 401(k) may have poor investment choices, and/or investment options with high expenses.

Most 401(k) rollovers are initiated from the 401(k) you are leaving.  Your human resources department or benefits office may require that you fill out a termination/rollover packet of paperwork.  Some 401(k) custodians may take direction over the phone.  Collectively you and your fee-only financial planner can determine what is the next step to move forward.

 

3) Rollover your 401(k) to an IRA

Benefits –

  1. This is typically a favored option. Once you set up an IRA you have the whole investment universe of options to invest in.  This could be mutual funds, ETFs or stocks.  It is easy to build a well-diversified portfolio when you have such a wide array of investment options to choose from.
  2. You have control over your money. You can always move your IRA to another investment custodian if you prefer a change of investment options.
  3. You will have control over investment expenses. There are a number of low cost investment options available via no-load mutual funds and ETFs at a number of investment custodians.

Disadvantages –

  1. If you are still working, you may end up with one extra investment account in a separate IRA. This is a minor disadvantage.  The benefits of investment selection and cost control provided with rolling your 401(k) to an IRA easily outweigh the disadvantage.

 

4) Cash out your 401(k)

Benefits –

  1. None, other than liquidity if you are in a situation desperate for cash.

Disadvantages –

  1. This is typically the worst decision you can make as any balance withdrawn is a taxable withdrawal. Your 401(k) custodian is required to withhold 20% in federal taxes, but your tax exposure could be higher depending on your marginal tax bracket.
  2. You will owe state income taxes on the withdrawal if you live in a state that taxes income.
  3. If you are under age 59 ½ you would also be subject to a 10% early withdrawal penalty.
  4. If you have an outstanding 401(k) loan balance, the loan would also become a taxable event and be subject to the taxes and penalties described above.
  5. You will miss out on any future tax-deferred compounded growth by cashing out your 401(k) today.

 

There are a couple of other scenarios to be aware of before deciding on one of the above choices:

 

  1. What if you have a loan balance against your 401(k)?
    • You typically have 60 days to pay back a 401(k) loan after leaving employment. After 60 days, your loan balance will likely be considered a taxable distribution and you will be subject to taxes and possibly a 10% early withdrawal penalty if you are under 59 ½ years old.
  2. What if you have greatly appreciated employer stock in your 401(k)?
    • You may have a tax preference option called Net Unrealized Appreciation or NUA which allows you to transfer the stock out of the 401(k) and pay ordinary income taxes on the cost basis and capital gains taxes on the gains. You will want to review this option in detail with your financial advisor and CPA prior to making any decisions.

In closing, I highly recommend you notify your financial planner of any employment changes which could impact your 401(k) options.  Once he/she is aware of your choices, they can help you determine what the best course of action is for your personal financial situation.  You can always ask your financial advisor to join you in a conference call with your benefits department and/or 401(k) custodian to make sure you both understand all of your options and what steps are required to move forward.

 

About The Author

 

Dave Fernandez, CFP® is a native of Arizona and has over 20 years of experience in the financial services industry.  He started his financial services career in 1995.  As a NAPFA Registered Financial Advisor, Dave owns a fee-only financial planning and wealth management firm, in Scottsdale, Arizona called “Wealth Engineering.”

 

Wealth Engineering, LLC

http://www.wealth-engineering.com/

 

401k Self-Directed Brokerage Option

Phillip+Christenson+Maple+Grove+Fee+Only+Advisor

401k Self-Directed Brokerage Option

Phillip+Christenson+Maple+Grove+Fee+Only+Advisor+Self-Directed+Brokerage+401k
Phillip Christenson

I’d like to thank Phillip Christenson, CFA for today’s post on the Self-Directed Brokerage option in your 401(k). Phillip is a Chartered Financial Analyst and financial advisor for Phillip James Financial located in Maple Grove Minnesota.  I highly recommend if you’re in that area you reach out to Phillip for further financial tips and help!

Thanks,

Stephen Reh CFA, MBA, CFP®

 _________________

Little Used Self-Directed Brokerage Option a Good Idea for Many 401(k) Investors

401(k) plans are a great way to save for retirement. They allow employees to put money away on a pre-tax basis to save for retirement. Even better, your employer will usually match some of your contributions up to a certain percentage. Many plans now even allow you to contribute after-tax dollars into a “Roth” 401(k). These are just some of the reasons 401(k) plans have become one of the primary ways people save for retirement. And as pensions become rarer, 401(k) plans are many times the only way people are saving for retirement. This makes them even more critical to a person’s financial future.  While these accounts have many benefits they still have some major drawbacks. One of the biggest of these problems is the number and quality of investment options employers offer within the plans. There are usually a handful of target-date funds (not my favorite investments), some actively-managed stock mutual funds, one or two bonds funds, and if you’re lucky a couple of index funds. As I mentioned, for many people this is their only source or retirement savings, so often a 401(k) can leave an investor missing out on key asset classes, under-diversified, and paying more expenses than necessary.

So, how can we address this major flaw of these accounts? With a Self-Directed Brokerage option. Not all 401(k) plans offer it but I have recently been seeing it in more and more plans. Soon I expect it to be a standard feature in most 401(k)s. So what is it? Well, this little known feature opens up a world of investments that an employee wouldn’t normally have access to within the constraints of a 401(k) while still keeping the tax qualified status of your account. Let’s say the average 401(k) plan has 10-15 investment choices, the Self-Directed Brokerage option provides access to literally thousands of investment choices. These additional investments will allow you to build a more complete portfolio. For example, you might want to be invested in Real Estate but your 401(k) doesn’t have any Real Estate Funds (REITs). With the brokerage option you would certainly be able to find the right Real Estate fund for you. This is where working with a financial advisor might be beneficial because they can help you wade through all the different choices and help you pick the best investments for your situation.

The self-directed brokerage option can also help you save money through reduced fund expenses. No matter which side of the investing coin you fall on (active or passive) you should be able to find lower cost investments using this feature. However, I have seen 401(k) plans that charge a small fee to utilize the self-directed brokerage option. It is usually a nominal amount and the savings from lower cost funds should more than offset the cost but it should be considered before making your final decision.

A 401(k) is very powerful tool that can help you save for retirement and save on taxes. But it gets even better if your plan allows you to choose the Self-Directed brokerage option. Check with your employer to see if it’s available through your retirement plan. You might also be able to find it by logging into your online account and looking for it yourself. Either way consider taking advantage of it to improve your overall retirement portfolio.

 

_________________________________

Thanks again for posting Phillip. 

I agree with Phillip that self-directed brokerage can be a great option for investors working with advisors or for savvy DIY investors.  For those employers wondering if they should add the option, you may want to investigate your liability and the need to vet the options inside the brokerage window.  In general, I would be cautious for employers to offer this option.  Here is a link to an article in Forbes discussing it:

http://www.forbes.com/sites/ashleaebeling/2014/08/28/dol-questions-401k-brokerage-windows/

** The information on this website is intended only for informational purposes. Investors should not act upon any of the information here without performing their own due diligence. Reh Wealth Advisor clients should discuss with their advisor if any action is appropriate.