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Retirement Account Balances Increase + The Basics of a 401(k) Plan

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It isn’t a secret that social security may not be enough for folks to retire when they are ready, and as a result, we are starting to see people take matters into their own hands. The average retirement account balances held by Americans surged to record highs in the last quarter. Workers hold an average $106,500 in their 401(k) plans, a 2.4% uptick from the previous quarter, says Fidelity Investments. Individual retirement accounts averaged $111,000, a jump of 3.8%. Both figures are nearly double where savers sat a decade ago. Employee contribution rates are also soaring, with the average American worker now contributing 8.7% of their salary to retirement accounts — the highest percentage since 2006. But for those who are not sure of their options what is a 401(k)? Investopedia has created this guide below:

What Is a 401(k) Plan?

By definition, a 401(k) plan is an arrangement that allows an employee to choose between taking compensation in cash or deferring a percentage of it to a 401(k) account under the plan. The amount deferred is usually not taxable to the employee until it is withdrawn or distributed from the plan. However, if the plan permits, an employee can make 401(k) contributions on an after-tax basis (these accounts are known as Roth 401(k)s), and these amounts are generally tax-free when withdrawn. 401(k) plans are a type of retirement plan known as a qualified plan, which means that this plan is governed by the regulations stipulated in the Employee Retirement Income Security Act of 1974 (or ERISA) and the tax code.

Qualified plans can be divided into two different ways: they can be either defined-contribution or defined-benefit (pension) plans. 401(k) plans are a type of defined-contribution plan, which means that a participant’s balance is determined by contributions made to the plan and the performance of plan investments. The employer is usually not required to make contributions to the plan, as is usually the case with a pension plan (which is one reason such plans are on the decline). However, many employers choose to match their employees’ contributions up to a certain percentage, and/or make contributions under a profit-sharing feature.

Contribution Limits

For 2019, the maximum amount of compensation that an employee can defer to a 401(k) plan is $19,000 (up by $500 from 2018). Employees aged 50 by the end of the year and older can also make additional catch-up contributions of up to $6,000. The maximum allowable employer/employee joint contribution limit is $56,000 for 2019 (up by $1,000 from 2018)  – $62,000 in 2019 for those aged 50 and older. The employer component includes matching contributions, nonelective contributions and/or profit-sharing contributions.

Investments

Typically, plan contributions are invested in a portfolio of mutual funds but can include stocks, bonds and other investment vehicles as permitted under the provisions of the governing plan document.

“Many 401k plans have index fund options which are inexpensive ways to invest in a diversified mix of assets. A U.S. large capitalization (cap) growth and value option is a good place to start. Then add a mid-cap choice, followed by a small-cap choice. Both could be growth,” says Elyse Foster, CFP®, founder of Harbor Financial Group, Boulder, Colo. “Then choose a foreign index; large-cap choices are usually offered. Bonds can be added via an index as well – a broad U.S. corporate bond fund is a good idea. Many 401(k)s are now offering a real estate option in the form of a REIT. This is an excellent way to diversify. If the plan offers a foreign REIT, buy both. This diversified mix will, over time, perform well.”

Distribution Rules

The distribution rules for 401(k) plans differ from those that apply to IRAs. The money inside the plan grows tax-deferred as with IRAs. But whereas IRA distributions can be made at any time, a triggering event must be satisfied in order for distributions to occur from a 401(k) plan. As a result, 401(k) assets can usually be withdrawn only under the following conditions:

Required minimum distributions (RMDs) must begin at age 70½, unless the participant is still employed and the plan allows RMDs to be deferred until retirement. “If you still enjoy working in your golden years and reach that most important 70½ where RMDs are required, you do not have to take them from the 401(k) where you are still working. You will, however, have to take RMDs from any IRAs or other retirement accounts (excluding Roth IRAs). But you could roll your IRAs or old 401(k)s into your existing 401(k) where you are still working and avoid RMDs while employed. Avoidance of the RMDs over 70½ while still working always assumes you do not own more than 5% of the company that sponsors the plan; otherwise, you will have to take RMDs even if still working,” says Dan Stewart, CFA®, president and chief investment officer, Revere Asset Management, Inc., Dallas.

Distributions will be counted as ordinary income and assessed a 10% early distribution penalty if the distribution occurs before age 59½, unless an exceptions applies. Exceptions include the following:

  • The distributions occur after the death or disability of the employee;
  • The distributions occur after the employee separates from service, providing the separation occurs during or after the calendar year that the employee attains age 55;
  • The distribution is made to an alternate payee under a qualified domestic relations order (QDRO) as a part of a divorce or legal separation;
  • The employee has deductible medical expenses exceeding 10% of adjusted gross income;
  • The distributions are taken as a series of substantially equal periodic payments over the participant’s life or the joint lives of the participant and beneficiary;
  • The distribution represents a timely correction of excess contributions or deferrals;
  • The distribution is as a result of an IRS levy on the employee’s account;
  • The distribution is not taxable.

The exceptions for higher-education expenses and first-time home purchases only apply to IRAs.

The majority of retirees who draw income from their 401(k)s choose to roll over the amounts to a traditional IRA or Roth IRA. A rollover allows them to escape the limited investment choices that are often presented in 401(k) accounts. Employees who have employer stock in their plans are also eligible to take advantage of the “net unrealized appreciation” rule (NUA) and receive capital gains treatment on the earnings.

Loans

Plan loans are another way that employees can access their plan balances, but several restrictions apply. First, the loan option is available at the employer’s discretion – if the employer chooses not to allow plan loans, no loans will be available. If this option is allowed, then up to 50% of the employee’s vested balance can be accessed, providing the amount does not exceed $50,000, and it must usually be repaid within five years. However, 401(k) loans used for primary home purchases can be repaid over longer periods.

The interest rate must be comparable to the rate charged by lending institutions for similar loans. Any unpaid balance left at the end of the term may be considered a distribution and will be taxed and penalized accordingly.

Limits for High-Income Earners

For most rank-and-file employees, the dollar contribution limits are high enough to allow for adequate levels of income deferral. But the dollar contribution limits imposed on 401(k) plans can be a handicap for employees who earn several hundred thousand dollars a year. An employee who earns $750,000 in 2019 can only include the first $280,000 of income when computing the maximum possible contributions to a 401(k) plan. Employers have the option of providing nonqualified plans, such as deferred compensation or executive bonus plans for these employees in order to allow them to save additional income for retirement. “Annuities would offer tax deferral of growth, but not a deduction,” says Allan Katz, president of Comprehensive Wealth Management Group, LLC in Staten Island, N.Y.

The Bottom Line

401(k) plans will continue to play a major role in the retirement planning industry for years to come. In this article, we have only touched on the major provisions of 401(k) plans. For more specific information on the options available to you, check with your employer and plan provider.

Ash Exantus aka Ash Cash is one of the nation’s top personal finance experts. Dubbed as the Financial Motivator, he uses a culturally responsive approach in teaching financial literacy. He is the Head of Financial Education at BankMobile and Editor-in-Chief at Paradigm Money. The views and opinions expressed are those of Ash Cash and not the views of BankMobile and/or its affiliates.

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Conferences Contemplate Offering Childcare + How to Offer Your Child a Leg up in Life!

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If you’re a working parent, you may have been forced at times in your career to skip important conferences due to a lack of childcare. The good news is, the tides may be turning, though slowly. Conference organizers in various industries are starting to come around to the idea that they’re missing something if parents are unable to attend. The trend, according to Quartz, is most poignant in science, technology, engineering, and maths, likely because those fields are trying to come up with creative ways to increase female participation.

This is important because these conferences create an opportunity for its participants to connect with others in their field and ultimately helps them increase their value in the workplace. It also allows them to make more money, which will come in handy as they are looking to improve their children succeed. So if you are a parent who wants to help your child with college, what do you do? Although college isn’t something that they will attend until they become an adult, it is important that parents start to plan for this expense as early as possible. With childcare being almost as much as rent or a mortgage, it can be challenging to save money for anything these days, especially college expenses.

Fortunately, a 529 Plan can help parents save money for their child ’s future college experience. The 529 Plan is a tax-advantaged investment. It was created to encourage parents, grandparents, legal guardians, etc., to begin saving money for the future college educations of their children, grandchildren, are legal wards. It receives its name from Section 529 in the IRS Code, and it is offered by state agencies and state organizations.

Not all states offer the 529 Plan, but those who do individually decide how the plan is designed and what kind of investment options they will offer. Most plans allow investors to come from out of state. The advantages for in-state residents who apply for a 529 college savings plan within their state can include tax deductions, matching grant and scholarship opportunities, protection from creditors, and even exemption from financial aid debt.

The 529 Plan is offered in two different forms. There is a prepaid plan, sometimes also called a guaranteed savings plan, which allows you to purchase tuition ahead of time, based on the current calculations of what the tuition of a specific university is. It is then paid out when the beneficiary of the policy attends a college or university.

There are also savings plans, which are based around the market performance of an underlying investment. These investments are generally comprised of mutual funds. Forty-eight states, plus the District of Columbia, offer the 529 savings plan. Usually, savings plans become more conservative, the older the beneficiary gets. There are also options for risk-based investments, which allows underlying investments to remain in the same fund, no matter what the age of the ultimate recipient.

The 529 college savings plans are an excellent way for parents, grandparents, or legal guardians to ensure that their young loved ones will be able to afford to go to the very best colleges and receive the very best degrees. It allows children the opportunity to follow their dreams, like before they are capable of reaching them. They are ideal plans for adults who want to provide college funds for their children but are unsure or unable to go about it in the way the movies have always told them they should. The 529 plans are realistic and affordable investments, designed to ensure a child’s future successes.

So as you contemplate whether or not you will start your family, keep in mind of these expenses but also know that there are vehicles available to make the ride smoother (pun intended)

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HP to Slash up to 9,000 Jobs + How to Make Yourself Employable

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Computer giant HP says it will cut up to 9,000 jobs, or 16% of its workforce, through firings and voluntary early retirement amid difficulty with its printing business. The California-based company said the layoffs are part of a restructuring plan that will save the company $1 billion by the end of 2022. The move, which is meant “to cut costs and boost sales growth,” said Bloomberg, comes as the company’s CEO of four years is stepping down. Dion Weisler will be replaced by HP executive Enrique Lores.

What if your job is making cuts? How do you become more employable? According to The Wall Street Journal, employers are becoming less picky, dropping skill and degree requirements to attract a larger pool of job candidates — especially in cities with the lowest levels of unemployment, such as Dallas or Louisville. The report states that an extra 1 million jobs were opened up to candidates last year with “no experience necessary.” But how do you go about getting yourself ready and employable in order to make the power switch? The following are five tips:

1. Be Proactive

Instead of waiting around to see who is hiring or simply just looking at job boards, look around, and make inquiries. What kind of job are you looking for? What environment are you interested in working in? Are there competitors to your current employer? Do you have an ideal place you want to work? All of these questions will allow you to determine who you should be reaching out to and how you should approach it. Being proactive can help show employers that you are the kind of person that takes the initiative.

2. Use Social Media

In today’s day and age, there isn’t a potential employer who will not search for you on social media when the time comes. Because of this, it is important that you start to build a strong profile online. Doing this can increase your chances of making that employment power switch and land the job of your dreams. LinkedIn is your best friend professionally, so make sure your profile is up-to-date. Many recruitment agencies use LinkedIn as a prospecting tool, so this may also help increase your visibility.

3. Have Unwavering Belief in Your Abilities

Right now, as we speak, there is someone living out their best life because they just believed in themselves, and conversely, there are people who have the skills and ability, but because of their lack of belief in themselves, they are not living up to their full potential. Be the former! Stop allowing yourself to be your biggest obstacle. Have an unwavering belief in your abilities, and even if a job says no, understand that it is their loss, not yours. Any employer would be privileged to have you on their team. Know that and believe in that fact as you step out to find your perfect employer match.

4. Keep Learn New Things

Never become so complacent with where you are right now that you don’t do what you need to do to maintain or increase your value in the marketplace. Even if you have been working in the same job or field for a few years, make sure you are engaging yourself in self-development on a regular basis. This may include developing in areas that have nothing to do with your current position but understand that the more you know, the more opportunities you allow to open up for you. There are many online courses that you can take or even certificate programs that can significantly increase your value.

5. Shake Hands & Kiss Babies

Lastly, make sure you become a master networker. The saying that “It’s not what you know, but who you know” is so accurate. The only twist to that is, “Who you know will get you in the door, but what you know will keep you there.” Your network is your net-worth. Make sure you are networking in the industry or profession that you are interested in. You will realize how small the world is and may be able to connect with the hiring manager directly, or even make such a good impression that the opportunities start pouring in re-actively. Either way, your ability to make a good impression and be around the right people may help you land your dream job.

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The Holiday Shopping Season is Looking Merry and Bright for Retailers + 11 Ways to Save During the Holiday Season

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According to a new survey, with shoppers expected to spend 5% more than last year. The increase in spending does not mean more crowds, though. About 53% of holiday purchases will be made online, with 20% being bought on mobile devices. The shift could affect shopping holidays like Black Friday, with half of consumers planning to make their purchases that day online.

The holiday season is not yet upon us, but retailers are gearing up so that means significantly more spending—and more potential to encounter financial trouble. Because of the emotional play many retailers use to get you to buy from their stores, it’s important to be overly vigilant with your spending during this time. Below are 11 ways you can save (instead of spend) during the holiday season.

1. Decide how much you can spend and make a plan.

Many people don’t like to use the word “budget” because it seems restrictive. However, creating a holiday budget or “making a plan,” as we’ll call it here for all intents and purposes, is imperative during the holiday season. By making a plan, you’re avoiding overspending and essentially telling your money what to do—rather than allowing it to be in control.

2. Open a holiday spending account.

Using your main checking account to do your holiday shopping is one of the biggest mistakes you can make during the holidays. Doing so allows you to tap into money allocated for other important things like bills and groceries. By opening a separate checking account for holiday spending, you’ll help yourself stay on budget. And once the money is gone, you have a clear stop on holiday shopping. Make sure it’s a free checking account, opening an account that charges fees would defeat the purpose of doing so.

3. Account for splurges.

Let’s be honest: you’re going to splurge this month. A dress for your office Christmas party? A sale at your favorite retail store? The jeans you’ve been eyeing for months are suddenly 40 percent off? We could go on and on, but you get the drift. Set aside a dollar amount that you’re willing to spend on yourself this month. Knowing how much you can afford will keep you from being swept up by “can’t-miss” deals.

4. Cut back on expenses.

Cutting back on expenses during the holiday season—or even before—will give you more money to allocate towards the holidays. Small changes like cutting your cable (you’ll be visiting family and friends most of the month anyway!) or avoiding takeout meals will save extra cash and make a big difference in your budget.

5. Track your spending.

Using a spending log is essential this time of year. Gifts aren’t the only thing affecting your budget—more social occasions means more spending. From extra Ubers to hostess gifts, your expenses can add up quick. This usually forces people to make decisions that they may not want to make, like tapping into credit or using money that is not allocated for holiday shopping. Using a spending log will keep your spending in check.

6. Narrow down your list.

It’s easy to get caught up in the fun of the season and want to gift something to everyone you’re close to. Let us remind you (as corny as it sounds) that presents are not what the holiday season is about. Take a look at your holiday list and be honest about what you can afford. It’s not fun, but your loved ones don’t want you hindering your financial future for them.

7. Set gift-giving expectations.

Setting gift-giving expectations is really important: If your love ones assume you’re going to spend a lot of money on them, they may feel obligated to do the same in return. Having a conversation early on about gift limits will allow both parties to avoid overspending, not to mention it will sidestep any ensuing embarrassment or guilt that comes with one party not giving an equally as lavish gift.

8. Take advantage of store offers and coupons.

Taking advantage of store offers and coupons should be a given, but you’d be surprised at how many people pay full price for things during the holiday season. Many people feel like they are competing against other shoppers to get the best gifts, so they don’t spend the necessary time finding the best deals. Don’t believe the hype! Make a shopping plan for each individual on your list. Research where you can find the best deals on the product and then sign up for company email lists. Follow sales and make purchases at the right time. Ordering presents in advance (or price shopping with ample time) not only assures that you get the best deals, but also that you don’t spend excess cash on things like rush shipping.

9. Be creative.

Being creative is about understanding that you don’t have to spend an arm and a leg in order to show your love ones you care. There are many people who are more appreciative of the thought that goes into a handcrafted gift than a purchased item from a big box store. Being thoughtful can have a lasting and more memorable effect than breaking the bank. Spending quality time with an elderly relative, helping a friend clean her home the day after a big party, or offering to babysit for a couple are just a few ideas.

10. Reduce decoration costs.

You may feel inclined to go all out when it comes to decorations, but if you’re crafty enough, you can save a lot of money by creating your own. If you really love holiday decor, wait until the season is over and purchase for next year. Prices for decorations are inflated during the holidays, so buying them during the off-season can save you a lot of money.

11. Remember the reason for the season.

We cannot repeat this enough: remember the reason for the season. The holiday season is not all about gift giving. Sometimes your presence is better than your present! The holiday season is about family and friends, and should be cherished in that way.

Do you have a holiday season savings hack that you swear by? ‘Tis the season to share!

11 Ways to Save During the Holiday Season was originally published on TheEverygirl.com.

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