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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 The amount deferred is usually not taxable to the employee until it is withdrawn or distributed from the plan.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on an after-tax basis (these accounts are known as Roth 401(k)s), and these amounts are generally tax-free when withdrawn. 401(k) plans are a type of retirement plan known as a qualified plan, which means that this plan is governed by the regulations stipulated in the Employee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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Levi Strauss & Co Is Planning to Go Public + How to Keep Your Public Information Private

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Are those Levi Jeans you’re wearing? Or a better question is “Are those Levi stocks you’re trading! Levi Strauss & Co is planning an initial public offering valued upwards of $5 billion, reports CNBC. The 145-year old San Francisco-based clothing company has tapped Goldman Sachs and J.P. Morgan to manage the deal, planned for the first quarter of 2019. Levi’s entered the public market in 1971 and was taken private in 1984 by Strauss’s descendants, who currently control the company. The iconic brand has recently seen its revenue climb and has cut its debt load. While going public for Levi is a great thing and can potentially take the company to the next level, going public can be a detriment. Especially since we live on our mobile devices, so every and anything is on there.

While mobile devices are convenient, this convenience can cost you a pretty penny if you don’t play it safe. According to the White House, cybersecurity is one of the most important challenges we face as a Nation. With many unscrupulous people out there, some apps may pose a big threat to your personal information and well being. Although app makers promise to protect your privacy, many data breaches have occurred, and while the Federal Trade Commission is doing its best to enforce privacy promises, you must be diligent in protecting yourself. Being diligent will make you a savvy mobile app user.

The following are four security tips that all savvy mobile app users can use to protect themselves.

1. Protect your device.

In the wrong hands, sensitive information, including personal financial information and personal contacts, stored on your mobile device can cause a lot of damage. Keeping your phone or tablet in a safe and secure place will help to mitigate the risk of unauthorized access. Lock your device with a password that is easy enough for you to remember, but complicated enough that it can’t be guessed easily. Try using a password that consists of a combination of numbers, and letters (both upper case and lower case), and special characters.

2. ONLY download apps from trusted sources.

The easiest way to compromise your personal information is to give it away. Download apps only from trusted sources to ensure that you are not aiding and abetting the theft of information. Read the app’s privacy policy to see what information the app will store and how it will be used.

3. Turn off your Wi-Fi and Bluetooth® when not in use.

While Wi-Fi and Bluetooth® are convenient ways to connect your device, thieves can use your connection to access your files. Turning off your Wi-Fi or Bluetooth® connection when you are not using it, will help to keep your information safe from hackers. Avoid open or public Wi-Fi connections. When you connect to an unsecured network, you invite others to view your private information.

4. Do not store usernames and passwords.

Sometimes easy isn’t safe. While granting permission for a website that you frequently visit to remember your username and password allows for faster and easier access, it is also very dangerous to your personal information. This is especially true of financial apps or websites that contain your personal information. If you use your mobile device to bank or shop, completely log out when you are finished. Avoid banking or shopping on your mobile device while on public Wi-Fi.

Proactively protecting your personal information can help you prevent identity theft and officially makes you a savvy mobile app user. Mobile devices were created for convenience, but don’t let convenience put you at risk.

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GE to Sell off Shares to Raise Cash + How to Raise Cash Personally to Increase Your Bottom-Line

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General Electric plans to offload up to 20% of its majority share in oil-services company Baker Hughes as it seeks to raise cash. The move comes amid investor concern over the conglomerate’s “high debt load.” The sale will generate roughly $4 billion for GE, which must maintain a majority stake in the unit until July 2019 as part of the original deal to buy it. While General Electric can sell assets to raise a lot of cash, what would you do if you need extra money? You may not have a $4 billion asset lying around, but I’m sure there are ways to increase your cash flow. The following are ten ways you can make some extra cash:

1. Sell Free Stuff from Craigslist

Craigslist is a great place to exchange goods and services and, for the most part, it is usually done for money. However, a little-known fact is that craigslist is also a great place to get freebies. Whether someone is getting rid of something because they no longer have room for it or they have to abruptly leave their home, city, or state; there are some rare gems that you can resell for a decent return. The key is to look for free stuff on Craigslist that is currently selling on Craigslist or elsewhere. Some items will be in great shape but if not, spruce it up and resell either on Craigslist, a flea market, or a garage sale.

2. Rent out Your Room

If you have a spare room in your living space and want to generate some side income, consider renting it out. Use Airbnb to put your home to work for you, whether you wish to rent out your entire home or a single room. Think about this…If you are traveling a lot this year, rent out your home to make some money while you’re away that can help pay for all of those adventures. That sounds like a great way to make some extra cash and travel for nearly free if you ask me. And don’t worry, there are security protections in place that help make this option less terrifying than most would think.

3. Teach Classes Online

Whether you are just starting out or a seasoned professional, there is something that you are good at! I am stating this as fact because even if it’s something you have never gotten credit for, chances are you have a skill that others may find valuable. Using this skill to make some extra income is possible thanks to platforms like SkillShare, Udemy, and Teachable.com. Many top experts use this as a lucrative way to earn passive income, but you don’t have to be a top expert to take advantage of this option.

4. Sell Your Photos

Do you have a keen eye? Are your photos museum-worthy? Well, if you answered yes or no to any of those questions, then you can sell your photos to stock photo agencies like Shutterstock, iStock, Adobe, and other similar companies. It really doesn’t matter if you are a professional or novice; you still have the opportunity to make some money. Most work on a per download basis where you get paid a percentage every time someone downloads your picture.

5. Sell Your Skills

Do you have a voice that Simon Cowell would pay a compliment to? Are you a talented graphic designer that can take any concept and bring it to life? Are you an artist who can give Michelangelo a run for his money? If so, sites like Task Rabbit and Thumbtack are great platforms to sell your skills. These aren’t only limited to those with creative skills; you can sell editing services, research services, typesetting, and the list goes on.

6. Offer to Babysit for Busy Professionals

Babysitting may seem like an obvious place to start when wanting to make some extra money and you may be thinking that you are not cut out to babysit, but here’s the twist. Look for moms and dads who are busy professionals who have small children under five. They will most likely tell you that they don’t remember the last time they were able to enjoy a quiet night out. Offering your services to this niche population will not only be a lucrative undertaking, but an easy job to do as well because chances are you will be simply house-sitting as the children sleep. If you have extensive experience in child care, consider signing up for sites like Care.com where you can set your schedule of availability.

7. Give Your Opinion

When you were a child, you might remember your parents telling you to “mind your own business,” but as an adult taking heed to this advice can cost you. This is because you can get paid to mind other people’s business. There are companies that will pay you to participate in focus groups, phone surveys, online surveys, and even product trials.

8. Drive People Around

You can really make a decent living becoming a driver for either Lyft or Uber. If a living isn’t what you are after, driving people around can still give you that needed boost in your finances by only working part-time.

9. Deliver Meals

Join apps like Ubereats, GrubHub or Postmates and deliver to-go food on your free nights or weekends. You also have the opportunity to get tips and the freedom to make your own schedule.

10. Clean out Your Closet

We’ve all stepped up to the consignment store counter to find out that the sweater from J Crew we never had the chance to wear is only worth $3. Womp. By selling your excess or used clothing on apps like Poshmark, you have the freedom to set your price and wait. Poshmark even provides the shipping label for you. If it doesn’t work out, you can always head back to your local consignment store or put the items on Craigslist.

 

 

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California Still Battling the Most Destructive Fire in Its Modern History + How to Minimize Financial Losses Due to Natural Disasters

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Our prayers go out to those in California, family, and friends who are dealing with this natural disaster that is wreaking havoc on the state. The most destructive fire in California’s modern history is still raging in the northern part of the state. At least 29 people have died, and about 6,700 buildings have been destroyed north of Sacramento, where more than 2,000 firefighters are battling the 105,000-acre Camp Fire. A further two people have died in two other large, uncontrolled fires burning in the Malibu and Thousand Oaks communities of Southern California. Overall, 250,000 Californians have been forced from their homes. The reality is that a natural disaster can be a devastating blow to your finances. Thanks to SmartAboutMoney.org, you can use the following checklists to help minimize any additional financial losses:

Protect Your Property

If you are being asked to evacuate the area and authorities allow you to enter your home, be sure to:

Collect your important financial documents along with your valuables. You will need them to file insurance claims, pay bills and take care of family members. Important documents include:

  • Legal certificates
  • Wills
  • Powers of attorney
  • Insurance policies
  • Social Security cards
  • Your checkbook
  • Bank account information

Get a visual. Take pictures and/or video of your damaged property.

Call your insurance agent as soon as possible to find out exactly what to do and what information is required to make a claim. Leave a contact phone number if your home is uninhabitable and you are staying elsewhere.

Separate damaged and undamaged items until a claims adjuster inspects them. Protect your property from further damage by making temporary repairs (such as putting a tarp over a damaged roof).

Save receipts for repairs and temporary lodging to submit to your insurance company. If you are not fully reimbursed for these expenses, they may be tax-deductible.

Keep copies of all correspondence with the insurance company and provide them with a detailed list of damaged property. The claims process will be much easier if you take the time before a natural disaster occurs, to photograph or videotape the contents of your home and list the brands and serial numbers of appliances and electronics equipment.

Look to relief organizations. Contact the American Red Cross. The Red Cross can provide emergency shelter, meals, clothing, medical assistance and referrals to government and nonprofit organizations for additional services.

Work With Your Employer

Disability benefits. If you or a family member is injured, you need to begin the process of applying for any available employee-sponsored disability benefits.

Family Medical Leave Act. You may be able to take advantage of the Family and Medical Leave Act if you are unable to return to work in the near future because you are caring for an injured family member. This law applies to companies with more than 50 employees.

Contact Creditors

As always, paying your bills on time protects your credit rating. But, considering the circumstance, your creditors might be willing to work with you on a delayed payment schedule if necessary.

Prioritize your bills. Keep in mind that insurance policies and mortgage or rent payments are the top priority.

Consider stopping some bills immediately. For example, you can contact your utility, telephone and cable providers to halt services on the property you have vacated. Before cancelling the service though, make sure you ask about termination and reconnection charges.

Seek Available Tax Relief

For victims of natural disasters such as earthquakes, floods and tornadoes, there are federal income tax deductions that may be able to offset some of the financial loss.

Casualty losses are deducted on  Schedule A as an itemized deduction. After the first $100 of loss, which is nondeductible, the remainder of a loss that is not reimbursed by insurance is allowed to the extent that it exceeds 10 percent of a taxpayer’s adjusted gross income (AGI).

If the president declares an area affected by a natural disaster a Federal Disaster Area, there are automatic extensions of the time for filing tax returns and paying taxes, waived penalties for late filing and payment of taxes, and special mailing addresses for faster processing of tax returns from disaster victims.

Under normal circumstances, a casualty loss is deducted on your tax return for the year in which the event occurred. However, in areas which the president has declared to be a Federal Disaster Area, victims have the option of taking their entire loss on their prior year’s tax return. If they have already filed a prior year return, they can file an amended tax return on Form 1040X to get a refund to help pay for disaster-related expenses. The IRS recommends writing “Disaster, (name of city or county and state)” in red ink at the top of the 1040X form. For additional information, consult IRS Publication 584.

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