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 The amount deferred is usually not taxable to the employee until it is withdrawn or distributed from the plan.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on an after-tax basis (these accounts are known as Roth 401(k)s), and these amounts are generally tax-free when withdrawn. 401(k) plans are a type of retirement plan known as a qualified plan, which means that this plan is governed by the regulations stipulated in the Employee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

The Daily Digm (News)

T-Mobile’s Dream of Telecommunications Domination Gets the OK + How to Create Mental Toughness While Pursuing Your Dreams

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T-Mobile’s $26 billion takeover of Sprint finally got approved by a federal judge, a move that will leave most wireless consumers with three major operators to choose from, including Verizon and AT&T. More than a dozen attorneys general had sued to block the merger that had already been approved by the Justice Department and Federal Communications Commission. The administration has required T-Mobile and Sprint to sell some units to pay-TV operator Dish Network as part of the deal.

Dream chasing isn’t for the faint at heart. It can take years before one sees the financial payoff of what was once an idea. T-Mobile is probably patient on the outside, but internal it is jumping for joy. It took them a few years to get to this point, but I’m sure they will be relieved at the fruits of their patients.

When building a business, your goal has to be more than money, or you will ultimately fail. Your drive has to be based on principle, change, and something greater than yourself. Here is how to stay mentally tough while pursuing your dreams.

Personal Development. The road to success is paved with character and growth. Personal development is one of the key drivers that sustain you on the path of your dreams. Trustworthiness, keeping your word, and dependability are imperative to any industry. It doesn’t matter if you’re a musician or painter, lawyer or doctor, these traits and non-negotiable and forever transferable to success.

Take Breaks. To get there, you must rest one mile at a time. The grind is overrated. Reflecting on how far you’ve come energizes you for the road ahead. Burnout is a danger to your accomplishments and leads to a failure by default.

Stay Hungry. Stay Foolish. Steve Jobs popularized this quote from an ad in The Whole Earth Catalog. It read Stay Hungry. Stay Foolish. We come to a point when we are happy with a level of progress and think we’ve learned everything. Accepting the truth that we never stop growing, and there is no limit to our success gives us the ability to keep going. To continue, you must never settle. You must always seek new ways of fixing things and solving problems. Discover new opportunities and be open to learning more.

Faith. Steve Jobs also mentioned faith throughout his journey. Believing so deeply in an idea that you make it come to life. Belief takes ideas and materializes them; and when you realize you can actually make something come to life, the sky becomes your launching pad, not the limit.

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Amazon Plans to Add 15,000 Jobs + How to Prepare for the Job You Want

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Amazon says it will hire 15,000 more people at its Bellevue, Washington, campus, as part of the company’s effort to allocate new workers after it abandoned its plans for New York City. The e-commerce giant had issues in New York trying to open a facility there, called Bellevue, where 2,000 employees are already located, a “business-friendly city.” It’s also close to the company’s Seattle headquarters. This is good news for those in the job market but if this isn’t what you are looking to do then how do you make yourself valuable in the job market?

Here are four ways to prepare for the job you want no matter your age:

1. Focus on Your Strengths, Not What You’re Lacking

Whether you are 20 years old or over 40 instead of focusing on your age, you need to focus on your strengths. Many young people with limited experience or older people who may not be up to date with the latest technologies focus on what they’re lacking, and this is a big mistake. Do you have the qualifications for the job? Can you bring value to this position? Whatever your strong suits are you should play that up in your resume, cover letter or communications with the recruiter. It’s easy to focus on why you can’t get the job, but the trick is not to let that get to you. Focus on your value!

2. Attack Your Job Search from All Angles

Networking, Answering ads and/or working with recruiters are the most effective ways to land a job. It is important that you just don’t focus on one method but all three. Networking obviously is the ideal way because it allows you to communicate your value directly, but the other methods have their benefits as well. Be proactive and use each method effectively.

3. Show/Explain Your Leadership Abilities and/or Innovation

Leadership and taking the initiative have nothing to do with age. Young leaders and old leaders can be more or equally effective as those who have the “ideal” age. Focus on your leadership abilities and be sure to display this to your current or potential employee. Also, make sure you are keeping up to date with current trends in your industry. This will allow you to show your innovation and add more value to your company.

4. Ask For What You are Worth

Lastly, ask for what you are worth. Don’t let being “too young” or “too old” deter you from asking for a salary you deserve. In fact, trying to downplay your worth may very well backfire on you. Also, if you have been with a company for a long time and your salary outpaces what the position is worth making sure you are adding to your skill set and not staying complacent.

Following these four tips can help you gain or retain employment. What are some other ways? Comment below>>>

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New Survey Says that Young People Don’t Like Job Hopping + How to Get Paid What You’re Worth

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Contrary to popular belief young people are not keen on job-hopping as most people think. According to a new survey, U.S. millennials and Gen Zers want to stay at their current companies for an average of 10 years and six years, respectively. Additionally, they say work is a major part of their lives, with 65% of people in Gen Z and 73% of millennials saying it’s part of their identities, according to a Zapier-sponsored poll. The age groups’ actions reflect the findings: Seven in 10 say they constantly check work messages outside the office. This is great for corporations but what does that mean for business owners?

If you are a freelancer or entrepreneur you know all too well the fight to get what you are worth. You will constantly be bombarded with offers to work for less or even for “exposure” as many like to call it now. But how do you gain the confidence and know how to charge and get what you’re worth? Here are 3 tips:

Build Your Resume. It’s said that if you do what you love you’ll never work a day in your life. Pursuing your passions and getting paid for it is the ultimate professional dream. You may have to start by working for free or at a discount rate to builds skill, ability, and your resume but once you have some stats under your belt its time to get that money… Keep in mind that if you are only in it for the money it will be difficult to experience long term financial gains so make sure you are pursuing your passion not only the paycheck.

Set a Standard. Pioneers have the ability to set standards. And even if you are providing services already in the market, no one can deliver them quite like you. Style and quality set you aside from others opening up a field of buyers seeking exactly what you offer.

Don’t Give In. A colorist (a person who literally adds color by hand or digitally in films and visual media; yes, there is a path for everyone) from Brooklyn, NYC once told me he had to be firm with pricing because he didn’t want to become that guy who works for free. After you have put in the work and set a standard you must not give in to fees below your ability. Yes, flexibility is key but don’t short change yourself. Getting paid your worth is ultimately the result of you believing in your ability and knowing there are people who will pay for it.

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