Tag: 401k

The Sweetness of a ROTH IRA

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The Sweetness of a ROTH IRA:

We all know we need to be putting money away for retirement. Most people just use their pension plan or their 401K plan at work. BUT if you are eligible for a ROTH IRA account, it’s worth having one! Does this make you a luck person? Well, I guess it depends on how you look at it. To be eligible, there are income limits.  If you file single for tax year 2024, your modified adjustable gross income needs to be under $161,000. Filing married that modified adjustable gross income needs to be under $240,000. IF you gross more than those amounts… Well then, you’re LUCKY! 😊

The Max amount per year you can contribute in 2024, is $7,000 per person if you are under the age of 50. If you are over 50 years old the max per person is $8,000. Check out the link from Schwab for more details.

Roth IRA Contribution Limits | Charles Schwab | Charles Schwab

What so great about having a ROTH? Do we need one if we contribute to our 401k plans?

I would say yes! Here is why. As we get older and decide we are ready to start taking money out of our retirement accounts to live on, we DO have to pay taxes on this money if it comes from a 401K, 403b, traditional IRA.  Really anything that is considered a PRE-TAX IRA. PRE-TAX means we have NOT paid any taxes on the money that got to hang out in those special accounts growing on compound interest. Uncle Sam wants his money! When we are retired, we still pay taxes on our income, for the most part anyway. Some states have some great tax breaks but let’s keep this conversation basic. Better to be pleasantly surprised at tax time in your retirement days, than surprised in a bad way.

A ROTH is money you put in an account that you have from a say, payroll check and instead of putting in in your savings account you put it in a ROTH IRA account. This account grows TAX FREE, with COMPOUND interest, and you NEVER pay a tax on it!!!! Did you get the word NEVER!!!! How SWEET is that! That’s our reward for not being high earners but let’s take the win here!!!

When it comes time to use any of our money in retirement it’s nice to have three buckets to pull from. This is where a tax accountant comes in handy.  But let’s deal with that WHEN we/you get to that point, as those pesky tax laws change all the time.

Bottom line, IF you have money in say a 401K, and a ROTH, and Social Security, this could help you have 3 spots to pull money out of each month and keep the taxes pay much lower.

Seems like a good idea to me! You do not need to max out these accounts every year either to make an impact on your bottom line 20-30 years down the road. Think about it and get on a ROTH IRA calculator to see if that motivates you to take some action. This simple calculator from Bankrate is great! Roth IRA Calculator | Bankrate

 If you do pull the trigger, or already have a ROTH, make sure the “assets are allocated” based on your risk tolerance, and don’t leave it in CASH.  CASH does not grow. You got this!

Common money problems for most of us…and the pay gap.

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If you google financial issues to see if you have “company” with whatever financial issue you personally may be dealing with… Good chance you have company! One of “the issues” that seems to be on every list, is a low income/the need to make more money. It’s actually the first topic on the list from a survey provided by SoFi.

7 Common Money Issues People Face | SoFi

These days it feels like everyone has or seems to need a side hustle.  Is it really because everyone can’t manger their money and not live below their means? Sure, there is some of that, but sometimes I talk to people and can not believe how low their salary is! I know people that have 40 years of experience doing a particular job and I KNOW they make less than someone doing the same job, and they are only 30 years old! What’s wrong with this?  There is no transparence in most companies, and we KNOW the guys still get paid more than most woman in most situations.  The pay gap is very real, and that gap can vary  by state. This article from Business Insider is eye opening. Pay Gap by State: How Much Women Earn Compared to Men (businessinsider.com)

As woman everything seems to be stacked against us… We make less money overall, we are in most cases the primary care givers for children, and or ageing parents, which may result in lost time at work or working part time. Woman also live longer, so NEED more money for retirement.

The ONE thing that IS equal is the cost of college! If woman make approx. 20% less than men in general, then tuition should be 20% less for woman, right!? Ok just me going a tangent there… But a valid point!

Because of the pay gap, women are starting more businesses, and hopefully investing more, to equal the playing field. Woman typically do better at investing they say because we are more patience and will allow the funds to grow and not panic and sell if the market goes down. That might be true, but I also think woman have a full plate most days and do not have time to look at their long term accounts every day, and we know what the term “long term” means. 😊Women have more patience and are willing to “educate” themselves on topics they have an interest in. But when it comes to “investing” people (not just woman) feel intimidated. It’s not intimidating, let’s not over think it. If you have a 401K AND you have “allocated your assets” then you’re investing! What does it mean to “asset allocate”? It simply means you have “picked” how you will divide up the money you are setting aside each month in that 401K.  Maybe you have some in a fund called “Large Cap” and some in “Small Cap” Or “international funds, or Index funds…. Just do NOT leave it in cash! Also do NOT ASSUME the “company”, as in the company you work for or the company that the 401K is with is” asset allocating”  for you! This is on you! But again, do not panic here. Get online and access your 401K account and log in. Find something that gets you to a spot that allows you to allocate the “funds” to “buy”. There are usually RISK assessment questions as well as questions like your age and the age you want to retire. Then the “robo” advisor will allocate your assets. That’s it! You are investing, yes you are an investor! 😊  Look at you, doing big girl stuff! Look at these allocations maybe once a year, you may or may not have to do anything with it.  The market will go up and down, which means your account could go lower than the month before. If the market in general is down, that will be the case for all of us. Remember this is a marathon, this growing your money game we are playing here. IF the market is down, and you still have extra cash in your budget, UP your contributions each month or even if it’s a ONE time shot with extra money. Hey, the Stock market is having a SALE!!! 😊 Good Luck!

Tax Time!

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Here we go… It’s that time of the year again, tax season.  The pressure of rounding up all the information we need to make sure we are taking all the deductions allowed. I personally rely on a professional to fill the forms in. Well, in all honesty that person is also pretty much family, so the fee is very reasonable.  The standard deductions for 2023 (so filing in 2024) filling single is $13,850 and $27,700 filling jointly or $20,800 for head of household. If you are over the age of 65, you may be eligible for more but should consult a professional.

When filing you either take that standard deduction, say the $27,700 or you itemize. Whichever number is higher usually works best. If you have a large mortgage payment with a high interest rate and other allowed deductions, you could exceed the $27,700 amount. NerdWallet has some great tips in this article on possible deductions for  2023. 22 Popular Tax Deductions and Tax Breaks for 2023-2024 – NerdWallet.

And who knew you could file your simple tax return with NerdWalled for just $50! Check it out if this could be a fit for you! The above link will take you there.

IF you find yourself having to PAY taxes this year, and you do not have a basic IRA account, maybe it makes sense to open one? If you only have a 401k and still owe taxes, it’s too late to add more money there, BUT you should have until April 15th to add money to a traditional IRA for the 2023 tax year. (Max $6500 if under the age of 50) This article from US News will give you the guildlines. IRA Contribution Limits for 2023 (usnews.com)

Keep in mind IF you do this because let’s say you owe $2000 this year, and you put $2000 in an IRA, it balances out? Not necessarily.  Plug in the numbers and see what tax bracket you need to be in for it to be a benefit for this filing. It may or may not be a “thing” for you this year but should be a push for you to UP your 401k contribution ASAP, as to not get stuck on that side next year.

Taxes and the lack of time to grow your money seem to be the biggest hinders to growing wealth. They say we should have at least two buckets for long-term growth accounts.

  1. Traditional retirement accounts, like an employer 401K, 457, 403b…. These a tax deferred account, so it lowers your taxable income. If you make $50,000 a year and put $10,000 a year in your 401K (does NOT included the employer match) then you are taxed as IF you only made $40,000 a year. That’s a basic outline. The money grows with compound interest for many years, and you pay a tax on that money years down the road on what ever amount you take out each year.
  2. ROTH IRA or ROTH 401K (If you are lucky to have one) With a ROTH IRA, you have already paid taxes on this money, and it can grow with compound interest, and you NEVER pay taxes on any of that money!!! There are income level caps to be able to contribute to a ROTH IRA. If you do a ROTH 401K, you pay the tax first and then it goes into the account to grow with compound interest and the same rules apply. But do check the rules and understand them.

Check out the link from Investopedia, which does a great job to beak it all down in simple terms. Roth 401(k) vs. Roth IRA: What’s the Difference? (investopedia.com)

Taxes are no fun, and it seems like some of the rules on what’s a deduction and what is not is always changing. Fun fact. Many years ago, Ok like 30 years ago.😊 you could write off the interest on a personal credit card and a car loan! Not anymore, and yet there is a higher percent of people with credit cards and the average credit card debt in the US is thousands of dollars.  It’s a good idea to just have a place that you keep all your receipts in one spot. Things like medical bills that were not covered by insurance, home repairs, property tax bills, excise taxes bills, homeowners’ insurance bills…. You name it.

In most cases, at least in my state you can not deduct things like home repairs on a single-family home. But what if you decide to sell your home? Might be a different story that year.  I personally, keep a decorative shoe box for the “paper” stuff and TRY to remember to print an e-receipts I have. This way everything is in one spot and takes less time to organize what my “tax guy” needs or does not need.

They say we don’t really want to be getting big refunds, that we shoot for close to Zero so more of our money stays in our pocket through out the year. I get that, BUT I also do NOT want to see I owe Uncle Sam money! Again, this gets back to our behaviors and mind sets. If you are someone that wants to live on the edge and has money set aside incase you owe taxes, go for it! I am more comfortable with getting close enough and getting a refund! 😊 Its like Christmas in the Spring and I earmark that money for something specific or put it in savings for a bigger project like a home repair. Do whatever works best for your personality and needs but try to look back next year and say you learned something positive about how you file your taxes or that you did something positive with your return, if you are getting one.

Happy tax season!!!

Your Work Retirement Plan

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Are you really invested in your works retirement plan???

I know what you’re thinking, of course I am! If you have a 401K, hopefully you see a line item on your pay stub, with the amount or per cent you requested be taken out each paycheck.  These days some of us only have a paperless copy of our pay stub.  So here is why I asked. Last week I happened to be talking to two family members that both work in education. In the state we live in educators do NOT pay into social security, they pay into the state pension plan. Which is 11% of their pay right now. There are only 6 states that follow this plan. In the conversation I asked if they both also take advantage of the 403b retirement plan option? They both said yes. But as we got talking and they pulled up their online pay stubs, I said show me where the 403b is taken out? Well to both of their surprise it was not actually being taken out at all!

One of them had changed districts and filled in all the paperwork and asked everything get shifted over where the same company handled both school districts. Simple and easy right?

Here was the problem, the person on the other end never did anything, plus it is now a different HR/Payroll, because it’s a new school. It’s up to us to make sure the paperwork is in place and that the HR/payroll team is doing what you asked it to do!

One of the people only lost a little time, but the other lost 20 years! The other person also just never even thought of funding it monthly, and only relied on the pension, like the good old days.

Thirty years ago, there were more companies and jobs that offered a “Pension”. Here is the thing, people talk about social security and how there will never be anything left for most of us to collect. Who really knows???  Thirty years ago, if you had a job that offered a pension, people would say you were set for life! Well things started to change in 1978 when they passed the Revenue Act section 401K, which allowed employees to defer the taxes on the funds going into these accounts. Plus, these accounts can grow with compound interest. The law went into effect on January 1, 1980. That’s not that long ago.

Since the 1980’s, fewer private companies have offered a pension and for the people I know working in state jobs that do still offer a pension, they are always moving the mark! EX: The teachers I know were told years ago… Stay 30 years and you get your full pension! NICE, right? What if you started at 22 right out of school. Technically you are eligible for the full pension at 52!

 Not anymore, now they have moved the mark. You need 30 years PLUS you need to be 65 years old. WHAT?!  OK, maybe you just LOVE your job, and you think you will always LOVE your job… But what if after 25 years you’re burnt out and need a change? Now you’re in to deep… Or at least that’s what people say. But what if you let your “pension” money just sit there till your 65 and you do a different job, because you not only have the “pension” money, which is say 40% of your pay, vs 80%, you also have $500,000 in your 403b account still growing tax deferred! Might make it easier to make a change…. Plus your new job, probably has a 401K plan!

 Don’t get me wrong, I think it’s great if you have this benefit! I wish I did! BUT, if you’re young and starting out I think you really need to also put some money in your 403b or 457 retirement plans. It’s never going to hurt you! Even if it’s only $100.00 a month, it’s like $75.00 a month out of your check, because its tax deferred.

The lesson here is, FIRST LOOK AT YOUR PAYSTUBS, do not assume anything. You are responsible for making sure these things get done! There is NO Retirement babysitter checking on you. Once you know the account is being funded, make sure it’s not sitting there in CASH. Talk to the “advisor” of the plan, yes there will be one and have them help you allocate the funds. The term you hear is “asset allocation”. They can help you or if the plan has a ROBO advice, that works too. The online robo advisor will ask you some “risk” tolerance questions, and timelines. Then it will allocate the funds appropriately.  Nothing scarry here… Just taking charge of your stuff! You got this!