IRA

Investing Is Great, But Saving Is Even Better

Tim Lemke — Tue, 24 Jul 2018 08:00:09 +0000

When people talk about investing, they often emphasize getting the most return for their money. If they are getting a 7 percent return on their stock portfolio, they'll strive to get 8 percent. If they are already at 8 percent, they'll push for 9 percent or more.

Shooting for a high return is laudable, but what often gets lost in this discussion is the most powerful element of building wealth: saving as much money as you can in the first place.

It's important to remember that individual investors can't control stock market returns. They also can't entirely control the cost of commissions, fees, taxes, and the like. They can, however, control their own rate of savings. And there is ample evidence that it is the initial savings, not investment gains, that determines how much you end up with over time.

Let's examine this phenomenon further.

Saving more can offset lackluster returns

If you save as much as you can, you don't have to stress as much about getting the optimal return on your investments. In fact, a boost in savings can often be more powerful than a higher rate of return.

Here are two scenarios to illustrate this point.

In the first scenario, you save $5,000 per year for 30 years and get a healthy 10 percent annual return. This results in about $900,000.

In the second scenario, you save $8,000 per year for 30 years, but you only average an 8 percent annual return. You will end up with around $978,000 in this second scenario. In other words, just $3,000 additional dollars each year (or $250 per month) can more than offset a 2 percent difference in return. Bump the savings up to $10,000 per year, and you're looking at more than $1.2 million in the end. (See also: 6 Confidence-Inspiring Facts About the Stock Market)

Saving more can supercharge great returns

In an ideal world, you're able to save a lot and get a great return on your investments. When these things happen together, the results can be amazing.

Let's revisit the scenarios above. Imagine if you were able to boost your contributions from $5,000 to $8,000 annually while also getting that great 10 percent return. You'd be looking at $1.44 million 30 years later. In other words, that additional $3,000 each year results in $500,000 more over time.

Saving more can let you be more conservative

Not everyone is entirely comfortable with the notion of investing. There is always an element of risk when you put money in the markets, and everyone's tolerance for this is different. If you don't save a lot of money up front, you may find yourself trying aggressive and risky investing strategies to make up the difference. That cannot only take you out of your comfort zone, but lead to financial disaster.

If you save as much as you can, you can afford to be more cautious about what you invest in. This is especially true for older investors who are looking to preserve their savings as they near retirement. (See also: 4 Simple Ways to Conquer Your Fear of Investing)

More savings can mean more matching funds

If you have a 401(k) plan through your employer, you are likely eligible to receive matching contributions from the company. For example, the organization may choose to match all contributions up to 5 percent of your salary. Some match even more than that. It's free money, but you don't get that money unless you contribute yourself.

Fidelity reports that one in five 401(k) plan holders don't put in enough to get all potential matching funds. If you are unsure of how much to contribute to your 401(k), the best answer is as much as possible, but at least up to the maximum company match. (See also: 7 Things You Should Know About Your 401(k) Match)

Saving more can give you a bigger tax break

With traditional IRAs and 401(k) plans, any money you contribute is deducted from your taxable income. So let's say you earn $50,000 annually and contribute $5,000 into your 401(k). That means only $45,000 is taxed; under current tax law, that's $1,100 less you would pay in taxes compared to $50,000.

Investors can contribute up to $18,500 annually into a 401(k). With traditional IRAs, you can contribute as much as $5,500 each year. That is a big chunk of money that can grow into an even more massive sum over time and will lead to big tax savings.

You can withdraw Roth IRA contributions early, but not gains

If you have a Roth IRA, it's generally not a good idea to take out money before you retire. But, if you run into a financial crisis, you are permitted to take out your own contributions without paying any penalty or taxes. For this reason, there are some financial advisers who say it's OK to think of a Roth as an emergency fund if you have nowhere else to turn.

If you take out capital gains, however, you must pay tax on that money and a 10 percent early withdrawal penalty. Thus, if you don't put in a lot of money into your Roth to begin with, you may not really have that much available to withdraw. (See also: 7 Penalty-Free Ways to Withdraw Money From Your Retirement Account)

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Common Habits of Retirement-Savvy Savers

Alicia Rose Hudnett — Wed, 13 Jun 2018 08:00:27 +0000

Here's some good news for anyone behind on retirement savings: Being a smart saver isn't difficult. There's no magic secret to getting it right. Once you understand the rules of the game, you'll know exactly what you need to do to manage your money wisely as you navigate through life.

Here are some standard practices that every retirement-savvy saver lives by. Let them inspire and guide you during your own phase of accumulating wealth.

1. They never pass up free money

Whenever you have access to a workplace retirement plan, always check to see if there is a company match on contributions. If there is, make sure you contribute at least enough to earn the match. This is one of the easiest and fastest ways to jump-start your savings — and, of course, it's free money. Not taking advantage of a company match is one of the biggest missteps you could take with your 401(k). (See also: 7 Things You Should Know About Your 401(k) Match)

2. They always know where their money is

There is something to be said for having organization among your financial accounts. Having multiple old workplace retirement plans can lead to higher fees (paying multiple plan management and fund fees) and an undiversified portfolio (not realizing that all of your retirement accounts represent one portfolio and should be invested as a whole). Each time you leave a job, consider rolling your old plan over into either an IRA, or if allowed, into your new company's retirement plan. (See also: A Simple Guide to Rolling Over All of Your 401(k)s and IRAs)

3. They keep retirement savings for retirement

While most early withdrawals of retirement funds will result in a tax bill and a penalty fee, there are a few penalty-free exceptions for certain accounts, including a first-time home purchase or paying for some higher education costs. But these are financial goals that should be saved for separately, regardless of the fact that the government allows you to touch your retirement savings for them. Once you earmark money for retirement, don't factor it into any of your other financial obligations. The best thing you can do for your retirement accounts is to let them grow. (See also: 5 Questions to Ask Before You Borrow From Your Retirement Account)

4. They pay themselves first

For most people, their first financial priority each month is covering their non-discretionary living expenses, like housing, utilities, and food. But serious retirement savers know that paying their retirement account every single month as well sets them up for successful saving. Build retirement savings into your budget as a nonnegotiable bill, not as a leftover expense that you may or may not be able to pay at the end of the month. (See also: 7 Reasons You Really Need to Pay Yourself First (Seriously))

5. They use tax-advantaged accounts

It's in everyone's best interest, including the government's, that we save for our own retirement. That's precisely why there are accounts specifically designed to encourage long-term savings. Whether you use a tax-deferred account, which allows your money to compound for decades before any taxes are due, or a tax-exempt account, which allows your after-tax money to grow tax-free and qualified distributions remain untaxed, or a combination of both — a strategic saver makes use of all available saving tools. (See also: 401(k) or IRA? You Need Both)

Being a retirement-savvy saver doesn't mean having or saving more money than everyone else. It's about knowing what moves can make a difference in your savings goals and being an active and purposeful retirement saver.

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This article is from Alicia Rose Hudnett of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Right Way to Withdraw Money From Your Retirement Accounts During Retirement

Alicia Rose Hudnett — Mon, 11 Jun 2018 08:00:17 +0000

If you've been a diligent saver, you've probably recognized the importance of having a mix of retirement accounts: a tax-deferred IRA or workplace retirement account like a 401(k), a tax-free Roth 401(k) or Roth IRA, and maybe even a taxable brokerage account. And you probably already know that one way the government "persuades" you to keep your money in your IRA and 401(k) accounts is by imposing a penalty on most withdrawals before age 59½, at which time you can begin taking penalty-free distributions.

When you're finally ready to retire and start taking your distributions, you may wonder how to do it and which accounts you should draw from first. While avoiding taxes shouldn't be your only focus — after all, you've already spent years sheltering your retirement savings — here are some basic tax strategies that can guide you during the drawdown process.

Tax-deferred savings

One of the most popular ways to save for retirement is through the use of a tax-deferred retirement account, such as a traditional 401(k) or traditional IRA. You may have the majority of your savings in these accounts. Contributions to these accounts are made on a pretax basis. This allows you to keep more of your money during the saving and investing years, with the idea being that, although you will eventually be taxed on your withdrawals, you may be in a lower tax bracket than when you contributed the money.

At age 70½, the government requires you to begin withdrawing money from these accounts and to begin paying ordinary income taxes on any untaxed contributions and earnings that you withdraw. This can create a cycle of withdrawing your required minimum distribution (or RMD) or your own determined income need, and then having to withdraw more money to cover the income taxes due, and then having to pay even more taxes on the money you withdrew to cover the taxes due. Anyone inheriting a tax-deferred retirement account will owe taxes on the money as well. (See also: What Every Retirement Saver Should Know About Required Minimum Distributions)

Tax-free savings

Another popular retirement account is a Roth IRA or Roth 401(k), and while there are some significant differences between these two accounts, the fundamental structure of how they work is the same. You contribute after-tax money to the account and, assuming you follow all the rules, your money will grow tax-free and remain tax-free even when you begin qualified withdrawals.

Unlike a traditional IRA, there are no required minimum distributions you must take from a Roth IRA at a particular age. However, a Roth 401(k) does come with RMDs, so it's worth considering rolling this money over to a Roth IRA in retirement, where it will lose the RMD requirement. (Be sure to do this before your RMDs begin because you cannot roll over any amount already required to be withdrawn in the year you're in. So, if you have $10,000 in a Roth 401(k), and are already supposed to take $1,000 as an RMD in 2018, you can roll over $9,000 into a Roth IRA, but will have to take the $1,000 RMD this year.) Because of its tax-exempt and RMD-free status, a Roth IRA can be left untouched to build completely tax-free income for yourself or your heirs for as long as you like. (See also: 3 Financial Penalties Every Retiree Should Avoid)

Taxable savings

To round out your retirement accounts, you may have used a regular taxable brokerage account to invest above yearly retirement contribution limits. When you sell investments in a brokerage account, you may still owe taxes on your earnings. If you sell investments that you've held for more than one year, earnings will be subject to long-term capital gains tax. That rate depends on your tax bracket, but is 15 percent for most taxpayers.

By contrast, when you sell investments that you've held for less than a year, any earnings are considered short-term capital gains and will be taxed at ordinary income tax rates. If your investments have lost money, you may be able to claim those losses on your tax return.

Even though funds withdrawn from your regular investment accounts are taxable, they're still valuable during your retirement years to cover any large expenses or even to pay the income taxes due on RMDs from your other retirement accounts. (See also: Where to Invest Your Money After You've Maxed Out Your Retirement Account)

The years between age 59½ and age 70½

The years between when you turn 59½ and when you turn 70½ can be crucial to your retirement plan. This is the time when qualified distributions are penalty-free, yet it's before you're actually required to take any distributions. If you've left the workforce for full retirement or are working part-time and are now in a lower tax bracket, consider taking distributions from your tax-deferred accounts to both live on and possibly to roll over into a Roth IRA, an account that does not require RMDs.

With little to no income coming in, you can withdraw from your tax-deferred and taxable accounts and pay the ordinary income taxes due at a lower tax rate, or convert some of your 401(k) or traditional IRA funds, which will also be taxable at the time of conversion, to a Roth IRA for further tax-free investment growth. Doing so can help prevent you from being in a position where you have an outsized tax-deferred portfolio from which you have to take those RMDs (or risk paying a 50 percent penalty), whether you need the money or not. (See also: 6 Age Milestones That Impact Your Retirement)

Note that while you can convert a tax-deferred account to a Roth IRA if you're not working, you cannot contribute to a Roth IRA outright unless you or your spouse are earning income from a job.

Figuring out how to spend your retirement savings can be trickier and more complicated than it was saving all of that money, but understanding the different tax implications of your various accounts can assist you in finding the strategy that works best for your situation.

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This article is from Alicia Rose Hudnett of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why Your IRA Shouldn't Double as an Education Savings Plan

Tim Lemke — Wed, 30 May 2018 08:30:24 +0000

College and other education expenses can be some of the most burdensome costs you will ever face. Families may find themselves shelling out tens or even hundreds of thousands of dollars to universities, and many will spend even more on private elementary and secondary schools.

Saving for these education expenses is increasingly crucial, with some people even turning to their individual retirement accounts to help. IRAs have nice tax advantages and have long been used as a possible vehicle for college savings. But is it a smart idea to use an IRA to pay for college?

Using a retirement account for this purpose could be helpful, but has a number of drawbacks. Consider these reasons to avoid using an IRA for education expenses, if possible.

You can't borrow for retirement

Ideally, you want to save for both retirement and your child's education. But you should try to avoid letting education savings cannibalize your retirement savings. The last thing you want is to aggressively fund education accounts, only to find yourself unable to retire when you want to.

Any money you spend on education now won't be available when you are older, and you are costing yourself potentially tens of thousands of dollars in future savings. Remember that your kids can always get loans to help pay for college, if necessary. But there's no way to borrow your way to a comfortable retirement. This is especially important these days when people have been known to live 20, 30, or even 40 years past retirement age. (See also: How to Keep Student Loans From Wrecking Your Retirement)

Retirement and college funds should be kept separate

You can save for retirement or you can save for college. But it's a bad idea to try and save for both in the same account. That's because you are operating with different time horizons in mind. If you are saving for your child's college tuition, you will likely need that money in about 18 years, at most. Retirement, on the other hand, might be 30 or 40 years away.

This difference in timelines means that you will ideally be invested in different things. The college savings plan should contain more conservative investments than a retirement plan because you will likely need the money sooner.

There are other mechanisms to save for college

Using an IRA to save for college would be more acceptable if there weren't better options. Most states offer 529 college savings plans, which are designed to specifically save for education costs, and offer some great tax benefits to account holders.

These plans allow you to place money in mutual funds and other investments, and money grows tax-free as long as it's used for educational purposes. In many cases, the contributions are also tax-deductible. Many states also offer the ability to lock in current college tuition costs today if you are willing to commit to specific universities. (See also: 5 Smart Places to Stash Your Kid's College Savings)

It's harder to get help from family and friends

With an IRA, the only person who can contribute to the account is you. But a 529 plan allows any person to open an account and name virtually anyone as the beneficiary. This means that grandparents can set up 529 plans for their grandchildren. Individuals can set up plans for the children of close friends. You can even set up a plan and name a complete stranger as a beneficiary. Using a 529 plan instead of an IRA allows a broader set of people to help out with a young person's education expenses if they choose to.

IRA distributions count as income for financial aid purposes

If you choose to make withdrawals from an IRA to pay for college, that money will be counted as income for financial aid purposes. This is not the case for 529 plans. Money in a 529 plan is generally considered an asset (but only about 5.6 percent of the total account balance), and assets don't count as much as income.

Withdrawals from 529 plans are not recorded in the Free Application for Student Aid (FAFSA), so having money in these plans won't severely hurt your beneficiary's chance of receiving financial aid. Using an IRA to pay for college, however, could reduce the amount of financial aid your child receives.

Earnings from an IRA can't be withdrawn tax-free

Yes, you can withdraw money from an IRA to pay for qualified educational expenses. But it's only the contributions, not the gains, that can be taken out without being taxed before age 59½.

For example, let's say you have placed $40,000 into a Roth IRA, and that money has grown to $100,000 over time. Only $40,000 can be removed without paying taxes. Any additional funds will be taxed as normal income.

With 529 plans, there are no taxes on any withdrawals as long as funds are used to pay for education expenses.

IRAs have contribution limits

You are permitted to contribute $5,500 per year into an IRA, or $6,500 if you are over age 50. But 529 plans have no real contribution limit. At a certain point, you may have to report federal gift taxes if your contribution tops $15,000 in a year (and which will count against the giver's lifetime estate tax exclusion of $11.2 million). But you can avoid this by contributing up to $75,000 in a single year and spreading out the contributions over five years on your disclosure forms. (Many grandparents find this to be a great way to avoid estate taxes.)

Some 529 plans do have limits on the total amount you can have in an account at one time. Read the fine print of each plan to determine how that might impact you.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Solve These 6 Problems Your Heirs Could Have With Your Estate

Emily Guy Birken — Wed, 23 May 2018 08:30:40 +0000

Fifty-eight percent of Americans have no will, according to a 2017 Caring.com survey. That means state laws, rather than the wishes of their loved ones, will determine what happens to the property and assets of the deceased.

But before the 42 percent of Americans who do have a will start congratulating themselves on helping their heirs avoid such challenging situations, it's important to remember that even well-planned estates can cause problems for those who inherit. Here are the potential issues your heirs may face, and how you can make sure your final wishes are followed.

1. Your heirs don't know where to find your estate plan

You may have very specific wishes regarding everything from your burial instructions to who will get your mint condition Cal Ripken rookie baseball card — but those intentions can't be followed if your heirs don't know where to find your will and other estate planning paperwork.

Unfortunately, this is a relatively common situation, since many people consider talking about inheritance to be taboo or uncomfortable. Even if your heirs know that you have a safety deposit box in the bank, they may not know which bank, or which branch, or where to find the key.

This is why it's important to discuss your estate plan with your family. Introduce your kids to your attorney so they know whom to call in the event of your death. It's also a good idea to create an "in case of emergency" folder that provides your loved ones with the information they will need about where to find your estate documents, as well as the information necessary to handle your banking, taxes, bills, and other issues if you become incapacitated or pass away. (See also: 9 End-of-Life Cost Savings Your Survivors Will Thank You For)

2. Your will is too vague

There are number of ways that a vaguely-written will can cause your heirs problems. The classic example would be if the deceased simply states that her jewelry is to be divided among her children. This kind of imprecise language can end up causing a rift among siblings if more than one wants the same brooch — or if anyone feels slighted as to how the jewels are distributed. It is best to make sure valuable items are specifically distributed in your will to ensure that your wishes are followed without causing family strife.

But a vague will can have bigger consequences than hurt feelings for heirs. For instance, sometimes a will specifies that one family member is to inherit all of the money because the deceased had a verbal agreement with that heir to share the money with another family member. (You may remember this as the beginning of the plot of Sense and Sensibility.) Without specific language in place, there is no guarantee that your heir will do what you asked.

These sorts of informal agreements are often created in order to protect assets for minors or other individuals who cannot directly inherit — such as special needs adults who rely on government assistance and would lose it if they were to come into a large sum of money. Since a verbal arrangement can be disregarded, it is far preferable to create a trust to ensure the money goes to the person you want it to. There are a number of different types of trusts that can make sure your wishes are followed, can protect the government assistance of the family member in question, and will allow for no confusion or misunderstanding. (See also: The Fair Way to Split Up Your Family's Estate)

3. Your beneficiaries don't match your will

If you put together a well thought out estate plan in your will, but forget to update your beneficiaries on your assets, then it doesn't matter how detailed your estate plan may be — your assets will be distributed according to the beneficiary designation rather than your will.

This is a common issue for many estates, since relationships often change and account holders don't think to update their beneficiary designations. Everyone should review their beneficiary designations every few years to make sure they are not leaving unintended money to ex-spouses, estranged siblings, or other family members who have drifted out of their lives.

4. You name the estate as a beneficiary

A common error in estate planning is if you name your estate as the beneficiary of your IRA, 401(k), or life insurance. If instead you name a person as your beneficiary on these sorts of products, the assets can pass to your beneficiary without having to go through probate. That means the individual beneficiary will receive their money, no matter how many creditors have claims on your estate. But if your whole estate is your beneficiary, the money must go through probate — and your heirs will get only what is left after creditors have been paid.

In addition, if your estate is the beneficiary of your IRA or 401(k), your heirs must liquidate the investments within five years of your death, and pay the required taxes. If instead an heir is named as a direct beneficiary, they may have the option of delaying the required minimum distributions until they reach age 70½, allowing the money to grow tax-free until then. (See also: 6 Times You Need to Update Your Will)

5. Your non-spouse heir cannot roll over a retirement account

Even if you name an individual as the beneficiary of your IRA or 401(k), if the beneficiary is anyone other than your spouse, there are still some pretty big tax pitfalls that could affect your heir's inheritance. Non-spouse beneficiaries of tax-deferred retirement accounts cannot roll IRA or 401(k) money directly into their own retirement accounts without triggering a major tax bill. That's because a rollover would cause the entire amount to be considered taxable income. For that reason, it's preferable for non-spouse heirs of IRA and 401(k) accounts to take the money as required minimum distributions (RMDs) over a lifetime to minimize the tax bite. This is known as the "stretch" option.

Unfortunately, stretch RMDs are not without pitfalls. If your heirs do not take the correct required amount, there is a tax penalty of 50 percent of whatever they were supposed to take, plus whatever their ordinary income tax rate would be on the amount. To avoid this problem, you can direct your IRA or 401(k) custodian to administer inherited IRAs and automatically take care of any required minimum distributions.

6. Your annuity can push your heirs into a higher tax bracket

Passing on an annuity can be a good way of providing regular income to your heirs after you die. However, annuities also come with a potential tax problem since these products are also tax-deferred. An inherited annuity has untaxed growth, and the insurance company holding your policy will issue a Form 1099 for that untaxed growth to your heir, which means it will be included in the heir's gross income for the year. Depending how much growth there is, this could push your heir into a higher tax bracket, and the annuity payments they receive during the first year may end up being swallowed up by the increase in that year's taxes.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How Job-Hoppers Can Keep Up With Their Retirement Savings

Tim Lemke — Mon, 16 Apr 2018 08:30:09 +0000

It's very common these days for young people to move from job to job. The days of sticking with a company for decades and earning a big pension are over.

Thankfully, 401(k) plans and individual retirement accounts allow workers to switch jobs without losing their retirement savings, but it's still possible for all that job-hopping to disrupt your ability to save. If you do switch jobs regularly, there are some sensible things you can do to ensure that your retirement plan stays on track.

Open a traditional or Roth IRA

If you are between jobs with no access to an employer-sponsored retirement plan, there are still things you can do to save. If you have any earned income at all, you can contribute to an individual retirement account, which allows you to invest with some tax advantages.

With a traditional IRA, any money you contribute is deducted from your taxable income. With a Roth IRA, your money is taxed upfront, but you will avoid paying any taxes on investment gains when you withdraw the money when you retire. IRAs can be very powerful tools for retirement savings for self-employed people, part-time workers, or those with irregular incomes. You can maintain and contribute to these accounts even after you get a 401(k) plan from a new employer. (See also: 401(k) or IRA? You Need Both)

Roll over your 401(k)

If you had a 401(k) from one employer and switch jobs, you can take the funds from the old account and add it to the new one. This is called a 401(k) rollover. There usually is no penalty if you don't merge the accounts right away, but over time the old 401(k) provider may start to bug you about it. You should consider a rollover if the retirement fund from your new employer offers better investment options, lower fees, or both. If you call the brokerage firm that is managing your old 401(k), they will usually be happy to walk you through the steps to carry out a rollover. (See also: A Simple Guide to Rolling Over All of Your 401Ks and IRAs)

Open a rollover IRA

If you no longer have access to a 401(k) or don't like the investment options in your new retirement plan, you can place your investments in a new individual retirement account. This is called a rollover IRA, and it can be better than a 401(k) because you usually will have many more investment options, from mutual funds and ETFs to individual stocks and bonds.

Look into a 401(k)-to-Roth IRA conversion

When you have a 401(k), you will eventually be obligated to pay tax on any gains when you begin withdrawing money in retirement. That's why some investors look into turning their 401(k) and traditional IRA accounts into a Roth IRA, which allows money to grow tax-free.

The big catch to making this conversion is that you must pay tax on any gains you've had up until now. That could be a big chunk of change that you may not be in a position to handle right now, but a smart move if you think your tax bracket will be higher in the future. An accountant or financial adviser can help you determine whether converting an old 401(k) to a Roth IRA makes sense for you.

Play catch up

Let's say you left a job and were not able to contribute to retirement accounts for three months. But, you land a new job with a higher salary than before. If this happens, consider bumping up your retirement contributions to make up for that lost time. Any time you get new or unexpected income, consider using that to backfill the retirement accounts you may have been neglecting.

Once you make those extra payments, you may find that you have the ability to contribute the higher amount on an ongoing basis. And that's great, because the more you are able to save, the more you'll have in the long run. (See also: 6 Ways Meeting the 2018 401(k) Contribution Limits Will Brighten Your Future)

Pay close attention to the employer match

Employers can vary greatly in how much they contribute to workers' 401(k) accounts. Some will provide direct contributions while also matching what the employee put in. Some offer a full match on contributions, while others match just a portion. And some don't contribute at all. It's important to remember this when switching companies, especially if you are moving to a company with a retirement plan that's less generous.

Ideally, you will want to make sure that the total amount of money going into your 401(k) remains the same or goes up over time. If your new employer is contributing less on a percentage basis, consider bumping up your own contributions to make up the difference. (See also: 7 Things You Should Know About Your 401(k) Match)

Don't forget about the vesting period

If you work at a company that contributes to your 401(k) plan, it's possible that you may not be able to keep those contributions unless you stay at the company a certain number of years. For example, the company may reclaim any contributions if you leave before two years. This is called the vesting period.

To get the full advantage of a company retirement plan, it makes sense to stay through the full vesting period. Some companies offer a tiered vesting schedule, in which employees keep an increasing portion of company contributions each year until they are fully vested.

Be sure to read the documentation on your 401(k) plan to understand the vesting policies. If you leave the company before you are fully vested, you may be leaving large sums of money on the table.

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Where to Invest Your Money After You've Maxed Out Your Retirement Account

Tim Lemke — Tue, 10 Apr 2018 08:00:06 +0000

Are you a super saver? Have you managed to contribute the maximum amounts allowed into your 401(k) or individual retirement accounts? If so, you may now be wondering what to do with any additional money you have. Should you continue to invest? If so, how? Should you spend it on a Picasso painting or give it to your kids?

There are many options for people who have maxed out their retirement contributions. Here are some of them.

Taxable brokerage account

I'm a huge fan of the tax-advantaged nature of retirement accounts, but regular taxable brokerage accounts have their good qualities. For one thing, they are more flexible than retirement accounts. There is no limit to what you can invest in a taxable brokerage account, and while you will pay tax on any dividends and capital gains in these accounts, there is no additional penalty for withdrawing money before you retire. If you collect dividends from investments in a taxable brokerage account, they can be a great source of extra income.

Real estate

If you've put as much money into retirement accounts as you can, why not take a look at buying a property or house as a possible investment? Real estate can appreciate in value just like stocks, and you may even be able to draw income from tenants as well.

Investing in real estate is obviously different from investing in stocks or bonds. In this case, you are investing in actual property. There may be more costs upfront, and you may face the expense and work associated with managing it. But there are many people who have gotten wealthy by buying and selling properties.

It's worth noting that under the new tax law, you can't claim a tax deduction for mortgage interest from a second home. But the potential for real estate to rise in value and generate income is still a powerful thing. (See also: The Only 5 Rules You Need to Know About Investing in Real Estate)

Peer-to-peer lending

Did you know it's possible to make money directly off other people's borrowing? With peer-to-peer lending, an individual can use an online platform to purchase someone else's debt and make money off the interest payments. The money you can earn is based off the riskiness of the loan; more creditworthy borrowers will pay out less than those with worse credit.

There is always the risk of borrowers defaulting on loans, but most lenders have found good returns by purchasing a "portfolio" of loans at various risk levels. Lending Club and Prosper are two of the most popular peer-to-peer lending platforms. (See also: How to Make Money With Peer-to-Peer Lending Service Prosper)

Education savings accounts

If you have children or other relatives that will be going to college, you can help fund their education and receive some tax benefits for yourself. A 529 college savings plan is a popular option, because it allows someone to invest money and withdraw the gains tax free, provided the funds are used to pay for college. In many instances, the contributions are also deducted from your taxable income. The new tax law allows 529 plans to be used for other education expenses, such as private high school, as well. (See also: The 9 Best State 529 College Savings Plans)

The bank

It may seem silly to just put money in a simple savings account when interest rates are still quite low. But it's possible that, in an effort to max out your retirement accounts, you've been neglecting your cash savings. Having a good amount of cash on hand can give you a nice cushion in the event of an emergency and prevent you from raiding your retirement accounts. If you don't have at least three months' worth of expenses saved, it's a good idea to bolster that savings. Once you hit three months' of expenses saved, go for six. (See also: The Best Online Savings Accounts)

It's actually not uncommon for people of high net worth to have cash flow problems, because they focus so heavily on investing their money. If you are maxing out your retirement contributions, you're doing great. There's really nothing wrong with having more cash on hand than you may need, and you may find that it gives you some nice peace of mind.

Collectibles

I am personally not a huge fan of collectibles as an investment, but they can be useful as part of a broad portfolio. A savvy, knowledgeable collector can make good money on things like art, antiques, trading cards, or even classic cars. And collecting can be good fun. Just be aware that the returns on collectibles rarely top what you can get in the stock market. (See also: 10 Collectibles That Almost Always Become More Valuable)

Donations to charity

You may think that once you've maxed out your retirement contributions, there are no more tax breaks to be had. But you can get a tax deduction for donating to most charities. So you can feel good about supporting a worthy cause while helping yourself financially.

The one caveat here is that under the new tax law, it may be financially smarter for people to take the standard deduction rather than itemize. This could make donating to charity less advantageous from a tax perspective.

Gift it to family

If you are very wealthy and expect that your children or other family members will inherit your money when you die, it may be a good idea to begin transferring that wealth now to avoid taxes. Under the new tax law, the exemption for gift and estate taxes — the amount you can give away in your lifetime — is $11.2 million per individual. Married couples can transfer double that amount, or $22.4 million. It's also possible to make an annual gift of up to $15,000 per person (married couples can gift $30,000 per recipient) without paying taxes.

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Saving Goals for Every Age

Ashley Eneriz — Fri, 06 Apr 2018 08:30:09 +0000

It seems that current financial news is laser-focused on the crisis of skyrocketing student loan and credit card debt. While it's easy to focus on what the average American owes, we often forget that there is a savings crisis going on at the same time.

According to a 2017 GOBankingRates survey, more than half of Americans (57 percent) have less than $1,000 in their savings accounts. An astounding 39 percent of Americans have no savings whatsoever.

Retirement savings aren't faring well, either. According to a 2016 retirement confidence survey, more than a third of workers over age 50, and half the surveyed retirees, had less than $25,000 put away for retirement. Imagine trying to live the decades of your golden years on such a small nest egg.

It is time to save more money. Start following these savings goals for every decade of your life, and you won't end up as a sad savings statistic.

In your 20s

Don't waste your 20s thinking you have plenty of time to earn more and save more. Putting away even a small percentage of your income each month can translate into big savings by the time you hit your 50s.

Savings goals

In your 20s, your first goal should be to start an emergency fund and build it to $1,000. Setting up this emergency fund gives your finances a little cushion so that you can avoid dipping into debt every time something goes awry. Once you hit the $1,000 mark, build up your emergency fund to three to six months' worth of daily living expenses. This will protect your finances even further against expensive emergencies or a job loss.

Retirement goals

Before you leave your 20s, use your gross annual income as the target amount for how much you should have saved for retirement. For example, individuals making $40,000 per year should try to have $40,000 saved in their retirement accounts before turning 30. This goal sounds daunting, but it's achievable, especially if you start earlier rather than later. (See also: 5 Retirement Accounts You Don't Need a Ton of Money to Open)

If your company offers automatic deductions from your paycheck into a 401(k) each month, make sure you're enrolled so you won't have to consciously make the sacrifice. If you work for a company that offers a 401(k) match on a percentage of your contributions, make sure you're contributing enough to get that match. Otherwise, you're leaving free money on the table.

In your 30s

With the growing pains of your 20s out of the way, it's time to step up your personal finance game. During this decade of your life, you'll ideally start earning more money and keep the ball rolling on your savings goals. Remember to steer clear of unnecessary debt: In your 30s, you may be balancing a student loan with a new mortgage payment, so the less additional debt you take on, the easier it will be to reach your money goals.

Savings goals

If you have more expenses or are earning more money than you were in your 20s — especially if it's a lot more — you need to grow your emergency fund to a larger cushion. Aim to cover a year's worth of your daily living expenses (payments on your mortgage, student loan, credit cards, utilities, etc.). Once your emergency fund is fully funded, you want to keep that money there. Only dip into it when an emergency happens. After your financial emergency has been dealt with, you should get back to fully funding the account. (See also: 8 Ways to Decide if It's a "Fund-Worthy" Emergency)

Retirement goals

In your 30s, focus on doubling the amount in your retirement accounts to twice that of your annual gross income. Make sure your retirement portfolio is not set to an ultra conservative investment mix. You have several decades before retirement, plenty of time to recover from any market downturns, and you can afford to set your portfolio allocation to a higher risk. This will increase your account's earning potential while it still has a long time to grow. (See also: 8 Steps to Starting a Retirement Plan in Your 30s)

In your 40s

Your 40s can feel like an overwhelming financial decade. It's likely you have a lot on your plate; you may be trying to maximize your retirement savings while also putting away money for your kids' college education. Don't get discouraged; it's more important than ever to stay on the ball. (See also: 6 Personal Finance Rules to Live By in Your 40s)

Savings goals

At this point, your emergency fund should still have enough to cover a year's worth of living expenses. Once you've built enough safety savings, your extra dollars would better serve you elsewhere.

Your extra money should first go toward your retirement and paying off any high-interest debt. If your retirement accounts are well-funded, and your debt is low, you can then send your dollars to other important savings accounts, like a college fund for your kids, a family vacation fund, or a home renovation fund. Aim to contribute 20 percent of your monthly take-home pay to your desired savings account each month. (See also: 5-Day Debt Reduction Plan: Pay It Off)

Retirement goals

As mentioned above, retirement is a major priority now. It's more important to build your retirement savings than it is to put away money for your kids' college tuition or an unnecessary expense like a family vacation. Your kids will have options when they attend college, whether in the form of student loans, scholarships, or AP credits. You will not have any options if your retirement savings are not enough.

Aim to save four times your annual gross income in your retirement accounts before you leave your 40s. You don't have to switch your portfolio asset allocation to low risk, but consider revising your retirement accounts to a more moderate risk level. With your retirement savings looking healthy, don't fall into the temptation of dipping into it for emergencies or to pay your child's college tuition. It is seldom worth it. (See also: Are You Ruining Your Retirement by Spoiling Your Kids?)

In your 50s

As you enter your 50s, retirement is visible on the horizon. You may be facing unique challenges during this decade, such as changes to your health or caring for an elderly parent. This is the time to cover all your bases; accelerate your savings and play catch up where you need to. (See also: 6 Financial Steps to Take When Your Aging Parents Move In)

Savings goals

Your emergency fund should still reflect at least a year's worth of living expenses. If you have an aging relative who may need your care, or a health issue that threatens to leave you out of work, you may need to build your emergency savings further.

Your 50s are also the time to get serious about debt repayment. At this point, high-interest credit card debt is a large threat to your financial wellbeing. When you retire, you'll be living on a fixed income. If you didn't save enough money throughout your working life, that income may not be very high. The last thing you'll need to worry about are the bills piling up for your credit cards, car loans, or mortgage payments. Tackle these things as best as you can, now. The less debt you bring into retirement, the better.

Retirement goals

Before you leave your 50s, strive to have six times the amount of your annual salary saved for retirement. Your portfolio should now be managed as fairly low risk, though with people living longer than ever, it may still make sense to own a few higher-risk investments such as stocks.

In order to catch up on retirement savings later in life, take advantage of the additional money you can contribute to your retirement accounts once you hit age 50; in 2018, it's an additional $6,000 per year to your 401(k), and an additional $1,000 per year to an IRA. (See also: 5 Ways Longevity Is Changing Retirement Planning (And What to Do About It))

In your 60s

You are on the cusp of retirement, but this doesn't mean now is the time to slack off on savings. You should be working extra hard toward your goal of financial stability for your golden years.

Savings goals

The goal is to enter retirement with very little financial worry. You still need an emergency fund in retirement. If you don't have any liquid savings set aside for a crisis, focus on building that up. If your emergency fund is stocked, every extra dollar should go toward contributing the max on your retirement accounts and paying off the rest of your debt.

Retirement goals

Will retirement contributions even make a difference at this point? Yes! Boost your retirement funds as much as possible in the last few years you're still working. It's important to remember that life happens. You may have a plan to retire at 65, but a health issue, caregiving obligation, or even a layoff could force you to retire early. In a situation like that, you'll be so glad you continued contributing to your retirement accounts past age 60. (See also: What to Do if You're Laid Off Before You Retire)

Even in an ideal scenario, you'll still be relieved when you're ready to officially kick off your retirement with a well-stocked nest egg.

How much do you have saved?

How are you faring for your age group? Do you need to save more or are you right on track? If you are behind, don't get discouraged; now is the time to get your budget under control and accelerate your savings for a financially secure future.

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11 Basic Questions About Retirement Saving Everyone Should Ask

Damian Davila — Tue, 13 Mar 2018 10:00:06 +0000

Saving for retirement is critically important — we all know that. But sometimes, the confusing details can throw us off course or prevent us from doing all we can to properly grow our nest egg.

Education is the best tool when it comes to most matters of personal finance. And for retirement planning, there are some facts everyone should know. It's time to ask yourself these questions and brush up on the basics of retirement savings.

1. When can I start contributing to a retirement account?

With a traditional or Roth IRA, you can generally start contributing funds as soon as the account has been set up. However, rules can vary for employer-sponsored 401(k) plans. Some 401(k) plans may have a waiting period ranging from six to 12 months to make your first contribution, while others may allow you to contribute immediately. It's a good practice to check all applicable rules for your workplace retirement plan at the time of sign-up and again during every open enrollment period. (See also: 8 Critical 401(k) Questions You Need to Ask Your Employer)

2. How much can I save in each type of account?

You can sock away the most money per year in a 401(k). In 2018, you can contribute up to $18,500 to a 401(k), and an additional $6,000 in catch-up contributions if you're over age 50. By comparison, you can only contribute up to $5,550 to an IRA ($6,500 if over age 50). Due to its higher contribution limits, a 401(k) is a very beneficial account for those trying to make up for low savings in previous years or those close to retirement age. However, if possible, having both types of accounts is the even better option. (See also: 401(k) or IRA? You Need Both)

3. Am I taking advantage of the company match?

If you're offered a company match, you must take advantage of it. And since 94 percent of Vanguard 401(k) plans provide employer contributions, chances are that you have access to a workplace savings plan with a matching formula.

A common formula for matching is $0.50 per dollar that you contribute up to 6 percent of your annual pay. This means that a worker making $50,000 per year could receive an extra $3,000 in employer matching contributions by contributing $6,000 of their annual salary into a 401(k). Some might say there's no such thing as a free lunch, but an employer match on your 401(k) truly is a freebie. (See also: 7 Things You Should Know About Your 401(k) Match)

4. What happens if I change jobs?

From the date that you separate from your employer, you should aim to decide what to do with your 401(k) balance within 60 days. The reason for 60 days is that this is the deadline to complete an indirect rollover into a new retirement account (if your employer were to cash out your entire balance and hand you a check) and pay back any outstanding loans on your 401(k) (if not paid, they become taxable income and may even trigger penalties).

Under most scenarios, you have six rollover options for your total vested account balance:

Keep your account.
Rollover account into a new or existing IRA.
Rollover account into a new or existing qualified plan.
Do an indirect rollover.
Request a full cash-out of your account.
Do a mix of the above five options.

5. Is it better to contribute after-tax or pretax dollars?

There is no right or wrong answer here, as either way offers a benefit. Contributing with pretax dollars (traditional IRA, 401(k)) allows you to reduce your taxable income by deferring income taxes until retirement, at which point you're more likely to be in a lower tax bracket. So, if you're expecting to be making more money now than you will be in retirement, you should contribute pretax money. This is the majority of American workers.

Workers just beginning their careers, workers in professions with a high upside income potential, and individuals expecting a large windfall, such as a family trust or inheritance, can greatly benefit from contributing after-tax dollars to a Roth IRA or Roth 401(k).

6. Can I withdraw money early from my accounts?

Early distribution rules vary per type of plan.

401(k)

Generally, you can only take money from a 401(k) plan early due to a hardship or extreme situation, such as avoiding a foreclosure, making a first-time home purchase, or an unexpected medical expense. However, rules vary per plan: Some plans may only offer you the option to take out a loan, while other plans won't allow you to withdraw money early at all. If you take a distribution from a 401(k) before age 59 ½, you become liable for applicable income taxes and penalties.

Traditional IRA

There are several instances in which you can take an early distribution from a traditional IRA without incurring a penalty. This includes unreimbursed medical expenses, health insurance premiums during unemployment, the purchase of a first home, higher education expenses, and others. (See also: 7 Penalty-Free Ways to Withdraw Money From Your Retirement Account)

Roth IRA

Early withdrawals on contributions from a Roth IRA can be made at any time without incurring taxes and penalties, since you have already paid taxes on the money. Withdrawing any amount that exceeds your contributions counts as earnings, and is therefore subject to tax and penalties. In order to avoid those taxes and penalties, your Roth IRA must be at least five years old and withdrawals must be used for a qualified expense, such as the purchase of a new home or a disability. Higher education costs are also exempt from penalties, but you must pay income tax on the withdrawals.

7. What are required minimum distributions?

Eventually, the IRS wants its money in the form of taxes on your retirement distributions. When you reach age 70 ½, you must begin taking required minimum distributions (RMDs) from your retirement plans. These rules apply to traditional and Roth 401(k) plans, as well as 403(b) plans, 457(b) plans, and traditional IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. If you fail to take your RMD, the IRS will take 50 percent of the amount you should have withdrawn as a penalty.

The exception to the RMD rule is the Roth IRA, which is funded with post-tax dollars. (See also: Which of These 9 Retirement Accounts Is Right for You?)

8. Are there any tax credits for retirement contributions?

Come tax time, eligible workers can claim the Retirement Savings Contributions Credit, better known as the Saver's Credit. Depending on your adjusted gross income (AGI), you can claim 50, 20, or 10 percent of your retirement plan contributions, up to $2,000 for single filers and $4,000 for married filing jointly. For example, a married couple with an AGI between $41,001 and $63,000 can claim 10 percent of their eligible contributions for the Saver's Credit in 2018. (See also: Dumb 401(k) Mistakes Smart People Make)

9. What is the recommended 401(k) portfolio allocation?

Here's some advice from one of the most successful investors of all time, Warren Buffett: Put 90 percent of your 401(k) balance in a very low-cost S&P 500 index fund, and the remaining 10 percent in short-term government bonds. Keeping true to his word, he has included this very same advice in his will. (See also: Bookmark This: A Step-by-Step Guide to Choosing 401(k) Investments)

10. What is an HSA?

Those with a high deductible health plan (HDHP) are eligible for a health savings account (HSA), which is a way to make pretax contributions to save for medical expenses. Many HSA providers offer the option to put money in an investment account with several fund options, including mutual funds and low-cost index funds.

The main benefit of saving for medical expenses using an HSA is that you won't have to pay any income taxes on withdrawals used for qualifying medical expenses (even before retirement age). And when you do hit age 65, your HSA will basically become a traditional IRA. You can withdraw funds for any reason penalty-free, only paying income tax on the distributions. (See also: How an HSA Could Help Your Retirement)

11. Does my plan offer financial advice services?

More and more plans are jumping on the bandwagon of offering a robo-adviser (an automated service suggesting or performing certain types of transactions on your behalf). The range of trades that a robo-adviser can perform ranges from periodically rebalancing your portfolio to selling securities.

Fees can range, too: Some robo-advisers charge about 0.15 percent of your account balance or a flat monthly fee. Some plans may also offer you a-la-carte paid options to add a standard robo-adviser service. (See also: 9 Questions You Should Ask Before Hiring a Robo-Adviser)

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6 Questions All Rookie Investors Should Ask

Matt Bell — Tue, 06 Feb 2018 09:30:08 +0000

The first time you got behind the wheel of a car, you were probably a little intimidated. The same can be true if you're just getting started with investing. Here are some questions that may be on your mind, along with answers designed to help you begin your investing journey with the knowledge you need to succeed.

1. Why should I invest?

Especially if you're young, investing might not seem very urgent. Investment goals, such as retirement, may seem distant and vague.

The financial services industry has tried everything to get people to recognize the importance of investing for retirement, even using photo-enhancing software to show young people what they may look like when they're 65 or 70. A 2012 Merrill Edge study actually found the tactic somewhat effective in motivating people to save more for their later years.

Assuming you don't have access to such technology, maybe the best way to find the motivation to invest is to consider the cost of waiting. Crunching the numbers just may be the wake-up call you need.

2. What's the harm in holding off a little while?

The sooner you start investing, the less you'll have to invest each month in order to meet your goals.

Let's say you're 25 years old, plan to retire at age 70, and want to accumulate $1 million by then. Assuming a 7 percent average annual return, you would need to invest about $275 per month. Even waiting just five years will significantly increase that amount. Starting at age 30, you would need to invest about $361 per month in order to accumulate $1 million by age 70.

Here's another way to think about it. If you invested $200 per month from age 25 until age 70 and generated an average annual return of 7 percent, you'd end up with about $733,804. Wait until age 30 to start investing $200 per month, and you'll end up with $512,663.

That's amazing, isn't it? By investing for just five fewer years, you will invest just $12,000 less than if you had started at age 25. And yet, because of the power of compounding — more accurately, because of missing out on five years' worth of the power of compounding — you'll end up with about $221,000 less. That's a huge penalty for waiting. (See also: 11 Investing Tips You Wish You Could Tell Your Younger Self)

3. How much should I invest?

To get a general sense about how much to invest each month, use the Fidelity Retirement Score calculator. Once you run some initial numbers, you'll be able to see how changing some of your variables, such as how much to invest and when to retire, will impact your how much money you end up with.

4. Should I use my company's 401(k) plan or an IRA?

The key to answering this question is whether your employer offers a match on some of the money you would contribute to its 401(k) plan. If so, start there.

In a typical arrangement, an employer will match your contributions up to 6 percent of your salary. If yours will contribute a dollar for every dollar you put in, that's a guaranteed 100 percent return on your money. If it will match 50 cents for every dollar you contribute, that's a guaranteed 50 percent return on your money. Don't miss out.

If your employer doesn't offer a match, the decision depends on the investment options it offers. There are still some employers whose plans contain a strange mix of mutual funds with high fees (you should not be limited to funds with "expense ratios" higher than 1 percent). If that's the case with your employer's plan, you may be better off using an IRA. However, even with a solid 401(k) plan at your disposal, don't think an IRA isn't for you. Contributing to both plans can give you a further leg up in your retirement savings strategy. (See also: 401(k) or IRA? You Need Both)

5. What should I invest in?

It used to be a lot more complicated and intimidating to figure out what investments to make. Today, target-date funds have simplified the process. By choosing a single mutual fund that has the year of your intended retirement date as part of its name, such as the Fidelity Freedom 2040 Fund, you'll gain a portfolio that's diversified across stocks, bonds, and other asset classes in a way that's appropriate for someone your age. As you get older, the fund will automatically adjust its investment mix, becoming more conservative as you near your target retirement date. (See also: What You Need to Know About the Easiest Way to Save for Retirement)

6. What can I expect from my investments?

In short, you can expect that the ride will not always be smooth. Last year, the S&P 500 generated a nearly 22 percent return, but in 2008 it fell 37 percent.

Investing always comes with risk, and there's no way to predict how each year will turn out. A solid approach is to build a diversified portfolio, perhaps through a target-date fund, and commit to staying with it in good years and bad.

The longer you stay invested, the better your odds of success. As Morningstar documented in its 2017 Fundamentals for Investors report, from 1926 through 2016, 74 percent of one-year returns from the U.S. stock market were positive, 86 percent of five-year returns were positive, and 100 percent of 15-year returns were positive.

As with so many things, the best way to learn about investing is to get started. Taking the steps described above should get you moving in the right direction.

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8 Things Millennials Can Do Right Now for an Early Retirement

Tim Lemke — Wed, 24 Jan 2018 10:00:05 +0000

When you're young, it's hard to think of retirement planning as a priority. You have barely entered the workforce; now you have to think about what to do when you've stopped working?

But if you are of the millennial generation, the road to a comfortable retirement should begin now. And with the right moves, you may even be able to retire early. Consider these financial moves to supercharge your retirement plan.

1. Develop a net worth mindset

One of the keys to saving for a comfortable retirement is to focus on accumulating things that grow in value while reducing your liabilities.

This means earning and saving as much money as possible while eliminating debt. It means investing and watching your money grow, through things like stocks and real estate. It means avoiding spending money on things that will lose financial value or have no value to begin with.

This mindset will help you develop a high "net worth," calculated by how much your assets exceed your liabilities. You can't retire unless you have a high net worth, and you can't get there unless you make the right financial choices — especially at an early age. (See also: 6 Money Moves to Make If Your Net Worth Is Negative)

2. Open an IRA

If you have any earned income at all, you can open an individual retirement account (IRA), which allows you to invest in almost anything and enjoy tax savings along the way. With a traditional IRA, any money you invest is deducted from your taxable income. With a Roth IRA, contributions are taxed upfront, but any investment gains can be withdrawn tax-free when you retire. You will pay a penalty and taxes if you withdraw money before you turn 59½.

These retirement accounts can be powerful saving vehicles if you have the discipline to set aside as much money as you can. The earlier you invest, the more time your money has to grow. (See also: 5 Retirement Accounts You Don't Need a Ton of Money to Open)

3. Put money in a 401(k)

If you are employed by a company, there's a good chance that you have access to a 401(k) or similar plan. Don't ignore your human resources representative when they hand you a stack of plan documents urging you to sign up.

A 401(k) plan allows you to invest in a variety of mutual funds and other investments, and your company will often match your contributions up to a certain amount. Money you contribute is deducted from your taxable income. You should invest as much as you can into your 401(k), but it's imperative that you at least contribute enough to get the maximum in matching funds. Your contributions, coupled with the matching funds, can add up to millions of dollars by the time you decide to retire. (See also: 401K or IRA? You Need Both)

4. Open a taxable brokerage account

There's no rule that says all your investments need to be in retirement accounts. Regular taxable brokerage accounts don't have the same tax advantages as IRAs or 401(k) plans, but they do offer other perks, chiefly the flexibility to withdraw money whenever you want it. This is especially key for someone looking to retire before age 59.

Taxable brokerage accounts can be used to accumulate dividend stocks, bonds, or other investments that provide income that will allow you to retire early. (See also: 7 Investment Accounts All 30-Somethings Should Have)

5. Get a side hustle

To accumulate enough money for an early retirement, you'll need a healthy and steady income. If your day job doesn't quite pay enough, look for other ways to generate cash. This may mean freelance writing or playing guitar at local coffee shops. Maybe it's tutoring math, working as a DJ, or doing ASMR videos on YouTube.

If you're young, you have energy and freedom, and the ability to make some cash on the side. Earn it, invest it, and watch it help you retire for good from work at an early age. (See also: 14 Best Side Jobs For Fast Cash)

6. Learn to budget

It's simple: The only way to invest money is to save it, and the only way to save it is to spend less than you earn. This may be easier said than done, especially if you aren't making a lot of money early in your career. But it needs to happen.

Start by tracking your spending so you know precisely where your money is going. Then create buckets for various categories of spending (rent, food, entertainment, etc.). Budgeting requires focus and discipline, but can be fun — and ultimately rewarding — when you see your savings grow. (See also: 9 Ways Staying on Budget Can Be Fun (Really!))

7. Tackle that debt

You may have student loans. As a result, you may also have credit card debt. If this is weighing you down, it's time to do something about it or an early retirement will be impossible.

Begin by going after some of the most onerous debt first — usually, this is the credit card debt with the highest interest rate. Once the debt is eliminated, you can begin to focus on actually saving and investing, rather than simply making ends meet. (See also: The Fastest Method to Eliminate Credit Card Debt)

8. Get insured

The ability to retire early is as much a product of avoiding disaster as accumulating wealth. It's hard to save and invest aggressively if you find yourself saddled with tens of thousands of dollars in medical bills, or expenses to replace items lost when your apartment flooded.

You may think that health insurance is a waste of money because you are young and in good shape. You may think that you're a good driver and don't need comprehensive auto insurance. But if you truly want to gain financial independence and work toward an early retirement, you must be properly insured. Even if you have insurance now, review your policies to make sure you're covered at the right levels. Fail to do this, and you may find a single disaster will send your financial future off track. (See also: 15 Surprising Insurance Policies You Might Need)

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Which of These 9 Retirement Accounts Is Right for You?

Dr Penny Pincher — Wed, 24 Jan 2018 09:00:06 +0000

You might think that the simplest way to put away money for retirement would be to save or invest your money as you see fit — without reporting your contributions to anyone, and without following any special rules. The problem with following a freestyle retirement plan like this is taxes. You would pay full income taxes on the money that goes into your account, and you would pay capital gains taxes as your investment grows.

Fortunately, there are many retirement savings plans out there that can reduce your tax burden now and in the future, all while avoiding capital gains tax. And while there are many types of retirement accounts, you can — and should! — contribute to more than one. The 2018 contribution limit for traditional and Roth IRAs is $5,500 ($6,500 if you're age 50 or older). For 401(k) plans, the current contribution limit is $18,500 (plus an additional catch-up contribution of $6,000 if over age 50). (See also: Which Retirement Account Is Right for You?)

Here are some of the most popular tax-advantaged retirement plan options.

1. Traditional IRA

Contributions made to a traditional IRA are tax-deductible, which can reduce your current year income tax bill. However, you will have to pay income tax when you withdraw funds starting at age 59½. If your income is high now and you will be in a lower tax bracket after retirement, contributing to a traditional IRA may be a good move.

2. Roth IRA

Contributions to a Roth IRA are post-tax, so contributing to one of these accounts won't reduce your tax bill upfront. But when you withdraw the funds in the future, you won't have to pay income tax. A Roth IRA can be favorable if you are a young investor in a low tax bracket now. Also, if you are concerned that tax rates could go up in the future, contributing to a Roth IRA allows you to pay a known tax now versus a potentially higher tax in the future when you withdraw funds. (See also: 6 Reasons Every Millennial Needs a Roth IRA)

3. Traditional 401(k)

Employees can contribute wages to a 401(k) investment account as elective salary deferrals. The traditional 401(k) account works much like a traditional IRA where income can be contributed before taxes, but you will have to pay income tax on future withdrawals. Some employers provide matching contributions to 401(k) plans, and if you are not participating enough to obtain that match, you are leaving free money on the table. Keep in mind, however, that employer plans have fewer investment options than traditional IRAs, and that there may be limits on whether you can withdraw employer contributions early in, for example, a hardship distribution. (See also: 401K or IRA? You Need Both)

4. Roth 401(k)

The Roth 401(k) is an alternate 401(k) plan where employees can contribute after-tax funds. As with a Roth IRA, the Roth 401(k) allows you to pay a known tax today at your current tax bracket instead of an unknown tax rate in the future. A Roth 401(k) is also an attractive option to younger workers who are in a lower tax bracket now and who have a lot of time for funds to grow. If your employer offers matching funds, again, try to contribute at least the minimum required amount to receive the match. (See also: Things You Should Know About Your 401(k) Match)

5. SEP IRA

An SEP (Simplified Employee Pension) plan allows business owners — often the self-employed — to contribute to traditional IRAs on behalf of themselves and any employees they have. An SEP IRA has many of the same rules as a traditional IRA, but the employer is required to make all contributions to the SEP IRA, and employees can't make any.

An SEP IRA allows employers to adjust how much they contribute to an employee's account depending on the company's cash flow that year. Contributions cannot exceed the lesser of 25 percent of the employee's compensation, or $55,000, in 2018.

Money contributed to an SEP IRA is tax-deductible for the current year, and is subject to income tax when withdrawn in retirement. (See also: The SEP-IRA Is How the Self-Employed Do Retirement Like a BOSS)

6. SIMPLE IRA

A SIMPLE (Savings Incentive Match Plan for Employee) IRA is a retirement savings plan for businesses of any size, although it is still aimed at small businesses. A SIMPLE IRA allows employees to invest in their own accounts, in addition to receiving employer contributions of 1-3 percent of the employee's compensation. An employee may contribute up to $12,500 to a SIMPLE IRA in 2018.

Contributions made to a SIMPLE IRA (by both the employer and employee) are tax-deductible upfront and subject to income tax rates upon withdrawal.

7. 403(b) plans

A 403(b) plan, also known as a tax-sheltered annuity or TSA plan, is similar to a 401(k) — but is offered by public schools and 501(c)(3) tax-exempt organizations. Like 401(k) plans, 403(b) plans may be offered in either a traditional tax-advantaged or after-tax Roth version. (See also: 403(b) vs. 401(k): How Are They Different?)

8. Payroll deduction IRAs

Payroll deduction IRAs allow employees or even self-employed workers to automatically contribute to a traditional or Roth IRA through payroll deductions. The employees set up the account and then let the employer know how much they'd like to contribute from each paycheck. This is perhaps the simplest retirement program that a business can establish for its employees.

9. HSA "IRA"

A HSA (health savings account) is available to those who are enrolled in a high-deductible health plan (HDHP). An HSA allows you to contribute pretax funds into a savings or investment account, and you can withdraw funds tax-free at any time for qualified health expenses. Once you reach age 65, money left in an HSA basically acts like a traditional IRA — there is no restriction that the funds must be spent on health expenses, but they will be subject to income tax upon withdrawal. (See also: How an HSA Could Help Your Retirement)

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7 Easiest Ways to Catch Up on Retirement Savings Later in Life

Aja McClanahan — Tue, 16 Jan 2018 10:00:06 +0000

According to a survey by the Employee Benefit Research Institute, three in 10 workers report that preparing for retirement causes them emotional distress. Why? Well, because most people feel they are sorely behind when it comes to retirement savings.

The Economic Policy Institute reports that baby boomer families, on average, have just a little over $160,000 saved for retirement. With longer life spans, inflation, and increasing health care costs, it's possible that many retirees won't have enough to comfortably sustain their retirements.

If you feel behind with your retirement savings, you may be panicking. However, there's hope for you. If you're open to suggestions, a few smart moves will help you catch up on savings even late in the game. (See also: 7 Retirement Planning Steps Late Starters Must Make)

1. Change your mindset

One of the best ways to take the pressure off catching up with retirement savings is to change your mindset.

Rob Hill, owner of financial advisory firm R. Hill Enterprises, Inc., helps people plan for retirement and other stages of life. He says that in order to catch up with your savings, you need to first be more flexible with your idea of retirement. "The first thing I would suggest is not looking at retirement as an age, but rather a financial position," he says.

Hill explains that focus can ease anxiety and make a catch-up goal more feasible for some. He explains, "The goal of retirement is not a pile of assets, it is cash flow that makes retirement possible."

If you look at retirement in this light, you may discover you have more retirement runway than you thought and that building up your nest egg is a little more possible.

2. Make catch-up contributions

If you're over 50 years old, you can contribute more than usual to your 401(k). For 2018, employees within the age guidelines can contribute $18,500 plus a catch-up contribution of $6,000, for a total of $24,500. This approach can be even more helpful if your employer offers a match.

Kevin Ward, of Park Elm Investment Advisors, notes another way to save: an IRA — either a traditional IRA or a Roth IRA. "Aside from your employer-sponsored plan, you can save $5,500 in an IRA," he says. "For those over 50, there is an additional catch-up contribution of $1,000, for a total of $6,500." (See also: 6 Ways Meeting the 2018 401(k) Contribution Limits Will Brighten Your Future)

3. Contribute to a health savings account (HSA)

Though HSAs were created as savings vehicles for health care expenses, there are some tax advantages and treatments that can make this type of account a supplemental retirement option. In order for you to open an HSA, you must have a qualified health care plan, like a high deductible health plan (HDHP).

Shobin Uralil, founder of HSA management platform Lively, says placing money in an HSA has many benefits and "loopholes" that make this a great addition for retirement savings.

"You can save pretax money and then use pretax dollars to pay for qualified out-of-pocket medical expenses," he says. "After the age of 65, you can use HSA funds for anything you want, not just qualified out-of-pocket medical expenses."

It's also worth noting that HSAs have no mandatory distributions in retirement so you can save into your 70s, 80s, and beyond. This is helpful for anyone behind on retirement saving and needing more time to save. (See also: How an HSA Could Help Your Retirement)

4. Be frugal

You might be excited about the idea of saving more money, but wondering how you'll actually achieve those higher savings rates. Your best bet is to reduce your current lifestyle expenses. Of course, you'll want to adjust your spending to a level that is comfortable for you. But keep in mind the ultimate goal of having enough money to support your retirement.

The options for saving money are unlimited. With some creativity and motivation, you should be able to find some frugal habits that will help you make your savings goals — everything from downsizing your home, to eating out only once per month. (See also: 6 Ways You Can Cut Costs Right Before You Retire)

5. Postpone collecting Social Security

This is another strategy that can help you earn more income during retirement. The Social Security Administration reports that postponing Social Security benefits past your full retirement age can boost future payments by up to 8 percent for every year the income is deferred until age 70.

Tom Foster, national spokesperson at MassMutual, works with financial advisers and employers to educate them about 401(k) plans. He recommends postponing Social Security benefits because the returns are pretty significant if you can hold off. He notes, "Few investment strategies net such a return, never mind one with a guarantee." (See also: 6 Smart Ways to Boost Your Social Security Payout Before Retirement)

6. Keep working

A 2013 Georgetown University study estimates that there will be as many as 55 million job openings by 2020 due to baby boomers retiring and leaving the workforce. So the chances are, there will be plenty of demand for those who want to stick around and work longer.

Fortunately, we live in a wonderful time where the internet allows people to work longer, under flexible conditions from almost anywhere in the world. If you can keep working longer, it will add to your potential to save up even more money. (See also: 4 Creative Remote Jobs That Can Supplement Your Retirement Income)

7. Keep investing

It used to be that people drastically reduced their investment portfolios in anticipation of their "golden years." In order to reduce the risk of losing the principal amount of their savings, a retiree might be prompted to go with a very conservative investing strategy by keeping their assets in cash, bonds, or a combination of both.

Nowadays, people are living and working longer and may be able to invest and save more aggressively for longer periods of time.

Cliff Caplan, CFP at Neponset Valley Financial Partners, suggests that people needing to save more should continue to invest for growth. "Establish and continually fund a growth-oriented account that can benefit from lower long-term capital gains treatment," he says. "Dollar cost averaging can also be used to reduce volatility in a portfolio." (See also: 7 Reasons to Invest in Stocks Past Age 50)

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What Every Retirement Saver Should Know About Required Minimum Distributions

Emily Guy Birken — Wed, 10 Jan 2018 09:30:11 +0000

You may be aware of the fact that contributing money to a tax-deferred retirement account, like a traditional IRA or a 401(k), means you get to put money aside before it is taxed. This reduces your current tax burden and gives you a great incentive to save for retirement.

Unfortunately, Uncle Sam will eventually want his cut of that money. That's where required minimum distributions (RMDs) come in.

The good news is that you have until age 70½ before you have to worry about RMDs. But it's still important to understand how RMDs work and what to expect before you get to that age milestone.

What is a required minimum distribution?

Deferring taxes is great for the taxpayer, but the IRS can't afford for taxpayers to defer their taxes indefinitely. Individuals with tax-deferred retirement accounts have to actually withdraw money — and thereby pay taxes — or else those taxes will never get paid.

Everyone holding a 401(k) or IRA account (with the exception of Roth IRAs) must begin withdrawing money from those accounts during the year they reach age 70½. This ensures that account holders have enough time to allow their money to grow without permanently sheltering their money from federal taxes.

The IRS has established minimums that you must withdraw each year after reaching age 70½. If you fail to withdraw the proper RMD, you face a stiff penalty: The IRS will take 50 percent of the amount you should have withdrawn.

Calculating your RMD

It's also important to note that you are responsible for calculating and withdrawing the correct RMD each year — and the calculations aren't necessarily easy. Even if the custodian of your IRA or 401(k) does the math and paperwork for you, you are the responsible party in the IRS's eyes.

So how do you figure out your RMD? You need to start with three pieces of information:

Your date of birth.
The balance of each tax-deferred account as of Dec. 31 of the year before the year in which you turn 70½.
The IRS distribution table.

This IRS distribution table calculates your life expectancy based on your age. The table gives you a number that corresponds to the number of years the IRS expects you to live.

For instance, let's say a retiree was born on February 4, 1948, and will turn 70 in the first half of 2018. This retiree has a single IRA, with a balance of $250,000 at the end of 2017 (the calendar year before the year in which she turns 70½). To calculate her RMD, she'd look up her age (70) on the IRS distribution table to find the distribution period, which in this case is 27.4. She would then divide her IRA balance by the distribution period for her 2018 RMD:

IRA balance / Distribution Period = RMD

$250,000 / 27.4 = $9,214

To keep on the right side of Uncle Sam, she will need to withdraw a minimum of $9,214 from her $250,000 IRA in 2018. But remember, the operative word is "minimum." Account holders can always take more than their RMD if they choose to do so.

Why am I celebrating my 70½ birthday?

While 70½ may seem like an arbitrary number, there is a lot of thought put into this milestone age. The IRS makes a distinction between people born in the first half of the year, and those born in the second half. If your birthday falls between July 1 and Dec. 31, you don't officially have to take an RMD until the year you turn 71.

This means that those with birthdays in the first half of the year take their first RMD the year they turn 70, and those with the later birthday take their first RMD the year they turn 71 — which averages out to 70½. (See also: 6 Age Milestones That Impact Your Retirement)

Required beginning dates

To offer retirees a little more time to get their ducks in a row, the IRS does not require account holders to take their first RMD until April 1 of the year following the one in which you reach age 70½. That April 1 deadline is known as the required beginning date. The year in which that date falls depends on whether you have a birthday in the first or second half of the year.

So, our Aquarian born Feb. 4, 1948 will turn 70½ on Aug. 4, 2018. But remember, those born in the first half of the year calculate their RMD based on the year before they turn 70. So while she can wait to take her first RMD until April 1, 2019, at that point she'll calculate that RMD based on her age of 70 (which was her age as of Dec. 31, 2017), as well as her account balance as of Dec. 31, 2017.

The first year following the year in which you reach 70½ you will usually have two required distribution dates. Besides the April 1 date we just discussed, you'll also have to take another withdrawal by Dec. 31 of that same year. For our Aquarian, that means she will have to take a second RMD by Dec. 31, 2019. This RMD will be calculated based on her 2019 age of 71 and her account balance as of Dec. 31, 2018. This distribution catches her up on her requirements, and during all subsequent years, she is only required to take one RMD.

The required beginning date is similar for anyone with later birthdays. Let's say you're a Virgo with an Aug. 31, 1948 birthday. You'll turn 70½ on Feb. 28, 2019, which means you won't have to take your first RMD until April 1, 2020, and you'll calculate the amount based on your age of 71 (which is your age as of Dec. 31, 2018) as well as your account balance as of Dec. 31, 2018 — the year before you turned 70½. In addition to the April 1, 2020 distribution you will also have to take your 2020 RMD by Dec. 31, 2020, which you will calculate based on your age then of 72, and your account balance on Dec. 31, 2019.

Figuring out your required beginning date

If your birthday falls between Jan. 1 and June 30	If your birthday falls between July 1 and Dec. 31
Your required beginning date is April 1 of the calendar year you turn 71.	Your required beginning date is April 1 of the calendar year you turn 72.
You will use the age of 70 to calculate your first RMD amount.	You will use the age of 71 to calculate your first RMD amount.
Your second RMD is due by Dec. 31 of the calendar year you turn 71.	Your second RMD is due by Dec. 31 of the calendar year you turn 72.

How your RMDs are taxed

Since the entire exercise of taking RMDs is about making sure you pay the income taxes you owe, it's important to understand how your distributions will be taxed.

Your RMDs will be taxed as regular income at your applicable federal tax rate for the tax year for which you are making the withdrawal. This, in fact, may be the easiest-to-understand aspect of RMDs.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Critical 401(k) Questions You Need to Ask Your Employer

Damian Davila — Tue, 12 Dec 2017 09:30:15 +0000

The 401(k) plan is one of the most popular ways for workers to build up their nest eggs for retirement. As of June 2017, 55 million Americans held an estimated $5.1 trillion in assets in 401(k) plans. Whether you're already enrolled or planning to enroll in your employer-sponsored retirement plan, there are several details that you should find out to make the most of it. Let's review some key 401(k) questions you need to ask your employer. (See also: 5 Dumb 401(k) Mistakes Smart People Make)

1. When am I eligible to make contributions?

Different plans have different rules. You shouldn't assume that the same rules from your previous workplace retirement savings plan will apply to that of your current job. Some plans may require you to wait at least six to 12 months before you can contribute to your account, while others may allow you to do so right away. In a review of 4.4 million 401(k) plans in 2016, Vanguard found 67 percent of plans offered immediate eligibility for employee contributions.

2. Do you offer a company match?

America is experiencing very low unemployment levels. In October 2017, the Bureau of Labor Statistics reported the national unemployment rate stood at 4.1 percent, with some states reaching even lower rates (North Dakota and Colorado recorded 2.5 percent and 2.7 percent, respectively, that same month). Looking to retain and attract talent, more and more employers match employee contributions to their retirement accounts. In Vanguard's How America Saves 2017 report, 94 percent of employers offered matching 401(k) contributions in 2016, up from 91 percent in 2013. After you find out how much of a match your workplace offers, be sure to contribute at least up to that amount. If you don't, you'll be leaving free money on the table.

3. What type of formula do you use for matching contributions?

In 2016, there were over 200 different ways in which employers matched their employee contributions, according to Vanguard. By far the most common formula (70 percent of plans) is 50 cents for every dollar up to 6 percent of your pay. Assuming that you make $50,000, this would mean that your employer would contribute up to $1,500 if you were to contribute $3,000 to your 401(k).

Here are the next two most common types of matching formulas found in the study:

$1.00 per dollar on first 3 percent of pay, then $0.50 per dollar on next 2 percent of pay (22 percent of plans).
A dollar cap, often set at $2,000 (5 percent of plans).

It's important to find out the matching formula used by your employer so that you know how much you need to contribute to your plan to maximize that match. In 2016, 44 percent of surveyed plans required a 6 to 6.99 percent employee contribution for a maximum employer match.

4. When do employer contributions become fully vested?

While all of your 401(k) contributions become fully vested immediately, funds contributed by your employer may take longer to actually become yours. Knowing the applicable vesting schedule is essential to know how much of your 401(k) you'd keep if you were to separate from your employer at any point in time.

Depending on your employer, matching contributions may be immediately yours (cliff vesting) or gradually over a period of time (graded vesting). In the Vanguard study, 47 percent of plans granted immediate ownership of employer contributions, 30 percent of plans gradually granted ownership over a five- to six-year period, and 10 percent had a three-year cliff vesting waiting period. (See also: How to Tell if Your 401(k) Is a Good or a Bad One)

5. Can I take hardship withdrawals?

In a perfect world, you would leave your 401(k) funds alone until retirement. However, life happens and it may throw you a curve ball leaving you in a major cash crunch. Some plans offer holders the ability to withdraw money early without the 10 percent IRS penalty due to hardship exemptions, such as certain medical expenses, avoiding foreclosure, and funeral and burial expenses.

Some plans may even allow you to take hardship withdrawals for less gloomy situations, such as buying your first home and paying for college expenses for yourself, your spouse, or your children. Eighty-four percent of plans offered hardship withdrawals in the Vanguard study.

6. What are my investment options?

In 2016, 96 percent of surveyed 401(k) plans designated a target-date fund as the default investment option. There are many reasons, including high expense ratios and variable return rates, why you should look beyond target-date funds and consider all funds available in your 401(k).

On average, 401(k) plans offered 17.9 funds to plan holders in 2016. Over recent years, more and more plans are offering a suite of low-cost index funds covering domestic equities, foreign equities, U.S. taxable bonds, and cash. In 2016, 57 percent of plans offered such an index "core" of funds covering at least these four asset types. Take a good look at what your 401(k) has to offer so that you can select the best funds for your unique financial goals. (See also: Bookmark This: A Step-by-Step Guide to Choosing 401(k) Investments)

7. Do you offer financial advice?

Plans may offer a wide variety of financial advice, ranging from access to a financial adviser a few times out of the year to fully-fledged management of your investments. These perks often come at a cost ranging from 0.25 to 1 percent of your account balance. Still, depending on your financial situation, getting professional advice may be worth every penny to maximize your nest egg or handle tricky tax scenarios.

Besides checking for a human financial adviser, inquire about whether or not your plan offers you robo-advisers. Often charging much lower fees than human advisers, robo-advisers can offer valuable services, including automatic portfolio rebalancing and tax-loss harvesting (selling securities that have experienced a loss to offset taxes on both gains and income). (See also: 9 Questions You Should Ask Before Hiring a Robo-Adviser)

8. Can I make Roth contributions?

If you are just starting your career, have a large upside income potential, or are expecting a big salary bump in the next few years, having the ability to make after-tax contributions to your nest egg is important. Under these scenarios, taking the tax hit early in your retirement account would make sense because you would be at a much lower tax rate now than in the future. This is why 65 percent of Vanguard 401(k) plans offered Roth 401(k) contributions in 2016. For some plan holders, a Roth 401(k) is a great way to grow contributions tax-free forever.

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: