contributions

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:

Stop Believing These 5 Myths About IRAs

Alicia Rose Hudnett — Thu, 07 Jun 2018 09:00:21 +0000

Here's an important life lesson you may not have been told in childhood: You will spend your entire adult working years saving for one main goal — retirement. And one type of retirement account that almost everyone has access to is an individual retirement arrangement, or IRA.

IRAs come in two main formats, the Roth and the Traditional. And while both are valuable, they each bring plenty of confusion regarding some of the rules and regulations about saving in these types of accounts. Here are five IRA myths that may be preventing you from using this valuable retirement-savings vehicle.

1. I can't save in a workplace retirement plan and in an IRA

Even if you currently contribute to an employer-sponsored retirement account at work (such as a 401(k)), you can still direct additional funds into a Traditional or Roth IRA. (See also: 401(k) or IRA? You Need Both)

For Traditional IRAs

Anyone under age 70½ with earned income can make contributions to a Traditional IRA. But if you are covered by a workplace retirement plan, the IRS may restrict the deductibility of your contributions. For 2018, if you are covered by a workplace plan, are single, and make less than $73,000, or if you're married, file taxes jointly, and earn less than $121,000, you can contribute to a Traditional IRA and deduct either all or a portion of your contribution.

If you are single and earn $73,000 or more, or if you are married, file taxes jointly, and earn $121,000 or more, you can still make a nondeductible contribution. When you make a nondeductible contribution to a Traditional IRA, you don't receive an upfront tax break, but your money will still grow tax-deferred in the account.

Note: As an alternative to putting nondeductible dollars into a Traditional IRA, some advisers recommend putting this money into a brokerage account instead. That's because even though money in a Traditional IRA grows tax-deferred, distributions are taxed at ordinary tax rates. Meanwhile, although you receive no tax break for investing in a brokerage account, you may be able to get the more favorable tax treatment on your capital gains when you withdraw those funds in retirement. Having said that, this still doesn't discount the need for an IRA. (See also: Where to Invest Your Money After You've Maxed Out Your Retirement Account)

For Roth IRAs

Whether or not you have a retirement plan at work has no bearing on your ability to contribute to a Roth, but the IRS does impose income limits on who can contribute directly to this type of IRA.

For 2018, if you are single and make $135,000 or more, or if you are married, file taxes jointly, and make $199,000 or more, you are prohibited from contributing directly to a Roth IRA. There is a workaround to this rule called a "Backdoor Roth," which involves making a nondeductible contribution to a Traditional IRA, then converting that to a Roth IRA. This is a common and standard practice, but see a financial planner or tax adviser to determine the tax implications for your own specific financial situation.

2. I don't make enough to contribute to an IRA

Every year that you earn income is an opportunity to save for retirement. The government allows you to contribute a certain amount of money each year into tax-sheltered accounts. If you miss a year, you miss saving for that year forever.

Anyone with earned income under the age of 70½ can contribute to a Traditional IRA, and anyone, regardless of age, with earned income (but within the income limits listed above) can contribute directly to a Roth IRA. Even if you are unable to contribute the maximum allowable amount, make a contribution count every single year. And remember that you have until Tax Day of the following year to make your contribution for the current year. (See also: 5 Dumb IRA Mistakes Even Smart People Make)

3. I can't contribute to an IRA if I don't have my own earned income

Unlike other savings accounts, IRAs must have a single owner and can never be titled as a joint account. And up until now, we've pointed out how the first criteria for contributing to an IRA is having your own taxable compensation. But the IRS does make an important exception to this rule for nonworking or low-income earning spouses by allowing them to piggyback off a working spouse's record of yearly income, whereby all the same rules apply. This is called a spousal IRA. This is a smart way for a couple to continue a diligent savings routine even in a one-income household.

4. I don't need an IRA

Let's get this straight: Everyone needs an IRA. Whether by choice or life circumstances, everyone will retire someday. And retirement is expensive. Even if you are already covered by a workplace retirement plan, an IRA can help you capture and save much-needed excess funds that will help you get by later in life.

If you have extra cash sitting in a savings or checking account (not counting your emergency fund), you can begin transferring that money to fund an IRA. As long as you have earned income for the year, it doesn't matter where the contribution money comes from. (See also: 6 Reasons Every Millennial Needs a Roth IRA)

5. I can't touch my money until retirement

The whole purpose of saving for retirement involves taking a long-term view and allowing your money to grow untouched. And it's true that when you use a tax-sheltered account to save for retirement, there will be penalties if you don't follow all the rules. While you always have access to your own money, there are a few guidelines to keep in mind.

In general, if you are younger than 59½, any money you withdraw from a retirement account will be considered an early withdrawal subject to income tax and a 10 percent penalty. But there are important exceptions to the rule, including for medical reasons or even to pay for some higher education costs.

All direct contributions to a Roth IRA are made with after-tax money, so you always have tax-free and penalty-free access to your original contributions. Note that there are different rules for Roth conversions; but if you follow the rules, you can still gain penalty-free access to your funds after a waiting period and possibly before retirement.

Retirement is your most expensive long-term financial obligation, and you'll need to save as much as you can for as long as you can. Don't let myths and misconceptions steer you away from the value of an IRA.

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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:

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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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:

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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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:

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 Things You Should Know About Your 401(k) Match

Tim Lemke — Wed, 17 Jan 2018 09:30:05 +0000

If you are working and have access to a 401(k) plan from your employer, you may have heard references to a "company match" on contributions. What does this mean? It means that your employer is helping you save for retirement by matching the money you contribute, up to a certain amount.

These matching funds can be a very powerful way to save money over time, and it's important take advantage of a company's full 401(k) match if you can. Every company has different policies regarding these matching funds, and things can often be confusing for new investors. Here are some key things to know.

1. The match is free money

A 401(k) match is not a bonus based on your job performance. It's not a payment made in lieu of your salary. It's truly a contribution from your company to help you save for your retirement, which you can use to invest in a variety of mutual funds and other investments.

There's only one catch, which is that you need to direct a portion of your own money into the 401(k) plan first. That's why they call it a match. Some employers will automatically sign you up for the 401(k) plan and set aside a certain percentage of your salary as a contribution each pay period. (Don't worry — you can always adjust that amount.) If you are unclear on how much you should contribute to your 401(k), try to at least put aside enough to get the maximum company match. If you miss out on the full match, you are missing out on free cash that could add up to tens of thousands of dollars or more over time. (See also: How to Tell if Your 401K Is a Good or a Bad One)

2. Companies match differently

There is no standard or required way for employers to match 401(k) contributions. Some companies are very generous and match every dollar you contribute, no matter how much you put in. Others will match only a very small percentage. Matching contributions can change if a company is doing better or worse financially. When searching for a job, learning about a company's matching policy can help you decide whether you want to work there. Think of the 401(k) plan as part of a company's overall benefits package.

A company's match may also offer some insight into the overall health of the firm. If a company recently stopped matching contributions, that's a red flag that the company may be in trouble.

3. There is often a "vesting" period

Many employers will begin matching contributions as soon as you begin working there, but you may have to give back those matching funds if you leave the company after a specific time. For example, if you've been setting aside 5 percent of your salary into your 401(k) and your company is matching that, you don't necessarily get to keep the company's contributions right away. You may have to wait one year, three years, or even longer to keep that money permanently. This is called a vesting period.

About half of employers offer immediate vesting, according to one Vanguard survey. But others have different vesting schedules. Some will allow you to keep a portion of company contributions after a certain amount of time, and increase that total annually until you are fully vested. (Example: 20 percent vested in year one, 40 percent vested in year two, etc.)

Vesting schedules and policies can be confusing and can change, so be sure to read your 401(k) plan documents carefully. And if your company does have a vesting period for its 401(k) match, try to avoid leaving before that time is up, as doing so could result in you forfeiting thousands of dollars plus any future investment gains. (See also: 8 Critical 401(k) Questions You Need to Ask Your Employer)

4. Contribute more, get more

Here's a brain teaser for you: If Company A makes a dollar-for-dollar match on all employee contributions up to 4 percent, and Company B matches contributions up to 8 percent at 50 cents on the dollar, which company is contributing more?

The answer is that they are both contributing the same amount. The difference, however, is that Company B is using its matching funds to incentivize workers to contribute more of their own money. If you take advantage of Company B's full match, you will have more money in total because your own contribution will be higher. Contributing more yourself will also save you money because those funds are deducted from your taxable income.

5. Matching money doesn't count against contribution limits

The IRS places a limit on the amount of money you can contribute to a 401(k) each year. For 2018, that limit will be $18,500. It's important to note that this limit only applies to money that the individual contributes. Money from the company match does not count against this total. Thus, the total amount of money from all sources going into your 401(k) each year could be much more than the IRS limit. Feel free to contribute as much as you can, take advantage of the full company match, and watch your savings grow. (See also: 6 Ways Meeting the 2018 401(k) Contribution Limits Will Brighten Your Future)

6. Sometimes the match comes as company stock

In some cases, employers will contribute all or part of a 401(k) match in the form of company stock. While free company stock is better than nothing, it's risky to have it comprise too much of your savings. Your employer already pays your salary, so your financial security is already tied to the company's success. Past employees of Enron and other failed companies can attest to the risk of having too much of their savings tied up in company stock.

If you receive company stock in your retirement plan, consider adjusting your investment mix so company stock doesn't comprise more than 5 to 10 percent of your portfolio. (See also: 7 Things You Need to Know About Investing in Company Stock)

7. It doesn't pay to front load your contributions

Let's say it's January and you just got a big pay raise, a bonus, or both. You may be tempted to throw as much money as you can into your 401(k) at that point. If your employer matches based on pay period, you may miss out on matching funds if you max out your contributions early.

So for example: Let's say you earn $200,000 annually and choose to set aside 30 percent of your income per month in the first few months of the year. And let's say your company matches all contributions up to 5 percent of your salary per pay period. Under this scenario, you will have maxed out your contributions by April and won't be able to contribute any more for the rest of the year. Meanwhile, your employer has only contributed up to the maximum company match for those first few months. In this case, your company will have put in about $3,332 when you would have received $10,000 in matching funds if you had spread the contributions out.

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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:

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

5 Things Every Small Business Owner Needs to Know About Employee Retirement Accounts

Damian Davila — Thu, 11 Jan 2018 09:30:10 +0000

Among small businesses, employer sponsored 401(k) plans seem to have gotten a bad rap. According to the United States Government Accountability Office, between 51 and 71 percent of small business employees don't have access to a workplace retirement savings plan.

There is a misconception that retirement plans are just for huge companies. However, this isn't true, and offering a retirement savings plan is the biggest step that a small business can take to increase workers' retirement savings. Let's review some of the many reasons why offering an employer-sponsored retirement account is a great idea for small businesses of all types. (See also: 8 Common Myths About Starting a Small Business)

1. Employees may prefer a retirement plan over a salary increase

According to a 2015 Glassdoor survey, 31 percent of workers valued a workplace retirement account, such as a 401(k) or pension plan, over an increase in pay. This makes sense; several studies have shown that workers benefit from automatic paycheck deductions to contribute to a workplace retirement plan. The Employment Benefit Research Institute found that two-thirds of employed workers not currently saving for retirement say they would be likely to start if automatic paycheck deductions ranging from 3 to 6 percent were used by their employer. By offering a retirement plan, small businesses may be able to attract more talent.

2. There are low-cost options available

Many small-business owners have the misconception that their only option to set up a workplace retirement plan for their employees is to pay an annual 1.5 to 2 percent fee to a provider. But nowadays, business owners have access to many lower cost options. Here are three examples of 401(k) providers for small businesses and their schedule of fees for employers:

Captain 401: $499 setup fee; monthly cost starting at $120 plus $4 per employee.
Employee Fiduciary: $500 setup fee for new plans; $1,500 annual fee plus a custody fee of 0.08 percent of plan assets.
Ubiquity: $495 setup fee; monthly cost starting at $115 plus other transaction service charges.

Besides providing lower costs, choosing a third-party plan provider allows you to delegate certain plan responsibilities, such as implementing nondiscrimination testing for retirement plans (in layman's terms, making sure that a company isn't favoring specific employees when making contributions). This lets you focus more on core activities of your business.

3. Eligible small businesses can claim tax credits

Those fees to set up and run a retirement plan may be tax deductible. If your small business employed 100 or fewer individuals who were compensated at least $5,000 in the preceding year, and your business hasn't offered a workplace retirement plan in the past three years, it may be eligible for the Credit for Small Employer Pension Plan Startup Costs.

Using Form 881, eligible small-business owners can claim a credit of up to $500 for qualified setup and administration fees, and costs to educate employees about the plan for each of the first three years of the plan. You can start claiming the credit in the tax year before the tax year in which the plan becomes effective, and you may carry it back or forward to other tax years if you can't use it in the current year.

Just remember that whatever plan expenses you use toward this credit, you can't use as business expense deductions.

4. Employer contributions are tax-deductible

In 2017, the Employee Benefit Research Institute found that nearly 73 percent of workers not currently saving for retirement would be at least somewhat likely to start if contributions were matched by their employer. The good news for employers is that the IRS usually allows them to deduct these matches, subject to contribution limits on qualified employee plans (including the employer's own plan).

Defined contribution plan: An employer can deduct contributions to an employee retirement plan, up to 25 percent of the employee's annual salary. In 2017, no more than $270,000 of an employee's annual salary could be used when calculating that 25 percent.
Defined benefit plans: The IRS recommends hiring an actuary to figure out your deduction limit based on the rules of your defined benefit plan.

Remember that all deferred employer contributions, including earnings and gains, are tax-free for employees until distributed by the small-business plan. This is why an employer contribution is so valuable.

Let's assume that an employee and your small business have a 20 percent and a 10 percent tax rate, respectively. If you were to give that employee a $4,000 raise, he would only actually see $3,200 of that and your small business would pay $400 in taxes. On the other hand, with a $4,000 employer contribution to the employee's plan, the employee gets the full $4,000 now and the employer gets to deduct the $4,000 as a business expense.

5. Some states provide their own retirement plans

Across the nation, many states have launched, or are preparing to launch, state-sponsored plans to help workers save for retirement. Here are a few examples:

California: The California Secure Choice program (scheduled for soft launch in late 2018) will offer a retirement savings option to millions of workers employed by small businesses (under 100 employees) who don't have access to a retirement plan.
Connecticut: Nearly 600,000 workers lack access to a workplace retirement plan in the state of Connecticut. The Connecticut Retirement Security Program (currently in planning stages) will aim to offer retirement plans to private sector workers without a retirement option through their employer.
Oregon: OregonSaves launched in November 2017 and aims to offer workers employed by small businesses of less than 100 people a retirement savings plan. The program is expanding in "waves," with the next wave planned for spring 2018.

Depending on the state that your small business operates in, you may have to address whether or not your small business will offer a workplace retirement plan soon.

For example, let's say you have a small business in Oregon. OregonSaves is planning its next registration "wave" for spring 2018 for small businesses with 50 to 99 employees. If your business is not offering a retirement plan, you'll have to start enrolling employees in the state program (unless the employees opt out) on May 15, 2018. Following suit, small businesses that employ 20 to 49 workers will have to enroll on December 15, 2018.

The bottom line: Take action today

As a small-business owner, it makes sense to take a look at offering a retirement savings plan to your employees. This is a perk that employees value, is available through lower cost options, and provides tax breaks to both employees and employers.

In the near future, your employees may have to enroll in a state-sponsored retirement plan depending on whether or not you offer a workplace retirement plan. Offering an employer-sponsored retirement plan is an effective way to attract and retain the best talent and demonstrate that you have your employees' best interest in mind.

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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:

4 Easy Ways to Get Richer In 2018

Emily Guy Birken — Mon, 01 Jan 2018 09:00:07 +0000

The new year is a great time to start practicing better financial habits. Implementing good money habits on January 1 and committing to keeping them up throughout the year will make you richer by the end of 2018 than you were at the start.

Read on to learn just how much adopting these habits can enrich you throughout 2018.

1. Increase your 401(k) contribution by 1 percent: End 2018 with nearly $1,000 more

You are certainly aware of the importance of saving for retirement. Putting money aside when you are young will allow compound interest to do its magic and provide you with a comfortable retirement. In addition, if your employer matches some of your contributions to your retirement account, you can increase your retirement nest egg that much faster.

But if you already feel financially squeezed, you might assume that it's not worth the trouble to put aside the little bit extra. That is simply untrue. With just a 1 percent additional contribution to your 401(k), you could end 2018 almost $1,000 richer than if you'd instead blown that money on something frivolous.

Here's how. The average full-time wage and salary worker in the U.S. currently earns $44,668 per year, according to the Bureau of Labor Statistics. Let's say that's your salary. That means increasing your savings rate by 1 percent would add $446 more per year to your retirement account. And since $446 over 12 months is only going to result in $18.60 deducted from your bimonthly paychecks, it's unlikely you'll even notice the difference.

If your employer matches your contribution and you have not yet maxed out the matching amount, that $446 will magically become $892.

The average rate of return for 401(k) plans ranges between 5 and 8 percent per year. If we assume an 8 percent return on the investment of $892, that's $71.36 in growth for 2018 alone. So for a mere $18.60 per paycheck, you might end the year $963.36 richer.

And even if you are not lucky enough to have employer matching — or you've already maxed it out — you could get the same result by increasing your 401(k) contribution by 2 percent. That would still only "cost" you $37.22 per bimonthly paycheck, and result in nearly $1,000 in additional wealth by the end of the year. (See also: 5 Simple Ways to Boost an Underperforming 401(k))

2. Reduce how often you dine out: End 2018 with $900 more

According to a 2016 Zagat survey on American dining, the average person eats a restaurant- or commercially-prepared meal 4.5 times a week. All that dining out adds up. The Bureau of Labor Statistics found the average American household spent $3,154 on restaurant dining in 2016.

If you cut out one restaurant meal per week in 2018, you can end the year $455 richer. Cut out two meals per week, and you'll have $911 more in your pocket.

Here's the math. The Bureau of Labor Statistics calculates that the average American household spent $4,049 in 2016 on groceries. Assuming those households are dining out 4.5 times per week or for 234 meals per year — we can figure out exactly how much you save by brown bagging your lunch or eating at home.

Presuming you eat three meals a day, seven days a week, 52 weeks of the year, there are a total of 1,092 meals to account for in the year. If you're eating 234 of those meals at restaurants, you are spending $4,049 per year on 858 meals at home (1,092 meals total - 234 restaurant meals = 858 meals at home). Now, $4,049 divided by 858 meals comes to an average cost of $4.71 per meal.

If you're spending $3,154 on 234 restaurant meals per year, you're spending an average $13.47 per meal ($3,154 / 234 meals = $13.47). That means you're saving $8.76 per meal whenever you eat at home rather than at a restaurant ($13.47 - $4.71 = $8.76).

Let's say you reduce your dining out by one meal per week, or 52 meals total. That will save you $455.52 total ($8.76 x 52 = $455.52). Reduce your dining out by two meals per week, or 104 meals total for the year, and you'll save about $911.04 ($8.76 x 104 = $911.04). (See also: Are You Eating the 10 Most Over-Priced Restaurant Menu Items?)

3. Send an extra $100 to your credit card each month: Save more than $1,000 in interest

According to ValuePenguin, the average indebted household carrying credit card debt owes $10,955. According to CreditCards.com, the average APR is 16.15 percent, which works out to 0.013 percent per day. This means the average household will pay $3,675 in interest over the life of the loan if they make the minimum payment of 3 percent (or $329) per month, and it will take 45 months (that is, from January 2018 all the way through to October 2021) to reach the payoff date.

But if you send just $100 more to your credit card per month, you'll save $1,117 in interest, and cut a full 13 months off your repayment schedule. You can achieve this by simply putting an additional $50 from each bimonthly paycheck toward debt repayment. That would also help you reach debt freedom a year earlier. (See also: The Fastest Method to Eliminate Credit Card Debt)

4. Do more with your tax refund: End 2018 with nearly $6,500 more

If you're like the average American, your tax refund in 2017 was around $3,050. But too many people fritter that money away. While it's certainly exciting to get a payday from Uncle Sam every tax season, you could be doing much more with your money than blowing it as soon as the IRS check clears.

Let's say you file your return in April and get your refund in May. If you put that $3,050 into an index fund by June and it earns 8 percent interest, you'll have $3,195 by the end of the year. That's $145 in earnings.

In addition to that, you decide to change your withholding in January 2018 so you're not giving the IRS an interest-free loan. You keep $254 more from each paycheck ($3,050/12 = $254), and invest it in that 8 percent index fund. By the end of the year, you'll have earned $135 in interest, for a total of $3,183.

All together, your savings and interest add up to $6,378 for 2018. That's a hefty boost to your long-term financial security in exchange for saving the tax windfall you would have otherwise spent.

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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:

8 Signs You're Making All the Right Moves for Retirement

Dan Rafter — Tue, 05 Dec 2017 09:00:07 +0000

The 2017 Retirement Confidence Survey from the Employee Benefit Research Institute made a disheartening discovery; only six in 10 U.S. workers feel confident that they'll be able to retire comfortably. That means 40 percent think they won't.

That's grim news. But you don't have to fall into this group if you're making the right financial moves to prepare for your after-work years.

It can be tricky to know for sure how confident you should feel about your nest egg, but some key signs can indicate that you're on your way to building a happy and healthy retirement.

1. You've worked out the kind of retirement you want

The best way to prepare for retirement? You have to plan for it. This means knowing how you want to spend your after-work years. After all, if you plan on traveling the globe after retiring, you'll need plenty of money. If you instead plan to spend more time visiting your grandchildren, reading, or playing golf, you might not need to save quite as much.

The key is to determine what kind of retirement you want long before it arrives. That way, you can financially plan for it. And if you're in a relationship, remember that both you and your partner have to agree, and prepare for, the retirement lifestyle that suits you both. (See also: How to Find Your New Identity After Retirement)

2. You've set a retirement age

Do you know when you want to retire? You should. That decision can have a huge impact on your finances once you leave the working world.

If you were born between 1943 and 1954, your full retirement age is 66. If you were born after 1959, your full retirement age is 67. You can start claiming Social Security benefits once you turn 62. But if you wait until you hit full retirement age — or beyond — the money you receive each month will be far higher. In fact, if you start claiming your Social Security benefits at 62, your monthly payment will be lowered by 30 percent compared to how much you'd get at full retirement age.

And if you can hang on until age 70, you'll collect a monthly benefit that is 132 percent of the monthly amount you would have received if you started claiming Social Security at full retirement age.

There's nothing wrong with claiming your benefits early, if you've planned for this. But make sure you know how much money you'll need before retiring early. (See also: 5 Questions to Ask Before You Start Claiming Your Social Security Benefits)

3. You've made a retirement budget

Before you hit retirement age, it's important to determine how much money you expect to spend and receive each month once that steady paycheck has disappeared. This means it's time to create a monthly retirement budget.

For income, you can include any pensions, Social Security payments, disability payments, rental income, or annuity income you plan on receiving. You can also include the amount of money you expect to draw from your retirement savings. For expenses, include everything that you'll spend money on each month, including groceries, eating out, mortgage, auto payments, health care expenses, and utility bills.

Once you know how much you'll be spending and how much you'll be earning in retirement, you can better prepare for it. (See also: Here's How You Should Budget Your Social Security Checks)

4. You've paid off your debts

The best way to increase the odds of a happy retirement is entering your post-work years without any debt. That means paying off your credit cards, paying off your mortgage, and making sure you don't owe any money on your car once you've retired.

Paying off debt isn't easy. It's why so many of us are struggling under mountains of credit card debt. Before your retirement hits, though, start funneling money toward your debt. The more you pay off, the less financial stress you'll face in retirement. (See also: The Fastest Way to Pay Off $10,000 in Credit Card Debt)

5. You've maximized your retirement savings contributions

You should be contributing to an IRA, 401(k) plan, or a combination of both. But as retirement gets closer, make sure you are contributing the maximum amount to these retirement savings vehicles. Doing so will leave you with the greatest financial cushion for retirement.

It might seem like a financial sacrifice to devote, say, 15 percent of your regular paycheck to a 401(k) account. But by saving that much, as opposed to 5 percent or 10 percent, you can dramatically increase the amount of money you'll have when retirement arrives. (See also: 10 Signs You Aren't Saving Enough for Retirement)

6. You're playing catch-up

Once you hit your 50th birthday, you can contribute even more money each year to your 401(k) plan or IRAs. Take advantage of this benefit to provide a late-in-life boost to your retirement savings.

For the 2017 tax year, you are allowed to contribute up to a maximum of $18,000 in a 401(k) plan. But if you're 50 or older, you can make what are known as catch-up contributions and contribute an extra $6,000 — meaning that you can put a total of $24,000 into your 401(k) this year. For the 2018 tax year, 401(k) contribution limits will be raised to $18,500, which means those age 50 or older can contribute up to a total of $24,500 per year. (See also: 6 Ways Meeting the 2018 401(k) Contribution Limits Will Brighten Your Future)

Traditional and Roth IRAs also have catch-up policies for investors 50 or older. For the 2017 tax year, you can contribute up to $5,500 in either form of IRA. But if you are 50 older, you can contribute an additional $1,000, meaning that you can save up to $6,500 this year in a Roth or traditional IRA. This will be remaining the same in the 2018 tax year.

7. You've prioritized your spending — even when it comes to your kids

It's not easy telling your kids no, even when both they and you are adults. But when it comes to saving for retirement, you might have to do just this.

You might want to help your children pay for their college tuition. And hopefully, you've already saved for this. But if you didn't, you shouldn't be putting off saving for retirement to help your adult children pay for college.

Your children have other options when it comes to college: They can find a less expensive school, attend community college for two years, or apply for loans and grants. If you can't afford to save for both retirement and your children's college tuition, you absolutely must put saving for retirement first.

If you don't? You might just become a financial burden for your adult children when you can't afford to maintain a healthy retirement lifestyle. (See also: Are You Ruining Your Retirement by Spoiling Your Kids?)

8. You've tinkered with your savings formula

Early in your working days, it's a sound strategy to invest in a riskier mix of stocks, bonds, and other investment vehicles. The potential rewards are higher, and you have more years to recoup whatever losses you might suffer from a potentially more volatile portfolio.

But once you get closer to retirement, it's time to rebalance your investments to eliminate much of the risk. When you're 10 or five years from retirement, you want a safer investment mix because time is running short. You won't have as many years to recover from the downs that sometimes come with a high-risk, high-reward savings portfolio.

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

It's So Simple: 6 Steps to a Stable Retirement

Emily Guy Birken — Tue, 31 Oct 2017 09:00:06 +0000

If you are new to personal finance, you might find yourself thinking that reaching retirement is sort of like reaching a mythical place like Hogwarts. In both cases, the process required for entry is never adequately explained — and getting there yourself feels more like fantasy than reality.

While it's unlikely that an owl will ever arrive to welcome you to a magical school, retirement is actually attainable for each and every muggle. In fact, the rules for reaching a stable retirement are relatively simple and require absolutely no financial wizardry on your part,

Here are the only six things you need to do to achieve a stable retirement — no magic wands required.

1. Always spend less than you earn

No matter how much you make, you need to live on less than you earn. This is the kind of so-simple-it-feels-obvious advice that many personal finance experts take for granted, but keeping your expenses below your income is the cornerstone of saving for a stable retirement. Many people assume that they need to make a certain level of income before they can afford to start saving for retirement, but that's not true. As long as you always spend less than you earn, you can always save toward your retirement.

If you're not sure how to go about reducing your expenses so that you're no longer spending everything that comes in, start by tracking your spending. This will help you better understand where your money is going so you can cut back on unnecessary spending. (See also: Save More and Spend Less by Increasing Your "Mental Transaction Costs")

2. Max out your retirement contributions

Both your employer-sponsored 401(k) and your individual retirement account (IRA) have yearly contribution limits that you should strive to meet every year. The 2017 contribution limits are $18,000 for 401(k) plans (plus an additional $6,000 in catch-up contributions if over age 50), and $5,500 for IRAs ($6,500 if over age 50). The traditional versions of these investment vehicles are tax-deferred, which means you are funding your accounts with pretax dollars. Roth 401(k) plans and IRAs are funded with money you have paid taxes on, but they, like the traditional vehicles, grow tax-free.

Many people can't afford to meet the full contribution limit for their 401(k) plan, plus maxing out an IRA as well. However, getting as close to the maximum contribution as you can for both of these vehicles will put you well on your way to retirement stability. In addition, many employers offer a 401(k) contribution match — and not maxing out this kind of matching program is akin to leaving free money on the table. (See also: How Much Should You Have Saved for Retirement by 30? 40? 50?)

3. Work at least 35 years

While retiring early is a common dream among many workers, leaving the workforce before putting in 35 full years of employment could damage your bottom line in retirement. That's because your Social Security benefits are calculated using the 35 highest earning years in your career. If you have less than 35 years of work experience, the Social Security Administration uses zeros to create your benefit calculation, lowering your average earnings and your payout. If you don't have 35 years of employment history, it's a good idea to keep working to get those zeros replaced in your Social Security calculation.

Doing whatever you can to increase your monthly benefit will make a big difference in your bottom line once you retire. The most important increase you can make is to work at least 35 years total — although waiting as long as you can to take Social Security benefits is also an important strategy for increasing your monthly Social Security check. (See also: 6 Smart Ways to Boost Your Social Security Payout Before Retirement)

4. Avoid debt

We live in a society that tells us we can have it all right now and pay for it later. The problem is that we will indeed pay for it later — with an impoverished retirement. While it may be possible to finance the lifestyle you want with debt, you will have no money available to save for retirement or otherwise invest. In addition, the added interest expense of borrowing money to pay for your lifestyle just makes it that much more expensive and unsustainable. (See also: 5 Ways to Pay Off High Interest Credit Card Debt)

5. Invest for the long-term with index funds

While the movies show investing as a kind of game that you win by figuring out when to buy low and sell high, the best way to make sure your money grows is to follow a long-term buy-and-hold strategy.

A 2016 DALBAR study on investment behavior revealed that investors routinely underperform the market despite solid annualized returns. For example, at the end of 2015, the S&P 500 was averaging a return of 8.19 percent. That same year, investors saw returns top out at a measly average 4.67 percent — and this pattern is not new. Why such a discrepancy? Simple; rather than employing a buy-and-hold strategy, investors routinely try (and fail) to time the market. Year after year, their returns suffer as a result.

You can use statistics and a long investment term to your advantage by investing in index funds. These funds aim to replicate the movement of specific securities in a target index, which means an index fund is going to do about as well as the target securities will do. (See also: Want Your Investments to Do Better? Stop Watching the News)

6. Take care of your health

Your health can have an enormous impact on your financial stability in retirement. That's because health care costs are a major concern in your older years, especially since this is one aspect of your retirement budget that you may not have control over. According to a 2016 Fidelity study, a 65-year-old couple retiring in 2016 will need about $260,000 to cover their medical and health care costs for the rest of their lives.

While kale smoothies and daily kettlebell workouts cannot ensure your good health in retirement, taking good care of yourself throughout your life does improve the odds that you'll stay healthier as you age. You can consider each jog and healthy meal as an investment in your future. (See also: Don't Let Poor Health Kill Your Retirement Fund)

Reaching retirement, one step at a time

Achieving a stable retirement doesn't require any magic. Instead, it's a matter of following some simple rules that will ensure you have the money you need to retire comfortably.

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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:

5 Ways to Get the Most From Your Employer’s Automated Retirement Plan

Matt Bell — Wed, 18 Oct 2017 08:30:06 +0000

An increasing number of companies are automating their 401(k) plans — automatically enrolling new hires and even automatically choosing investments for employees. If that's true of your employer, don't be lulled into a false sense of confidence. Just because many decisions are being made for you doesn't necessarily mean they're the right decisions. Here's what you need to know.

1. Stay in

The starting point of automated retirement plans is automated enrollment. To not participate, you have to opt out. Don't do that. For the vast majority of employees, participation is a good thing.

2. Invest enough

Most automated plans set employee contributions at very low rates, such as 3 percent of salary, at least initially. Many employees, perhaps assuming that's how much they should be investing, never change their contribution rate.

However, 3 percent of salary is almost certainly not enough — not enough to get the full company match if that's available, and not enough to save adequately for retirement. So, use a free online retirement planning calculator to find out how much you should be saving and set your contribution rate accordingly.

If you can't afford to contribute enough right away, see if your company's plan offers auto-escalation, which will automatically increase your contribution rate over time. If it does, signing up would help you follow through on your good intentions.

3. Choose the right investment(s)

Your plan may automatically invest your contributions in a target-date fund. Such funds have many benefits, but also a few features you should watch out for. The primary benefits are that they come with preset asset allocations based on the year of your intended retirement, and they automatically become more conservatively invested as you near your target retirement date. (See also: What You Need to Know About the Easiest Way to Save for Retirement)

The primary thing to watch out for is that not all target-date funds are created equal. Funds from different fund companies all designed with the same target retirement date in mind can have very different stock/bond allocations.

It would be best to determine your optimal asset allocation using a tool such as Vanguard's free Investor Questionnaire. Then choose the target-date fund that most closely matches that allocation. It might be one with an earlier or later target retirement date than your actual planned retirement date, depending on your optimal asset allocation.

4. Don't pay too much in fees

If a target-date fund is the default investment in your 401(k) plan, and if you like the idea of using a target-date fund, you should still check the fund's expense ratio. The lower, the better. For example, with a fund charging an expense ratio of 0.75 percent, you'll pay $7.50 in fees each year for every $1,000 you have invested. If the expense ratio is 0.25 percent, you'll pay $2.50 per year for every $1,000 invested.

If the default fund's expense ratio is on the high side (to give you a point of reference, Vanguard charges just 0.16 percent for its 2040 target-date fund), see if your plan gives you access to a brokerage window. If so, you should be able to choose a target-date fund from among many fund companies, which should enable you to choose a lower-cost fund. (See also: Watch Out for These 5 Sneaky 401K Fees)

Another option is to see if your plan offers index funds, which typically have very low expense ratios. If so, consider using such funds to build a portfolio that matches your optimal asset allocation. You may be able to do so using as few as three funds.

5. Keep your hands off the money

Some companies with automatic retirement plans are finding that many participants are surprised by how quickly money has built up in their accounts. Surprise is quickly followed by a desire for that money, which is then followed by a loan.

It would be far better to remember what the money is for (retirement!) and keep your hands off. One of the key ingredients for successful investing is time. Pulling money from your account, even temporarily, gives it less time to compound. Plus, if you borrow against your account and then leave your employer — whether by your choice or your employer's — you'll have to repay the entire loan, usually within 60 days.

Automation has been very effective at driving up participation rates in 401(k) plans, which has been beneficial for thousands of people. However, to get the most out of your employer's automated plan, make sure the automated choices are truly the best choices for you. If they're not, don't be afraid to make some manual changes.

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

Yes, You Can Pay for Education With an IRA

Anum Yoon — Wed, 04 Oct 2017 08:00:07 +0000

When most people think of saving for a college education, they usually think of 529 savings plans or Coverdell Education Savings Accounts (ESA). These accounts allow you to grow your money by investing in select mutual funds, much like a typical retirement account does. (See also: 5 Smart Places to Stash Your Kid's College Savings)

While both of these accounts are great investment tools to pay for a college education, there's another option you may not have considered. A Roth IRA can also be used for educational expenses. There are pros and cons for each way to save for college. Here's a brief rundown:

Coverdell ESA	529 savings plans	Roth IRA
No tax deduction from contributions.	No tax deduction from contributions.	No tax deduction from contributions.
Withdraw your contributions tax free.	Withdraw your contributions tax free.	Withdraw your contributions tax free. (If you withdraw interest, it will be taxed.)
Annual contribution limit: $2,000 per beneficiary.	No annual contribution limit but most states limit total contributions to $300,000.	Annual contribution limit: $5,500, or $6,500 if age 50 or over.
Anyone can contribute but the amount they can contribute is limited by their modified adjusted gross income. Ability to contribute phases out once modified AGI reaches $220,000.	Anyone can contribute.	Must have income in order to contribute. People with high incomes ($181,000 for married couple) are prohibited from contributing.
Can be used for higher education and qualified K-12 expenses. Beneficiary must use account by age 30.	Can only be used for higher education expenses.	Can be used for higher education, first home purchase, qualified medical expenses, and retirement.
Account under guardian's name won't impact beneficiary's FAFSA.	Account under guardian's name won't impact beneficiary's FAFSA.	Withdrawals will increase your earned income and can affect beneficiary's FAFSA.

Roth IRAs

A Roth IRA differs from a traditional IRA in that the income you contribute is already taxed. The beauty of a Roth IRA is that the distribution you take from your contributions is not taxable (as long as the use is approved).

Let's say your child is a college freshman. You withdraw $15,000 from your Roth IRA for their first year of school. None of this money will be taxed, as long as it is from your own contributions and not from the interest earned. Withdrawals are considered returns of contributions initially, for tax purposes. They are considered interest earnings second.

Now, you are likely thinking, "But aren't IRA withdrawals subject to penalties if you withdraw them early?" Generally, yes. Normally, you must be age 59 ½ or older, and have had the account for at least five years to withdraw without incurring a 10 percent tax penalty. Why? Well, all IRAs are retirement funds, primarily. They are designed to be withdrawn only as folks approach retirement.

But no penalty applies if the withdrawal is for qualified educational purposes (or a first home purchase, or qualified medical bills). Even if your child or grandchild has a scholarship for full tuition, it's no problem. Roth IRAs can be used for any qualified educational expense, including room, board, books, and supplies.

If your child or grandchild ends up not going to college, or not needing all the money, you can simply keep the money to continue funding your retirement. Note that to place money back into a Roth IRA, it will be subject to annual contribution limits ($5,500 if under age 50, and $6,500 if age 50 or older).

Traditional IRAs

You can also use traditional IRAs to pay for college. Essentially, traditional IRAs reverse the tax advantage of a Roth. You get a tax deduction upfront for all money contributed to a traditional IRA — but all withdrawals will be taxed at the federal and state level.

As with a Roth IRA, if traditional IRA distributions before age 59 ½ are used for qualified educational expenses, they are not subject to the 10 percent penalty. However, they will be subject to tax. The IRS will get its money whenever you withdraw from a traditional IRA, regardless of what you withdraw it for.

Because of the tax implications, while it is possible to use a traditional IRA for educational expenses, it may not be the most prudent move. If you want to tap into IRAs for college expenses, a Roth IRA is the better bet financially.

An important caveat

Realistically, tapping your IRA to pay for your child's education should rarely be your first choice. It can be a smart move if you have a considerable amount saved and a lot of time left before retirement to pay it back. Otherwise, you'll be draining the account of funds you very much need. It may be wiser to use an educational savings account to save for your child's education instead. (See also: Why Saving Too Much Money for a College Fund Is a Bad Idea)

However, there are still benefits of using an IRA over an educational savings account if you know your retirement will still be secure. For example, by combining the funds into one account, you will have more flexibility in choosing whether to spend your savings on education — and how much — or to continue to hold it for your retirement.

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

This One Thing Could Be the Key to Retiring Rich

Annie Mueller — Fri, 29 Sep 2017 08:00:06 +0000

Writing things down is a powerful exercise. Productivity experts and personal growth coaches have long known this truth, and frequently promote writing down goals and priorities as a way to take control of life and achieve more. Does the power of writing apply to your financial life, as well? Turns out that it does in a very significant way.

Written plans lead to more retirement savings

A recent report from Charles Schwab makes it clear that writing down your financial goals can have a huge effect on how well you do in reaching them. According to the report, people with a written retirement plan are almost twice as likely to increase their 401(k) contributions and rebalance their portfolio. And that's not all a written plan can do for you: You're also twice as likely to stick to your savings goals if you've written down your plan.

Despite the obvious power of a written financial plan, most people don't have one. According to the Schwab report, even though about two-thirds of Americans have a financial plan, only a quarter of us have that plan in writing.

Is it really a plan if it's not in writing? Maybe, but it's certainly not as powerful.

Writing things down makes them seem more real and helps you understand clearly how to reach the goals you're setting. A survey from Wells Fargo found that folks with a written retirement plan felt much more secure about reaching their financial goals for retirement. It isn't that the amount needed for retirement changes, but that a written plan helped these individuals understand exactly what they needed to do to reach their retirement goals.

Start getting your plan on paper

How do you get your financial plan written down? Start simple and start right now: Get a piece of paper or open up a computer document, and start writing down your goals. Focus on three main areas: an income goal, a budget goal, and a long-term savings goal.

The key is to just get started and remember that you can adjust your plan as you gain more information. Until you have everything written down, you don't really know what you're aiming for or if your goals are even possible. (See also: Half of Americans Are Wrong About Their Retirement Savings)

Get some professional help to improve your plan

Once you've gotten some basic ideas down on the page, consult a professional financial adviser to help you turn those basic thoughts into a viable financial plan. Over two-thirds of the people who do have a written financial plan got help from a financial professional.

Getting professional help is a good idea for two reasons: First, it helps you to actually finish that plan you started. Second, having professional advice will result in a better financial plan. An adviser can help you ask questions, look at issues, and develop solutions you might have missed on your own. (See also: 7 Things Financial Advisers Wish You Knew About Retirement)

Turn your plan into actions

Once you have your plan written down, you need to translate it into regular actions.

For example, if you set a savings goal that you want to meet in five years, you'll divide that into a monthly savings amount. Now you have a monthly savings target (and we know that, with a written plan, you're much more likely to reach it). When you turn the goals on your plan into actions, you can quickly assess whether you're making progress or not.

Automate your financial actions

As much as possible, automate the actions that you derive from your financial plan. Set up automatic transfers into your savings account, for example, or have a certain percentage of your paycheck deposited into your savings account rather than your checking account.

Those small automations take the work out of reaching your financial plan. The easier you make it on yourself, the more likely you are to stick to your plan. (See also: 5 Ways to Automate Your Finances)

Review your financial plan regularly

A written plan is not a static thing, so you need to review it regularly and adjust it as needed. Perhaps you get a salary increase or an unexpected windfall; how will you apply it? Review your plan, decide where to apply your wealth increase, and adjust your plan as needed.

It's a great idea to set an annual appointment with your financial adviser; you can use that time to review your plan together. Then you can apply that professional insight to any adjustments you make to your plan, and move forward with even greater financial efficiency.

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