Retirement Savings Tax Credit Tips

March 26th, 2012  |  Published in 401K, 403b, IRA  |  2 Comments

If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be eligible for a tax credit, depending on your age and income.

Here are six things the IRS wants you to know about the Savers Credit:

1. Income limits The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and 2011 income of:

Single, married filing separately, or qualifying widow(er), with income up to $28,250
Head of Household with income up to $42,375
Married Filing Jointly, with incomes up to $56,500

2. Eligibility requirements To be eligible for the credit you must be at least 18 years of age, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person’s return.

3. Credit amount If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 ($2,000 if filing jointly). The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.

4. Distributions When figuring this credit, you generally must subtract distributions you received from your retirement plans from the contributions you made. This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date – including extensions – for filing the return for the credit year.

5. Other tax benefits The Retirement Savings Contributions Credit is in addition to other tax benefits you may receive for retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.

6. Forms to use To claim the credit use Form 8880, Credit for Qualified Retirement Savings Contributions.

Fipath Express Rollover Center

March 6th, 2012  |  Published in 401K, IRA  |  Comments Off on Fipath Express Rollover Center

FiPath is an online site that provides comprehensive, independent, unbiased retirement planning content and analytical tools so consumers can take control of their retirement planning. They recently released a new tool to help those who need to roll over their 401k to an IRA. The FiPath Express Rollover Center is the only tool of its kind in the industry. No other product enables the consumer to compare multiple options, based on their own interests and criteria, to select the perfect rollover solution for them. The FiPath Express Rollover Center is comprehensive, informative and easy to use. Within a few minutes a consumer can find the right option for them, saving hours of tedious research.

The FiPath Express Rollover Center lets you choose whether you would like to work with a financial advisor or financial services firm when you rollover your 401k to IRA. If you want you can choose expert financial advisor access since not all consumers want to manage the 401k rollover process on their own. For them, they have created the option to search through a universe of financial advisors chosen specifically for their expertise in helping consumers handle a 401k rollover. All advisors are presented based on distance to a consumer’s zip code. When using the tool you can reach out to up to 5 advisors, who will then contact you via phone or email depending on which you prefer. You can then select which of the advisors you wish to work with. You are in complete control of the process at all times. You can select who you want to work with or whether you want to work with anyone. If you decide not to work with an advisor, you will not be bothered with any followup phone calls or emails. All advisors have been screened by FiPath for expertise on rollovers.

You can also choose to work with a financial services firm. For consumers who wish to minimize costs, the ability to find a brokerage or mutual fund firm to work with directly is a great way to keep expenses down. FiPath allows consumers to search based on their interests, such as the existence of local branches or different investment vehicles, to find the firm that best meets their needs. All firms are presented based on average annual trading costs, from lowest to highest. All firms are compared apples-to-apples on relevant metrics – cost, products offered, annual fees, account minimums, etc — so consumers can quickly and easily compare firms. FiPath has given each firm a “FiPath Score”, which compiles scores from multiple industry sources (JD Powers, Barrons, etc) as well as FiPath’s own evaluation of each firm’s offering. Some firms are highlighted as best for specific types of investors – “First Time Investors”, for instance, or “Active Traders”. This is based on FiPath’s independent evaluation of each firm’s offering. When a firm makes a specific offer for new accounts, FiPath has included that too so the consumer can always get the best deal.

It is important that you spend time on your 401k retirement planning. You can save a lot of money by rolling over your 401k to an IRA. Depending on the employer, you may pay hundreds of dollars a year in management and custodial fees for keeping your money in an ex-employer’s 401k plan. Money in a 401k plan can only be invested in employer-selected investment funds. With an IRA, you have full control of your money. Because of the lower fees and broader choices that an IRA enables, money invested through an IRA will typically grow at a higher rate of return. This could mean tens of thousands of dollars more in an IRA savings account upon retirement. If you are looking to convert a 401k you need to check out the FiPath Express Rollover Center.

2012 401k Limits

January 30th, 2012  |  Published in 401K  |  1 Comment

The Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for Tax Year 2012. In general, many of the pension plan limitations will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged. Highlights include:

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000.
The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.
The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.
The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.

My Retirement Blog was featured in the following carnivals during the past week.

Yakezie Carnival at Little House in the Valley
Carnival of Financial Camaraderie at Financial Success for Young Adults
Totally Money at Passive Income to Retire
Festival of Frugality at Squirrelers
Carnival of Financial Planning at Credit Cards Canada
Carnival of Retirement at 20’s Finances

How to Solve the Retirement Crisis

March 6th, 2011  |  Published in 401K, Retirement  |  3 Comments

I recently read an article at Money Mamba titled “Solving the Retirement Crisis: A Tax Proposal.” The article includes studies stating that most people do not have enough saved for retirement and don’t know how much money they would need in retirement. The article also includes studies showing that after meeting with a financial representative most people significantly increase their rate of retirement savings. The author’s proposal therefore is “to halve the 7.65% FICA tax rate that an employer has to pay for hiring employees. In exchange, the company has to allow employees, twice per year, to sit with their 401k plan sponsoring agent to discuss their retirement goals, savings goals, and financial planning goals, whatever.” It seems logical that such a proposal would greatly increase the number of companies offering 401ks and increase the number of employees who use them and increase the amount of money saved in 401ks.

I think the proposal would greatly increase the availability of 401ks and many more people would have adequate retirement savings. The problem with the proposal is that there would need to be a corresponding reduction in Social Security and Medicare benefits. You can’t reduce the amount of taxes collected without also reducing the benefits paid out. Increasing people’s retirement savings wouldn’t reduce the amount of Social Security or Medicare benefits being paid out.

I think possibly a smaller reduction in the FICA tax rate along with a phased reduction in benefits paid might work although it would be difficult for such a measure to be passed by Congress. Some other ideas to increase retirement savings are to make all 401ks opt-out. Perhaps participation in 401ks could even be made mandatory. I also think it should be more difficult to take money out of your 401k before retirement. Any proposal that replaces Social Security with private savings would have to be carefully implemented to make sure it didn’t leave a large segment of the population without either enough private savings to live on or Social Security income.

Eventually something will have to be done and it will only be harder to solve the problem as more time goes by. What ideas do you have for solving the retirement crisis?

2010 401(k) Contribution Limits Could Fall

August 27th, 2009  |  Published in 401K  |  Comments Off on 2010 401(k) Contribution Limits Could Fall

The current 2009 limit for employee contributions to a 401(k) is $16,500, with employees over 50 able to contribute an additional $5,500 as a catch-up. When the IRS announced the 2010 contribution limits in October, we may find that the limit will be lowered because there is a provision in the law that requires that contribution limit to be pegged to inflation. The formula compares 2009 third quarter inflation versus 2008 third quarter inflation to calculation the contribution limits. Inflation was 4.94% in September 2008, it’s negative this year (since as far as March!).

In 2010 IRS could cut 401(k) contribution limit to $16,000 [USA Today]

401(k) Fee Disclosure Bill

April 23rd, 2009  |  Published in 401K  |  Comments Off on 401(k) Fee Disclosure Bill

This week the House Education & Labor Committee introduced the Fair Disclosure for Retirement Security Act of 2009, a bill that would require your 401(k) plan to clearly state all fees that it charged. Currently, the law doesn’t require your plan administrator to disclose all the fees and it’s often very difficult to find this information.

The bill requires 401(k) plans to include all fees in “basic investment information,” as it would disclosures on risks, returns, and investment objectives. The fees would include but not be limited to administrative fees, investment management fees, and transaction fees.

Plans would also be required to offer on low-cost index fund and disclose any financial relationships so that the company can determine if there are conflicts of interest.

Review Your 401(k) Fund Fees

April 10th, 2009  |  Published in 401K  |  4 Comments

This week, I analyzed my wife’s old 401(k) and learned that she had around $7,000 spread across nine funds at T. Rowe Price. Fortunately for her, and most other 401(k) participants, she’s not charged for having so many funds; it’s just a bit of a mess whenever you open up her statements because you have nine balances, nine bar graphs on performance, and nine discussions of the fund’s prospectus.

The only tangible negative about having those nine funds is that it becomes very difficult to figure out what your composite expense ratio is. An expense ratio is how much you’re paying a mutual fund to manage your money. A composite expense ratio is the average expense ratio across all your funds after you take your balances into consideration. It’s what your expense ratio would be if you were to treat all the funds in your 401(k) as one fund.

Anyway, her composite expense ratio wasn’t too bad, a 0.6946%, but we consolidated it all into two funds – a S&P 500 index fund and a PIMCO bond fund. This cut her expense ratio in half and gave her the kind of diversity she probably was looking for in the first place. It’s not as diverse as it was before but this is easier to manage from an information perspective.

This also fits better with her overall diversity plans because integrating an old 401(k) with 2 funds is easier than integrating 9.

401(k) Employer Match Cancellation

April 1st, 2009  |  Published in 401K  |  Comments Off on 401(k) Employer Match Cancellation

If you work at a company that has stopped 401(k) contribution matching by your employer, you should be happy, rather than upset. I’ve been talking to a few people, over email, about how they should respond to their company canceling their 401(k) match. Some are upset that their companies did this (one of them had it coupled with a 5% cut in salaries), but I reminded them that the alternative was the fire some of their co-workers. They understood that logic.

The next question was whether they should continue to contribute to their 401(k) and I said Yes! The recent drop in the stock market might give you reason to consider pulling back a little, the slowing of the economy might give you another reason to pull back a little, and the prospect of losing your job may have you wanting to bolster your emergency fund.

I would say that only the last reason is a valid one if you are considering lowering your 401(k) contribution. Unless you’re taking the money and earmarking it specifically for emergency savings, I think you should continue to make contributions, with or without the match, because in the long run the market will recover and you will retire a much happier person.

Being Fired Doesn’t Affect Retirement Vesting

March 12th, 2009  |  Published in 401K, Pensions  |  Comments Off on Being Fired Doesn’t Affect Retirement Vesting

If you are fired, it doesn’t affect the vesting status of your retirement assets. Any funds that hadn’t vested, will expire. Any funds that had vested, are yours to keep forever. Any contributions you made are always yours, regardless of how long you’ve been there or how the vesting schedule works. Your money is always yours.

Here’s a likely scenario – you contribute 6% of your salary to your defined contribution 401(k) plan and your company matches fifty cents on the dollar, kicking in 3%. The employer match doesn’t vest for a full year, meaning the 3% they put in doesn’t become yours until after a year. If you are fired in the next year, they will deduct the 3% from your account and leave you your 6%. The 6% you contributed is always yours, they can never take that away. The vesting schedule of 1 year simply means that the employer’s contribution isn’t yours until one year.

The same rule applies to defined benefit plans like pensions. Whatever you have vested is yours to take, role over into another account, whatever.

Being fired sucks, regardless of how much you get to keep, but at least you get to keep what’s rightfully yours.