Save My 401(k)!: What You Can Do Now to Rebuild Your Retirement Future (PERSONAL FINANCE & INVESTMENT) - Softcover

Rye, David E.

Softcover

ISBN 10: 007173631X ISBN 13: 9780071736312

Publisher: McGraw Hill, 2010

Synopsis

Easy-to-follow action plans for reversing retirement investment losses and rebuilding wealth for the future

Save My 401(k)! provides critical care to stop the hemorrhaging of your nest-egg dollars, stabilize assets, and rebuild wealth for the future.

The book's assessment tools help you pinpoint the best approaches for achieving long-term goals while being able to customize your 401(k) game plan for future times of economic uncertainty. A "Putting It All Together" section at the end of the book gets readers ready to hit the ground running with checklists and other tools for confident, winning retirement investing.

About this title

About the Author

David E. Rye (Scottsdale, AZ) has written several books on business and investing, including the bestselling investment classic Two for the Money. A contributor to the Wall Street Journal, Barron's, and Investment Business Daily, he conducts financial seminars and teaches at the college level.

Excerpt. © Reprinted by permission. All rights reserved.

SAVE MY 401 (k)!

What You Can Do NOW to Rebuild Your Retirement Future

By DAVID RYE

The McGraw-Hill Companies, Inc.

Copyright © 2010 The McGraw-Hill Companies, Inc.
All rights reserved.

ISBN: 978-0-07-173631-2

Contents

Preface
Acknowledgments
PART 1 UNDERSTANDING YOUR PLAN
CHAPTER 1 Getting to Know Your 401(k)
CHAPTER 2 Investment Options
CHAPTER 3 Know Where You're Going
PART 2 INVESTING FOR RETIREMENT
CHAPTER 4 Finding the Money You'll Need
CHAPTER 5 Making Good Investments
CHAPTER 6 Investing in Stock Funds and Bond Funds
CHAPTER 7 Investing in Index Funds
PART 3 MANAGING YOUR RETIREMENT
CHAPTER 8 Getting Ready to Retire
CHAPTER 9 Making Your Money Last
CHAPTER 10 Setting Up Your Estate Plan
PART 4 PUTTING IT ALL TOGETHER
CHAPTER 11 Applying Everything You've Learned
Glossary
Online Resources
Index

Excerpt

CHAPTER 1

Getting to Know Your 401(k)

DO YOU EVER wake up at night worried about the financial setbacks you'rehaving with your 401(k) plan in this chaotic economy? Does it aggravate you whenyour plan's value seems to be going in the wrong direction—down? The stockmarket nosedive shown in Figure 1.1 on the following page came on theheels of the 2008 recession and devastated many 401(k) plans. The figure showswhat happened to the average price of a stock on the New York and NASDQ StockExchanges from March 2008 through March 2009.

Many investors had made what they thought were good investments only to see asignificant drop in the value of their accounts in 2008 and well into 2009. Someblamed the 401(k) itself, but that's like shooting the messenger who brings badnews. If you're willing to take the time to really get to know what's insideyour 401(k), then you can start growing it into a nest egg that will help youretire comfortably.

How 401(k)s Work

Employer-sponsored 401(k) plans are retirement savings plans that were createdby the Internal Revenue Service (IRS) in 1978. They allow you to put some ofyour income away now to use later when you need it for retirement. To motivatepeople to start saving in their 401(k) plans, the federal government, in itsinfinite wisdom, created tax breaks for participants.

The plans rapidly grew in popularity when employees discovered that the plansallowed their employers to make tax-sheltered contributions directly into their401(k) accounts. In addition, they liked that 401(k) plans were more portablethan traditional pension plans because they could easily be moved from oneemployer to the next. Employers also liked 401(k)s because they were lessexpensive to fund than defined-benefit retirement plans and easier toadminister.

When you elect to participate in your employer's 401(k) program, you must agreeto deposit into the plan some amount of money from your paycheck. You determinethe amount to be deposited. Some employers match all or part of yourcontributions. You don't pay federal income tax on contributions until youwithdraw your money. What your 401(k) will be worth when you retire depends onthree basic factors: how much you and your employer contributed into the plan,what rate of return you realized from the investments you made, and the lengthof time your money remained in the plan before you withdrew it.

The Employee Retirement Income Security Act (ERISA) is the federal law that setsthe standards for employee retirement plans, including 401(k)s. Employers arerequired to provide to their employees documentation that describes the dailyoperation and benefits of their 401(k) plan, identifies the trust fund thatholds their employees' accounts, and keeps them up-to-date on their accountbalance, deposits, and earnings.

The Economy and Your Future

Now that the first decade of the twenty-first century is over, what's in storefor the second decade and how will it affect your retirement? For one thing,we've all inherited a mountain of private and public debt. Consumer spendingwill no longer get a steroidal fix from cheap loans and cashed-out home equity.Lending terms will be significantly tougher for both individuals and businessesalike.

Global competition will be fierce in manufacturing and services, keeping a lidon U.S. wages. The mountain of government debt incurring will inevitably resultin higher inflation, more taxes, and higher interest rates. Foreign creditorssuch as China will keep lending us money, but they'll demand a premium price fortheir loans. All of these economic events will dampen corporate profits,restrain stock prices, and hamper employers' ability to match employee 401(k)contributions.

The good news is that on average we'll live twenty years longer than ourparents. Unfortunately, that puts more pressure on retirement accounts. If youplan to retire in your sixties or earlier, you could live thirty or more yearsin retirement. So it's never too early or late to plan for a retirement that maylast longer than your working career.

The age you retire is up to you, regardless of your income level. The securityof your retirement will depend on focusing your attention on your financialgoals. Your 401(k) plan is more important now than it ever was. Fortunately, thelaws affecting 401(k) plans make it easier for Americans to save, but they alsomake workers more responsible for their own retirements.

What's in Your Plan?

Your 401(k) plan is a tax-deferred savings account similar to an IndividualRetirement Account (IRA) with several important exceptions. Your employer ownsyour 401(k) plan, which is an important distinction you need to understand. Allemployees are allowed to participate in their company's plan. The money that youcontribute into your part of the 401(k) plan belongs to you, and anycontribution that your employer makes on your behalf belongs to you once you'vesatisfied vesting conditions set by your employer.

Tax-exempt contributions to your 401(k) come directly from your paycheck up to$15,500, $22,000 if you're 50 or older, each year. You can contribute to your401(k) plan only while you're still working for the employer that set it up. Ifyou change employers and your new employer doesn't have a 401(k) plan, you canconvert it to an IRA. If your new employer has a 401(k) plan, you can transferit over into your new employer's plan.

Some employers contribute to their employees' 401(k) plans as their way ofencouraging their workers to participate in their retirement plan. Employerschoose the amount they're willing to contribute as part of a profit-sharingprogram or routinely make matching contributions that have nothing to do withthe company's profit. Matching contributions are made at a specified percentageof each employee's contribution. In some cases, employees are not 100 percentvested in matching contributions until they have been in the program for aspecified period of time. However, more and more employers are offeringsafe-harbor 401(k) plans, which make their contributions 100 percent vested(i.e., the money is yours) when they are made. Your own contributions are always100 percent vested.

An employer's contribution is one of the most valuable features of a 401(k)because it's like getting free money deposited into your retirement savingsaccount. Employers choose their own schedule for depositing money into youraccount. They may do it every payday or on a monthly, quarterly, or annualbasis. In some plans, you get their contribution only if you match it. Employersare not required by federal law to make contributions, and many stopped doing sowhen the recession hurt their businesses.

You typically have to work for a specified length of time, such as three or sixmonths, before you can leave the company without forfeiting your employer'scontribution. Make sure you know what the time requirements are in your plan.Your employer's contribution gives you an incentive to save, and it gives youraccount a powerful boost to grow through the appreciation of the investmentchoices you make. It therefore makes sense for you to always contribute at leastthe full amount that your employer will match. Most employees are allowed toparticipate in their employer's 401(k) if they are at least twenty-one years oldand have been with the company thirty to ninety days. The employer match featuremight not start until you have been with the company for a longer period oftime.

The rules that govern your employer's 401(k) plan are spelled out in a SummaryPlan Description (SPD) available from your human resources department. Itoutlines eligibility requirements, how to contribute, and how to withdraw money.Make sure you know the answers to these questions about the important featuresof your 401(k):

* Does your employer offer matching contributions, and if so, when are they madeand what are the vesting requirements?

* What are the minimum and maximum amounts you are allowed to contribute?

* When are you eligible to participate in your 401(k) plan?

* What investment choices do you have, and how do you change an investmentchoice after you've made it?

* If you quit your job, are you allowed to leave your money in the plan?

* What administrative expense fees do you pay? Are there any other special feesthat you may have to pay?

* Whom can you talk to if you need advice? How do you contact them? What are thefunction and responsibility of each contact person you're given?

* How can you get an itemized statement of your account whenever you want it? Isit available online?

401(k) Advantages and Disadvantages

One of the immediate advantages of a 401(k) plan is that once you startparticipating in one, it instantly reduces your current taxable income. Youdon't have to pay federal income tax on the money that is contributed into yourplan until you withdraw it. Here's an example of how you save on federal incometaxes when you participate in a 401(k) assuming the following:

* Your monthly gross pay is $5,000.

* You are in the 27 percent federal income tax bracket.

* Social Security and Medicare (FICA/FUTA) taxes are 7 percent.

* You are allowed to contribute up to 10 percent of your gross pay into a401(k), which is $500 per month for this example.

Table 1.1 shows what your take-home pay would be if you chose not toparticipate in the 401(k) versus what it would be if you did participate.

In this example, had you contributed $500 to your retirement plan, you wouldhave reduced your take-home pay by only $150. Without the 401(k), taxes eat awaythe money you could have been saving. And, we did not count the potentialinvestment earning (i.e., interest) you would have made on your $500contribution.

If you are participating in an employer-matching 401(k) plan, make sure you knowhow much you have to contribute to get 100 percent of the matching funds. Forexample, let's say you earn $50,000 and are allowed to contribute 6 percent ofyour salary ($3,000) into your 401(k). Your employer has agreed to match 50percent of every employee's contribution, or in your case $1,500. You end upwith $4,500 in your account after contributing only $3,000 of your own money.You also need to know the maximum amount you're allowed to contribute into your401(k). If you're 50 or older, you may be allowed to contribute more using whatUncle Sam calls a "catch-up" option.

While the tax advantages you get with a 401(k) are great, watch out for the flipside of the coin. If you think that since the money in your plan is yours thatyou can get at it whenever you want, watch out! There are strict rules thatdictate when you can withdraw money without having to pay a penalty.

Many companies permit you to make hardship withdrawals for specified reasons. Ifyou're able to qualify for a hardship withdrawal and under age 591/2, you will berequired to pay federal, state, and local taxes if applicable, and you may berequired to pay a 10 percent early withdrawal penalty. Hardship withdrawals areonly permitted if you can show you have an immediate financial need and canprove to your employer that you have exhausted all other financial resources toget the money you need. The hardship situations that have the IRS stamp ofapproval are:

* payment of post-secondary education-related expenses for you, your spouse,dependent children, and nondependent children

* costs related to the purchase of your primary residence or to prevent aneviction from your primary residence, such as a foreclosure

* medical expenses not covered by insurance for you, your spouse, dependentchildren, and nondependent children

You can withdraw only the amount you need to meet your hardship situation. Theamount of money you're allowed to withdraw must come from the money you'vecontributed. It cannot include money from investment returns or employercontributions. If your plan allows you to borrow money, you may be required totake a loan before taking a hardship withdrawal. You will have to repay the loanand interest with after-tax dollars. In some cases, the interest you pay goesback into your 401(k) account balance. Check your plan to see if it allows youto do this.

Rolling Over Retirement Accounts

Transferring your money from one tax-deferred retirement account such as a401(k) into another is known as a rollover, or a trustee-to-trustee transfer.There may come a time when it makes sense to roll over your 401(k) into a newretirement plan. For example, if you quit your job and start working for anotheremployer who has its own 401(k) plan, then you may want to roll over your old401(k) into the new plan. If the new employer doesn't have a plan, you can moveyour 401(k) into your own IRA or you can leave it with your oldemployer—if that is allowed. In some cases, your old employer will allowyou to leave your money in their plan even after you quit working for them. Ifyou are dissatisfied for whatever reason with your current plan, you may roll itover into another plan such as an IRA, as described next.

If you choose to transfer your money, you can do it by using either a directtransfer or a sixty-day rollover process. A direct transfer is the best choicebecause your money is transferred directly from the old trustee to the newtrustee into your tax-deferred account. If you elect to use a sixty-day rollovertransfer, you are given a check for the amount that's in your account from theold trustee and have sixty days to deposit the money with your new trustee.

You are allowed to do only one rollover of the same account once a year. If youmiss the sixty-day deadline or are not able to deposit the full amount that youwithdrew, you will owe tax on the amount not transferred plus a penalty ifyou're under age 591/2. Therefore, pay close attention to the paperwork involvedin moving money between retirement accounts. The IRS website (irs.gov)has easy-to-understand guidance on transfers.

Some employers prefer to give you a check for your 401(k) balance. If they do,have them make the check out to the financial institution (i.e., trustee) thatadministers the account where you want the money to go. If the check is made outto you, the employer is required to withhold 20 percent of your account value asfederal withholding taxes. You'll then have to file a special form with theInternal Revenue Service (IRS) to get that money back. The IRS will return thewithheld taxes when you provide them with confirming documentation that youtransferred your old account into another tax-deferred account. You don't wantto go through this IRS exercise; use the direct transfer option.

Replacing a 401(k) with an IRA

Individual retirement accounts, or IRAs as they are universally called, offerspecial tax breaks when used to save for retirement. They're like your 401(k)plan, but with IRAs you have access to an almost limitless number of investmentoptions to choose from that aren't available in 401(k) plans. Even if youremployer has a 401(k) plan, you can open an IRA yourself. Individual retirementaccounts are separate from your 401(k) and have limits on the amount you cancontribute each year. Depending on your income and whether you have a retirementplan at work, you might be able to deduct the amount you deposit in an IRA onyour tax return if you meet certain income restrictions, as outlined inTable 1.2. Consult IRS Publication 590 at irs.gov for specificIRA rules and questions.

If you're married, each spouse can have his or her own IRA and makecontributions if at least one spouse had taxable income in the year in which thecontributions were made. Both spouses can contribute separately up to the IRAlimit. Contributions can be made throughout the tax year and up until the April15 tax deadline. If one spouse has more than one IRA account, the annualcontribution limit applies to all the IRA accounts. There are penalties if theannual contribution limit is exceeded.

Contributions to an IRA are a do-it-or-lose-it proposition. If you don't make acontribution in a given year, you can't make it up in the following tax year.You're allowed to contribute up to $5,000 a year or $6,000 a year if you are 50or older. You can deduct your IRA contribution if you meet certain incomerestrictions that are covered in Table 1.2. The income limits are basedon the amount of your adjusted gross income (AGI), which is the sum of your workincome plus any other income you had such as interest and dividends frominvestments.

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Excerpted from SAVE MY 401 (k)! by DAVID RYE. Copyright © 2010 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Edition details

• Publisher: McGraw Hill
• Publication date: 2010
• Language: English
• ISBN 10: 007173631X
• ISBN 13: 9780071736312
• Binding: Paperback
• Number of pages: 224