Understanding Your 401k

A 401K is a retirement plan sponsored by your employer. It is a defined contribution plan where you contribute a certain portion of your income into the account. 401K accounts are popular because of two main reasons.

As a retirement investment, the 401K has both advantages and disadvantages:

Pros:

* Tax deferred until withdrawal.
* Possibility of additional contributions from employers

Cons:

* Withdrawal penalties of 10% with certain exceptions.
* Lack of liquidity if the contributor needs the money for another purpose.

Benefits of a 401K

First is is a tax deferred plan, as an example lets say you put $4,000 dollars into the account over a year and earned $54,000 that year, only $50,000 would have to be claimed as income. On the other hand, the benefits upon withdrawal once you've retired are taxed as income. Second, employers may offer a matching contribution giving you a strong incentive to deposit into the 401K account because of the increase in assets gained if employers match the deposit.

The tax deferment option can be advantageous because retirees generally require fewer expenses than during their career so can live off of a smaller yearly income. This drives them to a lower tax bracket so they have to pay less on the withdrawals from their 401K than they would have paid during their working years.

Although a 401K is an employer provided benefit, if you were to change employers and your new employer has a 401K plan, you can transfer your old 401K plan to the new employer. If your new employer does not offer a 401K plan, it can be transferred to an IRA at another institution or the old employer may charge a fee to keep the 401K managed through them.

The money deposited in a 401K is distributed among a variety of assets that could include stocks, bonds, mutual funds, money market funds and others. The options available are based on the specific plan your employer allows and the proportion of funds in each can be regulated by the contributor manually.

Deposit Limits

401K contributions are limited to a maximum of $16,500 a year in 2009. People age 50 or older are allowed an exception to this limit in the form of "catch-up" contributions. These catch up contributions are limited to $5,500 in 2009. These limits are also imposed if more than one 401K (such as a traditional and Roth) are owned by the same person, there can be no more than $16,500 contributed to both accounts combined. These limits are set by the IRS and can differ from the limits set by your employer's plan which may limit it based on a % of yearly income.

Withdrawing Funds from a 401K

The current age requirement to begin withdrawing funds from a 401K is set at 59 ½. At this point withdrawals can freely be made with no penalty, but an income tax must still be paid. If withdrawals are made before this point, there is a 10% tax added on to the income tax for the withdrawal.

There are a few exceptions to this rule. Some plans may allow the employee to take a loan out from their 401K plan. Loan conditions can vary greatly based on individual plans offered by employers but won't exceed 5 years and will be a reasonable income rate. The income is then paid back and added to the 401K account but does not get the tax deferred treatment that regular deposits get.

In addition to the available loan, 401K plans will not suffer the 10% withdrawal fee if the contributor dies, is disabled or cannot work any longer. If upon leaving the employer which holds the plan, the employee cannot find another plan to transfer the funds to such as an IRA or a new 401K, the funds can be distributed without penalty.

Types of 401K plans

All of the above information was in reference to a traditional 401K plan, the following is a list of non-traditional 401K plans available and how they differ from the traditional plan.

Roth 401K

A Roth 401K differs from a traditional 401K primarily in that it is does not have a tax-deferred contribution. This means that an income tax is paid on all income before the contribution is made but at the time of withdrawal, no income tax is paid. There are additional restrictions associated with a Roth 401K. The $16,500 limit is imposed on a combination of traditional and Roth 401K that an employee may have so they cannot invest $16,500 in two separate accounts.

SIMPLE 401K

This is a type of 401K plan available to companies with 100 or fewer employees. The employees eligible must have received at least $5,000 in pay from the company in the last year. Traditional 401K plans have a requirement for the employer to test whether the higher compensated employees in the company are being treated as equally as lower paid employees. The SIMPLE 401K eliminates those testing requirements so allows small businesses to provide retirement benefits to their employees without high costs. One difference is that the SIMPLE 401K has a lower limit of $11,500 contribution per year in contrast to the $16,400 limit in a traditional 401K.

401K plans are popular among employees and are the major source of retirement income for 44% of all workers. It is important when planning for retirement to understand the different options available and fitting them to your personal preferences. You can read more about how a 401K fits into saving for retirement and retirement investing.

You can find the original article here: Understanding Your 401k.

Finantage is independent of the financial services and banking industries. This allows us to provide honest and accurate information directly to you without forcing you to endure a sales pitch. We use this independence to give you a financial advantage whether you are buying your first home or you are setting up a retirement fund.

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You Can Rollover Your 401(k) Within Minutes, But Be Careful!

When you change your job, your old employer usually expects that you will take the money in your 401(k) plan with you. Leaving the money with the old employer is a bad idea. Withdrawing that money for spending is even worst! The better option is to do a rollover.

The process of rollover is very simple. You should decide which investment company you want to put this money. There are many companies in the market like AmeriPrise Financial, Schwab or TD AmeriTrade. You can select one of them and contact them for 401(k) rollover. There is a small form which you need to fill up. This form is very easy as it contains your basic information and details of your 401(k). Once you send them this form, they will start working on it.

In the meantime you should contact your former employer and request him for a rollover. You will be again required to fill up a form for such request. Within two weeks of this paperwork you should receive a positive confirmation from both your former employer and the investment company where you are going to rollover the money. And that's all you need to do.

The process looks very simple but there are some hidden dangers behind.

Remember, there is a time limit for taking the rollover decision. In case of you delay, your former employer has two options - he may allow you to continue in the company plan on he may send you the balance by check to get rid of you.

Keeping the money with your former employer is not a good option. They may not offer a wide range of investments, so your choice is limited. The returns may not be lucrative in this option.

Receiving a check of your 401(k) balance is worst option. You should never deposit that check into bank. That money will be considered your income for that year and you will be paying of tax on that! Then you will start using that money here and there. This is your retirement money and you should not spend it just in the middle of your career for less important things. So the best option is - rollover that money to an investment company of your choice and take care of your retirement.

401(k) rollover is indeed the best option when you change your job. It will get you great flexibility and you may not be required to contribute big money to continue with it. The only condition is - you should act fast.

You change your job frequently, depending on your career prospects, opportunities and pay rise. It's absolutely fine, but what about your retirement benefits? Your 401(k) account needs a rollover. You need to do it quickly with some precautions. What are they? Chintamani Abhyankar explains.

Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. He has written many books explaining inside secrets of the magic world of personal finance. His famous eBook Stop donating your money to IRS which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax.

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Low-Risk, Inflation Beating Investments For Your 401(k)

As a result of the meltdown of many 401(k) plans since 2008, many 401(k) owners are looking for more stable, less riskier investments to include in their 401(k) investment plans. Stable-value funds may be the solution for such investors.

Stable-value funds offer low-risk returns that beat inflation and should be considered as a safe-haven for your 401(k) plan. Stable-value funds typically invest in medium-maturity bonds with maturity dates ranging from two to four years. The longer maturity of the debt held by stable-value funds allows them to deliver higher yields than money-market funds. But the longer maturities also increase risk and that is why stable-value funds have higher returns. To minimize risk, institutions use insurance "wrappers" from multiple insurers to cover the uninsured portion of the stable-value fund portfolio.

Although stable-value funds offer higher returns than money-market funds, they do come with certain restrictions. Retirement plans do not allow you to transfer money directly from a stable-value fund to a money market fund or to any short-term or intermediate-term bond fund. Instead, you must move money into a non-competing fund such as a stock fund, for at least ninety days.

Stable-value funds have a lot of pluses but one negative is that you will not get rich from them. They are more conservative investments than traditional mutual funds and more aggressive than traditional money market funds. Investors should earmark at least 20% of their 401(k) funds to stable-value funds with the balance invested more aggressively or in accordance with your risk tolerance investment style.

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Benefits of Fixed Rate IRAs

What are IRAs?

Individual Retirement Accounts, or IRAs, is a personal saving account for individuals to save for their retirement. One of the main reasons for opening an IRA is the income tax advantage provided to the individual while they are saving.

When money is deposited into an IRA, it is often called a contribution. During the same year that the contributions are made, an income tax deduction will be available. This deduction will vary based on the amount of the deductions and also the tax laws. Most laws state an upper limit of how much can be invested in the IRA. This limit is usually tied to the amount of income received by the individual that year.

As long as no withdrawals are made from the account, the money invested, plus any earnings made on it, will accrue tax free. Each year, income and gains will be generated on the contributions plus increases from previous years without having to pay any taxes. Each year, further contributions can be made to the IRA up to the allowable limit for that time frame. It is important to remember that IRAs are designed to save for retirement, so most have early withdrawal fees, often as high as 10%, particularly if the individual begins to draw before the age of 59 ½.

There are a number of different types of IRAs available, including a traditional IRA, education IRA, simplified employee pension (SEP) IRA, simple IRA and Roth IRA. SEP and simple IRAs are IRAs created by employers for employees. Traditional, education and Roth IRAs are accounts opened by individuals for their own benefit. As the name implies, education IRAs are used to save for paying for further education. This type of IRA can be withdrawn prior to age 59 ½ if it is used to fund education costs.

What are Fixed Rate IRAs?

As with most investment or borrowing accounts, individuals can choose between fixed or variable interest rates. The same is true of IRAs. Many financial institutions offer both fixed rate and variable rate traditional, and Roth IRAs, while some also offer the choice for education IRAs also. The circumstances of the individual and their savings plan will determine whether fixed rate or variable rate is the right plan for them.

The main differences between fixed and variable rate IRAs are how the deposits are made and interest paid. With a fixed rate IRA, the individual agrees to deposit a certain amount of money over a specific period of time. There is usually an opening deposit amount and deposits are set up at regular intervals. Because the individual has agreed to "lend" this amount of money to the financial institution for the stated period, the benefit is often higher returns and a fixed interest rate for the entire period.

Variable rate IRAs work much the same as other variable rate investments, like mutual funds. Contributions can be made whenever the individual likes and the money is not locked in for a certain period of time. As such, the interest rate is not locked either, so it will fluctuate with market conditions. For short term investing, variable rate IRAs may make more sense, but only if the market shares gain in value.

Benefits of Fixed Rate IRAs

As stated, individuals who decide to invest in fixed rate IRAs can benefit from higher returns due to higher interest rates. The longer the money is invested and the greater the amount, the higher the interest rate. Because the investment is in an IRA, the interest generated on the contributions remains untaxed until they begin withdrawals.

Fixed rate IRAs provide more security compared to variable rate IRAs. A guaranteed interest rate over the term of the contribution is provided for fixed rate IRAs. If the market is particularly volatile, a fixed rate IRA will remain stable, allowing for a better forecast of the final amount saved.

In the end, deciding between a fixed rate IRA and a variable rate IRA comes down to the amount of risk the individual is willing to take with their portfolio. For higher, short-term gains, a variable rate IRA may be more popular. For many, the guarantee of a set amount of future income is what makes fixed rate IRAs more attractive to many investors. For those who are looking at long term investments, fixed rate IRAs, where the contributions role over, are likely to be the better bet.

Debra Dragon is a freelance writer for DepositAccounts.com. She writes about how to make your money work better for you through various deposit accounts, including savings accounts, interest checking accounts, IRAs, and money market funds.

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Benefits of 2010 Roth IRA Conversion

As a way to encourage individuals to move their funds from traditional IRA accounts and covert to Roth IRA accounts the government has instituted the 2010 Roth IRA conversion. This conversion, when planned and completed properly will be a great opportunity for individuals who are planning their retirement.

The impetus of the 2010 Roth IRA conversion was the government's need to get money. Traditional IRA accounts are not taxed until the money is removed. Roth IRAs are taxed before the money goes in. So, the need of the government for tax dollars could be a great benefit to individuals who want to create a retirement income that will not be taxed.

When a person converts their traditional IRA to a Roth IRA they will have to pay taxes on the value of the contribution. This is calculated using several different methods which include income of the individual, tax bracket, etc. However, once this tax has been paid and it is in the Roth IRA there will not be a need to pay taxes on it when one retires. That money, and the growth that it sees during the time it is in the account are not taxable income.

In order to get more individuals to participate in the 2010 Roth IRA Conversion the government also lifted the limitation that disqualified people making over $100, 000 in adjust gross income. These individuals can now participate in this IRA. The phase out of the ROTH contributions continues to be in place so if an individual cannot contribute because of the phase out there has been no provision made for them to re-enter the program.

The benefits of a Roth are innumerable. One is that the money in the ROTH is pre-taxed so one does not have to worry about taxes when they begin to receive benefits from it. the drawback, of course, is that there is no IRA deduction with these IRAs. Certainly a worthwhile trade off.

The next benefit is in regards to the Required Minimum Distribution that tax deferred IRAs have. When a person turns 70. 5 they have to take money from their IRA and it is taxed. If they don't take the money out they are taxed and penalized. Since Roth's has already been taxed it does not fall into the Required Minimum Distribution trap.

If you feel the tax free nature of the Roth is worth forgoing the initial IRA deduction that the traditional IRA offers you may be interested in this product. The 2010 Roth IRA conversion provides a small window of opportunity if you have a higher income.

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Your 401k and the Retirement Savings Contribution Credit

If you earn relatively little, there's good news for your 401k: a federal tax credit. A tax credit is better than a deduction because it directly reduces the amount of taxes you owe, making it as good as cash. Unfortunately, the federal tax credit is limited.

Eligibility for Retirement Savings Contribution Credit (in 2008):
Single person with income less than $26,500 a year
Head of household with income less than $39,750
Joint return with income less than $53,000

These amounts change every year. Check out the IRS web site for the latest figures by searching IRS.gov for "Retirement Savings Contribution Credit."

The credit is not available to full time students and people claimed as a dependent on someone else's (like a parent's) tax return.

The tax credit runs on a sliding scale, starting at 50 percent for single filers with income under $15,500 and joint filers with incomes less than $31,000. The 50 percent tax credit means that for every dollar that you contribute to your 401k, your tax bill is reduced by 50 cents. As incomes rise, the tax credit falls, until it reaches ten percent for those just under the threshold of eligibility.

Think about what this means for the lowest income workers whose companies will match half of their contributions: putting money into the 401k is free! Half the contribution is matched by the company, and the other half offsets federal taxes. It's a great deal if you can tighten your belt a little to be able to make the contribution.

Keep in mind, however, that this is not a "refundable credit." If you have enough deductions that you owe no tax whatsoever, you will not get cash back from the government. You'll only benefit if you have a tax liability. (I'm NOT talking about whether you get a refund after you file your taxes; I'm talking about whether your tax return shows that you pay any tax at all.)

The Retirement Savings Contribution Credit is a very good help to lower income workers concerned about their retirement. Unfortunately, it does not apply to very many people. Those folks who are eligible often feel that they have very little discretionary income. Saving for retirement is hard for low-income workers, but it is possible. This tax credit will make the task a little easier.

"The ABCs of Your 401k" is a free, on-line course that elaborates on this and other aspects of your 401k, at http://www.abcinvesting.com The course was created by the author of this article, Dr. Bill Conerly, chief economist of abcInvesting.com, which provides accurate, basic, and clear investing information.
(C)2009 abcInvesting.com LLC

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International Term Life Insurance Vs Cash Value Insurance

There are two forms of life insurance policies available. The first is Domestic or International Term Life insurance, which is the most basic form of insurance. It offers insurance death benefit coverage and that's it. With a term policy, your premiums are applied 100% to the cost of the term insurance. As you age and retirement grows near, the need for any life insurance decreases. Your children will now be able to support themselves and your savings for retirement will begin to approximate a lump-sum insurance payment. At this time, it may be safe to cancel or sell your current Domestic or International Term Life insurance policy.

The second type of insurance is cash value insurance. There are many financial products that fall under this category. They can include universal life insurance, variable life insurance and whole life insurance. Cash value insurance combine regular term insurance with a tax-sheltered savings plan that is long-term. One of the most important things to know about cash value policies is that they must be held for life, but this does not mean that premiums need to be paid for life; it is possible you only need to pay premiums for 5 -7 years. In most cases, there will be some upfront costs that are associated with setting up the savings plan, paying a commission to the agent and investing the money. Despite these initial charges, this type of tax-sheltered savings can have huge advantages, however, be aware that it may take at least 10 years for those advantages to be a benefit. If you are thinking of purchasing a cash value policy, make sure you learn about every aspect of the policy.

Understanding how a general cash value policy works is essential. Your life insurance is paid by a portion of your regular premium payment. The balance is then applied to the savings account attached to the policy. In order to build savings, your advisor should request a minimum death benefit and fund the policy over at least 5-7 years. The premiums for a cash value policy are higher than that of a term life policy with the same death benefit, but you are not buying this policy for the death benefit, but rather for tax-free savings and tax free withdrawals. For this retirement strategy, you definitely want to get the minimum death benefit to maximize the cash value growth. While the premium may seem higher, savings is the ultimate goal. The savings from a cash value policy can provide you with income that will cover all life insurance payments upon retirement. If you die, the balance of the savings and the death benefit is then passed onto your named beneficiary, which ideally will be an irrevocable trust. Depending on the type of policy, the amount passed on will be a portion of the death benefit of the insurance or in addition to that death benefit.

If set up correctly, removing money from the plan will not result in income taxes which is one of the key benefits of the policy. There are strict rules regarding taking money from the savings in the plan, but a good advisor or Estate Street Partners will walk you through those details.

In the author's opinion, the best type of cash value life insurance is Indexed Equity Universal Life (EIUL) because it has an annual minimum return guarantee, but still allows the cash value to grow at market rates every year if the stock market has positive returns. These policies lock in the gains in up years and avoid losing money in the years the market goes negative. Usually these policies are tied to a stock index like the S&P 500.

The mechanics are simple: The insurance company does not invest in the stock market, rather they invest in bonds and some of the interest that is generated from the bonds goes to you to guarantee a minimum rate of return and some of the interest is used to buy call options on the index. When the stock market index goes up it pays off the policy at the same rate of return of the market.

There are many people who will buy a cash value policy and then cancel it. Cash value plans can provide great benefits, but you must keep that policy and not cancel it. If you think you may cancel a life insurance policy later, it may be better to purchase a term life policy instead. But there is really no need to cancel it, just stop paying the premiums and the cash value will continue to grow tax free. Unlike a Term life policy, one does not need to pay premiums for more than 5 years unless they want too.

If you are contemplating buying life insurance, make sure the agent breaks it all down. You want to know the exact benefits of each type of policy and what these benefits entail. Many agents will recommend you to buy cash value because of the savings plan attached to it. While this may be a good option for most, it may not benefit everyone in the same way; it depends on each individual's situation. Each person has their own needs when it comes to life insurance, so make sure you get all the information needed before making a decision.

Best IRA Rescue provides services on your Roth IRA, IRA investments & traditional IRA and will help you reduce your inherited and beneficiary independent retirement account taxes in your estate assets. Roth on ROID™ is your advanced Roth IRA retirement planning strategy. It is Cash Value Life Insurance and one of the best IRA tax-savings strategies with benefits of a guaranteed death benefit, guaranteed principal, tax-free growth, and tax-free distributions from policy loans. Traditional IRAs and ROTH IRAs cannot invest in life insurance. Please contact us if you have any questions. Rocco Beatrice, CPA, MST, MBA

International Term Life
Term vs Cash Life Insurance
Boston, MA: 71 Commercial Street #150 Boston, MA 02109
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toll-free: 888-93ULTRA (888-938-5872) tel: +1.508.429.0011 fax: +1.508.429.3034

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