Don’t take loans from your tax-deferred accounts

It sounds too good to be true. Why borrow from a bank when you can take a loan out from your 401(k) or 403(b) and pay yourself back in both interest and principal? If that sounds like a great deal, it’s not. Money purchase plans, profit-sharing plans, 457(b) plans and both 401(k) and 403(b) plans may offer loans, but IRAs, SEP IRAs, and SIMPLE IRAs do not. The IRS does have some restrictions on the borrowing. It limits how much you can borrow at any one time. In general, you are limited to the smaller of 50% of your vested account balance, or $50,000. However, there is one exception (hardship) that allows you to borrow up to $10,000 even if it exceeds 50% of the balance. It also requires you to pay yourself a reasonable rate of interest on your loan. Generally, you have five years to repay the loan, although you are required to pay at least quarterly payments. Recently a Thirty-something-year-old client told me he had taken out a $7,000 loan from his $50,000 403 (b) tax-deferred retirement plan years ago. He was surprised to find that it was not an interest-free loan and that he was required to pay off the loan in its entirety before he could draw from the account in retirement. What’s worse, if he quit his job, his company required that he pay off the amount in 60 days. He thought it was the IRS that laid down the rule provisions, but that is not the case. It is the company you work for that offers the plan Some companies won’t let...

What does your 401(k) investments look like?

By Nate Tomkiewicz and Bill Schmick It might surprise you to know that many retirement savers religiously contribute to their tax-deferred savings plans but have no idea what investments they own. Many plan representatives simply suggest that if you don’t know, just invest in a target date retirement fund. Is this a good idea? Most 401(k)s and 403(B)s plans, for example, have between 20 and 30 investment options you can choose from. This menu of choices normally includes bond and stock funds as well as international funds. There are also balanced or blended funds, which invest in a mixture of stocks and bonds. Many plans also have some kind of annuity-like investment as well as target date funds. Supposedly, target date funds take the thinking out of investing. Let’s say you plan to retire in 2040, so you select a target date fund that approximates that year. The rule of thumb states that the closer you get toward retirement, the more conservative one should be. That means you should have more bonds than stocks (according to Modern Portfolio Theory) in your investment portfolio as you age. Each year you draw closer to retirement, the computer model that actually manages these funds simply put more bonds in your portfolio and less stocks. As a diligent saver who wants to make as much as one can before retirement, let’s look at the track record of bonds versus stocks over the last ten years. In this case we have used Vanguard’s intermediate term bond fund versus Vanguard’s S& P 500 Index fund. But wait, you may say, the last ten years stocks...

Retirement savers could see positive news this year (maybe)

In this acrimonious political environment, little in the way of new legislation is expected to pass both chambers of Congress. One exception may be the Secure Act. Last Tuesday, a key House committee unanimously approved the bill, which would greatly enhance some private retirement plans. The bill would not only increase the flexibility of 401 (k) plans but would also provide much greater access for small business owners and their employees. The changes would hopefully encourage many more small businesses to offer private retirement benefits to their workers. It is the most sweeping legislation to come out of Congress in over a decade. The sponsors, including the top Democrat and Republican on the tax-writing Ways and Means Committee, intend to allow smaller companies to join together to provide these plans and provide a $500 tax credit for companies that establish plans and provide their workers with automatic enrollment. It would also offer the opportunity for long-term, part-time workers to participate in retirement savings plans. A case in point is Brothers Landscaping and Construction of Hillsdale, NY. The McNamee’s established their business back in 2007. Twelve years later, the company’s revenues are just shy of $1 million/year. I have known these guys ever since they started cutting my lawn in 2007. Hard-working, conscientious, and honest to the bone, it is men like these who are the back-bone of this country. James, 29, called me a few weeks ago to explore opening a 401 (k) plan for he and his 28-year-old brother, Tucker, as well as four additional employees. “We felt we had to do it,” James explained, “in order to...

The IRS has its hands full this year

The government’s partial shutdown has everyone on edge this year. Despite assurances from the powers that be, many taxpayers are concerned that their tax returns won’t be processed on time. Should you be worried? One misconception many have is that the Internal Revenue Service (IRS) is closed. Not true, the IRS remains open, despite having no budget since December 21, 2018. The agency is running under a contingency plan, which includes operating with only 12% of its staff. Usually, you can e-file your returns in late January, and that remains doable. The IRS announced it will be accepting 2018 tax returns starting January 28, 2019.   They also said they would be issuing refunds. To do so, they will be bringing back a large portion of their laid-off workers. Those workers, like the other 800,000 furloughed Federal workers, won’t be getting a pay check until the shutdown is over. The question remains: how many of those workers are willing to return to their jobs without a paycheck? We are already seeing some departments (such as Homeland’s TSA workers) balk at working for free any longer. But the government shutdown is not all the IRS needs to worry about. Thanks to the Tax Cuts and Jobs Act passed in a hurry by Congress last year, the IRS has been working overtime to deal with the mountain of new changes and adaptions necessary to reflect the new tax laws. To add insult to injury, it took months before the new rules were actually delivered to the IRS from the legislative branch. At the time, the Inspector General said that it would take...

This year brings change to Social Security and Medicare Benefits

As the year begins, those who are retired, or who plan to soon, need to know the changes the government has recently announced to your benefits. The good news is that retirees will get a 2.8% increase in Social Security payments. While that doesn’t sound like much, it happens to be the largest cost of living adjustment in seven years. What that amounts to for the average couple in retirement is about $67 per month, or an average monthly payment of $2,448. If you are one of those workers like me, who waited until 70 years of age before collecting benefits and are considered a “high earner,” then you will be receiving as much as $73 more per month up to $2,861. On the opposite end of the scale, individuals who want to claim their benefits earlier than their full retirement age, (but still plan to work) get a benefit. The amount of money they can make before their social security benefits are reduced or eliminated has increased. This year, a worker younger than 66 can earn up to $17,640 before losing any social security benefits. That is $600 more than last year. After that, they will lose $1 in benefits for every $2 of earnings over that limit. If you are going to turn 66 this year, you can earn as much as $46,920 without jeopardizing your benefits, which is $1,560 more than you could last year. Anything over that new limit will mean you will lose $1 in benefits for every three bucks you make. The earnings cap goes away once you reach full retirement age. That...

Time to check your risk tolerance

It is a good time to take a reality check on how aggressively you are invested. The 6.9% decline in the S&P 500 Index over October was gut-wrenching. But entirely within the realm of probability given the historical data. Here are some questions to ask. Did you find yourself checking your investment portfolios every day? How about every hour? Did you have trouble focusing on other, possibly more important, things like your job, or your family and friends? Was it more difficult to sleep at night, or did you lay awake worrying about the markets? How much time did you spend checking the averages and listening to the talking heads on television or in the print media? Did you call your broker or investment advisor and, if so, how many times? Did you want to blame someone for the market’s decline? Did you need that money for something immediate? If you answered yes to any of the above questions, you are probably invested too aggressively. That’s not to say that a sell-off is in any way pleasant. Everyone feels the disappointment, the pain of losing money, and the fear that tomorrow will bring more of the same. And even though your losses are only on paper, you still feel some anxiety. The question is how you handle it. By now, most of my readers understand that the stock market is not a one-way street. Investors should expect at least three declines of around 5 percent and one decline of 10% per year in the stock market. That’s on average. There have been plenty of times when the averages have...