Author: Richard Archer

Make the Most of Your 401(k)

Posted on December 17, 2015 by - Smart Money Tips

make the most of your 401k

As Americans increasingly rely on their 401(k) retirement plans to secure their financial future, understanding the nuances and benefits of these plans is crucial, especially for Microsoft employees and others planning their retirement savings.

What is a 401(k) plan?

A 401(k) plan is a retirement savings account funded by employees. For 2024, employees can contribute up to $19,500 (or $26,000 for those aged 50 and older) to their 401(k) accounts. These contributions can be made on a pretax basis, reducing taxable income, or through a Roth 401(k), where contributions are after-tax but withdrawals are tax-free.

Employer Contributions and Matching

One of the significant advantages of a 401(k) plan is employer matching. Employers often match a portion of employee contributions, such as 50% of the first 6% of salary contributed. This employer match enhances retirement savings significantly, subject to vesting periods that ensure employees receive full entitlement to these contributions over time.

401(k) Contribution Limits and Tax Implications

Total contributions, including employer matches, cannot exceed $61,000 in 2024. Contributions to traditional 401(k) plans grow tax-deferred until withdrawal, where they are taxed as ordinary income. In contrast, Roth 401(k) contributions are taxed upfront, but withdrawals are tax-free during retirement.

Distributions and Withdrawal Options

Withdrawals from 401(k) plans are typically penalty-free after age 59½, though early withdrawals may incur a 10% penalty. Employees leaving their jobs can roll over their 401(k) balances into an IRA or their new employer’s plan, avoiding immediate tax consequences.

Borrowing from Your 401(k)

Many plans allow borrowing against vested balances, up to $50,000 or 50% of the account balance, whichever is less. Loans must typically be repaid within five years to avoid penalties, with unpaid amounts treated as taxable distributions.

Investment Options and Flexibility

401(k) plans offer diverse investment options, including stocks, bonds, and cash equivalents. This flexibility allows employees to tailor their investments based on risk tolerance and retirement goals, ensuring a well-rounded portfolio.

Key Takeaways for Microsoft Employees

For Microsoft employees, maximizing employer matches and understanding Roth 401(k) benefits can optimize retirement savings. Consulting with a financial advisor or plan administrator can provide personalized guidance on leveraging 401(k) plans for long-term financial security.

A 401(k) plan remains a cornerstone of retirement planning, offering tax advantages, investment flexibility, and employer contributions that bolster financial futures. Whether choosing between traditional or Roth options, prudent management of 401(k) plans is essential for achieving retirement goals.

Source/Disclaimer: Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund may seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. Diversification and asset allocation do not ensure a profit or protect against a loss. Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2016 Wealth Management Systems Inc. All rights reserved.

529 College Savings Plans

Posted on December 17, 2015 by - Smart Money Tips

529 college savings plan

If you missed the first posts in this series, find them here: “Getting Started Simply: How the College Financial Aid Process Works” & “Long-Term Strategies for Paying for College“

Section 529 plans are tax-advantaged college savings vehicles and one of the most popular ways to save for college today. I recommend them to clients often because they offer a unique combination of features that no other college savings vehicle can match.

What are the advantages of 529 plans?

  • Federal tax advantages: Contributions to your account grow tax deferred and earnings are tax free if the money is used to pay the beneficiary’s qualified education expenses. The earnings portion of any withdrawal not used for college expenses is taxed at the recipient’s rate and subject to a 10% penalty.
  • State tax advantages: Many states offer income tax incentives for state residents, such as a tax deduction for contributions or a tax exemption for qualified withdrawals.
  • High contribution limits: Many plans let you contribute more than $300,000 over the life of the plan.
  • Unlimited participation: Anyone can open a 529 plan account.
  • Professional money management: College savings plans are offered by states, but they are managed by designated financial companies who are responsible for managing the plan’s underlying investment portfolios.
  • Flexibility: Under federal rules, you are entitled to change the beneficiary of your account to a qualified family member at any time, as well as roll over money from your 529 plan account to a different 529 plan once per year without income tax or penalty implications.
  • Wide use of funds: Money in a 529 college savings plan can be used at any undergraduate college in the United States or abroad that’s accredited by the U.S. Department of Education and, depending on the individual plan, for graduate school.
  • Accelerated gifting: 529 plans offer an estate planning advantage in the form of accelerated gifting. This can be a favorable way for grandparents to contribute to their grandchildren’s education. Specifically, a lump-sum gift of up to five times the annual gift tax exclusion ($14,000 in 2016) is allowed in a single year, which means that individuals can make a lump-sum gift of up to $70,000 and married couples can gift up to $140,000. No gift tax will be owed, provided the gift is treated as having been made in equal installments over a five-year period and no other gifts are made to that beneficiary during the five years.

How do I choose the right 529 plan?

You can join any state’s 529 college savings plan. To make the process easier, it helps to consider a few key features:

  • Your state’s tax benefits: A majority of states offer some type of income tax break for 529 college savings plan participants, such as a deduction for contributions or tax-free earnings on qualified withdrawals. However, some states limit their tax deduction to contributions made to in-state 529 plans only.
  • Investment options: Ideally, you’ll want to find a plan with a wide variety of investment options that range from conservative to more growth-oriented to match your risk tolerance. To take the guesswork out of picking investments appropriate for your child’s age, most plans offer aged-based portfolios that automatically adjust to more conservative holdings as the beneficiary approaches college age.
  • Fees and expenses: Fees and expenses can vary widely among plans, and high fees can take a bigger bite out of your savings. Typical fees include annual maintenance fees, administration and management fees (usually called the “expense ratio”), and underlying fund expenses. Compare the costs among plans using Savingforcollege.com.
  • Reputation of financial institution: Make sure that the financial institution managing the plan is reputable and that you can reach customer service with any questions.

How do I open a new plan account?

Once you’ve selected a plan, you’ll need to fill out an application, where you’ll name a beneficiary and select one or more of the plan’s investment portfolios to which your contributions will be allocated. Also, you’ll typically be required to make an initial minimum contribution, which must be made in cash or a cash alternative. Thereafter, most plans will allow you to contribute as often as you like. This gives you the flexibility to tailor the frequency of your contributions to your own needs and budget, as well as to systematically invest your contributions.

What is a 529 prepaid tuition plan?

There are actually two types of 529 plans–college savings plans and prepaid tuition plans (prepaid plans are the less popular type). The tax advantages of college savings plans and prepaid tuition plans are the same, but the account features are very different. A prepaid tuition plan lets you prepay tuition at participating colleges at today’s prices for use by the beneficiary in the future. The following table describes the main differences:

College Savings PlansPrepaid Tuition Plans
Offered by statesOffered by states and private colleges
You can join any state’s planState-run plans require you to be a state resident
Contributions are invested in your individual account in the investment portfolios you have selectedContributions are pooled with the contributions of others and invested exclusively by the plan
Returns are not guaranteed; your account may gain or lose value, depending on how the underlying investments performGenerally a certain rate of return is guaranteed
Funds can be used at any accredited college in the U.S. or abroadFunds can only be used at participating colleges, typically state universities

Note:  Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits. As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated.

Source: Broadridge Investor Communication Solutions, 2016.

Long-Term Strategies for Paying for College

Posted on December 17, 2015 by - Smart Money Tips

piggy-bank

If you missed the first post in this series, find it here: “Getting Started Simply: How the College Financial Aid Process Works“

When should you start financially preparing for college? I recommend at least ten years ahead of time. At this point, we don’t know what your total college expenses might be, but we do know they will likely be significant. Additionally, many people are entering their prime earning years when their children start college, so they may have a painfully high expected family contribution (EFC). Starting to save early is paramount to a successful college funding strategy.

One way to help motivate regular savings is this fact: You have the choice of saving now and earning interest, or borrowing later and paying interest. The average annual cost of a private college in 2025 is expected to be $65,509. Public universities are expected to be $31,189! Clearly, benefitting from the power of compound interest in a college savings fund can help. For example, $4,000 invested in the market earning an average return of 7% would be worth $7,869 in 10 years. If you saved $4,000 annually for 10 years at this return, your college fund would have $59,134!

What are the most common choices for college savings accounts?

  • Taxable investment accounts: These accounts have no tax-deferred growth treatment, but have the most investment flexibility.
  • Trusts: If you have no chance of receiving financial aid at all, a trust for the benefit of your child can be an appealing tool since they lower your overall estate, allow some control, and have flexibility of investment choices.
  • Qualified State Tuition Programs (529 Plans): These tax-deferred savings plans come in two different types: prepaid tuition plans and tuition savings accounts. This program is the most common type of college savings plan I set up for my clients, so I will devote my next blog specifically to 529 plans.
  • Coverdell Education Savings Accounts: These accounts only allow annual contributions up to $2,000 per child (subject to income limits), but can also be used to pay for private elementary and high school tuition, among other things.
  • Your home: Some colleges recognize mortgage debt in their financial aid calculations, so aggressively paying down your mortgage and borrowing against your home equity can be an effective strategy.

For those who wish to delve deeper into this, here are two great resources I rely on and recommend to clients:

Getting Started Simply: How the College Financial Aid Process Works

Posted on December 17, 2015 by - Smart Money Tips

college financial aid process

This first post in our series on paying for college provides a brief overview of the basics, including how your “need” is calculated. In future posts, we will examine the financial aid process in more depth and give you pointers on how to try to get the most aid for which you are eligible.

The cost of a four-year private college education has surpassed $150,000 at many schools. Even the public Ivies—state schools with excellent reputations—can run in excess of $200,000. Despite these costs, billions of dollars in financial aid are available for qualified families. Success in securing aid isn’t just about demonstrating need; it’s about understanding the financial aid office’s strategies. Financial aid is essentially a negotiation where their goal is to maximize what you pay, while yours is to ensure a fair deal.

Each year of college, you will need to complete the Free Application for Federal Student Aid (FAFSA) and possibly the PROFILE form for specific colleges. These forms, more detailed than tax returns, determine your Expected Family Contribution (EFC)—how much income and assets they expect your family to contribute to college costs.

College expenses typically include tuition, fees, room and board, personal expenses, books, and travel. Your “need” is the difference between these costs and your EFC.

Regardless of the school you apply to, your EFC remains relatively constant, while your need varies based on each school’s cost. To bridge this gap, each institution assesses how eager they are to enroll your student and offers a financial aid package comprising:

  • Grants and Scholarships: tax-free funds that do not require repayment.
  • Federal Work Study: a federally subsidized student work program.
  • Student Loans: government loans, typically interest-free until after graduation.

Your initial aid package may not meet your needs, but understanding the financial aid process empowers you to negotiate with the financial aid office for better terms.

For further exploration, I recommend these two valuable resources to clients:

  • Understanding types of financial aid and how to maximize your eligibility.
  • Navigating the Free Application for Federal Student Aid (FAFSA) and the PROFILE form effectively.

Stay tuned for more detailed insights into navigating the college financial aid process!

Common Estate Planning Mistakes — and How to Avoid Them

Posted on December 17, 2015 by - Smart Money Tips

forms

Estate planning can be a minefield of potential missteps, some of which could have far-reaching consequences. Many of the poor choices individuals make when planning for their own future or passing assets to their families are caused by “one-size-fits-all” planning strategies or well-intended advice from family or friends. Following are some common and potentially costly mistakes along with suggestions for avoiding them.

Failing to plan. Whether drafting a basic will or crafting an elaborate strategy involving trusts and tax planning, an estate plan can help reduce estate taxes, save on estate administrative costs and specify how your assets are to be distributed. Today, the majority of Americans have no will. If you die without one, your estate will be divided according to the intestacy laws of your state — not according to your wishes. This could create problems if your intended beneficiary is a minor child, a child with special needs, a favorite charity, or a combination of the above. In these cases, you need a will that details each contingency and a trust or multiple trusts to accomplish your goals.

Not maximizing your marital estate exemptions. Perhaps one of the most important pieces of tax legislation passed recently is referred to as the “portability” provision. This means that if one spouse dies without using up his or her federal estate tax exemption — $5.43 million in 2015 — the unused portion may be transferred to the surviving spouse without incurring any federal estate tax.

How might the portability provision work in a real life situation? Consider the following scenario involving the hypothetical $8 million estate of Jim and Helen:

If Jim dies in 2015, the executor of his estate can elect to use the unlimited spousal exemption and can also transfer Jim’s unused $5.43 million federal estate tax exemption to Helen. If Helen dies in 2015 with $8 million in assets, her estate will have a total of $10.86 million in federal estate-tax exemptions: the $5.43 million exclusion transferred from Jim and her own $5.43 million exclusion. As a result, none of Jim and Helen’s $8 million estate would be subject to federal estate tax.

As welcome as the portability provision may be, it still does not account for future appreciation of assets from the first spouse’s estate. Nor does portability offer protection from creditors and others aiming to lay claim on an estate’s assets. Traditional strategies like credit shelter trusts and bypass trusts do provide these benefits and therefore are still essential planning instruments for married couples.

Naming a family member as executor. Your executor is the person who will be responsible for administering your estate after death. The responsibilities of an executor are serious, and you will want someone who will take them seriously. There are many important reasons to choose a paid executor — a bank or trust company, for instance — along with (or instead of) a spouse or family member. A professional executor is familiar with the probate process and may actually save the family money, keeping expenses under control. This will undoubtedly be an emotional time for your loved ones, and a family member may find it difficult to focus on the details involved with settling an estate. In addition, when you name a family member, especially a beneficiary as executor, you introduce the potential for conflict of interest. The larger the estate, the more likely those conflicts become.

Relying on advice from family or friends. Would you go to a friend or relative for surgery or to fix your car if he or she was not a skilled surgeon or auto mechanic? Why would you take their advice about estate planning issues if they are not professional planners? When seeking a professional, look for a specialist — someone who knows trusts, estate tax law, and probate issues. A specialist will have more experience and skill in his/her chosen area — and that will translate into higher quality services provided in the most cost effective manner.

No set of rules or advice can apply in all cases, but a sure way to avoid these and other problems is to rely on a trusted team of tax and legal professionals led by your financial advisor.

This communication is not intended to be tax and/or legal advice and should not be treated as such. Each individual’s situation is different. You should contact your tax/legal professional to discuss your personal situation.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2015 Wealth Management Systems Inc. All rights reserved.