Retirement & 401k

5 Things You May Not Know About an IRA

By: FaithFi, Rob West & Jim Henry

Do you think you know everything about your IRA? Find out by taking this pop quiz.

First, a little inspiration. Proverbs 18:15 reads, “An intelligent heart acquires knowledge, and the ear of the wise seeks knowledge.” So let’s seek some knowledge about IRAs.

Don’t worry, our quiz won’t count toward your final grade and just to make it easy, these will all be true or false questions.

Question #1: You can’t open an Individual Retirement Account if you already have a qualified retirement plan with your employer. True or false?

It’s actually false. An IRA can be a great way to supplement your retirement savings, even if you have a 401k or 403b with your employer. In 2023, you can contribute up to $6,500 to a traditional or Roth IRA, or $7,500 if you’re 50 or older. You can even have a traditional *and* a Roth IRA, but the combined contributions must not exceed those limits.

Question #2: You can invest in anything in an IRA. True or false?

That one is false. Your IRA isn’t an investment in itself. It’s more like a bucket that holds your investments, which are managed by the account’s custodian. That custodian will offer you a wide variety of investment options, like bonds, money market funds, stocks, and mutual funds, but there are limits. You can’t invest in things like whole life insurance policies, antiques, or physical precious metals (that last one requires a different animal, a self-directed IRA.

Question #3: If you should die, your IRA must go through probate and be distributed to your heirs according to your will. True or false?

That one, fortunately, is also false. Like many financial accounts, your IRA allows you to name one or more beneficiaries to receive those funds in the event of your death. The beneficiary designation supersedes anything specified in a will and prevents the IRA from going through the sometimes lengthy probate process. You do, however, have to keep the beneficiary designation up to date if you go through a major life change, such as the death of a spouse. The custodian can’t read your mind, so making your intentions known with a new beneficiary designation is necessary.

Question #4: At some point, you have to take money out of your IRA. True or false?

Unfortunately, that one is true. Traditional IRAs come with Required Minimum Distributions or RMDs. When you retire, you may not need the income generated by your IRA, and you’d be perfectly content to just let those assets accumulate. Uncle Sam, however, sees it differently. He wants his cut and is only willing to wait so long. That means you’ll have to start taking money out of your traditional IRA by April 1st of the year after the year you turn 73 and a half. In 2033, the age for RMDs will be extended to 75.

Now, if you’re worried that you’ll need a calculator and calendar to figure all that out, don’t worry. IRA custodians are required to send you an RMD notice by January 31 each year and you really want to pay attention to those notices. If you fail to take an RMD on time, the penalty is a whopping 25% of every dollar you failed to withdraw. This is why a Roth IRA is sometimes a better alternative since it’s funded with after-tax dollars and has no required minimum distributions.

Question #5: You can’t borrow from your traditional IRA. True or false?

That is also true. While you may be allowed to borrow from a 401k or 403b, (not advisable, by the way) you can’t borrow from an IRA even for a good cause like buying a house or sending your kid to college. If you withdraw funds from your traditional IRA, the money will be added to your adjusted gross income and taxed at your income tax rate and a large withdrawal could push some of your income into a higher tax bracket. You certainly don’t want to do that.

That’s our pop quiz. We hope you did well. Now pass your papers to the front, please.

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Retirement & 401k, Saving

6 Reasons Why You Shouldn’t Wait Until You Make More to Save More

By: Art Rainer

“I don’t make enough money to save for retirement.”

This is a common reason people provide, especially those just starting out in their careers, for not saving. Their plan is to start saving when they feel like they are making enough money.

Unfortunately, this mindset often leads to a stressful financial future. And it could have been avoided.

Here are six reasons why you shouldn’t wait until you make more to save more:

1. The Bible teaches us that saving is wise.

Proverbs 6:6-8 says this—Go to the ant, you slacker! Observe its ways and become wise. Without a leader, administrator, or ruler, it prepares its provisions in summer; it gathers its food during harvest. Throughout Scripture, we are taught that we should capitalize on times of abundance to get us through times of scarcity. For retirement, this means taking advantage of a paycheck to get you through a time when you no longer receive income from an employer.

2. Habit-building starts now.

Habitually setting aside money for the future does not magically begin when you have more income. The best way to ensure you will actually take advantage of a higher salary is to regularly save now, regardless of your paycheck’s size.

3. Great income is often followed by greater expenses.

When people get a raise, savings is not normally the first to increase. Expenses do. We make more so we spend more. The financial margin remains thin, even with a greater income.

4. For some, “enough” never happens.

Sometimes, this happens because their career never takes off as they hope. Other times, even though their income has increased, they don’t feel like they make enough.

5. Compounding.

It is said that a reporter once asked Albert Einstein what he considered to be the greatest invention of all time. His response? “Compound interest.” Compounding is earning money on your earned money. And the best way to take advantage of compounding is to start early. Remember this formula:

A little bit of money + A lot of time = A lot of money.

6. The mantra, “It’s never too late to start all over again,” won’t be as comforting as you think in the future.

Certainly, you can start habitually saving at any point. But you can never truly recapture lost time. Every month you delay saving is a month you never get back. It is a month that you are never able to take advantage of compounding. When you delay your retirement savings, you make your climb to retirement steeper.

Don’t wait until you make more money to save more money. Start now. Make it your goal to place 15% of your gross income into retirement savings. Whether you make much or little, now is the time to save for retirement.

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Retirement & 401k

401(k) Facts You Need to Know

Your Financial Future and Your 401(k)

Millions of Americans threaten their financial future by failing to roll over 401(k) funds when they change jobs. Too many people see leaving a job as an opportunity to get their hands on the cash they’ve been saving for retirement, but you can do irreparable harm to your financial future by doing so.

When you change jobs, you’ll have to make a decision about what to do with the money you’ve contributed to your employer’s 401(k) plan. There are three major options: leave the money in your former employer’s plan, take the money out, or roll it over.

401K Options

If your vested 401(k) funds total $5,000 or more, your employer is legally required to allow you to leave your funds in the company plan if you choose to do so. This may be a good option for you if you’re happy with the performance of your employer’s plan, it’s a bad time to cash out (you’ve lost money during a market slump, for example), or you have a waiting period at your new job before you’re eligible to roll your funds over into that plan.

Your second option is to take the money out of the 401(k) plan and not roll it over into another qualified plan. If you elect this option, your 401(k) provider will first deduct 20% and send it to the IRS to be applied to your income taxes when you file your return at the end of the year. The taxes deducted may or may not be enough to cover your tax liability. For example, if you’re in the 10% tax bracket, you’ll probably get some money back, but if you’re in the 28% tax bracket, you may owe an additional 8%. If you’re under age 59 1/2 (or 55 in some circumstances), you’ll also owe an additional 10% in early withdrawal penalties.

401K Withdrawal Penalties

Here’s how the above scenario may play out: You’re in the 28% tax bracket and are under 55 at the time you leave your job. You decide to have your 401(k) balance of $100,000 paid directly to you.

$100,000 – 401(k) Balance
– 20,000 – 20% Withholding
– 8,000 – Additional taxes (28% less 20% withheld)
– 10,000 – 10% early withdrawal penalty
$ 62,000 – Balance

IRA Facts

In addition to the federal income taxes listed above, you’ll also have to pay state income taxes on the amount you withdrew, leaving you with approximately 57% of your hard-earned money (assuming a 5% state tax rate).

You can avoid paying current taxes and penalties if you roll the money into your new employer’s 401(k) plan or an IRA. This scenario may look like this:

$100,000 – 401(k) balance
-0 – Taxes withheld
-0 – Additional taxes
-0 – 10% early withdrawal penalty
$100,000 – Balance

You can set up an IRA at most banks or financial institutions or directly with most mutual funds or publicly traded companies. In most cases, this can be done easily online or via mail. Be sure to request that the money be sent directly to the new 401(k) plan administrator or IRA administrator to avoid incurring taxes. Rolling the entire amount over to another tax-deferred plan should provide you with significantly higher retirement funds, especially if you are many years from retirement. If you take the money out of a tax deferred plan, you lose the power of compounding the full amount over the years left until retirement, possibly costing you hundreds of thousands of dollars.

So, if you’re faced with the decision of what to do with your retirement savings when you change jobs, remember: don’t throw away your 401(k)!

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