Retirement Planning Archives

What to Do If You Don’t Have a 401(k)

As the coronavirus sweeps the world and people take a step back to look at their financial picture, they are realizing that they do not have a company 401(K).

Even though some of these people work at a company where they offer a 401(k), they may not be eligible due to not meeting criteria, such as length of employment, or they are not a full-time employee.

So, as people are stressing more about the importance of having a hefty savings account, it’s a great time to discuss options for individuals who are not eligible for their company 401(k) or do not have one through their workplace. Below we will share several options for people in this situation according to an article by MorningStar.

1) Invest in an IRA.

A good first step for someone without a 401(k) is setting up an IRA. An IRA is a great other step to save for retirement and seek tax benefits. You are eligible to contribute $6,000 a year to your IRA.

2) Look Into Self-employment accounts are an option.

For self-employed individuals, there are several options to consider. Some of them are similar to 401(k)s but are just set up a bit differently. Speak with a financial professional to see what options you can set up for yourself.

3) Consider an HSA

If you have a high-deductible health care plan you can consider setting up an HSA in order to save some of those dollars and grow your money tax deferred.

4) Open a Taxable brokerage account.

While its always nice to grow your money tax deferred, investing in a regular taxable account is always a great option. You can speak with a tax professional to see how to do so in a tax efficient manner.

5) Be part of the solution.

Lastly, if you work for a small employer without a 401(k), maybe ask them to see if it’s something they are interested in starting. Never hurts to ask!

As always, if you have any questions about your current 401(k) or need help investing money in order to supplement a lack of one, please reach out to us and we would be happy to discuss your future financial goals.

Top 5 Pieces of Financial Advice

As we are all adjusting to the new norm that the coronavirus pandemic has created in our world, we are also learning pieces of advice that we could share from this experience. When going through an economic crisis, it’s important to keep some tips at top-of-mind to help you navigate the bumpy waters. In a CNBC Select Article, we found 5 great pieces of financial advice that we want to share with you to put in your financial repertoire.

First and foremost, try not to accumulate credit card debt. Racking up credit card debt can have very negative long term consequences, so it’s important that you pay the full balance on time. When you do not pay the full balance on time, your card will quickly accumulate interest, which often can get so high that it’s hard to pay off.

According to recent Federal Reserve data released in September, the average interest rate for all credit card accounts is 14.87%. Among accounts assessed interest, or accounts with outstanding finance charges, the average interest rate rises to 16.88%. But for consumers with credit scores below 670, interest rates can near 30%, CNBC Select reports.

Next, make sure you don’t buy things you can’t afford. Although this one seems obvious, it’s much more common than you think. Avoid overspending and spending on things you can live without. Start putting that extra money into savings accounts where you can be accruing interest and earning money.

Third, invest the year’s expenses or anything saved after you have the year’s expenses saved? Before the pandemic, many people were saying how you should have several months of rent and expenses in a savings account for a rainy day, but as we have seen the economic hardships the coronavirus has inflicted upon our society, we are suggesting to save about a year’s worth of expenses before investing it elsewhere.

Fourth, start to think like a savvy businessman or woman. Learn to negotiate. Especially in the world we are living in today, make sure you are constantly looking for deals and inquiring about credit card versus cash options. Oftentimes, places will charge you less if you pay in cash. So, before swiping that card, make sure you think about all your options.

Lastly, buy in bulk. With Amazon becoming increasingly popular and making it possible to get what you need in a matter of hours, take advantage of deals and places you can buy in bulk. If you can save a few dollars here and there, take advantage of it. It’s important to be a smart shopper, especially when buying something pricey, such as groceries for a large family.

By implementing some of these basic money management tips into your daily routine, you will find yourself becoming a more savvy shopper and saving more money. It is especially important during an economic recession to take these concepts into consideration and make the most of your finances. If you have any questions on other ways you can maximize your financial portfolio and find places in your budget where you can save money, please reach out to us at info@shermanwealth.com or visit our site at www.shermanwealth.com. Check out our other blog posts for more financial advice and tips!

Here’s How The Pandemic Has Upended The Financial Lives Of Average Americans: CNBC + Acorns Survey

The coronavirus pandemic has upended many Americans’ financial lives. While millions are unemployed and sufferings, there is actually more positive financial data than you would think.

According to CNBC and an Acorns Survey, many are saving more and spending less. In fact, 46% of the respondents said they are “more of a saver now” compared to before the pandemic. Additionally, 60% consider themselves “savers,” up from 54% last year. The poll, conducted by SurveyMonkey Aug. 13-20, surveyed 5,401 U.S. adults and has a margin of error of +/-2%.

About half, or 49%, said their monthly spending has decreased, compared to 33% last year. Some of those savings can be attributed to the fact that people stayed home and didn’t do things like dining out, said personal finance expert Jean Chatzky, co-founder of HerMoney.

While many have been struggling these last few months, others have picked up on some financial skills, learning how to save dollars here and there, cutting out old subscriptions, and being smarter spenders. By prioritizing wants versus needs and taking a look at how much money is going out each month, people have picked up better spending habits that will help them navigate these bumpy waters ahead.

With extra cash and savings in the bank, it’s important to talk with an advisor about options and investing that makes the most sense for you, whether it be saving for retirement, college tuition, or something else. If you have any questions for us, please reach out at info@shermanwealth.com and we would be happy to set up a time to discuss a financial plan for your future.

How Much Longer Until The US Economy Is Back To Normal? This New Index Shows We Have A Long Way To Go

As we approach the six month mark from when COVID-19 turned our world upside down, we are beginning to adjust our lives to this new “normal”. As we continue to adapt to this different way of life, some things are seeming back to the way they were before, but much remains new and strange. We are going about our days wearing masks and social distancing, watching our favorite sports teams play in “bubbles”, empty stadiums and arenas, and spending our work day in sweats and from the comfort of our homes.

As we begin to normalize some of these news ways of living, it raises the question of how far we really are from our old way of life? How much progress are we making towards this new “normal” that will be our future? As of right now, we’re seeing what’s called a “K” shape recovery, which is that the stock market is recovered, but the economy and mainstreet remains suffering. People are wondering if there will be a double dip recession potentially in the fall and winter months if the virus comes back.

We’ve been thinking about how to tackle these difficult and unknown questions and found an interesting article by CNN Business and Moody’s Analytics, which raises some of these questions as they relate to the economy.

According to their analytics team, the U.S. economy remains far from normal. Based on the back-to-normal Index that they constructed, which takes into account 37 indicators, including traditional government stats and metrics from a host of private firms to capture economic trends in real time, the U.S. economy was operating at only 78% of normal as of August 19th. They are using the economic data from prior to when the pandemic struck in early March as a baseline as “normal”. They are saying that the “economic activity nationwide is down by almost one-fourth from its pre-pandemic level-far from normal”.

Even though that data is not so promising, it’s important to note that it is substantially better than the darkest days of the pandemic in mid-April, when we were unsure of how dangerous this virus could be. As business re-opened between mid-April and mid-June, according to their back-to-normal index, the economy opened too quickly, with many surges in coronavirus cases throughout the summer leading to states halting their reopening plans.

While our country is recovering slowly but surely from this deadly pandemic that has swept our world, we still have ways to go to reach our pre-pandemic “normal”. While the economy still needs time to recover, it’s the best time to think about your finances and how to manage your money to make sure you come out of these unprecedented times strong. Find out how much risk you are taking on, what investments you have and where you want to be given the circumstances and with the all time highs in the markets. If you have any questions about your portfolio or ways you can manage your money during these rocky times, please reach out to us and we’d be happy to help.

What’s Ahead For Your Taxes If Biden Takes The Presidency

With the election around the corner and recent news of Joe Biden’s running mate, Kamala Harris, we wanted to take a look at his proposed tax plan and what impact it may have on the finances and current tax plans of Americans.

As Biden accepts his party’s nomination for president this week at the Democratic National Convention, high-income earners are beginning to wonder if it’s time to revisit their tax plans. Indeed, taxpayers with taxable income over $400,000 could see their individual income taxes tick up under a Biden presidency. The former vice president has also called for raising taxes on wealth transfer.

Below we will outline Biden’s proposed tax plan, which CNBC has sliced into two categories, income taxes and estate planning.

Income Tax

On the income tax side, Biden calls for raising the top individual income tax rate to 39.6% from 37%, and applying it to taxpayers with taxable income over $400,000, according to an analysis from the Tax Policy Center.

He’s also talking about an increase to payroll taxes. Biden would apply the 12.4% portion of the Social Security tax — which is normally shared by both the employee and employer — to earnings over $400,000, the Tax Policy Center found. Currently, the Social Security tax is subject to a wage cap of $137,700 and is adjusted annually.

Finally, Biden would also boost rates on long-term capital gains and qualified dividends to 39.6% — the same top rate as ordinary income — for those with income over $1 million, according to theTax Foundation. The long-term capital gains tax rate in 2020 is 20% for single households with more than $441,451 in taxable income ($496,601 for married-filing-jointly).

Estate Planning

Last month, the Democratic presidential contender collaborated with Sen. Bernie Sanders, I-Vt., and the two formed six task forces to release a 110-page policy document. The document gives some insight on what we might expect from a Biden administration. “Estate taxes should also be raised back to the historical norm,” the task force wrote in the policy plan.

Indeed, the Tax Cuts and Jobs Act roughly doubled the amount that you can transfer to other people — either at death or as a gift during life — without facing the 40% estate and gift tax. The gift-and-estate tax exemption is $11.58 million per individual in 2020.

Biden has set his sights on the “step-up in basis,” a provision in the tax code that allows an individual to hold onto an asset for years, watch it appreciate and then bequeath it to an heir at death. The owner’s basis — the original investment in the asset — steps up to market value at death, which means the heir is subject to little to no capital gains taxes if he sells it. Biden proposes taxing the unrealized capital gains in the asset at death, which essentially does away with the step-up. Wealthy households are likely to use gifting strategies to head off this change, said Bertles of Tiedemann Advisors. “This can be as simple as giving assets to a trust or outright to kids or grandkids while using the exemption,” he said.

Make sure to take a look at Biden’s proposal and think about how that may impact your situation. In just a few short months, this plan could be put into effect, so start thinking about any changes you could make to your tax plan and talk to an advisor for some guidance. As always, we are here to help if you have any questions regarding what these changes could mean for you.

You’re Running out of Time to Reverse this Retirement Withdrawal and Save on Taxes

Required Minimum Distributions (RMDs) are the annual withdrawals you must take from your individual retirement account and 401(k) plans after you reach age 72 (or age 70 ½ if you turned 70 ½ prior to January 1, 2020). The CARES Act, the coronavirus relief act that took effect this spring, allowed retirement account holders to bypass required minimum distributions for 2020. Those that inherited IRAs are also allowed to skip the RMD this year. (https://www.irs.gov/pub/irs-drop/n-20-51.pdf)

For those of you who have taken a Required Minimum Distribution (RMD) from your retirement savings at some point in the year, the clock is ticking for you to put that money back. If you already took the money out, you have until August 31st to put it back. However, you shouldn’t wait much longer than August 20th, as there are several steps and contacts involved in the process. In order to avoid any errors in the transaction, it is advised to return any RMD funds as soon as possible. It’s important to note that this RMD waiver only qualifies for 2020, meaning next year you’ll be required to take your distribution as per usual.

RMDs from traditional IRAs and 401(k) plans are subject to income taxes, so waiving the distribution or returning the funds could help you save on levies. But, make sure to give back the income taxes your custodian may have withheld, not just the net amount you may have received.

In other cases, some retirees opt to split their annual RMDs into 12 monthly disbursements, which means they have to return their monthly RMDs. In this scenario, you may have taken multiple distributions over the course of the year. Therefore, you’ll have to contact your custodian and have them hold the payments for the remainder of the year. You are allowed to replace the payments you have already received, too, but just ensure you cover the taxes withheld and act quickly.

Lastly, since the tax rules changed so rapidly this spring amid the coronavirus pandemic, savers should ensure that their custodians are marking the transaction as a “return of funds” and not a “contribution”, where you’d essentially be getting additionally taxed.

Make sure to talk with your custodian to see if you are squared away and eligible to return your mandatory distribution for the year. If you have any questions or concerns about your RMDs, please reach out to us at info@shermanwealth.com and we’d be happy to assist you in any way.

Did You Take A Required Minimum Distribution In 2020 From Your Retirement Account? If So, You May Be Able To Put It Back.

If you took a required minimum distribution from your retirement account this year and want to reverse it, you now may be able to. The IRS announced on 6/23/20 that anyone who already has taken an RMD in 2020 from certain retirement accounts has until Aug. 31 to put the money back. (https://www.irs.gov/pub/irs-drop/n-20-51.pdf) The announcement comes several months after the CARES Act eliminated those mandated distributions for the year — yet some people already had taken them before the law’s passage.

The CARES Act, signed into law in late March, enables any taxpayer facing an RMD in 2020 from their defined-contribution retirement plan — including a 401(k) or 403(b) plan — or their individual retirement account, to skip those withdrawals this year. This includes anyone who turned age 70½ in 2019 and would have had to take the first RMD by April 1, 2020. The waiver does not apply to defined-benefit plans (i.e., pensions.)

The IRS’s new relief applies to individuals who face RMDs either due to their age or because they inherited an account that comes with those mandated withdrawals. If you have any questions about these new rules, please contact your CPA for guidance. And, as always, please contact us if you have any questions relating to RMDs or other issues related to your finances.

Has Your Employer Suspended Its 401(k) Matching During COVID-19?

According to a recent survey, 16.1 percent of organizations have suspended matching employer contributions due to financial hardships caused by COVID-19. Worse yet, 1.3 percent of businesses have terminated their 401(k) plans altogether.¹ 401(k) plans and their matching employer contributions are relied on by millions of Americans to bolster their savings for retirement. If your employer has recently made an adjustment to its 401(k) offerings, you may want to consider how this could impact your future retirement and the next steps you should be taking.

Why Are Employers Changing Their 401(k) Plans?

COVID-19 has had a tremendous impact on businesses throughout the globe. With most states implementing stay-at-home orders, businesses have been forced to reduce hours or cease operation altogether. As Americans were encouraged to stay home throughout March, April and May, foot traffic all but vanished across America for months.

Even though some states have begun relaxing measures and stores are starting to open back up, America remains suspended in a fairly volatile market. People are worried about what the future will look like. Many of them are strapped for cash and not willing to spend like they used to. In return, businesses are suffering and searching for ways to save. Unfortunately, one of the first things to go is often employer-sponsored benefits such as 401(k) plans or their matching contributions.

Is it Legal for an Employer to Suspend Matching Contributions?

In most cases, it is legal for an employer to suspend matching 401(k) contributions. While it may have been an enticing addition to your benefits package upon your hiring, employers do have the power to simply stop offering this benefit. The most important thing an employer can do in this instance is to effectively communicate with employees who will be affected by the change. For example, explaining that cutting these benefits is their solution to avoiding layoffs will likely make employees more understanding and receptive to the change.

If your employer doesn’t provide you with an explanation or any idea of if/when contributions will start up again, speak to your manager or HR department. If your employer offers contribution matches to a safe harbor 401(k) plan, they must offer notice to employees 30 to 90 days in advance of suspending contributions.²

What Should You Do if Your Matching Contributions Are Suspended?

In the case that your employer does suspend matching contributions, there are a few next steps you can take to help maintain and grow your retirement savings.

Having an employer suspend matching contributions, even if it’s only temporary, is a sign of the times. We’re facing a global pandemic, the stock market’s unpredictable and people are worried about money. If you have been personally impacted by the coronavirus, you can even withdraw up to $100,000 penalty-free as part of the recently passed CARES Act,³ although this should only be done if you are in dire need of financial assistance. Withdrawing any amount from your 401(k) now will only rob your future retirement.

If you have questions regarding your company 401(k), please reach out to your financial advisor. Your advisor’s sole responsibility is to help you make unbiased, educated and objective decisions about your money. Use him or her as a sounding board to voice your concerns and discuss potential paths forward. How will you make up for the missing contributions? What financial impact will this change have on your future retirement? The market is volatile and economic confidence is low amongst investors. If you haven’t already, use this as an opportunity to reevaluate your current asset allocations and investment strategies. You likely have plenty of questions regarding any changes to your 401(k) and other investments and your advisor may be able to help you identify potential areas for improvement based on your current tolerance for risk.

Even if your employer has slashed matching contributions, that doesn’t mean you still can’t contribute to your 401(k). If you have the means to do so, consider upping your contributions, for now at least, to help offset the loss of any missing contribution matches. The contribution limit for a 401(k) increased in 2020 to $19,500. If you’re over 50, you’re allowed to contribute an additional $6,500 in catch-up contributions.⁴

In these challenging times, you are not alone if you find yourself working for a company that has suspended its 401(k) matching contributions. Hopefully, these changes are just temporary, but it is necessary to plan accordingly for what is happening in the present. Every penny counts when it comes to preparing for retirement and it is important to know how these 401(k) changes will affect your future savings. If you have any questions about the impact this may have on your future retirement earnings and what you should be doing right now to make up for any lost funds, please contact us. We are here to help!

Ways To Build Wealth And Boost Your Savings While You’re Stuck At Home

We’re all spending more time at home these days and it’s likely that money and finances are a stress for many during this pandemic. As the markets continue to be extra volatile, many people are feeling a lack of control when it comes to their money. Even though there isn’t much we can do about the state of the overall economy, there are some small-scale things you can do right now, from the comfort of your own home, to help you feel more in control of your finances. If it is all you can do right now to keep up with your bills, that should continue to be your main priority. However, if you’re in the fortunate position of having an income or some extra cash, the following tasks take 30 minutes or less and might just have you feeling a little better about the state of your finances.

REVIEW YOUR BUDGET

Every solid financial plan starts with a good budget, and now is a great time to go over yours. You should review your spending habits and try to determine which areas of your spending are relatively fixed — such as monthly rent and insurance coverage — and those that are discretionary, like your lattes, subscriptions and eating out.

Since you’ll likely be spending a lot of time at home this month, most of your convenience purchases will probably trail off. Comparing last month’s expenditures to this month, you will see where you are spending your money and you will be better positioned to make changes to your spending habits in order to prioritize saving money and spending on what you deem essential for your household.

GET SPECIFIC ABOUT YOUR FUTURE

Write down all the things that you want to do in your future – you can do this by yourself or with a significant other. Break it down into five-year segments. What do you want to do, where do you want to go, and what do you want to accomplish during each five-year segment? If you have career goals that include starting a business, making more money, or changing your job, you might need to learn some new skills to start down that path.

Being confined to our home offices gives us a great opportunity to focus on learning something new and developing plans for the next steps in life, whether it is signing up for an online class or doing some research on what it might take to take your career in another direction.

SET UP A 529 COLLEGE-SAVINGS PLAN FOR YOUR KID(S)

If you’ve been considering a college savings plan for your child, setting one up online is quick and easy. You should start by reviewing the 529 plan options where you live, since they often provide tax benefits while you save for your child’s college education. Just remember to keep your own future financial goals in mind, as well. Saving for your children’s education is very important, but should come second to saving for your own retirement.

REVIEW YOUR BENEFICIARY INFORMTION

You should make a list of your financial accounts that include beneficiary designations — like your IRA, 401(k), or life insurance — and make any necessary beneficiary information adjustments. Since these designations determine who will receive your account upon your passing, if they are left blank or not updated, your wishes could be ignored and assets could go to an ex-spouse, or state law could become applicable and decide how to split your accounts.

SET UP A NEW SAVINGS ACCOUNT

Now is the perfect time to set up a separate online high-yield savings account for your specific goals, whether it be for a vacation, saving for the holidays or possibly a new car. To make things even easier, you can also set up a direct deposit so that you put a little bit away from each paycheck towards that objective. However, remember that these “extras” should take a backseat to your emergency fund. Having three to six months of expenses set aside in a money market or high-yield savings account can provide peace of mind and can be a lifesaver in times of temporary job loss or medical costs.

DO SOME BOOKKEEPING

Now might be a good time to do some overall bookkeeping. This can include reviewing your insurance policies to see if you still have sufficient coverage for your needs, or working on your estate plan (are your medical directives all updated?). If your kids are old enough, this could even be a good opportunity to teach them how to balance a checkbook by showing them how you do yours.

EVALUATE YOUR INVESTMENT PORTFOLIOS

If you have money in the market that’s earmarked for retirement, you might be a little worried about how current events will impact your goals. Now is a good time to have a call with your financial planner to determine if your portfolio is still meeting your long-term goals, or if it needs to be adjusted based on current events.

Even though we may not have expected to be spending this much time in our homes over the past few months, it’s important to take advantage of the time while we can. These unprecedented times have given us the opportunity to slow down and focus on our families, as well as other important aspects of our lives like our finances. Taking just a half hour each day or week to go over these tasks can help us to feel more in control and less stressed about our money as we deal with the uncertainty of the times. As always, if you have any questions about any of the suggestions above or any other concerns about your finances, please contact us. We are here to help and we are all in this together!

Who is responsible for 401(k) participation?

If someone were to ask the famous Nobel Prize winner Richard Thaler this question, I think his answer would clearly be “managers and executives”. And to be honest, he makes a pretty compelling point.

As a man who has spent his career studying human behavior, Thaler draws the conclusion that humans are predictably irrational and consistently make choices which are not in their best interest. While this seems very simple on the outside, the findings are quite complex. Here’s a great example: only 50% of US workers participate in a workplace retirement plan. While some don’t have access to this type of benefit, many do have access, and simply don’t take advantage of it. Yet, we know that saving for retirement (and taking every advantage) is the optimal route to take.

Most of us would say we make wise decisions for ourselves and our families, but the data does not back up this sentiment. Thaler has also found that people only save money if it’s automatic. Thus, he feels to most important aspects of a 401(k) offering are:

Automatic enrollment
Automatic escalation
Good default low-cost investment options
Helping individuals roll their 401(k) into an IRA when they change jobs

Again, this seems like a very easy concept for CEOs and managers to adopt, but that doesn’t seem to be the case. Thaler proclaims, “If the employees at your firm are not saving enough for retirement, realize that it is your fault. And that is because we know how to make saving for retirement much easier and more successful.” But since so many workers aren’t saving, he places the blame on the managers themselves.

But why should you care? Because the financial wellness of your employees will affect the bottom line of your business. A report released by Gallup on the Economics of Well-being tells us that having a low sense of financial stability can lead to “stress, anxiety, insomnia, headaches, and depression”. All of these emotions lead to reduced productivity and output. And worse? Employee retention also tends to spike.

Step one: HR managers and senior executives should make 401(k) participation an “opt-out” decision. This creates a wall to prevent individuals from harming themselves by passing on automatic retirement savings. Second, escalating the amount of these contributions -over time – will allow your employees to increase their savings rate. Most studies have shown that your monthly savings rate is the number one statistic that will decide whether you will be able to retire on time or not.

Third, it is imperative that these retirement plans have low-cost investment options for employees to choose from. Simple index funds really will get the job done. In much of his work, Thaler points to the fact that humans are consistently irrational, so nudging them towards smart investment choices is important.

The key to checking off these boxes is most likely automation. Managers and CEOs have the authority to make these decisions. In theory, the financial stability of your employees (and the ability for them to feel that stability) is largely dependent these types of executives. However, when said managers do indeed take these steps, it’s really a win-win situation for everyone involved. Your employees’ minds aren’t elsewhere, worrying about paying the mortgage or whether they have enough saved to cover a medical emergency. Employees come to work with a clear head. They feel happier and therefore you get more production out of your employees.

If you are a small business owner and feel that you may be spending too much on 401(k) plan costs or that your employees are bringing non-related stress into the workplace, please feel free to reach out to us. We work with multiple small business and their employees in the DC Metro to help bring a sense of peace and stability to personal financial planning issues.