Are you making or losing money with your 401K Plan?
Investing your money in a 401k plan is one of the best things you can do for your future. With tax breaks and other incentives, it's easy to see why so many Americans are invested in their own retirement years before they even begin. But with all the talk about how great these plans are, there’s another side to them that some people don't realize: they're not always good investments!
A 401(k) plan is an employer-sponsored retirement savings plan.
The IRS defines a qualified employee as someone whose work for the employer is not less than 1,000 hours in any calendar year.
Employers can offer these plans as part of their employee benefits package, but they’re not required to do so. If your employer does offer such a plan, you may be able to contribute up to $19,000 into it if you are under age 50 and $25,000 if you are over 50 in 2018 (the limits will increase slightly each year). The company itself may contribute money on your behalf (a match), or you may be able to make additional contributions from other sources like bonus payments or tax refunds; these are known as “elective deferrals.”
Contributions made into your 401(k) account are tax-deferred which means that taxes on investment earnings accumulate over time until withdrawals begin at retirement age – typically between 59 1/2 and 70 years old depending on IRS rules (in some cases earlier).
You can start a 401(k) at any time, even if you are over 65 years old.
These plans are retirement savings accounts that allow you to save for your golden years in a tax-deferred way, meaning that your contributions aren't taxed until they are withdrawn.
You could use this money to supplement your Social Security benefits, build up an emergency fund or pay for college tuition for your kids or grandkids.
Employers may not offer a matching contribution feature, but all employees have the right to contribute.
It's not always easy to tell how much your employer will match, but it's worth at least checking in with HR before the end of the year. Some employers may choose to match a certain percentage of your contribution up to a certain limit. Others may choose to match only a portion of your contribution, or none at all. Instead of going through all these hoops, simply opt for as much as you can afford from your own pocket—it's still free money!
You can withdraw funds at age 59 1/2 (penalty-free) and the employer's match at age 65.
You can withdraw funds at age 59 1/2 (penalty-free)
The employer's match can be withdrawn at the age of 65
without a penalty. Early Withdrawal Penalties for 401(k) Plans. (Talk with your accountant before you make any withdrawal of you 401k plan)
You don't pay taxes on the contributions until you begin to withdraw from the account.
One of the biggest benefits of contributing to a 401(k) is that your contributions are tax-deferred. That means you don't pay taxes on the money you contribute until you begin to withdraw it, which can help lower your tax burden in the meantime.
However, once you start taking out funds, they're taxed as ordinary income and may be subject to an early withdrawal penalty if you are younger than 59 1/2 years old. You can withdraw some or all of your contributions (but not any earnings) without being penalized if:
You become disabled or die;
The account is transferred into an IRA maintained by someone else; or
You leave employment with the company sponsoring your plan after age 55 (if there is no other way for you to get access).
Withdrawals before age 59 1/2 will trigger a 10% penalty and income tax on the amount.
You'll pay income tax on the amount withdrawn and a 10% penalty if you're under age 59 1/2. You'll have to pay income tax on the portion of your withdrawal that's considered to be an "early distribution," which means that it was not taken after you reached age 55. This is true even if you are allowed to withdraw some or all of your money at other times during your working years, such as during periods of unemployment, or when leaving a job with an employer who sponsors a 401(k) plan.
The Roth 401K carries the same tax benefit as the Roth IRA, but with higher contribution limits.
The Roth 401K carries the same tax benefit as the Roth IRA, but with higher contribution limits. As of 2019, you can contribute up to $19,000 per year into a 401K account if you are under 50 years old and contribute an additional $6,000 if you are age 50 or older (in addition to your regular contribution). The Roth IRA has lower contribution limits at $6,000 per year for individuals under 50 and $7,000 for those over 50.
The greatest advantage of a Roth 401K over a traditional 401K is its ability to provide tax-free distributions in retirement when used properly in tandem with other retirement accounts such as IRAs or other qualified plans. Withdrawals from these types of accounts will not be subject to income taxes at all—as long as certain rules are followed—even if they were previously funded by pre-tax dollars!
The Roth IRA gives an investor more flexibility in how withdrawals are taken during their retirement years.
Another advantage of the Roth IRA is that it allows you to withdraw your contributions at any time without penalty. This is just one more way that Roth IRAs are more flexible than traditional IRAs and 401Ks in how they can be used.
For example, if you were to roll over your 401k into a Roth IRA and then need the money to pay off unexpected medical expenses, you would be able to access those funds without worrying about early withdrawal penalties (assuming they were not contributed as after-tax dollars). Conversely, with a traditional 401k or IRA plan all withdrawals prior to age 59 1/2 would incur an early withdrawal penalty regardless of whether or not you had contributed after-or pre-tax dollars into your account.
With this strategy in place, you can be guaranteed a monthly paycheck for the rest of your life!
With this strategy in place, you can be guaranteed a monthly paycheck for the rest of your life! It's called an annuity. An annuity is a contract between you and an insurance company (i.e Lincoln Financial Group, John Hancock, Fidelity and Guaranteed Co., Foresters Financial, Americo, and many more) that pays you money each month for the rest of your life or until some other time period comes to pass.
The way it works is that you pay them a lump sum (the premium) and they will pay you back the same amount plus interest daily over the course of your retirement years. You can take out any amount at any time but will have to pay a penalty for withdrawing money before age 59 1/2.
This is a great way to guarantee yourself a monthly paycheck for the rest of your life. The interest rate is usually higher than what you'll get in a CD or savings account so it's important that you find an insurance company with a good track record.
What are the Pros of Index Annuities
No active management or repetitive meetings with financial planners.
Automatic Pilot. Set it and forget it. This feature helps with personal or family concerns of cognitive decline in elder years.
Zero fees. A great amount of your hard-earned money gets eaten up with active management fees and fund fees.
Backed by huge insurance companies that have multiple layers of safety that protects your money, even in the event of a default. Life Insurance Companies have stood the test of time through devastating world wars, financial recessions and depressions, sweeping epidemics and pandemics, earthquakes, fires, inflation, and deflation. They should not be confused with P&C, or Property & Casualty Insurance Companies. Life Insurance Companies do not just close their doors and go out of business declaring all policies null and void. It just does not happen.
Potential for market-like returns without the risk of having your money invested directly in the market.
Never lose money due to a market downturn. Your money is completely protected from market volatility, and your gains are always locked in.
Historically, FIA’s have had better returns that long-term government bonds. Considering bond yields are at a historic low, this is very important point to consider.
Avoids probate with the naming of a direct beneficiary.
Tax-deferred.
Can be set up to provide lifetime income for you and your spouse and possible Long-Term Care benefits with an added rider (normally comes with a small fee depending on the terms. However, there are zero fee options)
100% of your money can become liquid in the event of a death, a terminal illness diagnosis, or confinement to a Long-Term Care facility.
Access to a portion of your money during your agreement that can be used for emergencies or a custom designed strategy for income.
100% of your money is eligible for interest gains from day one. No front-load fees and the agent’s commission is paid from the annuity company’s general fund. Nothing comes out of your pocket.
Potential for an upfront bonus.
Some Index Annuities can be designed to pass a larger death benefit to loved ones if you do not qualify for traditional life insurance.
Cons of Index Annuity
Surrender Charges. An annuity agreement comes with a declining surrender schedule. The way your money is protected by the annuity company is making investments in long-term bonds that have their own surrender schedules. So, if you change your mind and decide to pull your money out of the annuity before the agreed upon time, the annuity company must pay a surrender charge to liquidate the bond and that gets passed on to you. (Typically the surrender charges are from 1-6 Percent per withdrawal).
Limited Growth. Interest is credited in one of the three way – caps, spreads, and participation rates. If you choose an index with a cap, there is a ceiling on how much you can earn no matter how well the index performs. You are much better off sticking with a participation rate. The volatility of the index you choose will directly affect the participation rate you receive. For example, the S&P 500 is extremely volatile, so you will receive a lower participation rate. There are many indexes to choose from, and there are several that will give you higher than a 100% participation rate.
Limited Access. Typically, you have access of up to 10% per year of the overall account value in your annuity, and that includes any gains you have made. For this reason, it is vitally important to work with an expert and have a strategy to make sure this adds to your financial plan, not hinders it.
Conclusion
Investing your money in a 401k plan is one of the best things you can do for your future. With tax breaks and other incentives, it's easy to see why so many Americans are invested in their own retirement years before they even begin. But with all the talk about how great these plans are, there’s another side to them that some people don't realize: they're not always good investments!
An Index Annuity could be the retirement vehicle that can guaranteed one prosperous and enjoyable retirement without having to worry how the economic performs.
About the Author:
Isaac Trinidad, is an Insurance Broker appointed with more than 30 insurance companies. US Navy (1996-2000) and US Air Force (2002-2005) Veteran, Persian Gulf War and 9/11 Eagle Freedom Veteran. He’s the founder of Isaac Trinidad, LLC a Atlanta, Georgia Based Company.
Source: https://atlasfinancialinc.com/the-pros-cons-of-index-annuities/?gclid=Cj0KCQiA4uCcBhDdARIsAH5jyUlY7VuzjdV9p-AAgKsgLn9thj32urLYzuGkS8Ea355ij8aSw7jp9nsaAt7oEALw_wcB
