Five Ways You Can Save For Retirement
At Huntington, we have bankers experienced in retirement planning. Heres what we recommend to customers who want to get started with their retirement savings or stay on track.
Where Should You Put Your Retirement Money
These days, there is an ever-expanding landscape of banks and financial institutions that can help you save for retirement.
These institutions offer these services:
- Keep the money safe
- Help you make investment decisions
- Make the actual investments for you or enable you to do it yourself
If you look at the market landscape of financial providers one way to slice it up would be like this
|Boutique Firms and Banks|
|Independent Broker Dealers|
Other Alternatives To Taking A Hardship Withdrawal Or Loan From Your 401
- Temporarily stop contributing to your employers 401 to free up some additional cash each pay period. Be sure to start contributing again as soon as you can, since foregoing the employer match can be extremely costly in the long run.
- Transfer higher interest rate credit card balances to a lower rate card to free up some cash or take advantage of a new credit card offer with a low interest rate for purchases .
- Take out a home equity line of credit, home equity loan or personal loan.
- Borrow from your whole life or universal life insurance policy some permanent life insurance policies allow you to access funds on a tax-advantaged basis through a loan or withdrawal, generally taken after your first policy anniversary.
- Take on a second job to temporarily increase cash flow or tap into family or community resources, such as a non-profit credit counseling service, if debt is a big issue.
- Downsize to reduce expenses, get a roommate and/or sell unneeded items.
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Should You Use A Financial Advisor Affiliated With Your Bank
Pensions have pretty much gone away. We spend 20 to 30 years in retirement. And Social Security covers only a fraction of our retirement expenses. This means we are pretty much responsible for saving everything we need for retirement on our own.
This may seem like a daunting challenge some people might consider the help of a financial advisor. But should you hire a financial advisor thats affiliated with your bank?
For most people, a bank is their main provider of financial services. But this does not necessarily a bank is the right place for your retirement savings: They may not offer you the advice and services you need.
Make Retirement Your Own Merrill Lynch
Insurance and annuity products are offered through Merrill Lynch Life Agency Inc., a licensed insurance agency and wholly owned subsidiary of Bank of America Corporation. Trust, fiduciary and investment management services are provided by Bank of America, N.A. and its agents, Member FDIC, or U.S. Trust Company of Delaware.
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Your 401 Is A Big Part Of Your Retirement Savings But You Don’t Know The Last Time You Logged In
Effectively managing your investments and making the right financial decisions takes time, skill, and effort. Its not something you only need to do once. Your investment options change, the account needs to be rebalanced periodically, and as your 401 grows, you may benefit from a personalized investment mix rather than the age-based allocation in a target-date fund.
Regardless of whether you lack the time, desire, or investment acumen, the result is the same. Thankfully, it’s a solvable problem, and likely worth it have an advisor manage your retirement plan. Time is money, and theres a cost to delaying good financial decisions or extending poor ones, like keeping too much cash or putting off doing an estate plan.
The More Secure The Investment The Lower The Return
Most banks offer IRAs as certificates of deposit . The CDs are insured by the FDIC for up to $250,000 per person, per bank, in case the bank were to fail. However, the rate of return on CDs is generally much lower than the rate of return if you were to open an IRA at a brokerage firm. Generally speaking, the more secure the investment, the lower the return.
The investment portion of your bank may offer IRAs that are not CDs. Check with your bank to see if its IRAs fall under the “Certain Retirement Accounts Category” of FDIC Insurance. If they do, then your IRAs will be protected with the same limits as a CD. Either way, your funds will likely earn a much higher rate of return in an IRA than they would in a CD.
A CD locks in a set rate of return for a specific period of time, and when that period of time ends, you may choose to roll the current CD into a new one, without drawing out any funds. The market rates may go up or down, depending on the current economic conditions.
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What Are The Advantages Of Working With My Bank
People will choose to use their bank because they feel that the advisor is more trustworthy or because it simplifies the process of looking for a financial advisor.
A bank’s advisor will likely be able to offer you a wide variety of investments as well as life insurance options. The brokerage fees should be comparable to other financial advisors that work independently or for a brokerage house. It can be reassuring to have a reliable company and name when you are thinking about investing.
Even though it’s nice to maintain an established relationship, you should find out what happens if you need to change banks because you move or for a similar reason. You may want to be able to leave your investments at the bank even if you do not have an account there.
Key Considerations With 401 Loans
- Some plans permit up to two loans at a time, but most plans allow only one and require it be paid off before requesting another one.
- Your plan may also require that you obtain consent from your spouse/domestic partner.
- You will be required to make regularly scheduled repayments consisting of both principal and interest, typically through payroll deduction.
- Loans must be paid back within five years .
- If you leave your job and have an outstanding 401 balance, youll have to pay the loan back within a certain amount of time or be subject to tax and early withdrawal penalties.
- The money you use to pay yourself back is done with after-tax dollars.
Although getting a loan from your 401 is relatively quick and easy, the benefit of paying yourself back with interest will likely not make up for the return on investment you could have earned if your funds had remained invested.
Another risk: If your financial situation does not improve and you fail to pay the loan back, it will likely result in penalties and interest.
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Build An Emergency Fund
This should be the foundation of your financial plan and experts recommend having about six months worth of expenses saved. You can park this money in a high-yield savings account to earn more interest than you would in a traditional checking account. An emergency fund should help you manage most of lifes curveballs.
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Other Retirement Savings Options
In addition to your IRA, you should open a retirement account with your employer if they offer one, such as a 401. Additionally, if they offer an employer match, you should contribute at least that much to your retirement account.
If you are self-employed, there are retirement accounts available to you. You can open a , a KEOGH, a self-employed 401, or an IRA. Remember that when you are self-employed, you are solely responsible for preparing for your retirement.
Although you are required to pay Social Security, you should not plan on receiving Social Security as part of your retirement financial plan. The Social Security system might not be in place when you retire, and you might not qualify for as high of a benefit as you think.
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Following Are Some Tips To Take Into Account When Opening The Bank Account For Your Self
Explain that a self-directed 401k falls under the Internal Revenue Code and point the banker to the following IRS website:
Explain that a solo 401k falls under the retirement trust umbrella and that the business owner can serve as the trustee of the 401k trust. The above IRS web page confirms this, and here is the specific language.
Trusts and trustees. 401 plans are funded through a trust established to hold and invest the plans assets. At least one trustee is appointed to have responsibility for the activities of the trust and its assets. This is a serious responsibility with considerable potential for liability. Trustees might include the business owner, an employee, or a financial or trust institution.
Explain that the business owner as trustee direct all investments and decide on the bank or credit union of where to hold the solo 401k trust liquid funds therefore, the bank will not serve as the trustee of any of the alternative investments and will not administer or safe-keep the solo 401k participant loan documents. Instead, these are responsibilities reserved for the trusteetypically the business owner.
How And Why To Transfer Your 401 To An Ira
By Justin Pritchard, CFP® in Montrose, CO
When you change jobs or retire, you have several options for the money in your 401. You can typically transfer that money to an IRA, leave it in the plan, move it to your new jobs retirement plan, or cash out. In many cases, its smart to move your savings into an IRA. Well cover the pros and cons here so you can decide whats best.
The process can be confusing and intimidating, so its easy to do nothing. But that might result in leaving your savings with an employer that you no longer have any connection to, and one you might even dislike or distrust.
Key takeaway:Read more below, or listen to the explanation .
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Ira Vs : The Quick Answer
Both 401s and IRAs have valuable tax benefits, and you can contribute to both at the same time. The main difference between 401s and IRAs is that employers offer 401s, but individuals open IRAs . IRAs typically offer more investments 401s allow higher annual contributions.
If the IRA vs. 401 comparison is weighing on you, heres the quick answer:
If your employer offers a 401 with a company match: Consider putting enough money in your 401 to get the maximum match. That match may offer a 100% return on your money, depending on the 401. For example, some employers promise a 100% match up to 3% of salary. That means, if your salary is $50,000, your employer will put in $1,500, as long as you also contribute at least $1,500. Once you get the match, then consider maxing out an IRA for the year, return to the 401 and resume contributions there.
If your employer doesnt offer a company match: Consider skipping the 401 at first and start with an IRA or Roth IRA. You’ll get access to a large selection of investments when you open your IRA at a broker, and you’ll avoid the administrative fees that some 401s charge. After contributing up to the IRA limit, think about funding your 401 for the pre-tax benefit it offers. Here’s how and where to open an IRA.
Here’s more on the pros and cons of the IRA vs. 401 question:
» Want to turn a 401 into an IRA? See our guide to rollover IRAs
When Should I Hire A Financial Advisor
It’s generally a good idea to work with a financial advisor anytime you are making decisions about long-term investing or financial planning. If you do that on your own, you should have a strong understanding of financial markets, investment types, and laws about taxes and retirement funds. It can take a lot of time to keep up with all of these matters on your own.
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When A Problem Occurs
The vast majority of 401 plans operate fairly, efficiently and in a manner that satisfies everyone involved. But problems can arise. The Department of Labor lists signs that might alert you to potential problems with your plan including:
- consistently late or irregular account statements
- late or irregular investment of your contributions
- inaccurate account balance
Cant I Just Write A Check
For most workers, the answer is no. Your regular contributions to your 401 account typically only happen through salary deferral. In other words, the Payroll department needs to send money, and you cant just write a personal check if youre hoping to invest a large chunk or reach the maximum contribution limit by the end of the year.
Why not? For starters, the law does not allow you to defer funds that you already received. If the money is in your checking account, you received it. Also, your 401 plan might have specific rules saying you cant make your own payments into the plan.
Catch-up contributions: Those over age 50 can make additional catch-up contributions to retirement accounts. But 401 catch-up contributions, like other employee contributions, generally must go in through payroll deduction.
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Can I Borrow From My 401k If I No Longer Work For The Company
401k Plan Loans An Overview. There are opportunity costs. If you quit working or change employers, the loan must be paid back. If you cant repay the loan, it is considered defaulted, and you will be taxed on the outstanding balance, including an early withdrawal penalty if you are not at least age 59 ½.
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Consider The Size Of The Account Both In Dollar Terms And Relative To Your Other Investment Accounts
If you’re starting a new job, you’re likely starting from zero in your new 401. Since target-date funds can offer a lot of diversification own their own, it’s often a good starting point for new retirement plans. Even if you’ve had a 401 for several years, the account may only be a fraction of your investable assets.
All else equal, as the weight of the 401 increases relative to your entire portfolio, the more important it becomes to ensure the account is managed properly be it by you or someone else.
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Impact Of A 401 Loan Vs Hardship Withdrawal
A 401participant with a $38,000 account balance who borrows $15,000 will have $23,000 left in their account. If that same participant takes a hardship withdrawal for $15,000 instead, they would have to take out $23,810 to cover taxes and penalties, leaving only $14,190 in their account, according to a scenario developed by 401 plan sponsor Fidelity. Also, due to the time value of money and the loss of compounding opportunities, taking out $23,810 now could result in tens of thousands less at retirement, maybe even hundreds of thousands, depending on how long you could let the money compound.
Alternatives To A Solo 401
There are basically two options in addition to the solo 401 for freelancers and independent contractors who want to save for retirement and get the tax advantages that go with these IRS-approved choices:
- The , for Simplified Employee Pension, is designed to be an easy, flexible option for small businesses with employees. It works much like a traditional IRA but has higher contribution limits. The limits are the same as for the Solo 401: $58,000 for 2021 and $61,000 for 2022. However, your contribution cannot exceed 25% of your net adjusted income. You may not find that adequate for your goals. No catch-up contribution is allowed for those age 50 and older. No Roth option is available. A SEP IRA can be opened through any brokerage or bank.
- The Keogh Plan is open to sole proprietors, partnerships, and limited liability companies and is often used as a profit-sharing vehicle for professional practices such as doctors’ and lawyers’ groups. It has the same contribution limits as the SEP IRA and the Simple 401 but poses a greater administrative burden. There is no Roth option.
Another option, the SIMPLE IRA, is designed for businesses with 100 or fewer employees. It is open to sole proprietors but has a lower contribution limit than the Solo 401 or the SEP IRA. The maximum contribution is up to 3% of salary plus $13,500 in 2021 (rising to $14,000 in 2022. There is no Roth option.
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