The 401(k) is a retirement plan where employees are allowed to remove their savings before it gets taxed. There have been rumors that retirement savings will be taxed to add as a source for government funds. Find out the truth on this as Mr. Berko tells his thoughts on taxes and retirement savings.
Taxes and Retirement Savings
Dear Mr. Berko:
I have $362,000 in my 401(k) account. It took me 22 years to accumulate that amount. Now I’m told that Washington is considering a tax on the current value of everybody’s retirement accounts to help pay for the Tax Cuts and Jobs Act. Is this true?
My wife and I recently moved back to Fort Lauderdale and discovered you’re no longer on the air with your great call-in radio show. Why?
We’ve tried to remember your great definition of the word politics. Could you repeat it for us?
— JS, Fort Lauderdale, Fla.
It takes a daunting amount of preparation to host a call-in radio talk show for two hours twice a week. And after a dozen delightful years of hosting a fun-filled financial program on WSBR and writing this column, something had to give. The column won!
My definition of politics comes from two words: “poly-,” a combining form of Greek origin meaning “many,” and “ticks,” a noun denoting bloodsucking parasites. It’s so apropos today! With very few exceptions, it’s difficult to imagine a more fitting definition of Congress, as well as a great many elected officials in our 50 state legislatures. However, it also poignantly speaks to the intelligence and indolence of the voters who put them in office. Resultantly, the voter shoulders a great deal of the blame for so many of our nation’s problems. And yes, Congress wants to mess with our retirement accounts in hopes of finding enough revenue therein to pay for the tax cuts.
The first scheme that’s being floated (still in subcommittee) is to restrict the amount of money all workers could save pretax in 401(k) plans to $2,400 annually. Today workers in a 401(k) can save up to $18,000 a year, and those who are older than 50 can save $24,000. Because contributions are pretax, workers who have been saving $18,000 annually would pay taxes on an additional $15,600 of income. This additional tax would help pay for the tax cuts.
A second plan notes that Americans have saved over $7.6 trillion in 401(k)-type defined contribution plans, plus $8.6 trillion in individual retirement accounts, some 70 percent of which was rolled over from 401(k) accounts. That totals $16 trillion (nearly enough to pay off our national debt), and this amount grows larger each year. So far, this $16 trillion is virgin territory; it’s an untouched and untaxed asset that has nearly every “pollutician” in Washington salivating. Members of Congress want to figure out a way to tax this money and help pay for the tax cuts. And they want the money now. So they devised an ingenious second scheme to tax those trillions now rather than wait for the money to be slowly withdrawn five or 15 years hence. The incentive is to pay lower taxes (10 percent) on your retirement plan distributions now rather than wait until you retire and pay a much higher tax rate. Congress figures that if it offered a low tax rate of 10 percent on 401(k) money transferred to tax-free Roth accounts, it would theoretically generate new taxes of $1.6 trillion. And that would easily pay for the tax cuts. That’s an expialidocious idea, and I’d take advantage of that offer in a Sioux City second!
However, it would be only a stopgap measure, because the revenue from this potential tax would be a one-time event. It wouldn’t address the growing deficits plaguing the nation because Americans are too lazy to become informed voters. That’s why there are so many crooks in Congress. Eventually, Congress will propose a value-added tax. This is a consumption tax imposed by 160 countries across the oceans, fleecing citizens to pay for government pet programs. This consumption tax is placed on a product whenever value is added at a stage of production and at the point of retail sale. The United Kingdom, for example, has a flat 20 percent value-added tax, while the VATs in Germany, France, the Netherlands and Spain range between 5 percent and 21 percent.
A 5 percent VAT here in the U.S. would produce an extra trillion dollars annually for members of Congress to use to pay for repairing our infrastructure or otherwise spend while lining their personal pockets.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
COPYRIGHT 2018 CREATORS.COM
2015 Housing Update: Interest and Your Money
Diana Olick talk with Doug Duncan, The Chief Economist Fannie Mae who decided to cut his housing forecasts for next year. He also said that “Is it a good time to sell a house?” because five out of six people who buy a house have to sell one first. the rebound in housing “will be the support” for the broader economy. In 2015 housing set to fall?
8 Actionable Tips to Start Saving for Retirement
Retirement is something we all must face. And therefore it is something we all must prepare for.
Retirement is the finish line to a career and on the other side is a permanent vacation. But in the meantime, we need to save up enough money, and that can be stressful and difficult.
Saving money for retirement requires careful and strategic planning. That’s where this article comes in. This list will show you practical ways you can start saving money for retirement. If you already have a nest egg started, these tips can help you save even more money.
Let’s jump in.
1. Start saving today
The earlier you start saving for retirement the better. If you’re older, don’t be discouraged. There are ways to save money even after your 50s. But whatever your age is, it’s important to start saving today. The main reason why is compound interest.
You begin by contributing $2,000 in your first year. Without additional investment or work, you made $431.02 in four years. Essentially, your money worked for you and made even more money for you. The earlier you start this process the more money you will make.
2. Rebalance your budget
If you’re going to set aside money for retirement, you need to free up your budget first. Living well within your means allows you to allocate money to saving for retirement.
If you can’t afford to put money towards your retirement, it may be time to reconsider how you’re portioning your budget.
Begin by recording your income and monthly spending. This will give you a clear idea of how you’re spending your money and what areas need to be adjusted. Afterward, lower or cut unnecessary spending. Here are some suggestions to save money:
- If possible, go down to one vehicle
- Call insurance companies to lower your rates
- Call utility companies for suggestions to lower your bills
- End subscriptions to clubs, magazines, and streaming services
- Eat out less and cook at home
- Shop frugally at grocery stores
- Halt spending on luxury items
- Use free resources for entertainment, such as parks and libraries
3. Contribute the max to your 401(k)
The IRS institutes a limit on the amount you can contribute to an employee 401(k). In 2019, the IRS raised the limit to $19,000 per year for those under the age of 50. If you wait until the last second to start contributing, you can only give the maximum amount per year.
Ideally, the strategy is to save a portion of money annually for many years, rather than drum up a ton of cash in a few years before retirement. One of the greatest problems with 401(k)s is the lack of employee participation. Once it’s in your budget, increase the contribution to your 401(k) to the max.
4. Take advantage of employer’s match
Many employers offer to match a certain amount of your 401(k) contribution. This is free money. Always contribute enough to take full advantage of your employer’s match. Typically, they will offer to match up to a certain percentage of your income.
Let’s say they’ll match 50% of your contribution up to 5% of your salary and you make $40,000 a year. That means if you contribute $2,000 to your 401(k) your employer will give an additional $1,000. In this case, this is the maximum the employer will match.
This is an easy way to save extra money for retirement. Speak to your HR department to learn about your company’s matching rates.
5. Start an IRA
IRA stands for an Individual Retirement Account. These are managed through a brokerage rather than your employer, but you can have an IRA in addition to a 401(k). Since 2019, the maximum amount you can give to an IRA is $6,000 per year if you’re under the age of 50.
There are two types of IRAs – traditional and Roth. Both have advantages and disadvantages, so you’ll have to decide which one is right for your circumstances. The major difference between them is how and when a tax break is applied.
Traditional IRA – The money you put in is not taxed until retirement. If you withdraw early, the money is taxed and penalized. Investors choose a traditional IRA when they believe their taxes will be lower at retirement.
Roth IRA – This is usually a better option in most situations. The money you put in is taxed right away, but there’s no taxation when you withdraw at retirement. Investors choose a Roth IRA when they foresee their taxes will be higher at retirement.
Let’s compare the two in a hypothetical scenario:
In this scenario, the traditional IRA escapes a 25% tax but pays 30% later. On the other hand, the Roth IRA is taxed at 25% but escapes a 30% tax later on. It’s possible that taxes will be lower in the future, but most investors and analysts believe they will be higher.
Always research your eligibility and speak with a financial advisor before choosing an IRA. Certain circumstances affect contributions, taxation, and withdrawing from IRAs. For example, high-income makers are not able to contribute to a Roth IRA.
6. Use catch-up contributions
Once you turn 50, the IRS allows you to make additional annual contributions to your 401(k) and IRA. As mentioned earlier, if you are below the age of 50 you can only contribute $19,000 a year to your 401(k). However, if you’re over the age of 50 you may contribute an additional $6,000.
There’s a similar story for IRAs. Normally you can only give $6,000 per year to IRAs. But if you’re over the age of 50, you can give an additional $1,000 per year. The IRS calls these “catch-up contributions.” Use this freedom to accelerate your retirement savings.
7. Delay social security
The earliest you can receive social security is 62 years old. Every year you delay taking social security (up to age 70) increases the amount you receive later. Depending on when you were born, you have a different “full retirement age.” You can discover yours at the Social Security Administration website.
Not only does delaying increase your social security benefits, but it gives you more time to accrue money for retirement. But this strategy isn’t appropriate for everyone. Consider your situation and whether delaying social security is right for you.
8. Work longer
One of the simplest and surest ways to make more money for retirement is to work longer. This may not be what you want, but consider working for more years than you intended. At the very least keep it an open option for two big reasons:
Life has unexpected expenses. Medical bills and emergencies can set your retirement back.
You may end up missing work. Many retirees express this, so consider retirement carefully.
Working longer increases your nest egg and delays beginning the withdrawal process. Meaning, not only will you save more money for retirement, but you won’t dip into the funds until later. Your nest egg will take you further into the future.
Additional tip: Don’t be quick to announce your retirement plans to your employer. If you tell your coworkers you plan to retire at 62, the word might get around to the higher-ups. Then, when it comes time to fill a higher position, they could pass you up because they know you plan to retire.
Imagine if you ended up working until 67 to save more money and delay social security. That means you could have had a higher paying job for five years.
Don’t announce your retirement until you’re sure it’s the right decision.
Saving for retirement gives you peace of mind
There are immediate financial needs in life, but there are also long-term financial needs. Saving for retirement gives you a better future with more money and the potential for earlier retirement. But saving for retirement also gives you a better present.
It gives you peace of mind.
The first step is realizing you need to start saving today. Then use these tips and tricks to find the best way for you to save for retirement. By following these tips you can avoid the regret of starting too late or saving too little.
Start securing a great retirement fund for yourself today.
The Best Retirement Investment: A Stock Index Fund
What is your retirement money invested in? The safest and smartest investment is a stock index fund.
There are a lot of misunderstandings about investing in the stock market. Most are afraid and wary of this subject.
Try bringing up the subject with your spouse, or family, or friends. You’re bound to get concerned looks and questions like, “Isn’t that risky?”
They imagine trading stocks is like gambling large amounts of money at a casino. You can’t play against the smart, savvy Wall Street men – they’ll outsmart you every time!
Of course, it’s not quite like that. A stock index fund is not day trading. There’s no big, electronic screen with red and green numbers. There’s no well-dressed men sweating, picking up phones, and slamming them down.
Others are convinced they can trade stocks better than an index fund. They attempt to do research, but are unsure which stocks are best. How do you know if a company will succeed or fail? Which stocks should you buy or sell?
The answer to these fears and doubts is a stock index fund. This clever invention all but guarantees return. They have low expenses and are easy to manage.
In fact, Warren Buffett advises investing in a stock index fund:
“Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund” – Warren Buffett
In this post you’ll learn what a stock index fund is, why you should invest in one, and how to get started.
Let’s dive in.
What is a Stock Index Fund?
Stock (sometimes called a share) is a piece of a company that you own. If you have stock, you have a right to a portion of future profits the company makes. You also have the right to attend shareholder meetings and vote on company decisions, though you’re not obligated to.
The profits you receive from stocks are called dividends. Theoretically, if you own stock you can make profit for the rest of your life. However, companies do poorly from time to time, and dividends fall.
Analysts and financial advisors try to predict which stocks will do well and which ones won’t. They watch the news, ready to buy Apple’s stock when they announce a new phone. They’re ready to sell when a CEO has a public scandal.
The truth is you can never tell if a stock will do well in the future or not. They are too many variables. Besides, it’s stressful and induces anxiety.
A stock index fund looks at the long term growth of the entire stock market. Instead of worrying about which stocks will do well, a stock index fund invests in all of the stocks.
This clever invention operates on the theory that the collective stock market always wins. Meaning, even if some stocks do poorly, the overall performance of the stock market nets worth.
A stock index fund mirrors market indices. Let’s explain the difference between a market index and an index fund.
A market index records data on many stocks. These indices (the plural of index) are not investing in stocks; they are recording the rise and fall of stocks.
There are many market indices, but let’s look at a famous example: The S&P 500 (Standard and Poor’s). This index tracks the top 500 companies in the United States.
Now let’s look at index funds.
Index funds base their decisions off of these market indices. A popular index fund called the Vanguard 500 Index Fund bases their decisions on the S&P 500.
The Vanguard 500 Index Fund therefore copies the S&P 500 market index.
The Vanguard 500 Index Fund automatically buy all of the stocks, in the appropriate ratios, of the companies listed in the S&P 500.
Whenever the S&P 500 adjusts their index, the Vanguard 500 Index Fund also adjusts its portfolio.
You can track the Vanguard 500 Index Fund here. Here’s a screenshot of the fund’s recent activity:
If a company drops below the top 500, the S&P 500 records that. Then the Vanguard fund sells all of that stock, and invests in the new company now in the top 500.
Obviously not every company succeeds, but the collective of companies will. So if you invest in the 500 best companies, you will eventually, always make profit.
Pretty clever right? Let’s explain some more benefits.
Why Choose a Stock Index Fund?
There’s a lot of ways to invest your money – bonds, properties, high interest savings accounts. What makes a stock index fund different from these other options?
Stock index funds are passively managed. This means there’s less of a human component in buying and selling stocks.
As explained earlier, stock index funds simply copy market indices. There’s no guesswork, no research, and no magic formula to follow. All a stock index fund has to do to buy the stocks listed on a market index.
Software can do most of this work. Therefore managing a stock index fund is very easy, and doesn’t require a lot of overhead.
As of April 2019, the Vanguard 500 Index Fund has a 0.03% expense ratio. If you invest 10,000 dollars, 3 dollars will go to overhead cost every year.
Compare this to actively managed funds, which can be as high as 1.5%.
Stock index funds also have low turnover rates. Meaning they don’t constantly trade stocks, but rather do it sparingly and rarely.
In some cases, all an index fund needs to do is rebalance their portfolio every 6 months to match its market index.
This keeps costs down tremendously, since buying and selling stocks can incur capital gains taxes. By having lower turnovers, it’s cheaper to manage a stock index fund.
Ultimately, that means it saves you more money.
Simple strategy that never changes
There are no surprises with a stock index fund. Other investments may require a change of strategy. For example, if property value goes crazy, you may be forced to sell properties you own.
Actively managed funds may change their style or philosophy over the years. Perhaps they stop investing in tech companies and start investing in oil companies.
Or perhaps your old fund manager retires and a new manager takes over.
That comes with uncertainty about the future. But this doesn’t happen with stock index funds.
The strategy is always the same – follow the market index and always adjust stocks to match the index.
This tactic remains the same for any manager, any time period, and in any situation.
You don’t have to worry about overcoming new challenges or answering future questions.
The strategy is set in stone.
I won’t pretend there aren’t safer options. Investing in government bonds is widely considered safer than what I’m recommending.
However, investing in a stock index fund is safer than a lot people imagine.
As explained earlier, certain companies may do poorly, but the collective nets profit over time.
The reason is that the top companies are always competing, adapting, and trying to succeed in their industries.
With a stock index fund such as the Vanguard 500, you’re not betting your money on a particular company, but the U.S. economy.
Experts have tested this method for forty years. As previously mentioned, this is Warren Buffett’s common suggestion when giving advice on investing.
How to Invest in a Stock Index Fund
Investing in a stock index fund begins with research. You may want to consult with your financial advisor.
Then you must choose a fund. Not everyone will select the same one.
Some index funds are based on the Dow Jones, which only tracks the 30 largest public companies.
On the other hand, you can invest in a fund that tracks the entire US stock market. An example is the Vanguard Total Stock Market Index Exchange Traded Fund (VTI).
Various funds offer different levels of exposure to risk, overhead costs, and returns. So start with research.
One option to consider is what Warren Buffett recommended – a fund that tracks the S&P 500. Earlier I mentioned one – The Vanguard 500 Index Fund.
You can learn more, and start investing, in this fund at Vanguard’s website. There is a minimum investment of 3,000 USD.
For several years, many have considered Vanguard a trusted institution.
Alternatively, you can invest in stock index funds for other countries.
Historically speaking, the United States has been one of the most business-friendly nations on the planet. So there’s wisdom to particularly investing in U.S. stock.
You can also use other companies to manage your index fund(s), such as Betterment.
Invest Well to Retire Well
Going into retirement with a chunk of money in a stock index helps tremendously.
They regularly pay dividends. You can additionally take out more money, and slowly deplete your funds.
If you calculate your money, and pace yourself, you can retire knowing you’ll have a steady supply of money.
And you won’t have to work ever again.
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