by Stephen Reed | Accounting News, Financial goals, News, Newsletter
Key Takeaways:
- Keeping a gap between income and spending, even as income grows, is the foundational habit behind long-term wealth building.
- High-interest debt quietly drains money that could otherwise go toward saving and investing — paying it down is one of the best moves you can make.
- About 25% of workers miss out on their full employer 401(k) match; reviewing your full benefits package yearly can uncover more free money.
- Investing beyond a 401(k) — through an IRA or brokerage account — spreads your money across more than one place to grow.
- Avoiding comparison to others’ visible spending helps redirect money toward what actually builds financial security.
Many millionaires are quiet about their wealth. They keep things simple with modest homes, older cars, and middle-class incomes. What typically sets them apart is what they do with their money to build long-term wealth.
While a huge salary or a lucky windfall would kickstart your wealth-building into high gear, a handful of consistent, long-term habits can help middle-class workers quietly build substantial wealth. Here is what that looks like.
Live Below Your Means
This habit is the foundation of building wealth. It doesn’t mean living as cheaply as possible. It means making money moves with intention. It means leaving a cushion between what you earn and what you spend. Instead of automatically upgrading your lifestyle with every raise, put at least some of that extra income toward saving and investments.
That gap between income and spending is the game. You can enjoy your money while still making sure some of it is working for your future.
Be Careful with Debt
When it comes to building wealth, the monster under the bed is debt. It’s always lurking in the background, quietly draining resources that could be used for saving and investing – and high-interest debt has the sharpest teeth.
Every dollar going toward interest on a credit card is a dollar that can’t go toward saving and investing because part of your paycheck is already committed before it hits your bank account. If you’re carrying high-interest debt, paying it down is one of the best investments you can make.
Keep in mind that not all debt is equal. A mortgage on a house you can afford is different from a stack of credit card balances at 20% interest.
Take Advantage of All Employer Benefits
Roughly 25% of workers leave behind free money by failing to claim their employer 401(k) match. Middle-class workers focused on building wealth know to tap into this free money by taking full advantage of the employer match.
They look beyond 401(k)s, too. A health savings account (HSA), flexible spending account (FSA), employee stock purchase plan, tuition assistance, life insurance, or other workplace benefits could potentially save you money.
Instead of signing up during open enrollment and then never looking at it again, take an afternoon to review your benefits package each year. It’s a worthwhile time investment.
Invest Beyond 401(k)
A 401(k) is a great start to investing, but it shouldn’t be your whole plan. If you’re focused on building wealth, you should aim to have money working in more than one place. If you have money left after your regular expenses and investing in an employer-sponsored 401(k) plan, consider additional investing opportunities.
This could mean contributing to an IRA or investing in a low-cost index fund in a regular brokerage account. The trick is to just start somewhere. Even relatively small amounts can grow significantly over time.
Stop Comparing and Practice Contentment
We live in a culture that rewards spending you can see. Possessions are markers of success. New cars, new phones, grand vacations, and all of it posted on social media. It’s easy to start feeling like you’re woefully behind when you measure your reality against everyone’s highlight reels. But what you can’t see are their bank accounts, their debts, or their retirement savings.
Quietly building wealth looks pretty ordinary and even boring from the outside. But practicing contentment doesn’t mean you can’t ever enjoy your money. It means being smart with it. It means investing in what actually brings you joy instead of chasing status symbols. A paid-off mortgage and a strong retirement account aren’t easily showcased on social media, but they’ll lead to a life where money stops being a source of stress.
Building lasting wealth means being comfortable with financial progress that no one else can see. Over time, ordinary decisions can add up to an extraordinary amount of financial security.
by Amanda O'Brien | Accounting News, News, Newsletter, Retirement, Retirement Savings
Key Takeaways:
- A Roth conversion moves money from a traditional account into a Roth, taxed now in exchange for tax-free growth and withdrawals later.
- Converting during a temporarily lower-income year, such as between jobs, can let you convert at a lower tax rate.
- A “conversion ladder” — converting smaller amounts over several years to stay within your current bracket — typically beats converting all at once.
- Converting in your peak earning years, or when it would push you into a higher bracket, often doesn’t make sense.
- Because Medicare Part B/D premiums are based on income from two years earlier, a large conversion can quietly raise your Medicare costs.
If you have money in a traditional IRA or 401(k), you’ve probably wondered how much of those savings will eventually go to taxes. A Roth conversion can help reduce future taxes and build a source of tax-free income, but you generally need to pay taxes now to get those benefits later. Here’s a breakdown of the factors at play in determining if this could be a smart move.
What Is a Roth Conversion?
A Roth conversion moves money from a traditional retirement account into a Roth account. You pay taxes on that money now, at today’s rates. In exchange, that money grows tax-free from then on, and you never pay taxes on it again, not even when you withdraw it. Roth IRAs also don’t require the owner to take required minimum distributions (RMDs). Tax-free growth sounds like the right idea, but it isn’t always the best move.
When a Roth Conversion Could Make Sense
A Roth conversion could be the right move when your income is temporarily lower than usual. For example, if you’ve had a slow income year or you’re between jobs, this could be an ideal time to convert some traditional retirement savings at a lower tax rate.
A conversion may also make sense if you expect tax rates to be higher in the future or want to reduce future RMDs. Having money in both traditional and Roth accounts can also give you more control over taxable income during retirement.
Should You Convert Everything at Once?
Converting a traditional IRA all at once could trigger a substantial tax bill and push you into a higher tax bracket. Instead, converting smaller amounts over several years is typically a better move.
A common strategy known as a “conversion ladder” is to convert enough each year to take advantage of your current tax bracket without unnecessarily pushing income into a higher one.
Work with a tax professional to figure out how much you can convert each year without risking a jump to a higher tax bracket.
When You Might Want to Skip a Roth Conversion
If you’re currently in your peak earning years and sitting in a high tax bracket, or if the conversion could push you into a higher tax bracket than your current one, it may not make sense.
Keep in mind that you’ll need to pay the tax bill. Ideally, this should come from savings outside your retirement account. If you use retirement funds to pay the taxes owed, you’ll put a dent in your investments, and you could incur additional tax consequences.
The Medicare Trap
If you are approaching or already enrolled in Medicare, something to keep in mind is that a Roth conversion can quietly raise your premiums.
Medicare Part B and Part D premiums are based on your income from two years earlier. A large Roth conversion adds to your taxable income, which can increase your Medicare premiums. This is exactly why smaller conversions spread over a few years tend to work better for people in or near retirement.
A Roth conversion can be one of the smartest pathways to create tax-free retirement income, but it can also be an expensive mistake if you do it at the wrong time or with the wrong amount. A tax professional can help you assess your income needs, goals, and timeline if you’re considering a conversion.
by Amanda O'Brien | Accounting News, Financial goals, News, Newsletter, Retirement Savings
Key Takeaways
- Not coordinating 401(k)s can cost couples real money. Research suggests couples who don’t prioritize the highest employer match may lose an average of $14,000 in retirement wealth over their lifetime — not from saving too little, but from saving in the wrong order.
- Always prioritize the plan with the best employer match first. If one spouse’s employer offers a 100% match on the first 4% of contributions and the other offers 50% on 6%, contribute enough to capture the full match from the more generous plan before directing funds elsewhere.
- Regular “money dates” keep both spouses aligned. Scheduling brief, recurring financial check-ins — twice a year or quarterly — ensures couples catch changes like a new job with a better match and can adjust contributions before leaving money on the table.
When couples talk about retirement savings, they often overlook an important detail: how their two retirement plans work together. That small oversight can leave money on the table. Here’s how to coordinate 401(k) plans for the biggest impact.
What the Research Shows About Coordinating 401(k)s and Retirement Savings
Research shows that couples who don’t coordinate retirement contributions may miss out on valuable employer matching contributions. Over time, that missed opportunity can add up. Some estimates suggest couples who don’t prioritize the highest company match lose an average of about $14,000 in retirement wealth over their lifetime.
This isn’t a case of saving too little. It’s a case of not saving in the most strategic way.
Why the Employer Match Matters
An employer matching contribution is a powerful benefit in a workplace retirement plan. Many employers match a percentage of what workers contribute to their 401(k). For example, a company could match 50% on the first 6% of salary, or 100% on the first 3 or 4%.
This is essentially free money straight into your retirement account.
But when both spouses have access to company-sponsored 401(k)s, there are things to be aware of. One employer might offer a higher match than the other. Or one plan might match contributions sooner or at a higher percentage.
If couples treat their savings separately and don’t coordinate, they might just spread contributions evenly between the two plans. That sounds logical, but it might not be the smartest financial move.
In many cases, it makes more sense to prioritize contributions to the account with the highest employer match first.
For example, if one spouse’s employer matches 100% of the first 4% of contributions while the other matches the first 50% of 6%, it usually makes sense to contribute enough to the first plan to realize the full 100% match. Once that match is fully realized, additional contributions can go to the other plan.
This simple shift can increase retirement savings without requiring the need to save more money.
The Value of Money Conversations
The problem couples often run into isn’t math. It’s communication. And miscommunication can create gaps.
For example, one spouse may not contribute enough to receive the full employer match, while the other spouse contributes more than necessary to their plan with a smaller match.
When each spouse operates somewhat independently, and they don’t look at the bigger picture together, they can miss out on money.
The Power of Money Dates
The solution to this miscommunication is simple: talk about money more often. Try setting regular “money dates,” where you both schedule times to sit down and review your finances together. This can be done twice a year or once a quarter – whatever fits your specific circumstances. And it doesn’t need to be complicated. Even just a few minutes catching up on financial goals can ensure that you’re both on the same page.
These conversations can include topics like:
- Retirement contributions
- Employer match rules
- Changes in salary or benefits
- Debt payoff plans
- Upcoming financial goals
For example, if one spouse changes jobs and receives a better 401(k) match, a smart strategy would be to shift more contributions to that account.
Retirement planning isn’t just about how much you save. It’s also about how you save. And one simple question that isn’t always asked: Which 401(k) gives us the best match?
by Stephen Reed | Accounting News, News, Newsletter, Retirement, Retirement Savings
If you’re considering tapping into your 401(k) for a loan, you should be aware of how these loans function. In this article, we’ll delve into the ins and outs of 401(k) loans, exploring their benefits and potential drawbacks. Whether facing financial hurdles or seeking alternative borrowing options, the information below will help to make informed decisions about leveraging your retirement savings.
The Basics of 401(k) Loans
When you initiate a 401(k) loan, you are essentially borrowing funds temporarily from your 401(k) account. The borrowed amount, along with the interest charged, gets repaid into your account.
The IRS sets guidelines, allowing you to borrow up to 50% of your vested balance or $50,000, whichever is lower. However, if half of your vested balance amounts to less than $10,000, you might be eligible for a loan of up to $10,000.
Keep in mind, though, that while the IRS regulates these loans, it’s ultimately up to your employer to decide whether to permit them.
How a 401(k) Loan Works
Assuming an employer permits such loans, the approval process is typically simple. Unlike securing a loan from a third-party lender, qualification does not depend on a credit check or certain debt-to-income ratio requirements. Depending on how your specific plan handles loans, you will need to reach out to your plan administrator to initiate the loan request or complete an online application.
Once approved, you can expect to receive the funds within two to three business days. Repayment is conveniently handled through automatic deductions from your payroll over a standard five-year period.
Interest rates are determined by your employer, commonly calculated as the prime rate plus 1%. It’s worth noting that the interest paid on the loan goes back into your 401(k) account, effectively allowing you to repay yourself.
Pros and Cons of a 401(k) Loan
When evaluating any type of borrowing, exploring the upsides and downsides is an essential part of the process. On the positive side, these loans offer convenience, with the interest paid funneling back into your account. For instance, if you’re paying 7% interest on a 401(k) loan, that 7% gets reinvested into your 401(k), bolstering your savings. Plus, if you manage to repay a short-term loan promptly or even ahead of schedule, it might not significantly impact your retirement funds.
However, there’s a significant drawback to consider: the risk of losing the tax-sheltered status if you face job loss. Should you take out a loan against your 401(k) and experience a job change or loss before fully repaying the loan, you’ll have a limited amount of time to repay the loan in its entirety. Failing to do so not only subjects the outstanding amount to taxation but also incurs an additional 10% penalty from the IRS if you’re under age 59 ½.
When Does it Make Sense to Borrow from Your 401(k)?
Borrowing from your 401(k) should be a rare incident, but it can be a viable solution when facing a pressing need for significant cash in the short run. However, it’s crucial to reserve this option for substantial needs, rather than trivial expenses.
A 401(k) loan option is typically a better choice than relying on other options such as payday loans or personal loans, which usually carry exorbitant interest rates. Additionally, securing a 401(k) loan is relatively straightforward compared to the complexities of securing loans from traditional financial entities.
When a 401(k) Loan is Not the Best Option
Here are some situations where it’s best to avoid tapping into your 401(k):
- Non-Essential Expenses: Using a 401(k) for luxuries like vacations isn’t advisable as these are discretionary purchases, not necessities.
- Job Uncertainty: If you’re uncertain about your job’s stability or foresee a job change, reconsider a 401(k) loan. Leaving your job without paying the loan could lead to hefty tax obligations.
- High Financial Needs: Given that 401(k) loans are limited to 50% of your vested balance or $50,000, they might not suffice for substantial expenses. Moreover, borrowing a large sum could strain your budget with hefty repayment obligations.
Repayment Rules
Navigating 401(k) loan repayment rules involves adhering to IRS guidelines, while employers oversee specific loan aspects. Here’s what the IRS mandates:
- Repayment Period: Typically, loans must be repaid within five years. The exception to this is when the funds are used to purchase a primary residence.
- Payment Frequency: Minimum payments are required quarterly.
- Job Change Consequences: Upon leaving a job, employees might face immediate repayment demands for any outstanding loan balance. Failure to comply can result in taxable distribution, potentially incurring penalties. To mitigate tax consequences, workers can roll over the balance to an eligible retirement account by the federal tax deadline of the following year.
Alternatives to a 401(k) Loan
A 401(k) loan is likely not the only option available to you. Here are a few other avenues to explore.
Use Your Savings. Tap into your emergency fund or other savings. Ensure your savings are parked in a high-yield account to maximize returns.
Opt for a Personal Loan. Personal loans offer flexible repayment terms without jeopardizing your retirement savings. Many lenders provide quick access to funds, often within a day.
Explore HELOCs. If you own a home with sufficient equity, a Home Equity Line of Credit (HELOC) can be a viable option. Similar to a credit card, it offers revolving credit, allowing you to access funds as needed up to your approval limit.
Consider a Home Equity Loan. With potentially lower interest rates, a home equity loan is secured by your home. It’s an installment loan, ideal for planned expenses. However, defaulting on payments could put your home at risk.
by Jean Miller | Accounting News, News, Newsletter, Retirement, Retirement Savings
At some point in your employment journey, you’re going to find yourself at a crossroads – whether you voluntarily quit a job for a new position or face an unexpected layoff. Amidst the emotional and logistical challenges of these changes, one crucial aspect that requires attention is your 401(k) plan with your former employer. Here’s how to manage your 401(k) plan when employment changes.
Assess Your Options
When you leave your current job, you need to evaluate your available options for your 401(k). Typically, these are your main options:
- Leave it be: In some cases, leaving your 401(k) with your former employer may be a viable option, especially if you’re content with the plan’s performance and fees. This option is often convenient and allows you to maintain the tax-advantaged status of your retirement savings. However, you won’t be able to make additional contributions, and you’ll need to manage the account independently.
- Roll it over into your new employer’s plan: If your new employer offers a 401(k) plan and allows rollovers, transferring your 401(k) to your new employer’s plan would allow you to consolidate your retirement savings, making it easier to manage. Be sure to research the fees and investment options of the new plan before making a decision.
- Roll it over into an Individual Retirement Account (IRA): Transferring your 401(k) funds to an IRA provides more control over your investments and may offer a broader range of investment options compared to employer-sponsored plans. IRAs are not tied to your employer, offering flexibility and portability. Be mindful of fees and investment choices when selecting an IRA provider.
- Cash Out: While it’s possible to cash out your 401(k) when you leave a job, it’s generally not advisable. Cashing out comes with tax consequences, including penalties for early withdrawal if you’re under 59 ½. Additionally, you’ll miss out on the potential long-term growth of your investments.
- Convert it to a Roth IRA: If you’re willing to pay taxes upfront, you can convert your traditional 401(k) into a Roth IRA. You will pay income taxes on the amount converted, but qualified withdrawals in retirement are tax-free. This option may be beneficial if you expect to be in a higher tax bracket in the future.
Understand Tax Implications
When contemplating what to do with your 401(k), it’s important to understand the tax implications that could be triggered. Cashing out, as mentioned, may trigger taxes and penalties. On the other hand, transferring your funds without a direct rollover may result in mandatory withholding. To avoid unexpected tax bills, consider consulting with a financial advisor who can offer guidance based on your personal situation.
Stay Informed About Deadlines
The different options available for your 401(k) are all subject to different deadlines. Missing these key deadlines could limit your choices. Some plans may require you to take action within a certain timeframe, so it’s imperative to stay informed about these deadlines to make the most informed decision possible.
Seek Financial Advice
Navigating the management of a 401(k) plan on top of a job transition can be stressful. A financial advisor will be able to offer valuable insights tailored to your specific circumstances. They can help you weigh the pros and cons of each option and guide you toward a move that aligns with your long-term financial goals.
