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How is a 403(b) Different From a 401(k)?
403(b)s are essentially the same as 401(k)s but there are a few notable differences. A 403(b) is extremely similar to a 401(k); the main difference is the type of employer than can offer each. 403(b)s are offered by public educational institutions, non-profit hospitals, non-profit organizations, religious groups and some government organizations. Due to the negotiating powers of many of those institutions, and their non-profit status, the administrative fees are smaller and they are not subject to some of the administrative oversight imposed on 401(k)s. Most 403(b)s are not subject to ERISA, which means they don’t have to satisfy as many auditing and reporting requirements. Continue reading...
What is Credit Counseling?
Credit counselors can negotiate debt management strategies with lenders on behalf of individuals with debt problems, as well as providing behavioral financial habit construction counseling. Debtors seek out credit counselors to find out what their options are to get out of debt and to get some coaching during the process. Credit counselors can be certified through several accredited institutions who are overseen by the Department of Justice in the United States, and they may be part of a non-profit organization, lending institution, or independent financial practice. Continue reading...
What Role Does Inflation Play in my Retirement Planning?
Inflation plays a crucial role in your retirement planning. Investors should anticipate 2% - 3% inflation each year, meaning that the costs of goods and services rise substantially over time. Retirees should also consider that inflation is different for different items. For instance, health care has a higher rate of inflation each year than retail goods, and the cost of home improvements generally rises faster than the cost of food. Continue reading...
What is AARP?
One of the largest and most influential groups in the country is the American Association of Retired Persons, or AARP. It is a nonprofit organization whose mission is the improvement of the quality of life for its members. The group is one of the largest entities in the country, and it’s free monthly magazine has a higher circulation than any other publication in the United States. Its membership consists of over 40 million American citizens over the age of 50. Members receive many benefits each year, including many discounts and coupons on food, lodging, travel, and so on, for dues around $20 per person per year. Continue reading...
How are My Retirement Benefits Computed?
Each Defined Benefit Plan has its own formula and therefore its own calculations. These formulas need to be arranged by an enrolled actuary to insure that they’ll work over time and will hold up to IRS scrutiny. In general, however, the calculations are strongly based on factors such as your age, your salary, and the number of years you have spent working for the company. For every bit of salary you collect, or length of time you add to your tenure, you add incremental amounts to the set benefit waiting for you in retirement. Continue reading...
How Do I Invest Money in My 403(b)?
Investing in a 403(b) is done by making contributions via payroll deductions and selecting investment options from among the available choices with your custodian. Payroll deductions on a pretax basis are routed into your 403(b) account with your consent. This can be done by telling the payroll department what percentage of your compensation you would like to send there, or by telling the plan custodian company, who tells your payroll department. Continue reading...
What is a Keogh plan?
Keogh plans are any type of qualified plan at a sole proprietorship or partnership. Keogh plans come in various forms, and this is because they are actually quite a broad category. IRS Publication 560 (found here) divides workplace retirement plans into SIMPLE IRAs, SEP IRAs, and Qualified Plans. This last category, Qualified Plans, includes profit-sharing plans, 401(k)s, 403(b)s, money purchase plans, and defined benefit plans such as pensions and salary continuation plans. Continue reading...
What is a Money Purchase/Profit Sharing Plan?
Money Purchase plans and Profit Sharing plans are two types of Defined Contribution plans that can be used at a business, together if desired. Both of these are Defined Contribution plans, which means that only the terms of the contributions to the plan are defined in the plan document. This is different than Defined Benefit plans, which specifically define the benefit due to an employee at retirement, which is generally a monthly pension payment. If an employer wants to use both a Money Purchase plan and a Profit Sharing plan, it is possible, but since both of them are Defined Contribution plans, they will be limited in aggregate to the allowable defined contribution limits for employer contributions. Continue reading...
Will my target mutual funds miss their targets?
Surprisingly, target funds seem to be doing their jobs well enough, despite their ‘one-size-fits-all’ style. There are many target date mutual funds that have appeared in the past 5-10 years, which are supposed to simplify your investment decisions. These target funds are nothing more than carefully selected asset allocations, based on historical models and a client’s time horizon. For example, Target Retirement 2018 will probably consist of 70% Fixed Income Funds, and 30% of Equity Funds, and Target Retirement 2028 will probably consist of 50% Fixed Income Funds and 50% Equity Funds, etc. Continue reading...
What is Adjusted Gross Income?
For tax purposes, Adjusted Gross Income is the basis of an individual’s income tax calculations, before “below the line” deductions. Adjusted Gross Income (AGI) is Gross Income (all of an individual’s earnings for the year) minus above-the-line deductions such as retirement plan contributions, education and medical expenses, Health Savings Accounts, alimony, military exemptions, and so on. After these adjustments, a person can take the standard federal deduction or itemize their other deductions. These are known as below-the-line deductions. Continue reading...
What are some Good Books on Investment?
The investing section in your bookstore has shelves packed with titles hoping to earn a five-star rating from you, but not all of these are going to be worth your time. There are thousands and thousands of books written about investments, stocks, Mutual Funds, retirement portfolios, and so on. By the time most of them hit the market, the information in these books has long become irrelevant. The classic treatise on investments is Ben Graham’s “The Intelligent Investor.” Try to avoid books with titles like “12 Steps to Financial Prosperity,” and “How to become a Zillionaire.” Continue reading...
What is the Difference Between Cash-Balance Plans and Other Retirement Plans?
Cash Balance plans are Defined Benefit plans, but are not much like Pensions as you may know them, or other types of retirement plans, for that matter. On one side of the retirement isle you have defined contribution plans, such as 401(k)s and SEPs and so on, where the contributions are certain, or at least ascertainable, while the ending balance or benefit of each employee’s account is unknown, or at least does not have to be (and in most cases isn’t). Continue reading...
What is a Profit?
In its simplest form, a profit is the revenue or income gained from an entity after all expenses/overhead is accounted for. In business, a company deals with a number of expenses - operating expenses (the cost of doing business), fixed costs (overhead), salaries and benefits, legal fees, and so on. If a company’s revenues exceed all of these costs combined, the company is considered profitable. A profit is also known as a company’s bottom line, net earnings, or net profit. Continue reading...
What are the Vesting Rules for My Keogh Plan?
Vesting rules depend on the type of Keogh contributions being made. The IRS imposes certain rules on Keogh Plans, which includes vesting restrictions. Different employers might have totally different vesting schedules, as long as they satisfy the IRS rules. It depends on the type of contribution being made, such as matching or profit-sharing or money-purchase contributions, whether the plan is a QACA, and so on. Many contributions are immediately vested, while some are gradually vested over a few years, and some are on a cliff-vesting schedule. Continue reading...
What is a Consolidated Tax Return?
A consolidated tax return is a single filing that covers several subsidiary companies and their parent company. One of the advantages of doing so is that the capital gains of one can be offset by the capital losses of another. It can also allow a profit sharing plan for the parent corporation to use profits from the subsidiaries. Corporations with subsidiaries can file a consolidated tax return that covers all of the affiliated companies. Continue reading...
What are Profitability Ratios?
Profitability ratios are useful analytical tools to evaluate a company’s ability to generate profits relative to all costs and expenses. A company that has high profitability ratios relative to competitors/peers, or a company that has demonstrated to improve their profitability ratios over time, is generally viewed as a healthy and attractive company from an ownership perspective. Some examples of profitability ratios are profit margin, return on assets, and return on equity. Continue reading...
What is the Difference Between a Thrift Savings Plan and Other Retirement Plans?
The main difference is that the TSP is only for Federal employees. A Thrift Savings Plan is essentially a 401(k) for employees of the federal government. It functions in the same ways and is subject to the same limitations. The contribution limits and catch-up limits are the same, as well as the employer contribution limit. The plan actually has lower fees than most 401(k)s, so that’s one difference. The investment options are fairly limited, but not much more than regular 401(k)s. There are basically 5 index funds to choose from and then a series of target-date funds that blend the index funds. Continue reading...
Can I Withdraw Money From My Pension Plan?
This is rarely an option, but the IRS does allow it. In general, you can’t withdraw money from a Pension Plan before you retire. You also may not be able to make non-recurring withdrawals after retirement, unless it is a lump-sum settlement. If your plan allowed it, the IRS would treat it just like withdrawals from a 401(k). Withdrawals before 59 ½ would be penalized with a 10% early withdrawal tax. Continue reading...
What is a Life Income Fund?
Life Income Funds (LIFs) are available to Canadians who have left a job before retirement and who are entitled to a sum of money in their pension plan. LIFs offer some flexibility, more than some other alternatives, but the amount that can be withdrawn at a time is limited to a minimum and maximum. The former employee could choose to leave the funds in the pension plan, or to use one of the alternatives to LIFs, which include a Locked-In Retirement Account (LIRA), which is provincially-regulated, or a Locked-In Retirement Savings Plan (LRSP), which is federally regulated. LIRAs and LRSPs do not permit regular withdrawals, and are seen as savings vehicles rather than income vehicles. Continue reading...
What is an Operating Profit?
Operating profit is a company’s profit from its business operations, and can be calculated by taking gross profits minus operating expenses. Operating profit is synonymous to operating income, and represents a company’s profitability from its core operations, which excludes earnings from other investments or interests and also does not factor the impact of taxes or interest. Continue reading...