Retirement the terminology has very big impact in majority of our lives will be a breeze if planned properly from day 1 you start making money. It can be as early as in your teenage wherein you take up part-time jobs and get paid for your efforts and it goes all the way if you start your own business, take-up a job with another employer, make money in passive basis like dividend income from stocks, mutual funds, investment income like fixed deposit income, profits realized from sale of stocks, assets, mutual funds and lots more
Money compounds on its own and this is 200% true with retirement planning. Money savings is directly proportional to the time you start saving money. always start early, sooner the better
Let us look at some common retirement options you should not overlook for your early retirement :
Start contributing and maxing out 401K Plan Every year – This is the best retirement option that many employers offer. 401K the retirement option offered by major employers starting with small,medium, large scale enterprises comes with hefty tax saving benefit. IRS has set an annual cap of $19000 per person and $38000 for a family of two as of 2019 if both are working. This is a limit that is revised by IRS and check your limit each year. If you are self-employed you have solo 401K option that you can setup on your own. Many financial services firm offer such funds. Talk to them as soon as you start your business to setup one for you
What is the real beneft of saving my money onto 401k?
1) Tax saving in Federal and State Income Taxes – All the dollars that are saved in 401K are 100% pre-tax (i.e) you don’t pay a penny tax on this. Basically 401k is a mutual fund that is approved and maintained by your employer. You get deduction in your federal as well as state income taxes on pre-tax basis. In many cases this helps you bring down your tax bracket significantly
2) 401K Loan – This is not recommended as your tax nest-egg should not be taken out unless otherwise it is extremely urgent and you have no other go. You can choose to take loan from 401K account that needs to be re-paid with some interest at a specified period. If you fail to do so the amount will be taxed with 10% additional penalty for premature withdrawal of 401k balance. Generally interest rates will be less than personal loans, credit card interest rates and can be used for rotation. If you choose to change your employer the 401K loan should be paid before leaving employer. Not, all employer 401K plan does come with loan provision. Check with your benefits department about this
Some interesting features and facts about 401K loan
1) 401K loans can be availed upto 50% of the existing 401K balance
2) If you’ve already taken a loan against 401K it is posible to take 50%-original amount taken
3) Interest rates are as low as 3.5%-4.5% depending on 401K fund provider + loan setup fees
4) Tenure of repayment varies from 60 months upto 15 years (in case of principal home purchase)
5) this cna be used to settle high rate credit card debts
6) Can be availed in less than 3 to 5 days
7) Easy to access online
This has only one caveat (or) trick – If you happen to loose your job and need to quit employer you’ll be given grace period of about 2 months (60 days) to repay entire amount. If your job is stable use it
Are 401K loans taxable?
There are no taxes or penalty associated with 401K loans. You need to stick to repayment schedule, pay it in full to avoid taxes in case of job loss
3) 401K stays after changing employer – Once you change the employer, your company gets purchased by a different employer, you leave the workforce altogether, you can choose to leave the 401K balance as it is until you hit the retirement age of 59.5 as of now after which you can take out the money and use it without any penalty after paying taxes. If your business is totally shutdown there are alternative options. Move from 401K to IRA which can be done on direct as well as indirect basis. If you want to transfer from one 401K plan to another 401K plan with same employer after buyout, different employer it is possible. Such transfers are done 100% tax free and without any penalty unless the money is used
4) Employer Match on 401K Free Money That you Carry for Life-time– Some employers give 3%, 5%, 10% to 50% 401K match. Top giants even give 100% 401K match. Some employers offer dollar match the free money you can never miss. Some employers do have trueup which is catch up of missed pay match at the end paycheck. This is a sweet spot that comes on tax-free pre-tax basis that grows tax free
5) 401k rollover from self to spouse account – If both members or all members of family work and have different 401k options there arises a desire to transfer 401k from one account to another. So is it permissible to transfer money from 401K to another 401K?
As per IRS the simple answer is NO. All we can do is transfer money from one’s own 401K to IRA or spouse’s IRA (if joint IRA account) where as 401K to 401K transfer of another person is not permissible
However, if you change jobs and if the new employer offers 401K you can rollover your old/existing 401K onto new employers 401K using direct or indirect methods
Will 401K contribution save Social Security and Medicare Taxes in paystub?
The plain answer to this question is no. the social security and medicare taxes are paid out in form of pension if the person completes the required number of years in service. This is based on income and not AGI. this value doesn’t change even if the person makes contribution to 401k
Check your next paycheck as well as W-2 forms to learn how this computation is done. However, you save lot in federal and state income taxes with 401K contribution
Save your health and wealth by contributing to Health Savings Account aka HSA , Flexible spending account FSA, both
The latest form of medical insurance the health savings account helps you save upto $7000 per year as of 2019 and the limit keeps changing typically increases year after year. So, even if both are employed the maximum per family is $7000 that includes both employer contribution, health rewards earned towards completion of healthy activities promoted by some insurance providers, employee contribution. Employee contribution portion is tax free and more details of the same is available in your W2 form. This is however taxed in states like New Jersey. Check with your auditor about your state rules
What can I use this invested amount towards?
This amount can be used to pay your medical bills, insurance premium, pharmacy bills while you are on unemployment. Look for the documents as some conditions apply. All the incentives that you earn towards completing certain goals are saved onto HSA. This depends on your employer as well as insurance plans
What is the unique advantage of HSA account?
One unique advantage of HSA is that as long as you have a highly deductible health plan that is HSA eligible you can contribute in HSA. For 2019 if you have employer sponsored HSA maximum contribution for family can go upto $7000 per year with catchup contribution of $1000 for 55 and above years of age. You don’t necessarily need an employer
In case of FSA this is a tax deferred account that necessarily needs to be established by an employer making it challenging if you dont have a job
HSA the health Savings Account is an option to save pre-tax money every year. The beautiful thing about HSA is that it can be retained in this savings account for ever and can be used to fund medical expenses. It is much of like 401K, IRA and the money can be invested in mutual funds, stocks, bonds etc.
Note that the funds in money market are FDIC insured. However, investment banking investments are subject to market risk.
So, what is HDHP and why it is needed to retain HSA?
HSA can’t function as stand-alone account. For setting up and investing in HSA it is mandate to have HDHP popularly called Highly Deductible Health Plan from an insurance provider. As per IRS the maximum limit of HSA contribution per couple/family per annum is $6900 in year 2018. For individual it comes around $3400. It keeps changing from year to year
To make use of this and invest in full HDHP premiums need to be paid for one whole year
What happens if HDHP plan gets canceled in between?
The amount in HSA is retained and can be rolled over for years until retirement age. Upon retirement this amount can be withdrawn in full without 20% penalty
Note that amount in HSA is calculated on a pro-rated basis and excess amount in HSA needs to be withdrawn before April 15th of next year. There is also a provision to invest less in next year with assumption that you enroll in HDHP the forthcoming year
HDHP is needed to make new investments in HSA and for maintaining HSA this can be done as normal bank account
Can you avail loan from HSA Account?
HSA, Health savings account as it is popularly called is the form of insurance one can go with HDHP the Highly deductible health plan. Unlike FSA the flexible spending account, HSA can be rolled forward across years and one can go for upto $6900 (family plan) the maximum limit that keeps changing and is being set by IRS every year. In case of FSA the maximum contribution per year as per IRS guidelines is $2600 and it varies. We get full tax benefit on $6900 as it is totally pre-tax amount.
IRA Tax Saving Instrument for employees and business owners – This comes in two different forms – traditional IRA which is pre-tax, roth-IRA which is post-tax but earnings can be withdrawn tax free after certain years