A 401k is a good place to start in planning for your future retirement, no matter how far away you may be from the actual time. A 401k account is a special type of savings account that is funded directly through your paycheck each pay period. How it works is that you and your employer determine the amount that is to be deducted from each paycheck you receive, then the employer determines your pre-tax earnings and deducts your 401k funds from the paycheck prior to taxes.
Once deposited in the special savings account, the funds in the 401k are then invested into many different types of mutual funds, bonds, and stocks. The great thing about a 401k retirement plan is that all of these investments are completely free of taxes until the time comes for you to withdraw your money from the 401k account.
Beginning in the early part of the 1980’s congress created the 401k retirement plan to allow people to begin saving money before they retire from their employment. It works as something of a financial net, ready for you when the time arrives.
There are several advantages with a 401k other than simply being a tax-exempt method of savings. Your employer may also have a match program. With this program, your employer would match part of your contribution into 401k. This means that whatever you contribute to your 401k, your employer will match a portion of it each pay period. Additionally, some employers raise the amount of their contribution when you have worked for them a certain number of years.
Another exciting aspect of 401k is that you have the option to determine where your funds will go when it is invested. To some, this is important and gives them the opportunity to maximize their retirement savings.
Furthermore, 401k has portability. If you should ever change jobs, you have many different options available in regard to your 401k. One of these options is to simply leave your 401k with your previous employer. This is the easiest option. However, you should be aware that the plan administrators could charge you for maintaining the account records. Another option is to roll the 401k over to the new employer’s plan. This will allow you to continue to deposit money into your 401k to add to the money you have already earned and saved.
You may also be able to rollover the 401k into an IRA. This is a great option, especially if employers only offer limited investments. You would have greater control over where your money is invested. Last, you could opt to completely cash the 401k out. This option has a few drawbacks. When you cash out your 401k plan, you must pay the taxes on that money and you could also be accessed a penalty for early withdrawal.
It is extremely important that you fully understand all of your options. Weigh the results of each one prior to making any decision about your 401k. Being educated, practical and informed before making your decision will help benefit your 401k and retirement in the long run.
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{Waking up in the morning on the first day of your retirement should be with a feeling of excitement, and not one of dread. If you are in dread, it must be because you failed to plan properly for that day. Try and help the next generation with better advice than you took.|In your retirement, you should stay in contact with friends. It helps your heart rate to be able to talk to someone from the past in an excited way. And it’s a lot better than sleeping and waking up unhappy every day.|Staying active in retirement is much easier when you have spent a whole lifetime in practice, preparing for it. Sincerely, what you get then is what you have planned for since now. Plan wisely. Map out what you want to achieve with your life at that time, eat well in preparation for it, exercise as much as you can, and save up good money to make such pursuits a possibility. That is how to make meaning of a retirement.}
{Your retirement can be much more enjoyable if you are in control of it. Only if you have let matters slip out of hand will you have that consternation that comes from uncertainty in your gut. So, which is it?|With the number of pension and retirement plans out there, you really have no excuse. You can have your retirement a fulfilling one if you can let them help you with the plans. It’s simply common sense.}
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If you are purchasing a home and have a substantial portion of your assets inside of a retirement account such as a 401K, 403B or other retirement product or annuity, you may choose the increasingly popular option of tapping those funds to make a down payment on your new home. Like any other accounts you may have in your name, such as brokerage accounts and bank checking, savings and money market accounts, most popular retirement accounts qualify as assets to be counted toward your “reserves”, a measure used by mortgage lenders to determine how many months of payments you must have in order to serve as a buffer covering payments you might miss if there were any interruption of your income.
Retirement accounts such as 401(k) or 403(b) annuity accounts are generally administered or sponsored in whole or in part by your employer. In addition to serving as excellent documentation of your earnings and savings, your 401K or 403B accounts can be used in a variety of ways to help finance your new home purchase. Depending on the specific restrictions applied to your account, you may have the option of withdrawing money directly from the account or “borrowing” money in the form of a loan (against your own funds) which is repaid at a generally low rate of interest. Regardless of whether you cash money out of your account or take a loan against it, be sure to thoroughly document any details of the transaction, including any withdrawal or loan application paperwork, demand drafts, cashier’s checks, deposit tickets, etc. for the purpose of substantiating this source of funds to your lender.
Lenders do treat down payment money from retirement accounts differently from program to program and state to state, sometimes from case to case. In particular, borrowing money in the form of a loan may increase what the lender’s perceives as your monthly debt obligations, because even though you are borrowing money from your own account, you are still obligated to make a payment every month which you wouldn’t have to make otherwise, and lenders will often consider this to be detrimental to your qualifying DTI or Debt to Income Ratio, making it harder to borrow as much money as you may need. On the other hand, cashing out any type of retirement account will always create a taxable event and sometimes also a penalty fee, which generally accounts to more than the nominal interest rate common to the loan option. Speak with your loan officer about the requirements of your individual program and weight the options with him/her or another trusted financial professional.
You may also consider speaking to your employer about any down payment assistance programs which may be available to you as part of your benefits package. These can come in many forms, but it is important to clarify with your employer that any down payment assistance granted does not amount to a loan and that there is no expectation of payment. Why would an employer want to help you make a down payment? Call them old fashioned, but most companies do want their employees to stick with them, and if your employer helped you achieve ownership of your dream home, how would you feel about them? As with the 401K, 403B or other retirement account options, down payment assistance from your employer should be documented in detail and all copies of communication, checks, deposit tickets and statements of account, along with signed records stipulating that the funds are given freely and not to be repaid, should be kept for submission to your lender.
Roth 401k is a good retirement savings option. Although it does not provide an up-front tax-deduction, the account eventually becomes tax-free, because the withdrawals taken at retirement are not subject to income tax.
This tax benefit can only be provided to persons who are at least 59.5 years old, or are disabled, and who have held the account for a minimum period of five years. Roth 401k provides an opportunity to save with a different kind of tax treatment. It is a good option for those who are just starting their careers, and expect their income to grow in the future.
Eligibility for Roth 401k:
Anyone whose employer offers Roth 401k is eligible for this investment option. If an employee leaves his/her job, the Roth 401k balance can be rolled over into a Roth IRA. One major benefit of enrolling in Roth 401k is that an account holder does not lose eligibility when the income becomes very high. There is no provision of helping a person open this account if his/her employer does not offer Roth 401k yet. Employers provide a form to their employees to state some, or all, of their 401k contributions that will go into their Roth 401k account.
Difference between 401k and Roth 401k:
401k makes available some tax relief in the year a person may have contributed into the account. However, a 401k-account holder is liable to pay taxes on his/her contribution, along with all the investment earnings, later.
A Roth 401k account holder does not get any tax benefit in the year of the contributions, but all the earnings in the account will be free of tax for as long as the account exists. Besides, a Roth 401k-account holder can roll his/her account to a Roth IRA. The Roth IRA account continues to grow with tax-free earnings for as long as it exists. However, Roth IRA is not available to taxpayers with an income above a certain level.
Advantages of Roth 401k:
Since tax rules allow a person to make it as large as a traditional account, the Roth 401k account is more valuable compared to it. Therefore, saving in a Roth 401k account can make a person much better off at retirement. Given below is a table showing the amount required in a traditional account to have the equivalent of $100 in a Roth Account.
If a person is in the 33% tax bracket, he/she will have to withdraw $149.25 from a traditional account in order to spend $100. This is because $49.25 is used to pay the tax on the distribution. Roth 401k provides more wealth at retirement, as the distribution from it is tax-free.
While many companies that already have the traditional 401k plans, wanted to implement Roth 401k plans, which have been effective from January 1,2006 according to the law, in reality only a few actually have done it, because of the extra expenses involved. These companies want to first observe the success of Roth 401k before actually undertaking the cost of the implementation.
Roth 401k is a good investment option to save tax-free earnings for retirement. People can take advantage of it to be able to have a secure retirement, which is free from monetary worries.
Estimates indicate that there is a target population of some 8.8 million senior households that both qualify for and are good potential candidates for HUD’s home equity conversion mortgage (HECM) reverse mortgage program. (Under an HECM loan, a lender advances money to a elderly homeowner, in the form of a series of fixed monthly payments, a line of credit on which the borrower may draw, or a combination. The senior homeowner is not required to make any payments on the loan so long as he or she remains in the house. The lender collects the loan balance-which includes the accrued interest and other charges as well as the amounts paid out-when the house is sold or the owner dies.) Yet in the most recent federal fiscal year, just 43,131 HECM loans were originated; over the sixteen year history of the program, a total of 162,268 HECMs have originated, representing only a tiny share of the potential market.
There are some obvious and tangible factors that help explain this low market penetration, most notably the high origination fees and closing costs relative to amounts that can be borrowed through the program. Less obvious are the intangible psychological fears that may prevent senior homeowners from stepping into a reverse mortgage. Being aware of these factors can help potential borrowers more clearly assess their own situation and make a more calculated decision about whether or not a reverse mortgage is right for them:
* Fear of Giving-up a Hard-Earned Goal – Most elderly homeowners have spent their working lives focused on the goal of “paying off the mortgage.” Taking out a reverse mortgage is, in essence, a decision to do a complete turnabout and initiate the process of growing a new mortgage. For some seniors, this just doesn’t make sense, no matter how rational the decision to trade-in home equity for better living standards in later life may appear to a detached observer.
* Fear of Being Suckered – HECMs are administered, heavily regulated and insured by federal government agencies (in particular HUD). From the standpoint of protecting innocent borrowers from ruthless lenders, HECMs are about as “safe” a mortgage product as can be imagined. Yet there are true horror stories from the pre-HUD reverse mortgage era about seniors being forced to sell their homes or lose them to foreclosure. Unfortunately, these stories have now become urban legends and still taint the phrase “reverse mortgage”.
A related issue is the ongoing problem of elderly homeowners being contacted by “home repair” companies, annuity salespersons, and other pitch-men promoting the reverse mortgage as the ideal way to pay for their valuable product or service. The tacky nature of this type of solicitation further increase doubts and fears about whether reverse mortgages are truly legitimate.
* Fear of Financial Complexity – There is no question that reverse mortgages are complex financial tools. Moreover, by their very nature they run counter to many of the golden financial management rules that senior homeowners have strived to abide by over their adult lives – i.e. “reduce debt”, “avoid high transaction fees”, “grow your home equity”, etc. Largely because of the complexity, HUD requires all HECM applicants to participate in counseling sessions to ensure they have full understanding of the reverse mortgage process and the other alternatives that may be available. Yet, while necessary and well-intended, the counseling requirement itself may scare-off some potential applicants who feel that they just won’t be capable of digesting all the new information presented.
* Fear of Not Leaving an Inheritance – For many seniors, the desire to leave an inheritance to children or grandchildren is quite strong – even to the point of accepting a more modest than necessary lifestyle to ensure that an estate survives them. Seniors who have this goal and whose largest asset is their homestead, clearly will perceive that a reverse mortgage runs directly counter to their strong bequest motive.
* Fear of Sacrificing Future Flexibility – To be a sensible financial decision, a reverse mortgage should equate to a conscious decision by the homeowner to stay put for the long term – minimally 5-7 years and, ideally, for the rest of the homeowners’ lives. Obviously, this commitment is especially difficult for the elderly homeowner. Death, long-term illness or incapacity and similar issues weigh heavily on the minds of many seniors and make long-term housing commitments especially stressful.
To a large extent, further growth in the reverse mortgage area will depend on the success of efforts to educate the target population. Some observers feel that the next generation of retirees -i.e. baby boomers – will enter their retirement years with a far greater understanding of financial matters and with less aversion to indebtedness. This may prove true but the reverse mortgage concept is so fundamentally different from what people are used to that overcoming the fears of potential borrowers will remain a challenge.
Reverse Mortgage: A Dignified Way For Retirees To Supplement Income And Take Care Of Expenses
For many Americans reaching the retirement age, the equity build up in their home is their only real asset. Reverse mortgage is a way to tap into this asset and create a stream of income needed for retirement or take care of an unexpected financial need that is usually related to health care costs in the elderly.
Reverse mortgage is not like a refinance, equity loan or a second loan on your home and there are some pitfalls.
So what is a reverse mortgage?
As the term implies the flow of money is reversed. Instead of the homeowner paying the lender on a predetermined schedule, the lender pays the homeowner and there aren’t any payments due until the home owner moves or dies.
How did reverse mortgage start?
Roger Maris broke Babe Ruth’s single-season home-run record in 1961 but like most things in life, a single act of kindness has a much longer longevity and a more widespread influence than that of fame and ironically these acts of kindness remain obscure.
The history of reverse mortgage can be traced to Nelson Haynes of Deering Savings & Loan (Portland, ME) who made the first reverse mortgage loan to Nellie Young, the widow of his high school football coach. This event was reported to be motivated by kindness and started a chain of events over the following forty years to extend a helping hand to today’s retirees.
Reverse mortgage helps many retirees cope with their financial difficulties and more importantly,helps them to have a way to retain their independence and dignity. And retirees are reaching for this solution in record numbers. According to the National Reverse Mortgage Lenders Association in 2004, lenders originated a record 37,829 HECM loans during the most recent federal fiscal year – a 109 percent increase over the 18,079 loans closed the previous year.
Why would a lender do this?
The act of kindness may have started this idea but lenders are not charitable organizations and they will not be in business long if they don’t have a return on their investments. In this case, they calculate the amount they lend based on the value of your home, projected appreciation, your age and a number of other factors. They expect to get paid the money they have lent plus the interest when the homeowner moves or dies.
What are HECM Loans?
Federally-insured home equity conversion mortgage (HECM) is the most common of reverse mortgage loans that the U.S. Department of Housing and Urban Development started offering in 1989.
Who cares about federal insurance?
In traditional loans, when you borrow the money, you have the cash in hand and the lender has taken all the risk secured by your home. However in a reverse mortgage, you may plan to receive a monthly payment over a period of time. What will happen if the lender is no longer around to pay you?
This is why the federally insured reverse mortgage ads another dimension of safety and peace of mind. This peace of mind also comes with a price tag. HECMs limits the maximum loan amount a homeowner can borrow.
What about Non-HECM?
Many lending institutions offer this category of reverse mortgages and their limits are usually higher than that of HEMD. However they are not federally insured and they can have a much higher expense associated with their processing.
Can any one qualify for a reverse mortgage?
The eligibility requirements for a reverse mortgage are:
* You are a homeowner
* You are 62 years of age or older
* You own your home outright, or have a low mortgage balance that can be paid off at the closing with proceeds from the reverse loan
* You live in the home
* In case of HUD, you are also required to receive consumer information from HUD-approved counseling sources prior to obtaining the loan. You can contact the Housing Counseling Clearinghouse on 1-800-569-4287 to obtain the name and telephone number of an HUD-approved counseling agency and a list of FHA approved lenders within your area.
* Upkeep of property taxes and staying out of bankruptcy are also required.
How much money can I borrow?
The amount of money you can borrow is based on a different set of formulas than the traditional mortgage qualifications. Your age, the value of your home, the current interest rates, and the loan costs impact the amount. Older individuals with more valuable homes in lower interest rate environment can borrow more.
What types of homes are eligible for reverse mortgages?
Single family, two-to-four unit properties, townhouses, detached homes, units in condominiums and some manufactured homes are eligible. However various restrictions apply to all with most significant being that you own them, live in them and have kept them in reasonable condition.
What about my heirs?
If death occurs while you still owe money to the lender, your heirs are obligated to pay the borrowed amount, plus interest and other fees, to the lender. They usually do this by selling the house. Whatever remains after paying the lender belongs to your heirs. The loan cannot be passed along.
What are my borrowing options?
You have five options:
* Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
* Term – equal monthly payments for a fixed period of months selected.
* Line of Credit – unscheduled payments or in installments, at times and in amounts of borrower’s choosing until the line of credit is exhausted.
* Modified Tenure – combination of line of credit with monthly payments for as long as the borrower remains in the home.
* Modified Term – combination of line of credit with monthly payments for a fixed period of months selected by the borrower.
What about reverse mortgage scams?
Like most other scams directed to senior citizens, telemarketing is on top of the list. Never agree to anything over the phone, especially on the first call and do not give personal information, financial or otherwise, over the phone.
There is never a cost associated with getting information on reverse mortgages. This information is available for free. Ask for written copy of everything that should include an address and a phone number so that you can confirm the data.
* DISCLAIMER: Vishy Dadsetan, FreeCreditReport.ws or My Favorite Shop, Inc. do not endorse any reverse mortgage product or lender. This article and website does not provide legal, accounting, or other professional services. If legal or other expert assistance is required, the services of a competent professional should be sought. Although Vishy Dadsetan has made every effort to ensure the accuracy and completeness of the information contained in this site, it assumes no responsibility for errors, omissions, inaccuracies, or inconsistencies.
Retiring or leaving the company–How to Properly do an IRA Rollover
Retiring or leaving the company–How to Properly do an IRA Rollover
Whether you are retiring or changing jobs, you need to know what to do with your employer sponsored retirement plan before your leave. Once you leave a job for whatever reason, you can choose to:
•Rollover the money into an IRA (ira rollover)
•Take the lump sum and pay the income tax and potential penalties
•Leave the money at the company if the company offers that as an option
•Rollover the money into your new employer’s plan, if that plan accepts rollovers
Realize that the above are options offered by IRS. However, your employer’s rules may be more restrictive and if so, there’s nothing you can do. For example, if you have a pension plan that offers payout options over your lifetime or jointly over the lifetime’s of you and your spouse, but there is no option to rollover a lump sum to an IRA (ira rollover), than the rollover option isn’t available to you. In other words, the “summary plan document” rules. You may want to get a copy of that now and have your financial advisor review it so that you know what options you have.
So the starting point is to get the information from your employer plan as to the options available to you.
What is an IRA Rollover?
IRA rollover means to move money from a retirement plan such as a 401(k), 403b (tax sheltered annuity) or 457 (municipal deferred compensation) into an IRA or other plan. If you receive a payout from your employer-sponsored retirement plan, a rollover IRA could be to your advantage. You will continue to receive the tax-deferred status of your retirement savings and will avoid penalties and taxes.
There are two reasons that rollovers are favored over other options:
•You have virtually unlimited investment selections. Unlike your employer’s plan which may have six investment options or even 50 investment options, in a self-directed IRA, you can choose any stock, any mutual fund and a host of other options listed later.
•Company plans often can restrict choices for non-spouse beneficiaries. Specifically, they may not be able to stretch IRA distributions over their lifetime. The benefit of this “stretch” is it defers taxes and allows the funds to potentially grow longer and larger in a tax-deferred environment.
The reason to leave your retirement plan with your company (if they permit this) is because your company plan is covered by ERISA and is protected from creditors. However, under the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the creditor protection will follow the money if it is rolled into an IRA and not commingled with other IRA money (from annual contributions).
Combining with Other Retirement Accounts
The rollover IRA is usually funded by the eligible distributions from a company sponsored retirement plan. These distributions can be combined with your existing IRA(s) or placed into a separate IRA, but see the new creditor protection rule mentioned above. In fact, the IRS permits these funds to be combined with other types of retirement accounts. For example, say you have been self- employed and you have a one-person profit sharing plan (often referred to as Keogh plans), you could rollover the employer-plan assets into your profit sharing plan. Or, if you have a second job and that employer has a 403(b) plan and also accepts IRA rollover contributions, you could rollover your 401(k) balance into that 403(b) plan.
Completing your IRA Rollover
When it’s time to retire, you have a few options on moving the money from your employer’s plan.
Direct IRA Rollover:Your employer can directly rollover your retirement plan payout into a Rollover IRA and you will avoid the 20% IRS withholding tax. This is exactly what you should do by providing your employer the name, address and account number for your new Rollover IRA custodian. For example, you give your employer instructions to send your retirement account to ABC securities, account #8889999. Funds are sent directly to the IRA account and you never touch them. This is the preferred method of moving retirement funds.
Payout by Check: If your employer hands you a check for your retirement funds, the employer must withhold 20% for potential taxes. You can avoid the 20% IRS withholding tax on a payout by check from your employer if you deposit the check plus 20% into a rollover IRA within 60 days. In order to complete the tax free rollover, you now have 80% of your IRA rollover in your hand and you must take the other 20% out of your pocket so that you have a completely tax free rollover (you will get the 20% income tax withheld as a refund after you file your tax return). Don’t allow your employer to give you a check, as this requires you to take money out of your pocket to complete your rollover.
Taking a lump sum distribution: This is typically not a wise option because you will pay income tax on the distribution and a 10% penalty if under age 59 ½. However, there may be reasons to take a taxable distribution. If you are set on buying a $300,000 boat and spending the rest of your life floating about the globe, then you may need to take your retirement funds now and pay tax. However, if you can avoid using these funds currently, you’ll hopefully have a nest egg when you’re old.
