That probably seems like an odd question. But if you contribute to a 401(k) plan at work, then you’re going to want to know about the new regulations issued recently by the U.S. Department of Labor. In a move that’s good news for employees, these new rules will require 401(k) service providers to disclose all the fees that are deducted from a participant’s account. In addition, service providers that are paid $1,000 or more must document the direct and indirect compensation they receive. You may be surprised at what you see.
Direct compensation is paid directly from the 401(k) plan; indirect compensation comes from sources other than the plan sponsor (your employer) and goes to the 401(k) record-keeper, investment manager, etc., for things like sales charges, redemption fees, surrender charges, etc. There are a number of moving parts to every 401(k). Each gets its cut. More than 50 million Americans are saving for retirement in a 401(k) plan. These plans vastly outnumber the number of pension plans (defined benefit).
And that 1%? The Government Accountability Office reports that a 1% difference in 401(k) fees can cut your retirement assets by almost 20%. Fees do matter. And on July 16, 2011, you’ll be able to see just how much your employer’s plan costs. In the meantime, find out what the expenses are for the funds you’re currently holding in your account. If it’s not on your statement, call the fund company and ask for a prospectus. That’ll tell you everything you need to know. Good luck. Until next time, here’s to good planning!
That’s the big question, of course, because nobody really knows. I thought you’d be interested in a recent report by the Life Insurance and Market Research Association. Of the nearly 47 million pre-retirees in the U.S. between the ages of 50-64 (5-10 years from retirement…hopefully) nearly 65% only expect to live 20 years or less once they stop working. And by the time those folks are 3-5 years into retirement, 66% believe they’ll live longer than 20 years. Like many things, the anticipation is much worse than the reality, or at least that’s what many of us are hoping for.
Apparently, as we ease into retirement, our expectations about longevity become more realistic. (It’s the age thing.) That may also help to explain why younger people don’t give too much thought to living a long time. I guess it seems so far away. I never used to think about it much, either. Retirement for many Boomers is getting pushed down the road. Hopefully, Boomers will be able to retire before the Generation X’ers and Y’ers. Until next time, here’s to good planning!
I’ve always been a big fan of Roth IRAs. It’s the thought of tax free income in retirement. Starting this year, taxpayers with an adjusted gross income of $100,000 or more will be able to convert a traditional IRA to a Roth IRA, something that’s not been permitted in the past. Converting to a Roth will continue to be an option for those with AGI’s under 100,000. The rub, of course, is that you’ll have to pay income tax on the amount converted. So, the real issue is whether you want to pay taxes now or keep your traditional IRA as it is and pay taxes as you withdraw the money down the road.
You might consider a Roth conversion if:
- you’re able to leave the money in the account for five years or more and until you reach at least age 59 ½
- you expect your tax rates to rise in the future and would rather pay taxes now
- you can pay the resulting taxes from a source other than the traditional IRA. This allows the full amount invested to grow until it’s withdrawn
Congress voted to allow the payment of taxes to be made over two years, if you convert in 2010. That will ease the pain a bit. So why would you want to convert your traditional IRA now?
- You’ll be able to withdraw from the Roth tax free
- There are no required minimum distributions on a Roth like there are with traditional IRAs and other retirement accounts. So, your Roth can stay invested longer. You’re bound to have unexpected expenses to cover in retirement
- If you never have to tap the Roth, you’ll be able to leave a tax free asset to your heirs, although they may be subject to minimum distributions
- A Roth IRA can provide tax diversification. You’re going to need all the options you can get while retired. Having tax free accounts, along with tax-deferred accounts like a traditional IRA or a 401(k) may provide just what you need
It’s best to get help from a professional if this is a strategy you’re considering. Good luck. Until next time, here’s to good planning!
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