Financial Planning and Advice Blog for Syracuse

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Make the Most of Your 401(k)

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By wpadmin September 29, 2014

If you're like many other Americans, your employer may offer a 401(k) plan, which provides a convenient vehicle for saving for retirement. 401(k) plans allow you to contribute up to $17,500 in 2013 and additional amounts if you’re aged 50 or older. There are now two types of 401(k) plans: traditional and Roth-style plans. Traditional plans feature pre-tax contributions, which are taxed at ordinary rates when withdrawn in retirement. New Roth plans offer after-tax contributions, but qualified withdrawals are tax free. With either plan type, employers may elect to match part or all of the contributions you make to your plan.

401(k) plans typically provide you with several options in which to invest your contributions. Such options may include stocks, bonds, or money market investments. If you leave your company, you can roll over the accumulated balance into an IRA or other retirement plan in a tax-free transaction. However, if you choose to physically receive part or all of your retirement account balance, you will have to pay taxes and penalties.

Normally, funds cannot be withdrawn before age 59½ except in cases of extreme hardship. However, some 401(k)s allow you to borrow as much as 50% of your vested account balance, up to $50,000. But if you leave the company, you must pay back the loan in full immediately; loans not repaid to the plan within the stated time period are considered withdrawals and will be taxed and penalized. Accordingly, borrowing from your 401(k) should only be a last resort.

As more Americans shoulder the responsibility of funding their own retirement, many rely increasingly on their 401(k) retirement plans to provide the means to meet their investment goals. That's because 401(k) plans offer a variety of attractive features that make investing for the future easy and potentially profitable. Be sure to talk to your employer or plan administrator about the specific features and rules of your plan.

What Is a 401(k)? A 401(k) plan is an employee-funded savings plan for retirement. It takes its name from the section of the Internal Revenue Code that created these plans. 401(k) plans are also known as "qualified defined contribution" retirement plans: qualified because they meet the tax law requirements for favorable tax treatment (described below); and defined contribution because contributions are defined under the terms of the plan, while benefits will vary depending on plan balances and investment returns.

Tax Treatment of 401(k) Plans The 401(k) plan allows you to contribute up to $17,500 of your salary in 2013 to a special account set up by your company. Future contribution limits will be adjusted for inflation. Keep in mind that individual plans may have lower limits on the amount you can contribute. In addition, individuals aged 50 and older who participate in a 401(k) plan can take advantage of so-called "catch up" contributions of an additional $5,500 in 2013.

401(k) plans now come in two varieties: traditional and Roth-style plans. A traditional 401(k) plan allows you to defer taxes on the portion of your salary contributed to the plan until the funds are withdrawn in retirement, at which point contributions and earnings are taxed as ordinary income. In addition, because the amount of your pre-tax contribution is deducted directly from your paycheck, your taxable income is reduced, which in turn lowers your tax burden.

The tax treatment of a Roth 401(k) plan is different. Under a Roth plan, contributions are made in after-tax dollars, so there is no immediate tax benefit. However, plan balances grow tax free; you pay no taxes on qualified distributions.

Both traditional and Roth plans require that distributions be qualified. In general, this means they must be taken after 59½ (or age 55 if you are separating from service from the employer whose plan the distributions are withdrawn), although there are certain exceptions for hardship withdrawals, as defined by the IRS. If a distribution is not qualified, a 10% IRS penalty will apply in addition to ordinary income taxes on all pre-tax contributions and earnings.

If your plan permits, you can make contributions in excess of the 2013 limit of $17,500 ($23,000 if over age 50), as long as your total contribution is not mo...

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How to Dig Yourself Out of Debt and Save at the Same Time

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By wpadmin August 25, 2014


Paying down debt can be a daunting task. But with a little self-discipline and some faith in yourself, your financial picture can change for the better in about six months. Your key to success will be to establish a debt reduction plan and stick to it. That way, you may be able to bring debt under control and even eliminate it.

There are three potential keys to a successful debt reduction plan. First, you need to track your monthly income and expenses. Once you have a record of your spending, compare your monthly outlay with your monthly income. If you have a surplus, this is the amount you can apply each month to paying down debt and building savings. If you have a shortfall, you’ll need to cut expenses.

Second, you’ll need to establish good saving habits. Each month, use your income to first pay expenses. Dedicate whatever is left to savings or reducing your debt. And third, reduce debt by controlling expenditures. Certainly, paying off credit card debt and installment loans is easier once you stop using your cards.

The bottom line is that you may not be able to solve your debt problem overnight, but you can potentially solve it over time. Not only will a combined debt reduction and saving strategy begin to lighten the load now, it may help you feel better about your future.

Wherever you might be financially, getting ahead can feel like it's beyond reach. Current bills can seem to gobble up almost everything. Unexpected ones seem to crop up whenever you have a little extra cash.

Chances are, you find it difficult to do anything because you don't know where to start. Relax. A lot of people are in your situation. What you need to do is face up to the matters at hand and set up a plan of action. The time to do that is right now. With a little self-discipline and some faith in yourself, your financial picture can potentially change for the better in about six months.

Paying Debt and Saving What should you do first? Reduce your debt or start saving? The following three-part strategy may help you control your cash flow, pay off your debt, and encourage saving so you can handle the unexpected expenses that may have gotten you into debt in the first place. In time, you'll be ready to invest. But first you have to know what you owe and what you're spending.

Tracking Spending The steps outlined in the box below will help you determine how much cash you have to pay off your debt.

Next, you'll want to keep track of your typical expenses for one month or so to find out where your money is going. Also figure your unexpected expenses for a year's time -- auto and home repairs, gifts, vacations, etc. -- and divide that number by 12. You may want to use one of the personal finance software programs available to track your spending. Once you have a record of your spending, compare your monthly outlay with your monthly income. If you have a surplus, this is the amount you can apply each month to paying down debt and building savings. If you have a shortfall, you'll need to cut expenses.

How Much Do You Have to Pay Off Your Debt? Step #1: Create a personal balance sheet and list your debts in order of interest rate, from highest to lowest.

Step #2: Add up your liquid assets, including savings and investment accounts, if any.

Step #3: List any major purchases needed in the next year. Subtract this amount from your liquid assets. What remains is the amount you may have to pay your debts.

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