Barrett's 2 Cents

No-filter financial advice for alpha boomers

Author: Barrett Porter (page 1 of 8)

Turbo Charge Your 401(k)

If you’re earning a six-figure salary and enrolled in a company 401(k) plan, here’s a “hot investment tip” that could result in significant annual tax savings and a larger future nest egg—and you may not need to save a penny more than you’re saving now.

Warning! This article is going to get into the specific math and legal details of how to execute a tax strategy. It will probably apply only to high-earning baby boomers who contribute to a 401(k). If you want it explained in plain English, call your CFP or CPA.  401k

What You’re Doing Now

You defer a portion of each paycheck to your 401(k) or Roth 401(k) and probably receive an employer match. Any additional savings are held in a personal or trust (i.e., non-retirement) account. The 401(k) money grows tax-deferred and your other money is taxed along the way. Thus, your tax-deferred money should grow at a faster pace.

The Missed Opportunity

In most cases, your deferrals and the matching contributions will not get you to the maximum employee/employer contribution allowed by the IRS. For example: Let’s say you’re over 50, earn $200,000, defer the maximum of $24,000 and get a match totaling $8,000. That’s $32,000 in total contributions. But wait—the IRS allows you to contribute up to $53,000. So, how is it possible to get another $21,000 in your account?

The Roth 401(k) Loophole

Using the same example as above, if your 401(k) plan is set up to allow it, you can add $21,000 of after-tax dollars to your 401(k). If you do this for, say, 15 years, that’s $315,000 of contributions (your cost basis), plus whatever portfolio appreciation you get. You don’t get a current deduction, but the growth is still tax-deferred.

New IRS rules will allow you to withdraw funds from your 401(k) at one of two trigger events:

  1. You leave employment with the company
  2. The plan allows you to take an “in-service distribution” [meaning that your 401(k) plan allows you to roll funds to an outside IRA or Roth IRA before you leave the company].

At either trigger event, you would cherry pick the $315,000 and move just those funds to a Roth IRA. The remaining balance can be rolled to a traditional IRA. Voila!

If your personal spending doesn’t allow for deferring more of your take-home pay into your portfolio, you can still use this strategy, but only if you have significant non-retirement account reserves. You just make withdrawals from those accounts to offset the additional saving your doing into your 401(k).

Taking Action

Ask your employer two questions and share your responses with your advisor:

  1. Are after-tax 401(k) contributions permitted?
  2. Are in-service distributions permitted?

There may be unique circumstances that limit how much you can add in total to your 401(k), so consult with your advisor and CPA before engaging in this strategy.

Happy deferring,
Barrett

 

The opinions expressed are those of the author and are subject to change without notice in reaction to shifting market conditions. This blog is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

The “B” Word

Sometimes I wonder if I’m the only financial planner who hates Budgeting.  I’m a good saver, but I can’t imagine a life where I get an alert three weeks into March telling me that I spent too much on groceries. Don’t get me wrong – many people’s lives have been greatly improved through strict budgeting. But if you’re already a good saver, and the idea of a budget makes you go deer-in-headlights, here’s your workaround.

monkey budget

Track Spending

You don’t need to set a target for your spending. Sometimes, knowing where your money is going is enough. It may not matter now, but at some point you will wish you had this information handy.

By using websites like mint.com, over time you will get a clear picture of where your money goes. You will first need to add your credit card and bank accounts so that most of your spending information gets imported. Then, set a weekly calendar reminder and spend just five minutes placing those “uncategorized” transactions into their proper category. For you OCD types, it’s better than Tetris – you might actually enjoy it.

After a year, you can start playing with the “trends” tab to see where your money went. I was blown away when I saw how much I’ve spent on dining out and groceries (guilty as charged for letting my whiskey purchases hide in the groceries category).  Will I change my current spending patterns? Nah. But I know where I can cut spending later if needed.

Budget Only Where It Matters

That said, we all have our spending blind spots. For some it’s impulse shopping. For others, it’s never being able to say no to a needy family member. Think about your blind spots. For me, they are travel and charity. In a given year, there’s a very high chance I’ll look back and wish I had done much more or much less of one of them.

To address that, I now have two additional savings accounts nicknamed “travel” and “charity” (same bank) that receive automatic monthly transfers from my checking. For now, there are no other categories where I feel I need to control myself – I eat what I eat and update my wardrobe when holes appear.  I’ve heard of some people creating five or more of these types of “earmark” savings accounts. They can even be created for those short-term goals like saving for a home.

Talk to your advisor about your spending blind spots. It just might spare you from having to create a full-blown, gulp, budget!

Happy saving,
Barrett

 

 

The opinions expressed are those of the author and are subject to change without notice in reaction to shifting market conditions. This blog is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

 

 

The Great Vacation Home Debate

campHyrule07_cabin
There’s exactly one situation where I love vacation homes – when good friends own them. Vacation homes are a lot like kids – you will spend lots of time with them, you won’t regret having them (on most days), and you will drastically underestimate the costs and energy that will be involved.  We all know how much we typically spend per night for a luxury vacation rental or hotel room.  So before you buy that 2nd home, perhaps you’d like to know what your equivalent “nightly rate” might be.

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All In or Bust

nmoeUdsSo much for beginner’s luck… Less than an hour into my first-ever game of Texas Hold’em I was told that I had no choice but to go “all in” with the last of my poker chips. (The all-in moment is where you put what’s left of your chips into the pot and hope for a winning hand that will keep you alive.) Investors have a choice when it comes to being “all in,” though it’s often not an easy choice to make.

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The Volatile-Income Saver

squirrel nutsEver heard the story of the guy who burned through an entire fortune worth $150 million and still has debts to pay?  If only Cher could have delivered a 2nd smack on the cheek of Nicolas Cage and another “snap out of it!” maybe things would be different. One thing that’s certain with those who work in “the biz” is the lack of certainty around earning and saving. Volatile- income professionals (VIPs) of all types often share feelings of scarcity even in the midst of their big-income years.  For you VIPs out there, here are a few ideas.

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