401k Secrets: 12 Industry Insiders Share Things You Didn’t Know About Your 401k

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Last Updated on: 27th May 2019, 08:01 pm

It is that season again when IRA contributions are on many a mind. With the deadline looming on April 15, 2019, to make IRA contributions for 2018, time is of the essence. That said, there are probably some things you don’t know about your IRA or 401k. Experts weigh in on 10 secrets about IRAs and 401ks that are often overlooked.

Self-Direct Your Investments 

“Some employers allow for you to self-direct your investments in your 401k. There are still some prohibited transactions but self-directing can open up a world of investment options that you might not otherwise have within your company's traditional 401k. If interested, it is best to contact your HR department to see if this is an option.”

Mindy S. Hirt, CFP(r), Senior Vice President, Wealth Advisor, Argent Trust Company

Taxable Assets

“Well, let me tell you that most middle to higher income households ($110K – $350K) are actually in a lower Federal tax bracket today than they will be in retirement. However, most accountants like to get the tax deduction today, and the tax deduction is very enticing to the individual making the contribution, but why would you take a tax deduction today at 22% or 24%, only to pay upwards of 28% or more tax on that money in retirement? Please allow me to elaborate.

1. 401K and IRA distributions (especially when folks have pensions), combined with Social Security and Required Minimum Distributions (RMDs), will cause many people's income to be near or higher than it is now.
2. Tax brackets will almost certainly be higher in retirement than they are today, due to significant tax cuts implemented in 2018.
3. If one spouse dies, the surviving spouse's income will be more than half, and they will reach the higher tax brackets quicker when filing taxes as a single individual.
4. The taxation of Social Security is predicated on other income, and will likely cause phantom taxation of the Social Security payments.
5. Additional considerations are that the income the 401K / IRA distributions in retirement could cause their Medicare premiums to be higher and/or they could be impacted by rule changes that could cause Social Security payments to be means-tested.

The assets that could become a burden in retirement are taxable assets such as IRAs, 401(k)s, and 403(b)s. These assets will be considerably larger in retirement, based on even modest growth expectations and future contributions. This only exacerbates the items listed above. There are many other things that the average investor may not know, but above is probably the most unique.”

Michael Menninger, CFP(r), President, Menninger & Associates, Inc.

Roth IRA for Your Child

“Did you know that you can open up a Roth IRA for your child?

Yes, this is true. Opening up a ROTH IRA for your child can give him the head-start he needs to get a leg up for retirement, fund his education,
place a sizeable down payment on a home, or to use in an emergency.

When you start a Roth IRA at an early age, you take advantage of compound interest. If you put $100 each month starting at 15 years of age with an average 7% annual return, then you would end up with $600,276 by the age of retirement.

However, if your child didn't start contributing to a Roth IRA until they reached 30 years of age, they would only have $205,873. This is assuming they contribute the same $100 per month with a 7% annual return.

The power of compounding interest is just to good to pass up.

There are a couple of things to note when opening a Roth IRA for your child.

1) They have to have an income and it needs to be documented.

2) They can only contribute the amount they earn in that year.

Opening up a Roth IRA can be one of the most powerful financial decisions you can make for your child. “

Marissa Sanders, Personal Finance Expert, Simple Money Mom 

IRA Conversion into a Roth

“Many people are aware of the benefits of a Roth, but can’t take advantage due to income limitations ($135,000 for single filers and $203,000 for married). However, they can still take advantage of a Roth through conversion of their traditional IRA into a Roth IRA.

There is no limit on the amount you can convert from your traditional IRA into a Roth. However, you do have to pay income tax on the amount you convert.. That taxable conversion counts as regular income, so it could move you into a higher tax bracket. Conversely, if you know your taxable income will be lower in a given year, that may be a good time to convert a traditional IRA into a Roth.“

Lou Haverty, CFA, Financial Analyst Insider

Expense Ratios of Funds

“Many employees do not fully understand the importance of paying attention to fees when they enroll in their 401(k) or IRA plans. A large number of investors never change the funds they invest in and leave the fund selection up to the 401k or IRA plan manager. Fees are referred to as expense ratios and can vary significantly between individual funds in a plan. Ignoring the expense ratios of funds could eat up to 30% of a 401(k) portfolio by the time you reach retirement!”

Ryan J, Financial Coach / Blogger, Arrest Your Debt LLC 

Untouchable in Bankruptcy

“Your IRA or 401k are untouchable in a bankruptcy. Your creditors cannot touch them no matter how much you owe. So, an IRA or a 401k is a great
hedge against other big risks.”

Russell Knight, Law Office of Russell D. Knight

Stay-at-Home Spouses 

“Most people don't realize that even stay-at-home spouses can have an IRA, and should. They also don't understand that if they are in a traditional 401k or IRA they are creating a huge tax bill during their retirement years. A person needs to seek alternatives to retirement after maxing out their employer's match. If an employer matches 6%, they should not be putting 20% into a pre-tax account.”

April Caldwell, Women's Money Coach, April Caldwell, Inc. 

The Tax Savings Aspect

“Although many consider the retirement savings aspects of 401ks, IRA and other defined contribution plans, many often overlook the tax savings aspect and the tax planning opportunities. A normal “W2” employee can set aside up to $19,000 of their earnings tax-free in 2019, which directly lowers their taxable income. Maxing out your 401k contribution can be a powerful strategy especially if you are a high earner on the cusp of a higher tax bracket. At the end of the year, you should consider deferring part of your bonus into your 401k in order to reach the limit and save on tax.

For business owners (including those with a side business), the contributions to a Solo or Individual 401k can reach as high as $56,000, subject to limitations! Business owners often overlook this and are mistakenly paying taxes with their free cash flow rather than investing for the future and deferring taxes. The best part is certain contributions can be made up until tax day, so you can actually make 2019 contributions that will offset 2018 taxable income!”

Greg O'Brien, President and Founder, Greg O’Brien, CPA

Not Every 401k is the Same

“In the 401k retirement plan realm, the biggest misconception is that all 401k's are the same. They are not at all. There are basic rules that govern all retirement plans including 401k's, but they are by no means all alike. There are a myriad of choices the Plan Sponsor (often the employer) has to make when setting up a 401k. For example, vesting can be from 0 to 6 years with several different sliding scales to reach 100%. There can be a required delay after an employee leaves before they can take a distribution (helpful if you have high turnover, or to keep employees from quitting to get the money). There are decisions regarding profit sharing calculations, matching, eligibility, and what counts as income. All plans are governed by the Department of Labor and the IRS, mainly through the passage of ERISA in 1974, but don't think just because your old company allowed hardship distributions that your new company has to; every plan is different.”

Allan Watts, Retirement Planning Advisor, Keystone Financial Group, LPL Financial 

Hidden Plan Fees

“There are a multitude of different charges that can seriously erode a retirement nest egg, even though they may not be listed on a statement! These fees can come from several sources: the funds invested in, the 401(k) provider that administers the retirement plan, the third-party administrator on the plan. I'll give you an example: Let's say that you save $10,000 a year for 30 years in a 401(k) and average an annual return of 7%, but you also pay 2.0% in annual fees, your finishing total is about $690,000. With 3% in annual fees, you're looking at approximately $575,000. Significant amounts that can mean the difference between an extra vacation each year in retirement – or not.”

William F. Davis, CFP(r), Financial Advisor, Ameriprise Financial Services 

Alternative Asset Investments

“The average investor is not aware that he or she is allowed to invest IRA and 401k funds in alternative asset investments, such as real estate and even cryptocurrencies. In fact, other than life insurance, collectibles, and certain self-dealing and conflict-of-interest transactions outlined under Internal Revenue Code Section 4975, a retirement investor is permitted to make alternative asset investments using retirement accounts.

One of the interesting items retirement account investors are not aware of when it comes to using retirement funds to make alternative assets is the potential application of the unrelated business taxable income (UBTI) tax. The UBTI tax is generally not an issue for retirement account investors investing in traditional investments, such as stocks, however, it can be triggered if an investor uses an IRA to buy real estate or uses retirement funds to invest in an active business through a pass-through entity, such as an LLC. Also, of interest is that there is an exemption to the UBTI tax for 401k plan investors using a nonrecourse loan to buy real estate pursuant to IRC 514(c)(9), which does not apply to IRAs.”

Adam Bergman, President, IRA Financial Group & IRA Financial Trust Company

Fund An IRA With Physical Precious Metals

“Many investors are unaware they can fund their IRA with physical precious metals. Legislative changes in the late 1990s made many forms of gold and silver eligible for inclusion in a self-directed IRA — primarily name-brand bullion bars and government-issued bullion coins. There are only a few reasonable restrictions: 1) the items must be of investment-grade purity, which is defined as .995 fine (i.e. 99.5% pure) or higher; 2) the items must be produced at an ISO-compliant refining facility; 3) the metals must be stored in an authorized depository (i.e. an insured vault); and 4) numismatic items (collectibles) typically cannot be included. The same annual contribution limits for your IRA apply, based on the dollar amount (at the time of inclusion) of gold, silver, platinum, or palladium being used to fund the account.”

Everett Millman, Precious Metals Specialist, Editor, Gainesville Coins

Keep these expert tips and commonly overlooked facts in mind to take full advantage of what your IRA or 401k has to offer. They will help you get the most out of your contributions.

Sarah Bauder
Sarah Bauder

Sarah Bauder has a decade of experience at numerous publications, writing about finance, politics, economy and more.

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