Investors will often ask me whether they should have a taxable investment account, especially when that investor is evaluating the overall tax efficiency of their investments and corresponding accounts.
As back-to-school season rapidly approaches, educators may be too busy preparing for the upcoming year to think about their retirement savings. But for educators and employees in other non-profit sectors, you might have access to a great retirement savings vehicle that you may not know about — the 403(b) plan.
In their inception, 403(b) plans were run less like a retirement plan and more like a group of separate IRAs. Because the majority of them were run by one predominant recordkeeper, these plans had problems that affected a participant’s ability to grow their money and properly save for retirement.
First, this meant participants only had access to the investment options that the recordkeeper offered. Participants were not getting what is known as “open architecture”, meaning they did not have the opportunity to access the best large-cap growth funds in the marketplace. They were limited to the recordkeeper’s capabilities.
Second, participants in the early 403(b) plans found themselves in a guaranteed interest contract (GIC), which locks participants’ money in at a crediting rate lower than what would be found in the marketplace. It also would not allow participants to withdraw money faster than a seven to 10 year period, making it a fairly illiquid investment vehicle. At best, this prevented a participant’s account from growing at a reasonable rate. At worst, it also provided for a nasty surprise when a retiring participant was unable to withdraw a significant portion of the account.
When the IRS made some changes to 403(b) plans rules 10-15 years ago, they began to operate much more like 401(k) plans. Now, 403(b) plans are a great resource for educators and other non-profit employees, and the reputation often found around these plans is much less accurate. These plans offer many benefits to employees, such as:
- For most employees, 403(b) plans are essentially indistinguishable from 401(k) plans. The plan offers participants a chance to defer some of their paycheck to put away for retirement. This can happen in two ways. Participants can put away pre-tax money now and pay taxes on it when they take distributions later in life. Or, in a Roth option, participants can put away taxed money and let it grow tax-free.
- This savings vehicle allows you to expose your savings to the market, which presents the opportunity for it to grow at a much higher rate than if it were put away in a savings account or another bank account. A savings account will not grow your money enough to be ready for retirement.
- Investing in a 403(b) plan gives you the opportunity to have a portfolio that will be managed for you and will take into account your age, retirement goals, and risk tolerance to form the strategy right for you. You may even have access to a managed account, which is actively managed and takes into account all aspects of your financial situation.
- Some plan sponsors may offer a matching contribution, where they will match a certain percentage of your regular paycheck deferrals to invest in your account. If you aren’t taking advantage of a 403(b) plan with a matching contribution, you’re missing out on that bonus.
If you’re a plan sponsor, you should be ensuring all your employees know about the benefits of the plan. One way to be a competitive employer is to not only offer a good benefits program but to also show that you support your employees in their financial wellness and that you care that they have a good nest egg for retirement.
One way you can do this and be a good employer is to hire a company like ours, Qualified Plan Advisors, to educate your participants about their plan, investment, strategies, and overall financial wellbeing. With our expertise in financial planning, we can truly be a crucial tool for your employees to achieve their retirement goals.
As the school year starts, one thing you should not have to worry about is your retirement savings or financial wellness. For this reason, you should take advantage of your 403(b) plan, and, if available to you, talk to a financial advisor about how to achieve your retirement goals. At Qualified Plan Advisors, we know that working in the education, the medical, and non-profit field comes with a lot of pressure and is crucial to society, so we are here to take the stress out of financial planning.
Advisory services offered through Prime Capital Investment Advisors, LLC. (PCIA), a Registered Investment Advisor. Prime Capital Investment Advisors doing business as Qualified Plan Advisors, “QPA.” 6201 College Blvd., 7th Floor, Overland Park, KS 66211
Should you pay off your student loans or save for your retirement first? This question poses the trade-off: having less money to pay toward student loans or not contributing as much to your retirement account. Especially for young professionals who have less disposable income, the challenge is determining how best to designate those funds.
Here are some things to consider when deciding how to allocate your money:
- Before you make any other financial decision, set aside an emergency fund: This fund should amount to at least 3 to 6 months’ worth of your expenses.
- Prioritize creating a personal monthly budget: Evaluate your monthly income (based on take-home rather than gross) and estimate your monthly expenses. Subtract those expenses (including your student loans) from your total income and that difference will give you an idea of how much is leftover to put toward retirement.
- If your student loan interest is high, consider putting more toward debt: Paying more toward your debt will help you pay less in interest and more toward the principal loan amount.
- Contribute what you can: Many advisors can attest to the fact that steady contributions to a retirement fund (even $20 or $50 a month in the beginning) will build itself over time because of compound interest. Starting younger gives the account more time to grow with interest AND investment returns, plus having a retirement plan through your workplace could mean you’ll receive employer matches, which is basically “free money”.
In summary, how to handle your finances is based on a number of personal factors like your debt load and how much you’ve already saved for retirement. Balance your short- and long-term goals and set yourself up for a secure future. Need more advice? Contact our team at https://qualifiedplanadvisors.com/contact-us/ and someone will reach out to you shortly!
Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management (“PCWM”) and Qualified Plan Advisors (“QPA”). Securities offered by Registered Representatives through Private Client Services, Member FINRA/SIPC. PCIA and Private Client Services are separate entities and are not affiliated
Have you filed your 2020 taxes yet? We know it can be overwhelming doing your taxes in general and with 2020 being the year of the pandemic, there are even more questions surrounding this year’s tax season and Tax Day. Our advisors are here to help – check out answers to some of the most-asked questions of this year:
- Are Stimulus Checks Taxable? They’re not considered taxable income. Because they’re an ‘Economic Impact Payment’, the IRS doesn’t count it toward your income. They will still need to be reported on this year’s taxes though and can be filled out on the new entry in the 1040 form.
- How will unemployment affect my taxes? Unemployment is considered taxable income, so even though the government increased typical weekly unemployment payments, you will still owe taxes on any benefits you received.
- Last year, tax filings were delayed. Will that happen again this year? The deadline has been extended to May 17th.
- What happens if I deferred my college loans, rent payments, or mortgage payments? You will not be penalized for this and will not need to take it into consideration when filing this year.
- If I worked from home in 2020, can I claim deductions for my home office expenses? Unfortunately, you cannot deduct those unreimbursed costs because the Tax Cuts and Jobs Act eliminated those deductions through 2025.
- What if I owe money for my taxes but can’t pay? You can ask the IRS for a payment plan. The IRS offers different types of installment plans to fit what works best for you.
If you haven’t started yet, here is a helpful checklist you might need to complete the job:
- Personal Information – 2019 Taxes from State and Federal, Social Security Number
- Income Information – Including your W-2 forms and 1099 forms
- Deductions – Including Retirement Account contributions, educational expenses, medical bills, property taxes or mortgage interest, charitable donations, classroom expenses, and state and local taxes.
- Credits – Child Tax Credit, Adoption Expense Information, First Time Homebuyer Tax Credits, etc.