ﬁnancial literacy series - ljpr · 2018-12-17 · ﬁnancial literacy series ljpr financial...

The 401(k) is a very powerful tool toward retirement. Where else can you pay yourself, take it off your taxes, invest it, and pay taxes later? What about an employer matching contribution? Free money is a rare sighting, but employer matching contributions are the closest thing to free money that you will encounter.

50 Good 401(k) Ideas is chock-full of ideas we’ve seen in our years in the business. We take a wide range of ideas, from simple ones on how to get more money in the plan (hint: give up a bad habit) to the value of dollar cost averaging, which lets you take advantage of market volatility. In this guide, you’ll see some ideas on:

• How simple small contributions, like $3 a day (a cup of coffee!) can add up to about $122,000 in 30 years.

• How new tax rules can let certain plan participants contribute as much as $59,000 in a combination of pre-tax and after-tax contribution (that can later be rolled into a Roth IRA).

• Why plan loans sound good, but may be a bad idea.

• How markets going up and down can help your 401(k).

• Plus 50 more ideas on beneficiaries, increasing contributions, rollovers and things you’ll want to know about this powerful tax planning vehicle.

We think you will find many of these ideas useful in building your financial future. Remember, it’s not how much you make, it’s how much you keep.

5480 Corporate Drive, #100Troy, Michigan 48098

248.641.7400ljpr.com

©2017, LJPR Financial Advisors, all rights reserved. Leon LaBrecque, JD, CPA, CFP®, CFA

Making the Best Use of 401(k) Plans

50 Good401(k) Ideas

Tax, Investment, Estate Planning and Roth Ideas

financial literacy series

Reducing Uncertainty®


LJPR Financial Advisors

1. Capitalism works. People want better lives for themselves and the next generations. Because of that, they will

work hard, invent new stuff, and come up with ways to improve theirs and others’ lives.

2. Abundance, not scarcity. Capitalism can and does create abundance. When something new is created (like cellphones),

someone wins (the cellphone manufacturer and the users), and someone loses (landline manufacturers). But most developments, because they are designed to make our lives better, provide way more than they take away. Cars put buggy-whip manufactures out of business, but created vastly more wealth.

3. Anybody can participate in capitalism. Stocks are cool: you can own one share of Apple and share in Apple’s success. You can buy one

share of an index fund and participate in 500 companies’ success.

4. There’s a whole world. The United States is the greatest country in the world, warts and all. However there are 22 times

more people who live outside of the US. They buy cars, cellphones, food, gas and soap. We need to invest globally to share in global capitalism.

5. Big stocks are big for a reason. Big stocks grew by doing something right (even though they might not still do it right today). We

want some big stocks. It’s like NFL players: they are in the NFL for a reason.

6. Little stocks are the next Apple. All big stocks were small once. A good opportunity for growth is in small stocks. However, small

stocks have more risk. So small stocks are like promising high school football players, midcap stocks are like promising college football players. If you want to have a football team for generations, you need some of all of them.

7. Don’t put all your eggs in one basket. Diversify. This is simple. There is some company right now that has the next big thing. Which

company, we don’t know. But if you own all of the stocks, you own the monster and some duds.

8. Infinity and hell’s basement. This is the “heads I win, tails I lose” fallacy. Berkshire Hathaway went public on 03/17/80 at $290

a share (if you were in the know, you got in back in 1957 for about $7). On January 12, 2017, it was $242,800 per share. That’s about an 83,700% rate of return. GM, Kmart, Enron all define ‘hell’s basement’: They went down 100%. That’s why investing works.

9. Fees Matter. We believe equity returns and fixed-income returns tend to migrate to an average, and that the

costs to provide such returns are a direct drag on performance. Any time you pay a mutual fund company, a broker, a bank or us, it reduces your rate of return. We take into consideration the costs of the manger or funds when selecting an ingredient in a portfolio. Furthermore, we feel sales-based fees (like A, B or C loads on mutual funds) are a further drag, and try to avoid or minimize any transaction-based costs.

10. Season to taste. The last point of the Creed is that you need to stay balanced. Investing is like riding a bicycle,

you need to keep your balance to move forward. We re-set the allocation periodically to reduce risk. Sometimes rebalancing increases return, but it always keep us on track.

Small Good ChoicesTM

Personal Finance for Young Professionals

Work or Retire?

Lump-Sum Distribution

Helping you identify the small things you can do to keep your financial plan on track.

Building Your Plan to Financial Independence

How to Analyze When to Retire if you have a Defined Benefit Plan

Considerations in a Lump-Sum Offer: Financial, Tax and Estate Planning Issues and Analysis

50 Good IRA Ideas

50 Good 401(k) Ideas

46 Good 403(b) Ideas

Estate Planning

Trustee Manual

Making the Best Use of IRAs: Tax, Investment, Estate Planning and Roth Ideas

Making the Best Use of 401(k) Plans: Tax, Investment, Estate Planning and Roth Ideas

Making the Best Use of 403(b) Plans: Tax, Investment, Estate Planning and Roth Ideas

Protecting What’s Yours for the People that Matter

Guidelines for the Successor Trustee of Your Living Trust

©2017, All rights reserved.

50 Good 401(k) Ideas Making the Best Use of 401(k) Plans


Leon C. LaBrecque, JD, CPA, CFP®, CFA

Fifty Good 401(k) Ideas

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Disclaimer

This book is intended for informational purposes only. Best efforts were used to ensure that the information contained in this book is accurate as of the time it was written; however, the author and every person involved in the creation of this book disclaim any warranty as to the accuracy or completeness of its contents. This book is not a substitute for obtaining legal, financial and other professional advice as the contents of the book apply to your individual situation. It is recommended that you obtain legal, financial and other advice or assistance before acting on any information contained in this book. The writer and every person involved in the creation of this book disclaim any liability arising from contract, negligence, or any other cause of action, to any party, for the book’s contents or any consequences arising from its use.

LJPR Financial Advisors 5480 Corporate Drive, #100Troy, MI 48098ljpr.com248.641.7400

Copyright ©2017 by Leon C. LaBrecque. All rights reserved.ISBN: 978-1-5323-3131-2Printed in the United States of America.

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About the Author

“The more you know, the more time you can spend enjoying life, rather than worrying.” For Leon LaBrecque, who has been featured in media outlets like InvestmentNews, CNBC, USA Today and Forbes, reducing uncertainty is a theme that runs throughout his professional life. As a practicing attorney, CPA, CFP® and CFA, he is an educator at heart, and has a passion for helping others fully understand their financial lives.

After growing up in Hazel Park, Michigan, graduating magna cum laude from University of Detroit Mercy with degrees in accounting and law, he grew his wealth management firm, LJP Financial Advisors, from the ground up with a foundation in financial education. LaBrecque brings to the table a mind that never rests and a catalog of life experiences that allows him to deeply connect with his clients and understand their individual needs.

Leon has created hybrid communications and calculators regarding pensions for several states including Washington, Idaho, Louisiana and Montana. His experience as an attorney working in the financial management industry allows him to evaluate his client situation from both a financial and legal perspective.

In pursuit of reducing uncertainty and elevating financial literacy for individuals and organizations from all demographics, LaBrecque launched LJP Pride, the programming arm of his firm that offers financial education. LaBrecque also shares his expertise in the community, where he serves as Trustee for the Hazel Park Promise Zone, advisor to the Sustainability Institute of Detroit, and is a member of the Sherriff’s and Municipal Memorial Assistance Response Team, among other roles. Leon joined the MICPA Board on September 1, 201 and is eager to increase financial literacy across the state of Michigan. He has authored several books and proprietary financial programs for General Motors, Ford Motor Company, AT&T and numerous law enforcement organizations.


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About LJPR Financial Advisors

LJPR Financial Advisors is an independent, fee-only wealth management firm headquartered in Troy, Michigan. The company has been offering comprehensive fiduciary wealth management services since 1989. Its team of experienced advisors has a unique way of connecting with clients to help them feel confident, secure and ready for the future. Tax Planning, Financial Planning, Estate Planning, Investment Management all come together to optimize clients’ wealth. Detailed Social Security analysis, Monte Carlo simulations, and IRA planning are all components of the company’s holistic approach.

Want a one-hour consultation LJP offers an initial consultation at no charge. To arrange an overview of your situation or to answer your IRA question, contact: [email protected] or 248.641.7400.

Want a workshop for your employees or group? A member of our team can provide a number of topics on financial literacy, including:

I A Planning Small Good ChoicesTM

401(k) Planning Personal Finance for Young Professionals

403(b) Planning Work or etire

Estate Planning Lump-Sum Distribution

To arrange a workshop, contact: [email protected] or 248.641.7400.

Contact Information:

Leon C. LaBrecque, JD, CPA, CFP®, CFA

LJPR Financial Advisors 5480 Corporate Drive, #100 Troy, MI 48098 Phone: 248. 41.7400 Fax: 248. 41.7405 Email: [email protected] Twitter: @leonlabrecque www.linkedin.com/in/leonlabrecque

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Table of Contents

3 Disclaimer

4 About the Author

5 About LJPR Financial Advisors

9 Idea 1: Why a 401(k) is a good idea

10 Idea 2: Pre-tax savings – A write off worth considering

12 Idea 3: Stash your refund (and get another refund)

14 Idea 4: The three main ingredients

16 Idea 5: Time is money

17 Idea 6: Starting early – The twins

18 Idea 7: Contributions – More is better

19 Idea 8: The most important bill You 20 Idea 9: The 18% solution; or how you can build a great future

imitating VISA

22 Idea 10: Save a raise (or part of it)

24 Idea 11: Save a bonus (or part of it)

25 Idea 12: Pre-tax versus Roth 401(k)

26 Idea 13: When a Roth 401(k) really works

29 Idea 14: Five ways to save more

31 Idea 15: Why 401(k)s can be better than an IRA

33 Idea 16: Five more ways to save more

35 Idea 17: King Kong of 401(k) math - Return

37 Idea 18: New mega-saver rule

39 Idea 19: Dollar Cost Averaging: how to make volatility work for you

41 Idea 20: The 59½ rule (10% penalty) 42 Idea 21: The age 55 rule and avoiding the 10% penalty

43 Idea 22: Other exceptions to the 59½ rule

45 Idea 23: Substantially Equal Periodic Payments (SEPP) – How to get money out of a 401(k) at any age without the 10% penalty

47 Idea 24: Consider Net Unrealized Appreciation (NUA) special rule if you have employer stock

50 Idea 25: Why hardship withdrawals can cause more hardship

52 Idea 26: How plan loans work and why you probably shouldn’t take one

54 Idea 27: IRA rollovers and transfers

56 Idea 28: How to make a good beneficiary designation


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58 Idea 29: Some assembly required: put your 401(k)s together for retirement

60 Idea 30: How solo business owners can maximize 401(k)

62 Idea 31: HSA or 401(k)? The answer might be surprising

63 Idea 32: What happens to 401(k) upon death?

65 Idea 33: When to take a spousal rollover and when not to

67 Idea 34: What to do with Designated Roth Account Contributions

69 Idea 35: Roth 401(k) versus Roth IRA

71 Idea 36: Periodic Rebalancing reduces risk

74 Idea 37: Don’t put all your eggs in one basket; Diversification

79 Idea 38: Fees matter – a lot

81 Idea 39: Why time in the market may matter much more than time-ing the market

83 Idea 40: An interesting fact about down points in the year

85 Idea 41: What’s the most you can stash?

87 Idea 42: Don’t cash out

88 Idea 43: Always match the match

89 Idea 44: Watch out for vesting

90 Idea 45: No double-dipping if you have two jobs

91 Idea 46: You can double-dip if you have a 401(k) and 457(b) at the same employer

92 Idea 47: State tax rules

94 Idea 48: 401(k) for the self-employed person vs. employee

96 Idea 49: Age 70½ Rules for 401(k)

98 Idea 50: If you have employees and have your own business, seek a safe harbor

99 Conclusion

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401(k) plans are a great financial planning tool for all walks of life. However, there are a lot of moving parts and complex rules that we need to navigate to fully use this powerful tool. We’ve compiled a list of planning ideas and opportunities in the area. I also recommend the materials of Natalie Choate, Michael Kitces and Ed Slott. Natalie’s book, Life and Death Planning for Retirement Benefits, is a must read for tax wonks like me. Michael Kitces’ website, kitces.com, has the “Nerd’s eye view” of articles and education in Financial Planning. From one nerd to another, I like Mike. And Ed Slott’s “2016 Retirement Decisions Guide” is a great read on IRA advice. Ed is the dean of planners. For everyone else, I hope the 50 ideas are useful. Note the icons next to the topics. Some ideas may cover more than one topic, and will have multiple icons. You’ll probably read these out of order (I call this a ‘bathroom book’). I think you will find at least some of the ideas useful. Obviously, if you need help with an idea, reach out to us at [email protected] or my personal e-mail at [email protected]. Thanks for reading, and let us know if you want additional copies for family, friends, employees or coworkers.

taxes

beneficiary

legal

roth

investing


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Idea 1:

Why a 401(k) is a good idea.

Many people hear about 401(k) plans, but don’t really know what they are and how they work. Sometimes, we even hear complaints about 401(k) plans as being ‘bad’. In reality, a 401(k) is a compensation deferral arrangement. It allows you to take a portion of your wages, salary, bonus, or self-employment earnings and put it in a separate liability-protected vehicle with special tax rules. You can take money out of your current pay on a pre-tax basis and withdraw it later and pay the taxes then; or you can take money out of your current pay on a post-tax basis in a Roth 401(k) and receive it later tax-free.

In any event, saving money for the future is a good idea. The 401(k) becomes an automatic savings vehicle, putting the savings aspect ‘out of sight, out of mind’. In addition, the tax-deferred nature (and tax-free growth in the Roth 401(k)) allow a more substantial growth opportunity: you amplify your results by not paying taxes currently (or in the case of Roth 401(k) ever) on the investment performance.

If everyone was well-disciplined, the Tax Code stable and the investing environment stable, all the handsome intelligent folks would be able to save for retirement and build substantial pockets of wealth for themselves and future generations without any issues. However, in today’s world where guaranteed pensions are in decline, markets are uncertain, and tax rates and calculations are complex, the 401(k) is a retirement vehicle that allows for the accumulation of significant retirement assets over time.

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Idea 2:

Pre-tax savings – A write off worth considering.

One of the primary features of a 401(k) is current pre-tax savings. We frequently are asked about the notion of a ‘write-off’. ‘How can I get a write off ’ is the question. To be sure, in the tax code, there are write-offs, deductions or credits that reduce taxes. Primarily, the incentives in the tax code are geared toward business (like writing off business assets) or special situations (like having money earned outside of the United States). The normal person with a paycheck has limited use of deductions or write-offs. A common ‘write-off’ people refer to is mortgage interest. To be sure, some people can deduct mortgage interest. However, consider the actual rules:

You can only deduct mortgage interest if you itemize deductions and your mortgage interest exceeds the standard deduction amount;

You only deduct the interest, and not the principal

Mortgage interest deductions are after you calculate your adjusted gross income and this usually means the interest is not deductible on your state income taxes;

The deduction makes the interest cost cheaper, but is still paid to the lender.


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Now, consider what would happen if you paid an entire mortgage payment to yourself, and got a current deduction for it? This is the pre-tax 401(k):

You reduce your current ad usted gross income by the amount of your contribution. This saves you federal income taxes and, in most cases, state income taxes on the full contribution, up to the limits.

You do pay Social Security (FICA) and Medicare taxes on the contributions.

Your paycheck is reduced by the after-tax amount. In other words, you get to invest your contributions and the tax dollars you would have paid (you’ll pay the taxes later).

Here’s an example: You are in the 15% tax bracket, which means that you make between $20,000-$48,000 if you’re single and $40,000-$9 ,000 if you’re married. You don’t itemize deductions. Say your state tax rate is 4.25%. If you put $1,000 into your 401(k) pre-tax, you reduce your paycheck by about $808.

Pre-tax leaves you more money in your paycheck. So we frequently see people who are under-contributing to their 401(k) (which is a lot of folks) find a surprise when they increase their contribution. Go to the next tip to see a good example.

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Idea 3:

Stash your refund (and get another refund).

So where do we go to get money into our 401(k)? Here’s an easy one: your tax refund. Based on IRS data from 20151, 83% of taxpayers received an income tax refund. The average refund was about $3,100. So think this over: that means that about 40 million American families have a savings plan that:

They contribute money to out of their paycheck regularly;

They pay taxes on (federal, state, FICA and Medicare);

That earns no interest;

That they get back anywhere from a couple of months to a year later.

Gosh, an after-tax, zero-interest savings plan. What a good idea. Not Pre-tax 401(k) has profoundly more value if you really want money:

You contribute money out of your paycheck regularly

You pay no federal (and most likely no state) income taxes on the contribution;

You invest immediately, and pick your investments

You might get a matching contribution from your employer;

You take the money out mostly under your own terms.


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So, what we’re suggesting to people who want to save more (which is most): save your income tax refund to fund your 401(k). You then deduct the contribution from your income taxes and let’s add a bonus: You can still get a refund

Let’s take Mike and Chris. They earn, between the two of them, about $86,0002. They withhold $11,800 from their federal taxes. They file their tax return and receive about a $2,800 refund. Let’s suppose they change their withholdings to contribute $2,800 into their 401(k) instead of over-withholding. They now contribute $2,800 into their 401(k) and raise their exemptions to 3. This means they now have about $8,900 in taxes withheld, and their net paycheck goes up slightly (about $10 a month). They file their return and now have an extra $120 in their paycheck and a $432 refund

Old Plan New Plan$2,800 refund $2,800 in 401(k) plus $120 in

paycheck plus $432 refund

What to do with the extra money? Well they could spend it, pay down some debt, fund a Roth IRA, fund a college fund, or…put it in the 401(k). Their choice.

1 IR-2015-342 We’re using this number after extrapolating the IRS data. If we take the

average tax bill (after refund) of about $9,000, the earned income for a married couple not itemizing to get to that bill would be $86,000. Their marginal rate would be 25% (not counting state income tax).

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Idea 4:

The three main ingredients.

With 401(k)s, or any investment plan, there are three main ingredients to building a balance. These are:

Contributions. How much you put in the plan. This one is simple: the more you save, the more you have. $200 a month accumulates twice as much as $100 a month. $1,000 a month accumulates ten times as much as $100 a month.

Time. How long you leave it in the plan. The math on this one is impressive. Say you generate a 7.5% annual return on your assets in your plan. For purposes of discussion, say you put about $200 a month into the plan. After 20 years, you will have contributed $48,000 ($200 a month for 20 years), but will have accumulated about $110,700. The difference ($62,700) is your investment return. Go another 10 years, adding another $24,000, and you’d accumulate about $269,500, more than two and a half times as much. Continue for another 10 years, and the balance would be about $ 04,700 The first 20 years gets you about $110,700, the next 20 gets you and additional $494,000. Time is money (as we say in Idea 5).

Return. How much return do your investments generate? Here the math goes off the charts, mainly because every little increment of return is amplified by time. If we took the example above ($200 a month) at 30 years, here’s what happens if return changes:


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Bank deposit at 2%: $98,500

Conservative mix at 5%: $166,500

Moderate mix at 7½%: $269,500

Aggressive mix at 9%: $366,100

Crazy stock at 12%: $699,0003

You need all three ingredients to make it work optimally. Save a lot, stay in the plan, and invest wisely. But, that’s what the ideas in the book are all about.

3 There are only 119 stocks with average annual total return of 12% or over for the 25 year period ending 12/31/2016. There are 189 US stocks with total cumulative return over 25 years of 10.00% or more (including Home Depot, Apple, Altria, Jack Henry & Associates, Lowes, Paychex, Stryker, Amgen, Southern Co, etc.). By way of reference, Apple lost 79.2% of its value between 1992 and 1997.

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Idea 5:

Time is money.

As we indicated, time is money. The calculations of compound interest make it so that you earn interest on your interest. The longer you do this, the greater your overall returns. In Idea 4, we gave an illustration of how time works in your favor.

Here’s a wild example of time value, particularly time. In 1626, Peter Minuet allegedly bought the island of Manhattan for $24 worth of trinkets from the Manhattan Indians4. If the Indians had taken said funds and invested them at 5%, they would have accumulated over $4.1 trillion dollars5. Manhattan is worth, according to a study by Rutgers University economists6, $1.4 trillion dollars. So the Indians, investing their funds, could buy back Manhattan and have $2.7 trillion left over7.

The longer you are invested, the more you have.

4 We do know Minuet traded trinkets to the Indians. The Indians basically didn’t have property rights in their culture, so they couldn’t sell the island, but that was good enough for the Dutch.

5 389 years, 5% compounded annually.6 What’s Manhattan Worth? A Land Values Index from 1950 to 2013, Barr,

Smith and Kulkarni. Rutgers University Working Paper WP2015-002.7 The surplus is enough left over to buy 100% of Apple, Alphabet (Google),

Microsoft, Exxon Mobil, Facebook, and GE as of 06/01/2017.


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Idea 6:

Starting early – The twins.

Because of the enormous power of compound interest, the sooner you start saving the better off you will be. Take an example of Jack and Jill, who are twins with the ability to save in their 401(k) plan:

Jill starts saving the day she hires in and contributes $100 a month to her 401(k). She does this for nine years, then stops saving (we don’t know why, but she needs to stop for this example). At the end of nine years she has accumulated $14,986. She makes 7% annually on her investments. She doesn’t take it out, but leaves it invested and keeps it until she retires 20 years later. When she retires, she has $57,991.

Jack watches Jill save her money and finally decides that he too should begin saving. The year she stops, he starts to contribute to his 401(k). He contributes $100 a month for 21 years and at the end has accumulated $57,098, which is less than Jill’s nine years of contributions. Starting early paid off. It’s too bad Jill didn’t keep it up. If Jill did keep up; she’d have about $122,000. Not bad for only contributing about $3.33 a day. Of course, this example ignores raises and the full tax effects. You get the idea: pay yourself first.

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Idea 7:

Contributions – More is better.

As you can see from Idea 6, time is a major factor. Again, the longer you stay invested, the more you have because you make interest on your interest. You obviously can accumulate more by contributing more. This is pretty straightforward: the more you put in, the more you accumulate, proportionately.

Consider the following chart, which shows different monthly contribution amounts at 7% annually:

Years $ 100 $ 200 $ 400 $ 500 $ 1,0001 $1,239 $2,479 $4,957 $6,196 $12,3932 $2,568 $5,136 $10,272 $12,841 $25,6813 $3,993 $7,986 $15,972 $19,965 $39,9304 $5,521 $11,042 $22,084 $27,605 $55,2095 $7,159 $14,319 $28,637 $35,796 $71,593

10 $17,308 $34,617 $69,234 $86,542 $173,08520 $52,093 $104,185 $208,371 $260,463 $520,92730 $121,997 $243,994 $487,988 $609,986 $1,219,971

As you’d expect, you accumulate twice as much contributing $200 a month compared to $100 a month. Squeeze aside a car payment to yourself ($400), and you could accumulate $487,988 over 30 years. By the way, did we mention that your contributions to your 401(k) are tax-deferred and you don’t pay current taxes on them? So a $400 monthly contribution will save you federal income taxes (potentially 15% or 25%) and state (we’ll use Michigan) income taxes (4.25%). As a result, your paychecks might only be reduced by about $283 a month by contributing $400 a month into your 401(k).


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Idea 8:

The most important bill – You!

Human behavior is a funny thing. We know we should do something, but our behavior gets in the way. So, we make a living and pay our bills, buy coffee or pop, get clothes, go on vacation, and go out with friends and family. All the while, we know we want to save for retirement. Yet something always gets in the way. The 401(k) allows you to place your funds in your most important bill: you. Because 401(k) is deducted from your paycheck, your retirement saving is removed before you see it or get a chance to let it be reallocated to other things. Most of us are responsible adults who pay our bills on time and then allocate the remainder. Think about this: pay yourself first and then pay your bills and reallocate the remainder. A cool effect of paying yourself first is that once you hit a rhythm of savings, you can accomplish a successful retirement and that mission is covered: you can spend or save surplus funds for other things.

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Idea 9:

The 18% solution; or how you can build a great future imitating VISA.

A frequent question is then: how much should I save for retirement Most of the time, the answer is ‘as much as you can’. But we’ve quantified the question and will make it more useful: ‘How much to I need to save out of my check to retire in 30 years with the equivalent of a pension of <x> % of my pay?’

We’ve spent a lot of time analyzing retirements and pensions. Once we had a lottery winner (back when you could only take a series of payments over 20 years), and they asked us how much they needed to stash out of each lottery check to keep the flow running forever. We thought this was a cool question, and it mattered to us as well: How much do we have to stash out of our paycheck to keep the paycheck lasting after we leave employment? That, as it turns out, is a million-dollar question.

So, let’s figure it out. We’ll set some ground rules:

We want to replace our paycheck when we retire (after what we save in the 401(k));

We want to retire, or be able to retire, after 35 years of savings (this way you can assume you goof off for part of the time, or get your education or knock off college debt);

We’re going to assume we can make 7% annually long-term in our investments;

We’re going to assume that our pay goes up by 2% a year, and in retirement, we want our retirement income to do the same (go up by 2% a year);


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We’ll actually receive Social Security, but we are going to ignore it for now.

So how much do we need to have put away in our 401(k)? 18%.

This may sound daunting, but what this math gives you is full independence. You have a pension (which is really what a 401(k) is, a form of pension) that pays you 100% of your ending after-savings wage, with a 2% cost-of-living adjustment, forever. Who wouldn’t want that? And we might point out that some folks have balances on their credit cards, where they pay interest of up to 18%. Hmmm, pay Visa 18% or pay yourself 18%?

If this still bothers you, remember some employers (most actually) have some form of employer contribution, either in the form of a matching contribution (you put some in, they match it fully or partially) or an employer contribution. So if your employer matches 50% of your contributions up to 10% of pay, you’d want to contribute 13% of your pay.

We ignored Social Security. Let’s suppose you want your 401(k) to replace 50% of your ending pay, presuming you’d collect some Social Security. You’d need to have about 9% put into your account yearly (you and your employer). None of this time value magic works unless you do your part, which is put something in the plan.

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Idea 10:

Save a raise (or part of it).

Many people would like to contribute to their 401(k), but can’t spare the money for a large contribution at the start of their career. A solution is to gradually increase the contribution, hopefully as your pay increases. Here’s an example:

Rick starts as a new employee with his employer. Let’s, for the sake of example, say he makes $36,000 per year. His pay goes up by 2% a year. His employer contributes 3% of his pay to the 401(k). At the end of 30 years, he’d have about $129,700 accumulated if he contributed nothing (assuming 7% annual rate of return). Now, that is an ‘OK’ number, but by no means enough to have a good retirement (if he withdrew 5%, he’d only have about $550 a month). We’d like to persuade Rick to contribute more, so we start small: We ask Rick to pay himself a cup of fancy coffee a day ($3 a day, or $90 a month). If he does just that, and we add the employer contribution, he would now have about $259,000 at the end of 30 years.

But that’s still not enough for a prosperous retirement. $259,000 at the end of 30 years would only replace about 21½% of Rick’s ending pay. So we offer another idea: What if Rick saves half of his raise until he gets to 10% of his pay? (He won’t notice part of the increase he stowed away.) So what happens when Rick increases his savings 1% a year from his raise and stops once he is contributing 10%? About $494,300 in 30 years, enough to replace about 44% of his ending pay.

Add in some Social Security, and Rick is on his way. Save part of your raise; you didn’t have it before, so you won’t miss it.


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Idea 11:

Save a bonus (or part of it).

Another great way to get some more money into your 401(k) is to save all or part of a bonus. For purposes of this idea, call a bonus any additional pay you might receive. Get paid overtime? Stow away some of the overtime pay. Get a quarterly bonus? Save part of it. Notice anything about some of these ideas? We’re trying to get you to save money that you don’t already see, taste, smell and feel. If you commit to saving part of your bonus before you get it, you can save it. If you save part of your raise before you get it, you don’t notice. If you save your income tax refund, you didn’t have that in your paycheck anyway, and as we have seen, the income tax refund idea gives you even more money.


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Idea 12:

Pre-tax versus Roth 401(k).

For 2016 Pre-Tax 401(k) Roth 401(k)Tax Benefit Tax-deferred until

withdrawalTax-free growth

Taxes Contributions pre-tax

Withdrawals taxable

Contributions after-tax

Withdrawals tax-free (rules apply)

Contribution Limit $18,000/yr $24,000 if 50 or older (2017)Matching Contributions

Available from many employers

Any match must be in pre-tax account

Distributions (no penalty)

Age 59½ or disability Age 59½ and 5 years or disability

Mandatory Distributions

Age 70½ unless still employed. Mandatory at 70½ if 5% or greater owner.

Age 70½ unless still employed. Mandatory at 70½ if 5% or greater owner. Roll to Roth IRA, no age 70½ rule.

Rollovers Upon termination of employment or age 59½. If plan allows in-service withdrawal, may roll to traditional IRA. Can roll to Roth IRA, but must pay taxes on rollover.

Cannot roll to traditional pre-tax 401(k). Can roll to Roth IRA or another Roth 401(k).

Changing Custodians

Can swap to any other 401(k) custodian if you change employment or Rollover IRA

Can swap to any another Roth 401(k) if you change employment or Roth IRA

Protection Account is protected from bankruptcy (exceptions apply)

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Idea 13:

When a Roth 401(k) really works.

A Roth 401(k) is a terrific builder of balances, mainly because you get tax-free growth. But, you pay taxes on the money you contribute to get the tax-free growth and withdrawal later. If you are in the same tax bracket when you put money in the plan as you are when you take money out of the plan, the mathematical results are identical. A lot of people will be in a lower tax bracket when they are in retirement or withdrawal mode, or so they think. If you are certain you will be in a lower bracket in retirement, then using pre-tax contributions are clearly better. It’s simple: you might make deductible contributions to your 401(k) today when you’re in the 25% (or higher) bracket and pay 15% taxes later. One big problem we see is that people mistakenly believe they will be in the 15% bracket. More on that in a moment.

When you know you will be in a higher tax bracket later the Roth 401(k) works extremely well. This is one of the reasons we love to encourage young folks, who are usually in a low tax bracket at the beginning of their career, to have a Roth IRA or Roth 401(k). Pay tax now at 15%, take the money out tax-free later (or if you like, maybe pass it on to heirs tax-free). So the decision of choosing Roth 401(k) is basically a prediction of your future tax bracket. Simple, right?

Not so fast. When you have a 401(k) (and perhaps a subsequent IRA rollover), you have control over when you take withdrawals. However, starting at age 70 ½ the law mandates an annual Required Minimum Distribution (RMD), which is calculated by using the account balance and dividing it by a factor from a life expectancy table. It’s simple to see that as you get older, your life expectancy is shorter and your required distribution has the potential to get larger8. So


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a retiree age 70½ or older is taking out progressively more and more money as they get older. The next observation is that in a married couple, it is nearly certain that one spouse will predecease the other, allowing the survivor to make the 401(k) or IRA their own. So far, so good, except the survivor is single and pays tax at a higher rate. This can be a bigger problem when there is a younger surviving spouse (which happens frequently). This problem can get significant when the distribution is delayed.

Let’s take an example. Suppose Ashley and Tom both work ($80,000 a year). Ashley is 10 years older than Tom. Both will get a pension when they retire of about $3,500 a month, and both are good savers. Ashley retires at age 60 with a balance of $550,000 in her 401(k). Tom retires 10 years later with a similar balance of $550,000. Because Tom is still working, Ashley delays taking her Social Security until age 70 on the advice or her financial advisor9. They then decide that they will take the RMD on Ashley’s 401(k) rollover, which may grow to about $1.082 million.

Ashley’s Retirement

Tom’s Retirement

Ashley Age 85

Ashley’s Pension $42,000 $42,000 $42,000Tom’s Pay/Pension $80,000 $42,000 $42,000Social Security10 0 $38,500 $59,200RMD11 0 $39,500 $155,600Total Income $122,000 $162,000 $298,800

Note that the couple has much higher income later than when Tom was working. Their tax bracket also went higher as their income increased. The Roth 401(k) or a combination of Roth and pre-tax may have been a better option, particularly if they had rolled their Roth 401(k) into a Roth

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IRA. This would eliminate the RMD completely, as well as the tax burden. If Ashley had one-half her balance in a Roth 401(k), and didn’t need it (which it appears), she would have more in her Roth IRA rollover (from her Roth 401(k)) than she would have had taking RMDs from her 401(k). The Roth would go tax-free to her beneficiary. Tom could take the Roth rollover into his own Roth IRA, and still avoid RMDs.

8 We say potential because your IRA or 401(k) has to make at least the percentage return near the distribution rate. In other words, if you have your IRA or 401(k) in a bank account making 1%, and you’re withdrawing 4%, the account will shrink. If you make 6% and take out 4%, your account will grow for a while until the distribution rate becomes larger than 6%.

9 Because Social Security is paid to a surviving spouse, a delaying strategy provides about an 8% increase in benefit both to the retiree and to the surviving spouse to age 70. In the case of Ashley and Tom, Ashley’s benefit would increase by 8% a year. When Tom turns 62, they could collect on both. If Ashley predeceased Tom, he would get the greater of his benefit or hers. If Tom predeceased Ashley, she would continue to receive her larger benefit.

10 Assumes Ashley takes her Social Security at age 70 and Tom takes his at age 62. Ignores COLA on Social Security.

11 Using IRS Table I and 7% return assumption.


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Idea 14:

Five ways to save more.

We’ve run some big ideas to get more cash into your 401(k), like using your tax refund, saving all or part of raises or bonuses, and adding overtime to the 401(k). Here are some more suggestions on saving some money and then contributing those savings to a 401(k). For fun, we took some of the savings ideas and ran them out to 30 years at 7% annually.

1. Buy yourself a 401(k) coffee. Like gourmet coffee? How about putting $3 a day into your 401(k) and forgetting the coffee? 30 year effect? $109,80012.

2. 401(k) diet soda. Diet soda is an interesting product: no sugar (which is why we thought you drank soda) and sometimes no caffeine (another reason why we drank it). Skip a can a day (call it $1.50), and in 30 years: $54,900. The same probably applies to bottled water, which is… well… water.

3. Kill a credit card and pay yourself. We don’t like credit card balances (credit cards are OK if you pay them off, particularly if you get some free stuff, like plane tickets). Suppose you have a card with a $45 minimum payment and you pay it off. Now pay your-self (remember that idea?). In 30 years, instead of a $1,500 credit card balance, you have $54,900 in your 401(k).

4. Lotto. Boy, the entertainment value of a Powerball is really fun. Heck, the $2 is fun fantasy. But, the odds of winning are 1 in 292 million. So, what if you buy 5 tickets for each play. Wow, your odds drop to 1 in 58.4 million But, if you stashed your $20 a week into your 401(k), you’d have a decent likelihood of $97,600 in 30 years13.

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5. Extra beer (or wine, etc.). Don’t get us wrong: we like beer. But perhaps one fewer? So suppose we divert 5 drinks a week into our 401(k)? Say $6 (Now we’ll get criticism for buying drinks that are either too expensive or too cheap. If you go to a college town, it’s cheaper). 30 year result? $146,400 (and maybe a smaller waistline).

Small Good Choices make a big difference. Cutting out pop, coffee, beer, lotto or some debt can really add up. If you did all of the ideas listed, you’d have $463,900.

12 7%, monthly deposit and compounding. All examples use this math.13 For giggles, if you stashed $20 a week for 50 years (from age 20-70) at 9%

(OK, we said we were doing this for fun), you’d have $933,500. If you used a Roth 401(k), that would be tax-free.


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Idea 15:

Why 401(k)s can be better than an IRA.

401(k)s and IRAs have slightly different tax rules, particularly regarding loans and certain distributions. You can take money from one 401(k) (or even other kinds of plans, like 401(a) and 403(b)) to another via a tax-free direct rollover. How this works is you have your money in the old plan directly transferred to the new plan. This might be your new employer or even your own business’ 401(k) plan. No new plan yet You can use a Conduit I A. A Conduit I A is a Rollover IRA that accepts a rollover from a qualified plan and holds onto it. Regular IRA rules apply, but you can roll monies into a Conduit back from the I A to the ‘new’ 401(k). Why bother? He are some things you can do in a 401(k) that you can’t do in an IRA:

Reasons to have funds in a 401(k):

401(k) has a much larger contribution limit than an IRA (for 2017: $18,000 for under age 50 versus $5,500 in an IRA, $24,000 for 50 or older versus $6,500 for an IRA);

401(k) has loans (with rules), IRAs do not: (no loans from IRAs);

401(k) allows no-penalty withdrawal upon separation from service and attaining age 55 or older;

All funds in a 401(k) allow for tax-free ‘back door oth’ with the Roth conversion rules;

401(k) does not require minimum distributions (RMD) if you are 70½ or older and still working (unless you are a 5% or greater owner).

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401(k) plans have favorable tax treatment for company stock. If you buy employer stock in your 401(k), the distribution to you in stock comes out taxable at the lower of cost or market. This means if you worked at

Y and bought stock over your working career such that your basis in Y stock was $30,000 and the value was $100,000, you’d be able to get the stock out and only pay ordinary income taxes on the $30,000 (the lower of cost or market). This rule is called Net Unrealized Appreciation (NUA), and is an important advantage of a 401(k) (see Idea 24).

401(k) plans are sheltered from lawsuits differently than IRAs. IRAs are also sheltered, but under a different set of rules, and Rollover or Conduit IRAs are generally accorded the same protection as 401(k)s. But check state law if you are concerned.


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Idea 16:

Five more ways to save more.

Here are five more ways to stash some cash in your 401(k). Find savings and stash it.

1. Brown bag a 401(k) lunch. If going out to lunch costs $10, and a brown bag lunch costs $3, you save $7 a day (plus maybe time and transportation) by brown bagging. Suppose you brown bag 4 days a week (go out one day, you deserve it). That comes out to about $120 a month. Stash $100 in your 401(k), spend the rest, plus the tax savings on your 401(k) contributions.

2. Collect money, not stuff. People seem to collect all kinds of things. We’ve seen the normal art and coin collections, but have also seen little pig salt shakers, Barbie dolls and antique oil cans. Collecting can be fun, but how about a little psychological game? For every dollar you put into your collections, put the same dollar into your 401(k). Buy a $20 addition to the collection every week? Stash another $20 a week in your 401(k). From what we’ve seen, collecting is usually more for pleasure than profit. We’d rather have a collection of tax-deferred mutual funds (or even cool stocks) than a big tub of Beanie Babies.

3. The 3 day rule. Larger entities have spending poli-cies, and you should consider one as well. A business or nonprofit might have a policy that says anything over $5,000 requires board approval. How about this for you: “Anything over $50 (or whatever) requires me to wait 3 days (or whatever period will make you either forget about it or reconsider it). Still want it three days later? Go for it. Forgot about it? Good, you didn’t need it or want it that badly.

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4. Turn off the lights and turn down the heat. My Dad used to ask me ‘were you born in a barn ’ I thought it was a weird question since I thought he probably knew where I was born. That was until I began paying electric bills and heating bills on my own. According to the Department of Energy, turning your thermostat back 10º - 15º for 8 hours can save 5% -15% on your heating bill, about 1% for every degree you turn down for 8 hours. Bottom line You can save a couple of hundred dollars a year (or more), and save energy while you’re at it: double green.

5. Cancel something you don’t use. Have a gym mem-bership you’re not using? Well, you should probably use it, but if you aren’t, dump it and pay yourself into your 401(k). (Kind of ‘fiscal fitness’ instead of ‘physical fitness’). Same goes for magazine subscriptions, etc.


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Idea 17:

King Kong of 401(k) math - Return.

Time is money, and money is money, but return is king. Because of the math of compound interest, return has the greatest effect on accumulation. Return is profound in its change on the overall picture. Have a look at the following chart and watch what happens to $100 a month at various returns:

Years 3% 5% 7% 9% 11%1 $1,216 $1,227 $1,239 $1,251 $1,2622 $2,470 $2,519 $2,568 $2,619 $2,6713 $3,762 $3,875 $3,993 $4,115 $4,2424 $5,093 $5,301 $5,521 $5,752 $5,9965 $6,465 $6,801 $7,159 $7,542 $7,952

10 $13,974 $15,528 $17,308 $19,351 $21,70020 $32,830 $41,103 $52,093 $66,789 $86,56430 $58,274 $83,226 $121,997 $183,074 $280,452

Note that a 3% return (maybe all fixed income, for example) would accumulate $58,274, where a balanced portfolio of 7% might generate $121,997, but an aggressive mix of 11% would double the balance to $280,452. We can show you some crazy examples of high returns, but long term, consistent high returns are rare. For example, if we survey the Morningstar® database, only about 13% of the mutual funds in existence today were in existence before 12/31/96… over 20 years before we wrote this. Only about 744 funds (out of over 30,000) that exist today were around on 12/31/86. Out of the 744 funds, 204 have a return since inception (through 5/31/17) of over 10%. One of the top-performing funds was Fidelity Magellan (which was rated only one star, or the worst

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rating, on 12/31/12, and was closed to new investors, so don’t get excited). Magellan had a load-adjusted return from its inception in 1963 to May, 2017 of 15.87%. If you, your dad or your grandpa happened to invest $1,000 in May of 1963, when the fund got started, by 5/31/2017, you’d have almost $3 million bucks Of course, if we really want you to weep, we’ll talk about buying Apple stock in November of 1983 at around $2.50 per share, or maybe your granddaddy buying you some Berkshire Hathaway with Warren Buffet in 1962 (hint: it was about $11.50 per share, and the stock symbol today is BRK.A). Giant returns are very rare, but fun to look at. Plan for a decent return and be pleasantly surprised when you exceed it.


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Idea 18:

New mega-saver rule.

There’s a newer rule, IRS Notice 2014-5414, that tells us how to handle after-tax contributions in a 401(k) plan. Who has after-tax contributions? Well, Ford (SSIP) and GM (SSPP) salaried employees have been able to make after-tax contributions to their 401(k) plans for years. Many municipalities have after-tax contributions to their pensions for police and firefighter annuity withdrawal. If you set up a 401(k) plan for your company, you can easily set up a provision for after-tax contributions. This rule says you can roll over the taxable portion to a regular IRA and rollover the after-tax money directly to a Roth IRA. This is a fabulous planning opportunity, since it takes the taxable monies, defers tax on them, and takes the after-tax monies and puts them in a tax-free Roth. This means that you need to direct the plan to have two rollovers: One to the conventional Rollover IRA and one to your Roth.

What’s the big deal In a ‘normal’ 401(k), you are limited in your contributions to a dollar limit; $18,000 if you are under age 50 and $24,000 if you are 50 or older15. You might have an employer match or employer contributions as well. Overall, the maximum amount you can add to a 401(k) plan (combined with other qualified plans) is $54,000 if you are under 50 and $60,000 if you are 50 or older16. Suppose Syd is 60 and works for a company that has a 401(k) and the plan allows after-tax contributions. She has ample income elsewhere and can save as much as she wants. She can make a pre-tax (or a Roth) 401(k) contribution of $24,000. With the new after-tax rules, she can then make up to $36,000 annually of after-tax contributions that she can then roll into a Roth IRA. Roth IRAs are great planning tools, but stashing $36,000 a year in a Roth is extraordinary. If Syd does that for

ROLL TO RO

TH

ROTH 401(K)

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just 10 years at 7%, she would accumulate about $829,000: $497,000 in her Roth and $332,000 in her 401(k).

14 Notice 2014-54, I.R.B. 2014-41.

15 2017 limit.

16 2017 limit.


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Idea 19:

Dollar Cost Averaging: how to make volatility work for you.

There is a wonderful aspect of 401(k) investing called Dollar Cost Averaging (DCA). It’s commonly known that markets go up and down. If you are trying to time your investments to “buy low and sell high,” you’re taking on a daunting task. First of all, it’s our experience that deciding when to buy is a different discipline than deciding when to sell. It takes two different mindsets. Similarly, getting out of the market when the market is tanking might sound smart (and temporarily make you feel better), but you now need to decide when to get back in. In other words, successful market timing requires you to get out before it gets bad and get in before it gets good. Very tough to do.

Enter DCA. DCA is the simple notion that you just keep buying a fixed dollar amount per month (or pay period), irrespective of the markets (you fix market fluctuations with rebalancing). In the example on the following page, you buy $100 a month of a mutual fund. The fund starts the year at $10 a share, drops mid-year to $5 a share (egads ) and goes back up to $10 a share. You stay in and keep buying.

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MonthDollars

InvestedPrice Per

ShareNumber of Shares

Total Shares Value

Amount Invested

January $100.00 $10.00 10.00 10.00 $100.00 $100.00February $100.00 $9.00 11.11 21.11 $190.00 $200.00March $100.00 $8.00 12.50 33.61 $268.89 $300.00April $100.00 $7.00 14.29 47.90 $335.28 $400.00May $100.00 $6.00 16.67 64.56 $387.38 $500.00June $100.00 $5.00 20.00 84.56 $422.82 $600.00July $100.00 $5.00 20.00 104.56 $522.82 $700.00August $100.00 $6.00 16.67 121.23 $727.38 $800.00September $100.00 $7.00 14.29 135.52 $948.61 $900.00October $100.00 $8.00 12.50 148.02 $1,184.13 $1,000.00November $100.00 $9.00 11.11 159.13 $1,432.14 $1,100.00December $100.00 $10.00 10.00 169.13 $1,691.27 $1,200.00

Here’s a math quiz: If the fund started the year at $10 a share and ended at $10 a share, the return for the year is 0%. But if you kept buying the fund through the downturn and the upswing, you had $1,691.27 for a $1,200 investment, or about 41%. Note that you kept buying. It looked ugly in July, when you had $522.82 in the account and had invested $700.00. At that point you might have wanted to throw in the towel. The cool thing about DCA is that it keeps you investing, it makes you buy more when the price goes down.


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Idea 20:

The 59½ rule (10% penalty).

Say you have been following good advice and stashing a regular contribution and investing it wisely. You decided to retire. Now what? First, you have to understand that withdrawals for a 401(k) have some slightly complex rules when it comes to taxes, based on when you make your withdrawal. You pay taxes on the distribution, but no penalty if you are over 59½ years of age. If you withdraw funds before age 59½, there is tax plus an additional 10% penalty. If you separate from service (leave your employer) in the year you turn 55 or older you can also avoid the penalty if you take your distributions directly from 401(k) (i.e., you do not roll it over to an IRA).

In general, 401(k) plan taxes are as follows:

Feature 401(k) PlansTaxation Fully taxable as withdrawnEarly Withdrawal Penalty (before age 59½)

Yes, 10% if withdrawn before age 59½ (unless you separate service at age 55 or older)

§72(t) (SEPP) to avoid 10%

Yes, pre age 59 with restrictions (minimum 5 years or age 59½)

Rollover to IRA or other plan?

Yes to I A or another employer’s 401(k) plan

Minimum distribution at 70½?

Yes, later of age 70 or retirement

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Idea 21:

The age 55 rule and avoiding the 10% penalty.

This is a highly misunderstood rule. You can avoid the early distribution penalty if you separate from service (e.g., quit, retire, get fired, etc.) and have attained the age of 55 or older17 at separation. The age 55 is defined as ‘the calendar year you attain age 55’. This means if you attained 55 in December, you could take a distribution anytime in that year, if you left your employer that year. The important thing to remember on this rule is the phrase ‘and’. You will have no penalty if you take a withdrawal after attaining age 55 if you separate from service in a year you attain age 55 or older. So if you retire in 2016 and are 55 or older in 2016 (but under 59½), you can take money out of your 401(k) without penalty. Retire in 2016 at 53 and take money in 2018 when you are 55, the penalty will apply. Recognize that once you are 59½ or older, this rule doesn’t apply.

Special rule for first responders. The rule of age 55 or older is different for first responders (police and fire). They can do penalty-free early withdrawals in the year they attain age 50 or older and separate from service18. So a police officer or firefighter with a 401(k) (or as they may usually have, a 401(a), 403(b) or 457 plan) can take a distribution from their plan if they retire (separate from service) after attaining age 50 or older.

17 I. .C. 72(t)

18 The Trade Priorities and Accountability Act of 2015 and I. .C. 72(t)(10)


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Idea 22:

Other exceptions to the 59½ rule.

Besides the age 55 and separation from service exemption, there are other exemptions to the 10% penalty, including:

Distributions made to your beneficiary or estate on or after your death.

Distributions made because you are totally and permanently disabled.

Distributions made as part of a series of Substantially Equal Periodic Payments over your life expectancy or the life expectancies of you and your designated beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply. This is called the Substantially Equal Period Payment exemption (SEPP), or 72(t) exemption.

Distributions to the extent you have deductible medical expenses that exceed 10% of your adjusted gross income (7.5% if you or your spouse is age 65 or over) whether or not you itemize your deductions for the year. The 7.5% limitation is effective for years beginning after January 1, 2013 for individuals age 65 and older and their spouses.

Distributions made due to an IRS levy of the plan under section 6331 of the Internal Revenue Code.

Distributions that are qualified reservist distributions. Generally, these are distributions made to individuals called to active duty for at least 180 days after September 11, 2001.

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Distributions made to an alternate payee under a Qualified Domestic Relations Order (QDRO), and

Distributions of dividends from employee stock ownership plans.

Most of these exemptions are not attractive (like dying, becoming disabled, divorcing or having an IRS levy). However, the next idea does cover a way to take a distribution at any age once you separate from service.


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Idea 23:

Substantially Equal Periodic Payments (SEPP) – How to get money out of a 401(k) at any age without the 10% penalty.

As we’ve stated, 401(k)s are subject to the rule that funds must remain in the 401(k) until age 59½. There are a variety of exceptions to this rule, listed previously in Idea 22. One significant exception is the SEPP or 72(t) exemption. This provides that you may withdraw from a 401(k) at any age provided you have separated from service and you take a series of substantially equal payments over a period associated with your life expectancy. The series of payments cannot be modified for a period of the longer of the time period in which you attain age 59½ or 5 years. So if you begin a SEPP from a 401(k) at age 52, you must continue it to age 59½. If you begin a SEPP at age 57, you must continue it until age 62 (5 years). There are three methods of taking the SEPP:

You may use your life expectancy under the I S Single Life Expectancy Table. You take the distribution similar to the calculation of an MD: You divide the year-end balance in the 401(k) by your life expectancy. Each subsequent year, subtract one year from the life expectancy. For example, if you were 53, you would take the IRA balance and divide it by 31.4. If the IRA were worth $500,000, your SEPP would be $15,924.

You may use the life expectancy table and the 7520 rate19 to determine an amortized distribution. If the interest rate for calculation was 2.04%, the amortization method would produce a SEPP for a $500,000 IRA on a 53-year-old owner of $21,721.

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You may also use the fixed annuitization method. For the above example, this method would produce a SEPP distribution of $21,617.

You can get a one-time Mulligan for a SEPP calculation. ev. Rul. 2002-62 permits a one-time change in the calculation method used20. Thus, if the market made a significant change in the IRA value, or your facts and circumstances changed, you could make a one-time change from whatever method you used to another more favorable calculation.

Do not modify the SEPP stream once it is calculated. Modification means increasing, decreasing, stopping or transferring into or out of the SEPP 401(k) plan. You have to leave the SEPP 401(k) alone for a time period which is the longer of 5 years or number of years to attain age 59½.

You also should know on SEPP that the calculation is done on a per-account basis. So if you were 53 and had a $1,000,000 balance in your 401(k), but only needed about $21,721, you could split the 401(k) into a Rollover IRA and take a SEPP on a $500,000 I A and leave the rest in the 401(k). You can have as many SEPP calculations as you want. If you start a new SEPP calculation, the rule of ‘greater of 5 years or age 59 ’ time testing applies to each calculation.

All in all, the SEPP exception is a good way to access 401(k) money early if you need it. But it’s like the mercury lights we used to have in the gym in school way back in the 60s: once you turn it on, you have to leave it on, for the longer of 5 years or age 59½.

19 I. .C. 7520(a)(2)

20 Rev. Rul. 2002-62, 2002-2 C.B. 710.


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Idea 24:

Consider Net Unrealized Appreciation (NUA) special rule if you have employer stock.

As we mentioned earlier, there is a special tax treatment for employer stock in your 401(k) account. Many larger employers provide their matching contributions in the form of stock in the company, or allow the participant of the 401(k) to buy employer stock. There are two issues here: first is an investment issue of how much employer stock someone should have in their plan as a percentage of total assets. [By the way, our opinion is no more than 20% is a reasonable guideline]. The second is the special rule of Net Unrealized Appreciation, or NUA.

NUA is the difference between what you paid for the company stock (the basis) and the fair market value on the date of distribution. When you have company stock, you can roll it over into an IRA, just like the non-stock portion of your 401(k), or you can take your distribution in the form of company stock and use the NUA rule. NUA can be an advantage if the stock has gone up. The reason is the appreciated company stock is taxed as a distribution at the lower of cost or market. When you eventually sell the company stock, you pay tax at the reduced long-term capital gains rate as if you held the stock for 1 year or longer. Long-term gain treatment has tax advantages, and you receive long term treatment irrespective of how long you actually held the stock.

Long-term capital gain taxes for federal taxes can be 0% (if you are in the 15% bracket or lower) to 20% (or even 23.8%21). This is far lower than the 39.6% maximum rate. In addition, qualified dividends on company stock are also taxed at

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preferential rates. Let’s say you worked for a company that allowed you the option to purchase employer stock in your 401(k), and you have still kept your entire 401(k) balance in the employer 401(k) plan. Suppose you have bought the stock steadily over the last 30 years, and your basis in the stock is $40,000. The stock is now worth $100,000. The company stock has a dividend yield of 4%22. You have not (and this is important ) taken any distributions from the company stock. You’re over 59 (you’re 0 for our example). Which is better, to take the NUA or to rollover the stock to your IRA? To help us out, we will assume (yes, we know what that means, but it’s part of any example) the following:

That the employer stock pays a dividend yield of 4% and appreciates by 3%;

To illustrate your taxable income will be in either the 15% bracket or the 39. % bracket. (Yes, we know your mileage may vary, but we would make a large number of charts if we used the whole tax-bracketology.)

So this table looks at NUA + rollover versus rollover of the whole amount:

Federal Bracket 15% Bracket 39.6% BracketNUA Rollover NUA Rollover

FMV of NUA Stock $100,000 $0 $100,000 $0Basis of NUA Stock $40,000 NA $40,000 NATax on Stock $6,00023 $0 $15,840 $0IRA Distribution $0 $4,000 $0 $4,000Dividends on Stock $4,000 $0 $4,000 $0Taxes on Div/Distribution $0 $600 $952 $1,584Net Distribution $4,000 $3,400 $3,048 $2,416Tax Rate 0% 15% 23.4%24 39.6%Appreciation on stock taxed to heirs on death?25 no yes no yesSale of Stock Taxed? Capital

gainOrdinary income

Capital gain

Ordinary income

RMD?26 no yes no yesCharitable Contribution? FMV of

stock any age

Qualified Charitable Distribution at 70½

FMV of stock any age

Qualified Charitable Distribution at 70½


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The rules on NUA:

You must meet all four of the following criteria to take advantage of the NUA rules:

You must distribute your entire vested balance in your plan within one tax year (though you don’t have to take all distributions at the same time).

You must distribute all assets from all qualified plans you hold with the employer, even if only one holds company stock.

You must take the distribution of company stock as actual shares. You may not convert them to cash before the distribution.

You must have experienced one of the following:

- Separation from service from the company whose plan holds the stock (except in the case of self-employed workers);

- Reached age 59½; or

- Total disability (for self-employed workers only); or

- Death.

21 This is adding the 3.8% Medicare surtax on net investment income to the 20% capital gain rate.

22 Recognize dividends are dollar based, so we are quoting yield.

23 Federal taxes of 15%. Ignores state income taxes.

24 20% capital gains tax plus 3.8% Net Investment Income Tax.

25 Stock held at death outside of qualified plans is generally stepped-up in basis to the fair market value at death and the capital gain disappears.

26 With owning stock outside of the IRA, the dividends are paid (or reinvested) irrespective of age.

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Idea 25:

Why hardship withdrawals can cause more hardship.

You can take distributions from a 401(k) without separating from service in the situation of a ‘hardship’. In the case of a qualified hardship you will still incur ordinary income tax but may avoid the 10% penalty tax discussed below. A ‘hardship’ withdrawal is made from the 401(k) in a limited number of hardship situations. These include:

Un-reimbursed medical expenses for you, your spouse, or dependents.

Up to $10,000 towards the purchase of an employee’s principal residence.

Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.

Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.

Funeral expenses.

Certain expenses for the repair of damage to the employee’s principal residence.

But to discourage early withdrawals, in most cases the IRS imposes a hefty financial penalty including a 10% early withdrawal penalty if you are younger than 59½ and do not meet a qualified exception. There is no 10% pre-59½ penalty if you are disabled or have medical expenses over 7½% of


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AGI, or by a court order. You may only make the withdrawal in the amount of the hardship, which means you will probably have to come up with the tax and penalty dollars out of pocket.

We think hardship withdrawals can cause more hardship because they are taxed, and usually penalized. Take a $10,000 hardship withdrawal, and you have a tax bill plus a $1,000 penalty. It can be a spiral, where the hardship causes the penalty, which causes more hardship, which causes more penalty.

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Idea 26:

How plan loans work and why you probably shouldn’t take one.

Many 401(k) plans allow loans. At first blush, a plan loan sounds like a good idea. You put money in the plan and deduct the contribution from your income. You then borrow your own money back out of the plan, tax-free. You then pay yourself back, with interest. What could be better? Well, there’s a catch: all of the above is true: you borrow the money tax-free and pay yourself back. What is not as apparent is that you don’t deduct the interest you pay yourself, but you pay taxes on your repaid loan and interest. In other words, loans cause you to be taxed twice.

Here’s an example: Brian has $150,000 in his 401(k) plan. He wants to make some home improvements. His plan allows loans for up to 50% of the vested value of his account, up to $50,000. Brian borrows the $50,00027. His plan charges him an interest rate of prime rate plus 1%, or 4½%. His payments are $932 a month. He happily pays the loan back, knowing he is paying himself. At the end of 5 years, he’s paid back the $50,000, plus $5,929 of interest. His account grew by his repayments. Now the catch: when he eventually takes the money out of his 401(k), he pays tax on the distributions, including the interest he paid himself. In other words, he’s paying tax twice, once on the money he used to pay back the loan, and a second time when he takes distributions.


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Are loans always a bad idea? No. First, loans are way better than hardship withdrawals, so if the loan is a last resort, use it. Second, the 401(k) loan might be cheap enough that the interest rate makes it worth it. Third, use a loan if the proceeds are used for a good purpose, like your education. Fourth, 401(k) plans are not counted in financial aid, so using a 401(k) loan after you file for Financial Aid may be better than alternate forms of loans for education (like PLUS loans)28.

27 This is the maximum on plan loans. There is a lower limit of 100% of the vested balance or $10,000.

28 Student loan interest can be tax-deductible (within limits).

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Idea 27:

IRA rollovers and transfers.

By now, it’s well-known that you can transfer a 401(k) balance to an Individual Retirement Account or IRA. The movement from a 401(k) to an I A is commonly called a ‘rollover’. The general concept of rollovers is simple: if you move a 401(k) balance from a 401(k) to an IRA, there is no tax on the transaction. This can be accomplished in two ways: a rollover or a direct transfer.

Technically, a rollover is when you take the money from your 401(k) and receive a check, and then, within 60 days, deposit the money into a ‘ ollover I A’. A direct transfer is when you instruct your 401(k) custodian to directly transfer the 401(k) balance to your IRA without designating the money to you in your name. In either case, you still get a check, but in the rollover, the check is made out to you and in the transfer the check is made out to your IRA. Sounds the same, but it’s not.

The reason is the requirement of income tax withholding on 401(k) distributions. When you receive a 401(k) distribution, the law mandates a 20% withholding if the check is payable to you, the participant. With a direct transfer, there is no withholding requirement. Note that the rollover is tax–free if you roll ALL of the distribution into the IRA. Here is the problem: When you take a distribution in your own name, you only receive 80% of the distribution and the IRS has the other 20%. So if Max has $100,000 in his 401(k) and wants to roll it over, and takes it as a rollover, he’ll get a check for $80,000 and $20,000 will go to the IRS. To make the transaction tax-free, he needs to put $100,000 in his IRA, so he’d need to come up with an additional $20,000. This whole problem is eliminated with a direct transfer.


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So the bottom line is easy: to roll your 401(k) into an IRA or another plan, do a direct transfer. It’s easy: you merely designate your IRA (usually the distribution is made out to an I A ‘for the benefit’ of you) and send that check made out to your I A to the I A provider. You can do an unlimited amount of direct transfers in a year, so you can set up an IRA at one place and move it easily. But do it directly.

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Idea 28:

How to make a good beneficiary designation.

A good beneficiary designation clearly states who shall inherit your 401(k) after your death. You should name both primary and secondary beneficiaries. For married couples, the spouse is usually named as the primary beneficiary and the children, if any, as secondary or contingent beneficiaries. To name individual beneficiaries, give the complete legal name of each beneficiary. For multiple beneficiaries, you must also state the percentage of the IRA each will receive. For example, you might designate 50% to Jack Doe and 50% to Jill Doe. You can add per stirpes (“by roots” in Latin) after the name of an individual beneficiary if you want that beneficiary’s children to get the share if the beneficiary you named predeceases you.

A version might look like this:

Primary beneficiary: Melinda Gates

Secondary beneficiary: 33 1/3% to Jennifer K. Gates, and her issue, per stirpes;

33 1/3% to Phoebe A. Gates, and her issue, per stirpes; and

33 1/3% to ory J. Gates, and his issue, per stirpes;

Or the survivor of them, if they die leaving no issue.


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If you name a Revocable Trust as a beneficiary, you will need to give the name of the trust and the date the trust was created. Make sure your Revocable Trust has the correct language, which is called a ‘pass-through’. If you name an IRA Trust as a beneficiary, you would use the following designation: “name of trust, date the trust was created, FBO name of beneficiary”. Typically, the custodian of the IRA has a beneficiary designation form. If the custodian does not have a beneficiary form, you should give the custodian a written statement listing your beneficiaries.

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Idea 29:

Some assembly required: put your 401(k)s together for retirement.

In todays’ world, the regular ‘pension plan’, where you get a guaranteed monthly pension, is getting rarer and rarer. For that matter, it’s getting rarer and rarer that anyone stays at one job for an extended period of time. My Dad worked at one place for 22 years and got a miserably small pension, then worked at another for 13 years and got another tiny pension. Many employers have 10-year vesting on their pensions, so you might move before 10 years and get zilch. According to the Bureau of Labor Statistics, in 2016, the median number of years an American spends at a job is 4.2 years. Given that, a person could have 10 jobs over a 40 year career and have no pension.

Unless, of course, they participated in 401(k) plans at each employer and didn’t cash them out. Suppose Bill makes $22 an hour, and works for his first employer starting at age 25. This employer matched the first 4% of Bill’s pay as a contribution, so he contributes 4% and the employer matches 4%. After 8 years, Bill has about $40,600 if he achieves a 7% annual return. He leaves this employer. But here’s the important rule: he doesn’t cash out: he either rolls this into his new employer’s plan or to an IRA. If he cashes out, he pays about a $4,100 penalty plus regular income taxes on the $40,600 balance. If he keeps assembling his retirement, it keeps growing. Assuming Bill earns about the same wage with 2% annual increases, and keeps having 8% put away for him by him and his employer’s contributions (which we don’t think is enough), he’d have about $697,000 at age 60. If he cashed out each time (and spent the money), and only worked at the last job for 8 years, he’d have about $40,600.


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We think that many times it’s best to consolidate in the 401(k) versus the IRA. A 401(k) has the advantages of the age 55 exemption (see Idea 21), loans (see Idea 26) and overall simplicity of having things in one place. However, watch the fees and costs on the investments. If the new 401(k) has expensive investment options, consider rolling to an IRA, or even keeping it at the old employer. You can assemble it later, but keep the pieces.

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Idea 30:

How solo business owners can maximize 401(k).

If you own your own business, a 401(k) can be an exceptional way to save taxes and for retirement. 401(k) plans have two annual limits: the maximum deferral limit of $18,000 per participant per year ($24,000 if you are age 50 or older) for 2017 and an ‘annual addition’ limit of combined employer and employee contributions of $54,000 ($60,000 if age 50 or older). Let’s start out with a sole owner(s) of a business and look at the rules:

Sole proprietors or partners who have no common-law employees may have a 401(k) for themselves.

The employer (the business) can make a maximum contribution of $54,000 per eligible employee. The maximum deduction is 25% of compensation. There are no income taxes or FICA or Medicare taxes on employer contributions.

The employee (the owner or partner) can contribute either pre-tax or as a Roth 401(k), up to $18,000 for 2017 ($24,000 if 50 or older).

Total combined contributions of employer and employee for 2017 cannot exceed $54,000 ($60,000 if age 50 or older).

So let’s do a couple of examples:

Mark has a successful contracting business and is unincorporated. He manages the business, and has independent contractors (non-employees) for all other parts of the business. He’s 35 and his 2017 net income is $60,000. He’s wondering how much he can contribute to


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a solo individual 401(k) versus a SEP IRA, a SIMPLE IRA or a profit sharing plan. His wife also works and their combined income is sufficient to live on, so Mark is looking to contribute the most he can. Here’s the bottom line for $60,000 of net income:

Individual 401(k): $29,152

SEP IRA: $11,152

SIMPLE IRA: $14,124

Profit Sharing Plan: $11,152

If Mark made $190,440 of net income, he could maximize the 401(k):

Individual 401(k): $54,000

SEP IRA: $36,000

SIMPLE IRA: $17,742

Profit Sharing Plan: $36,000

What about multiple owners, like maybe two professionals? Suppose John and Patricia are both lawyers, in practice together in a Professional Corporation (PC). They are both over age 50 and make $288,000 of net income in their PC. If they split the earnings between salary and 401(k), they can each put away $60,000 in their plan. That’s $120,000 of tax-deferred (or tax-free on some if they use the Roth 401(k)).

If a small business has employees, they will probably need to pay attention to the ‘safe harbor rules’. Employees add complexity to the amount you can stash in your own 401(k), since you have to make a mandatory safe harbor contribution (either as a fixed percentage or a matching contribution). In addition, you have to make employer contributions to employees as well. Still worth doing? Absolutely, but if you have employees, the answer takes more reflection.

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Idea 31:

HSA or 401(k)? The answer might be surprising.

401(k) Pre-Tax HSA

Contributions Before-federal/state Subject to FICA/Medicare

Before all taxes

Earnings Not taxed until distribution Not taxed if used for qualified medical expenses

Distributions Taxed as income Not taxed if used for qualified medical expenses

2017 Contribution Limit $18,000 $6,750 (family coverage) $3,400 (single coverage)

2017 Catch-Up Contribution $6,000 starting at age 50 $1,000 starting at age 55Withdrawal Eligibility Age 59½ Any time for qualified health

expensesInvestment Opportunity Yes Yes, usually with minimum

account balancePenalties Yes. 10% early withdrawal on top

of income taxYes. 20% if used for something other than qualified medical expenses before age 65

Employer Contributions Allowed AllowedAccount Ownership Trust held for employee’s benefit Employee/Individual

Required Distributions Age 70½ NoneEstate Planning/Beneficiaries Will become taxable income to

spouse or any other beneficiary when withdrawn

Can be left to spouse and remain in an HSA; taxed as income to other beneficiaries


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Idea 32:

What happens to 401(k) upon death?

When you die, your 401(k) is transferred to your designated beneficiary (for more information on how to make a good beneficiary designation, see Idea 28). It is always a good idea to have a solid multi-layer beneficiary designation. There are some important points about beneficiaries:

401(k) proceeds that are paid subject to a beneficiary designation are not subject to probate, nor are they subject to distribution pursuant to a will, unless the estate is named as the beneficiary. Remember that a beneficiary designation trumps a will or other testamentary document, unless the 401(k) names the estate or trust as beneficiary.

If your estate is named as a beneficiary of your 401(k), or if you have not named a beneficiary, your 401(k) will go to your estate and will be subject to probate court jurisdiction.

If you name your estate as a beneficiary or fail to name a beneficiary, the entire balance must be distributed within 5 years and taxes must be paid.

The beneficiary of a 401(k) must pay taxes (unless they are a charity). In general, beneficiaries can roll over a 401(k) to an IRA (spousal or inherited), or take the money out and pay taxes. IRA withdrawals are taxed to the beneficiary, and the beneficiary must take their RMD.

If the beneficiary is your spouse, they have two IRA options, see Idea 33.

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Non-spouse beneficiaries can generally take a 401(k) as a lump sum and roll it to an IRA, or if the plan allows it, take an extended payout.

- The extended payout can distribute the money to the beneficiary over their life expectancy.

- Distributions have to start by December 31st of the year following the death of the 401(k) owner.

- If the participant was 70½ or older and taking RMDs, non-spouse beneficiaries have to take their payouts on the same schedule.


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Idea 33:

When to take a spousal rollover and when not to.

When you die, if your spouse is named as your primary beneficiary, your spouse can roll your 401(k) into their IRA as a spousal rollover. The spousal rollover is a good idea in many cases. First, the spouse treats the IRA as their own, so they can start taking their RMDs when they reach age 70½. For a younger surviving spouse, this can be a big advantage, since they don’t have to take the distribution until they reach 70½. Suppose Julie, age 60, survives Henry, age 72. Julie can roll Henry’s IRA to hers and is not required to take distributions until she reaches age 70½. When she does take her RMD, she uses a table with her longer expected lifespan to compute the distributions. If the IRA was worth $500,000 and she made 7% annually, the IRA would be worth about $1.2M at her reaching age 70½. She would then take it out using the RMD table, which would let her take a RMD of about $31,000. If Henry left his IRA to a 60-year-old non-spouse, they would have to begin to take distributions immediately and use their own life expectancy table. Higher accumulations are available with a spousal rollover.

However, a spouse may not want to use the spousal rollover when the surviving spouse is under 59½: If the surviving spouse is under 59½ and needs the money, the exemption to the 10% penalty (for under age 59½) for distribution upon death is better than the distribution options available under a spousal rollover. However, the surviving spouse may have to take a RMD of their own and their options upon the spouse’s death are limited.

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Another situation might be when the surviving spouse is much older than the decedent: Suppose in my example above, Julie had pre-deceased Henry. Henry may be better off leaving Julie’s plan alone and taking her RMD when she would have attained the age of 70½. This is because a surviving spouse can take distributions on the required beginning date of the deceased person, which is typically September 30 of the year following the decedent’s death.

Roth IRAs are not subject to RMD rules and as such, allow additional tax-free growth by using the spousal rollover.

The last point is that Inherited IRAs are subject to the claims of creditors and Spousal Rollover IRAs are not. If there is an asset protection issue, the Spousal IRA affords more protection.


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Idea 34:

What to do with Designated Roth Account Contributions.

Designated Roth Account Contributions (DRACs) are a great mega-saver tool. The DRAC allows you to save your contribution and earnings tax-free. For anyone that expects to be in the same or higher bracket in retirement, or for someone wanting to build a dynasty (a jumbo tax-free accumulation), the DRAC is a very logical option. Like a Roth IRA, there are some great benefits. It’s worth looking at the differences between Roth IRAs and DRACs:

DRAC Roth IRA

Income Limit no yesRMD at age 70½ yes noContribution Limit for 2017

$18,000 or $24,000 if over 50

$5,500 or $6,500 if over 50

First-in/First-out no yes

The DRAC (Roth 401(k)) lets you put much more away in tax-free savings (than a Roth IRA). However, for some perplexing reason, you are required to make RMDs at age 70½ from a Roth 401(k). There is a simple and elegant solution to this problem: oll your oth 401(k) into a oth I A. oila No RMD and continued tax-free growth.

This can be huge. Let’s say Sue is 50 and maximizes her Roth 401(k). She deposits $24,000 a year into her Roth 401(k) balance. She retires at age 70, and doesn’t need her Roth 401(k) balance. If she earned 7% annually, her Roth 401(k) would be worth $983,900 from the accumulation from age 50 to 70. If she rolls the Roth 401(k) over to a Roth IRA, she

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won’t need to take any RMDs. If she leaves it alone, and continues to earn 7% annually, she’d have over $3.8 million by age 90. She could leave that princely sum to children or grandchildren, tax-free, who would have to take RMDs. If she left the Roth IRA equally to 4 grandchildren who are 30 years old, they’d each start receiving about $17,800 a year, tax-free, which would go up each year. If they made 7% annually, by the time they reached age 65, they’d be getting about $185,600 a year and have a balance of about $3,985,000 EACH All from the accumulation of the maximum oth 401(k) over 20 years.


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Idea 35:

Roth 401(k) versus Roth IRA.

There are a variety of savings methods, ranging from pre-tax 401(k) contributions to after-tax contributions to Roth 401(k), which use after-tax contributions and accumulate earnings tax-free. There are some differences between a Roth 401(k) and a Roth IRA. The chart on the following page illustrates some of the differences.

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Feature 401(k) Pre-Tax Roth 401(k) After-Tax Roth IRAContributions Pre-Tax After-Tax After-Tax After-TaxLimit on Contributions

$18,000 under age 50 (2017); $24,000 age 50 or older

$18,000 under age 50 (2017);

$24,000 age 50 or older

$54,000 (total) under age 50 (2017);

$60,000 (total)age 50 or older; less any other contributions

$5,500 (per spouse) under age 50

$6,500 age 50 or older

Income Limit No No No $132,000 single (2017) $194,000 married filing jointly

Withdraw without Penalty

Separate from employment; age 59½. Exception for: 72(t) Age 55 rule

Age 59½ Any age if separate from employment (contributions only); greater of 5 years or age 59½ if in-plan Roth Rollover

Longer of age 59½ or 5 years for contributions and earnings.

FIFO exception for contributions.

Loans Possible Possible Possible NoRolled to IRA? Yes Yes, to oth I A Yes, to oth I A,

or in-planNA

Self-Directed Yes, within options

Yes, within options

Yes, within options

Yes, unlimited

Portable? Yes, to I A, other 403(b) or 401(k)

Yes, to other oth 401(k) and to Roth IRA

Yes, to other Roth 401(k) and to Roth IRA, if in-plan rollover

Yes to other oth IRA

Mandatory age 70½ Distributions

Yes No, if rolled to Roth IRA, other-wise yes

No, if in-plan rollover then if rolled to Roth IRA, otherwise yes

No


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Idea 36:

Periodic Rebalancing reduces risk.

In general, a major goal of investing is to try to preserve return and keep down the risk. To this end, rebalancing is a technique that is used to reduce risk. It is a well-proven axiom of investing that the mix is extremely important. Different asset classes produce different returns over time. In general, the riskiest asset classes tend to produce higher returns. If you started out with the 70% equity/30% fixed investment mix, that mix would morph into a riskier and riskier portfolio over time; all the while, you get closer and closer to needing the money (at retirement). To stop this upward risk spiral, you can use a technique called rebalancing, or periodically resetting the portfolio back to its original mix. This accomplishes a few things:

Provides opportunity in down markets by re-allocating to equity investments.

“Buy low.”

Reduces risk in up markets by re-allocating to the safer fixed investments.

“Sell high.”

By automating the process, rebalancing helps prevent making a timing decision.

Don’t get all excited about rebalancing being a “timing” mechanism. It isn’t. Rebalancing has a main purpose of reducing risk. It can increase return in volatile markets, but the long-term direction of markets is up. We could give you a bunch of examples, but the best one is from a study by Vanguard29.

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Comparison of 60% stock/40%30

bond portfolios 1926 through 2009Monthly

RebalanceNever

RebalanceMax Stock % 68 99Min Stock % 52 36Final Stock % 61 98Average Annual Return % 8.5 9.1Annualized Std. Deviation (Risk) % 12.1 14.4

This study is pretty interesting. It takes a long time period (1926-2009) which covers the best of times and the worst of times. Note that if you didn’t rebalance, you ended up with 98% stocks. If you were investing your retirement funds, do you think 98% stocks is a good idea for sleeping at night? What is more telling is that rebalancing to stay around 60% stocks reduced annualized return from 9.1% to 8.5%. However, volatility (risk) went down from 14.4% to 12.1%. That’s a 19% reduction in risk for a 7% reduction in return.

How often should you rebalance? This is a great question and the answer is surprising. The same Vanguard study took that same time period (1926-2009) and compared rebalancing a 60/40 portfolio monthly, quarterly, annually and never. Since rebalancing makes sense, you’d tend to think more frequent was better, but look at the statistics:

Frequency Monthly Quarterly Annually NeverAverage Equity % 60.1 60.2 60.5 84.1Annual Turnover % 2.7 2.2 1.7 0Number of Rebalances 1,008 335 83 0Average Return % 8.5 8.6 8.6 9.1Volatility % 12.1 12.2 11.9 14.4

It’s evident that rebalancing reduces risk. The possible surprise is that rebalancing works better if you don’t do it too often. Annual rebalancing actually earned a higher return and was less risky in this time frame than monthly rebalancing. We kid around and tell our clients to rebalance on their half-birthday (the date 6 months from your real birthday). You’ll have something on your calendar and it won’t interfere with your real birthday.


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Rebalancing with income is another way to rebalance, which works very well, by using your 401(k) contributions to rebalance. Instead of resetting the allocation of your balances, you direct your contributions to the disproportionately low asset class. If the market was down, you’d direct your monthly contribution to equities (that old “buy low” again) and if the market was high, you’d direct your contributions toward fixed. Here’s a chart from the Vanguard study, which again highlights the effects of directing income and dividends to rebalance:

Frequency Monthly Income NeverAverage Equity % 60.1 61 84.1Annual Turnover % 2.7 0 0Number of Rebalances 1,008 0 0Average Return % 8.5 8.5 9.1Volatility % 12.1 11.3 14.4

Here, note that income rebalancing worked even better as a risk reduction method than monthly asset rebalancing. The bottom line is that rebalancing is a great technique for reducing risk in your retirement portfolios. We use it in our practice and in our own portfolios.

29 “Best Practices for Portfolio Rebalancing” July 2010, Jaconetti, Kinniry, and Ziberling. Vanguard Research.

30 S&P 500, Barclay’s Aggregate Bond Index.

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Idea 37:

Don’t put all your eggs in one basket; Diversification.

We hear all the time about ‘don’t put all your eggs in one basket’. This concept, called diversification, is a time-honored principle. Mutual funds are a natural form of diversification. For example, a fund called an index fund might buy the Standard and Poor’s 500 (S&P 500) which consists of 500 large US stocks in a variety of industries. You get 500 stocks, weighted to their size, usually for a very low fee. That being said, diversifying in all large US stocks is taking away the risk of one stock going south (think Enron or Kmart), but does not reduce the risk of the category of investments going down, like when the whole US market goes down.

To get around this problem, a good practice is ‘asset class investing’, where you diversify not only in funds or ETFs, but in different types of assets. You might buy bonds and stocks, US stocks and international stocks, big stocks and small stocks. You might add some real estate. Think of the concept of a Monopoly board: if you own part of all the properties, you can’t lose.

So here is an example of how you might go about creating a mix. The concept of asset allocation is to get the right mix (for you) of safe stuff and stuff that grows. Think of it like a car: how big of an engine do you want (equities) versus how much safety equipment (fixed income/bonds)? For the most part, all pension systems invest their money this way, in a mix of equities and fixed income. No large pension system we can find will try to ‘time the market’ by getting in or out at some specific time. For one thing, it’s too darn hard, and for another, you never know the unknown factor, like 9/11, that can bite you. Big pensions have a legal obligation: to


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provide the most retirement income with the least amount of relevant risk. We think this is a good goal for both big retirement plans and retirement plans with one participant.

How asset allocation works:

Consider the return and risk on a plan that has all its money in the stock market—in this case—the S&P. The return from January 1995 to December 2014 is about 9.81% a year (not bad). The risk, called standard deviation (Std Dev), is 15.06%, which is a lot of up and down risk. Our goal, through asset allocation, is to reduce risk, and hopefully increase return. Remember that risk is very ugly in the actual distribution phase of retirement, since you may be more likely to be withdrawing funds when the market is down.

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To start diversifying, we add some bonds, or “airbags,” to protect us in the event of a crash. We’re adding 30% into the bond side. The return went down some, but not too much, and the risk went down quite a bit. We lost about 0.84% return to cut risk by 4.46%. Seems like a good trade-off (it is).

We think the U.S. is the greatest country in the world (can’t say the same about all our politicians), but the world as a whole has more growth potential, and more diversification than just the US markets. We add some international stuff, and the return goes down and the risk goes down again. Now we have 8.13% return and 10.48% risk. Let’s see if we can do better.


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We challenge you to name a big stock that wasn’t once a small stock. Think of any? Small-caps turn into mid-caps, which turn into large-caps. When Apple was a tiny company, the growth rate was much greater than when it was worth over $750 billion. If we add small and mid-cap U.S. stocks, which tend to grow faster and be riskier, we see a logical outcome: Return is up and risk is up. Let’s go further. Return now up to 8.67% and risk slightly up to 10.74%.

There are about 900 million people in North America, Europe and Japan. There are about 3.5 billion in the growing emerging markets. Now, more than half the world’s growth is in emerging markets, such as China, Brazil, and India. These markets have risk, but a lot of return and a lot of room to grow. We add something risky and what happens? The return goes up to 8.64% and the risk goes down to 10.93%. Can we do one better?

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Now we add high-yield bonds (also called junk bonds) to the pile. We have gone almost full circle: we have the long-term return very close to the stock market with lower risk. It’s the miracle of asset allocation. Put Idea 36 (rebalancing) and 37 (diversifying) together and you are now investing more like a pro.


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Idea 38:

Fees matter – a lot.

In any investment, fees matter. In long-term investing, fees matter a lot. The lower the fees, the more return you capture on your investments within your 401(k). Vanguard31 provides a great example in the following chart:

The chart shows the impact of expenses over a 30-year time horizon where a hypothetical portfolio of $100,000 is invested in an investment that grows at 6% annually. In the low cost scenario, the investor pays a management fee of 0.12%. In a high-cost scenario, the investor pays a management fee of 0.63%, which is the approximate average asset-weighted expense ratio of US stock funds as of 12/31/2016. If there were no costs (which is extremely unlikely), the invested $100,000 would turn into $574,349. In the low-cost fund, the account grew to $554,028. In the high-cost scenario, $475,154. What The difference of 0.51% was about an $80,000 difference on a $100,000 investment. Is this really the case Yes. According to Morningstar, the anguard 500 Index Fund Admiral Shares (VFIAX) has a management fee of

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0.05%. The Mainstay S&P 500 Index Fund Class A (MSXAX) buys the same index (the S&P 500). It has a front-end commission of 3% and an expense ratio of 0.60%. Start with $100,000 on 04/01/2006 and end on 03/31/2016, and you have about $196,700 in the Vanguard fund and $180,400 in Mainstay32. $16,500 difference in just ten years. This is just two similar mutual funds. Go to an annuity and you may see mutual fund fees, administration charges, maintenance fees, rider fees and mortality and expense charges. These can hit as high as 3.93%, or about 78 times higher than a no-load index fund. Fees matter.

31 Vanguard Insights: Investing Truths: Investing Truth About Cost – https://investor.vanguard.com/investing/how-to-invest/impact-of-costs?lang=en

32 Source: Morningstar. Using 10 year total return and adjusting for a one-time 3% commission on MSXAX.


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Idea 39:

Why time in the market may matter much more than time-ing the market.

Here’s a chart that tells a very important story. It covers the period of 20 years ending 12/31/2016.

Source: J.P. Morgan Asset Management analysis using data from Bloomberg. Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Past performance is not indicative of future returns. An individual cannot invest directly in an index. Data as of December 30, 2016.

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What we have is the return on the S&P 500 for the 20 year period ending 12/31/201 . You likely have a similar investment in your 401(k) plan. If you stayed invested for the entire 20 years, you made an average rate of return of 7.68% annually. That’s pretty good, especially if you consider the number of things that happened between 1997 and 2016: a couple of wars, terrorist attacks, dot-com bubble and bust, the Great Recession, and a housing bubble. However, if you missed the 10 best days, your return dropped to 4.00%. That sounds pretty bad, but because of compounding, it’s worse. If you had $100,000 in your plan at the beginning of 1997 and left it alone, you’d have a bit more than $439,000 by the end of 2016. But if you missed the 10 best days, your balance would be around half, or $219,000. Miss the 30 best days of 20 years, and you earned nothing.

Another important point is that these ‘best’ days are usually preceded by a ‘bad’ day. So many of those ‘best’ days had an ugly trading day the day before. You need to know that in a 401(k) plan, if you call the custodian and want to move your money, it takes place at 4:00 pm on that day. So if the market is having a bad day and you want out, you get out at whatever the market is at 4:00 pm. Similarly, if you want to ‘get in’ on a good day, you get in at 4:00 pm. It then seems that the only efficient way to time markets is to get out the day before a bad day and get in the day before a good day. Good luck on that one.


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Idea 40:

An interesting fact about down points in the year.

Since we are having fun with charts, here is a favorite of ours. The chart on the following page shows the S&P 500 per year from 1981 through 2015. The light gray boxes indicate the lowest point during the year, so in 1981, there was a point the market was down 18%. In 1982, there was a point the market was down 14%. In fact, if you notice, for every year, there was a down point in the market, ranging from the benign 1995, where the S&P was down 3% to the abysmal 2008, where the market was down 47% at one point. But now look at the bar with the black box on top. That’s how the S&P did for that year. So in 1995, the S&P 500 had a positive 34%, even though it was down 3% at one point. Brutally ugly 2008 finished the year down 38%, but negative 38% is better than negative 47%. 2009 is interesting; since it was down 26%, and ended the year up 23%.

So we see that every year had a dark spot, but notice anything about the chart? Most years had an up year. 27 out of the 36 years were up, despite a low point. The average annual total return for the whole period was +11.1%, while the average intra-year decline was -14.2%. You don’t lose until you sell.


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Idea 41:

What’s the most you can stash?

We like squeezing little amounts into the 401(k), like we indicated in earlier tips. This is great, but sometimes, we like to look at how to max the heck out of a plan. Here are some numbers for 2017:

Maximum deferral under age 50 $18,000 (100% of compensation)Maximum deferral age 50 or over $24,000 (100% of compensation)Annual compensation limit $265,000Annual Defined Contribution limit (<50) $54,000Annual Defined Contribution limit (50+) $60,000

So the maximums will depend on your age and position. If you work for a company (or yourself) and are under age 50, you can save up to $18,000 a year. In the year you attain age 50, you can save up to $24,000. This is per spouse as well, so a married couple 50 or over could stash up to $48,000 a year of elective deferrals if they both work and make at least $24,000 each.

That’s just elective deferral limits. The employer can put in money as well, up to limitations of $54,00033. So a self-employed person can put away (and deduct) $54,000 a year if under 50 and $60,000 if age 50 or older. Take a married couple that are both self-employed and you double it. Adding employees causes problems (for a variety of reasons). There are rules on how much an owner can put away in relation to the other employees. Most plans use a ‘safe harbor’ method to allow the owners to get maximum deferrals. The numbers can get crazy if you really hit the maximums. Suppose Sue finishes grad school, gets her life in order, and lands a great job. She puts away the maximum starting at age 30 and

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keeps maximizing every year until she turns 65. If she earns 7% annually, and if the limits increase by 1% a year, she’d have a projected $3.28 million at age 65. A businessperson in the same scenario (ages 30-65, 7% annual return, maximum contribution) would accumulate over $9.3 million.

By the way, Mark Levchin, chairman of Yelp, had 2.7 million shares of Yelp in his oth I A in 2014. As of August 22, 2017, that’s worth $112,941,000. You can hit a home run with a great investment as well.

33 For self-employed, this has a limit of 25% of net earned income (IRS Publication 560, Retirement Plans for Small Business).


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Idea 42:

Don’t cash out.

According to a 2014 report by Fidelity, 35% of all participants who left their jobs cashed out of their 401(k) plans. The average balance of an account cashed out, according to Fidelity, was $16,000. Bad idea. First, if you cash out of a plan and are under age 59½, you pay the income tax plus a 10% penalty. So if the average plan participant was in the 15% bracket, they’d pay 15% federal tax, a 10% penalty tax, plus state taxes. They’d probably net around $11,000. The second part is worse: when you cash out, you lose the compounding. So if you were 30 when you cashed out, you would have had, by age 65, $170,825 more in your account by leaving it. Don’t touch the money.

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Idea 43:

Always match the match.

Free. Money. Employers sometimes will match part of your contribution. This is free money. If your employer matches 50% of your first 6% of contributions, you get 9% contributed for your 6%. Oh, and don’t forget that you get pre-tax contributions for less out of your paycheck. So let’s say you make $1,000 a week and your employer matches 50% of the first %. You put in $ 0, which costs you about $4834, and you get $90. Picture $48 (two twenties, a five and three singles). Now picture $90 (four twenties, and two fives). Which would you rather have? Matching is free money. Take every penny of the match. Even if you have to eat some ramen noodles.

34 Assuming a 15% federal rate and 5% state rate.


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Idea 44:

Watch out for vesting.

Employer contributions are great. Your money you contribute is always yours, but sometimes, employer contributions are subject to vesting. This means you are not entitled to the employer contributions for withdrawals until after a period of time. Most of the time, employer contributions vest over a 3-5 year schedule, so you may be vested in a portion each year (like 33%, 66% then 100%). Once you vest, your contributions and your employer contributions are yours.

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Idea 45:

No double-dipping if you have two jobs.

What if you have two employers? Can you participate in two (or more) plans? The answer is you may have more than one plan, but you are subject to the overall limitation for all your plans. So if Louisa works at Aardvark and participates in their 401(k) (with a match) and also at Orange, she can contribute to both plans. However, her contributions are limited to $18,000 if she is under age 50 and $24,000 if she is 50 or over. Employer contributions or matches are not included in the limits. The total limitations on all plans of employee and employer contributions is $54,000 for 2017 ($60,000 if you are 50 or over).


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Idea 46:

You can double-dip if you have a 401(k) and §457(b) at the same employer.

So Idea 45 says you can’t double-dip the max. But you can double dip if you have a 401(k) and a 457(b). A 457(b) is a deferred compensation plan that looks and acts a lot like a 401(k), but is provided by a governmental employer. Some governmental units offer both a 401(k) and 457(b) plan. In this case, you can put the max in both, so $18,000 in your 401(k) and $18,000 in your 457(b) (or $24,000 in each is you are 50 or over). This gives some massive savings opportunities.

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Idea 47:

State tax rules.

A point all 401(k) users should recognize is that the state of residency matters both on the contribution side and on the withdrawal side. In general, you deduct pre-tax 401(k) contributions from state income taxes in the state you earn the money. So if you work in Michigan and are a Michigan resident, you deduct the 401(k) contributions (pre-tax) from your taxes. If you withdraw the funds in Florida as a Florida resident, you do not pay income taxes. This can work in a variety of ways that can make a difference on the state of residence in withdrawal. California, for example is pretty tax-unfriendly, with income taxes as high as 13.3% and an additional 2.5% penalty for early distributions (California appears to be the only state that imposes an early distribution penalty). Thus, If you made a lot of money, you would deduct federal taxes (at about 40.5%) and California taxes (at 13%). Your 401(k) contribution in a high tax state is subsidized by your tax savings. When you withdraw funds, you’d then pay your federal and state taxes. But if you lived in neighboring Nevada, there is no state income tax. You may have worked in California and retired in Nevada, and you save the tax differential. In 201 , nine states (WA, N , AK, WY, SD, TX, TN, FL and NH) have no individual income taxes at all. State of residency matters.


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Note it’s not enough to just say you live in another state (like if you spend three months in Florida and nine months in Michigan). You have to establish what is called legal domicile, which may include:

Residence for a prescribed period of time;

Voting in that state;

Registering your motor vehicle and operator’s license.

All in all, if you might retire to a different state, state taxes matter.

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Idea 48:

401(k) for the self-employed person vs. employee.

A couple of examples of how this can work.

We’ve covered a lot of ground on the 401(k), which we think is a grand method of saving for retirement. It might be useful to run a couple of examples from start to finish.

Stu works for a utility company in Michigan. His employer has a 401(k) with a 4% company match. The company also matches dollar-for-dollar the next 4%. Here are some facts:

Stu’s married. His wife, Sue (who is the same age as Stu), works and makes about $40,000 a year.

Stu starts at the company at age 25. He intends to work until eligible for Social Security, which is age 62.

Stu reads a great book on 401(k)s and decides that he has to max the match, so he contributes 4%. This, added to employer match and company contribution, gives him a 12% contribution.

Stu receives a 2% increase in pay every year.

Stu invests in a balanced target fund and earns a 7% annual return.

Under this scenario, Stu will take 4% out of his paycheck, which would be about $1,800 a year ($150 a month, or about $4.50 a day, after taxes about $3.60 or so) at the beginning (more as he gets raises). At age 62, his account would be worth about $1.2 million. If he takes out 4% (with the idea of leaving back 3% for inflation), he could take about $4,000 a month, plus his Social Security. He replaces about 75% of his income (we’re assuming he makes about $93,000 at the end


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of his career and his Social Security would be about $1,900). He still keeps his balance, which would grow if he continues to achieve a 7% return. Note at age 70½, he’d have to change his distributions to reflect the RMD rules.

Louise is a doctor. She has finished medical school and has just finished paying off her student loans. She now wants to maximize her retirement assets. Here are her facts:

Louise is single and is age 35. She has her own practice (PLLC) and is the only employee.

She makes $300 - $400,000 a year and can save the maximum in her plan. Her CPA tells her she can put away $54,000 and deduct it from her taxes.

She uses $18,000 as her employee contributions and the balance of $36,000 as a contribution from her company. In the year she turns 50, she can put an additional $6,000 away. (We’re going to assume the limits stay the same: they won’t, but it makes the example easier)

She earns 7% annually on her investments.

She intends to practice until she reaches age 70.

With Louise, she’s packing away money, but got a late start due to medical school and student loan repayments. However, in her 35 years of savings, she builds up a mega-plan with over $8.6 million. At a 4% withdrawal rate, she can take $344,000 a year and her balance and income would still grow.

Two examples. Regular saver and a mega-saver. Both reap the rewards of tax-deferred savings.

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Idea 49:

Age 70½ Rules for 401(k). With a 401(k), you have a RMD rule. This rule basically provides that you must start taking distributions from a 401(k) plan by April 1st of the year following the year you turn age 70½35, or if later, the year you retire. So if Maurice is retired and turns 70½ on June 12, 2017, he could take his first RMD during 2017, or wait until April 1, 2018. But if he does that, he will have to take an RMD for both 2017 and 2018 in the 2018 tax year. Normally, taking two distributions in a tax year would have double the tax liability. However, certain times, it might make sense. For instance, if taking the RMD in the first possible year (2017 in my example above) would cause Social Security benefits to be taxable, or if there was some other income in that year. Note that the timing to take the first year RMD gives an opportunity to do some tax planning.

401(k) plans have an important exception to the RMD rule, the rule of ‘retirement’. With an I A you have to take MDs under the 70½ rule. With 401(k), you only are required to take RMDs if you have retired. Note that this exception does not apply if you are a 5% or greater owner. So if Uma is a lawyer with her own practice and is over 70½, then she has to take RMDs even if she still works. If Uma works for a big corporation or law firm and is not a 5% or greater owner, she can continue to contribute and does not have to begin RMDs.

Another question we hear a lot is when to take the RMD during the year. The beginning, throughout the year, or the end? Once you are subject to RMD, you can take them any time during the year. The rule is you must take them, or be subject to a 50% penalty. So the question arises: When is the best time to take the RMD? The market has an upward


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bias, so we ran a hypothetical case with real numbers. We took an IRA with 60% in the Vanguard S&P 500 index fund and 40% in the Vanguard Total bond Index. We used the current Table III36 chart (note that in our example, this chart was only used for distributions in 2003 or after) and the real returns from 1997-2016, presuming that the IRA holder was 70½ at the beginning. There are studies that show the timing of deposits or withdrawals diminishes over time, so we weren’t sure what to expect. Here are the results, assuming you started 20 years ago in a 60% equity/40% bond portfolio:

Beginning of Yr Withdrawal

End of Yr Withdrawal

Monthly Withdrawal

Total RMDs $1,495,954 $1,423,876 $1,449,725Ending Yr Balance $1,142,894 $1,326,618 $1,243,643TOTAL $2,638,849 $2,750,494 $2,693,368

Conclusion? The end of year RMD withdrawal produced less taxable RMDs and left a higher balance than the other two options. In total, using the same investments and calculations, the end of year withdrawal produced a total wealth increased by $111,646 and a balance that was $183,724 bigger. In that period, the option of making an RMD withdrawal at the end of the year created less taxes and produced a higher balance.

Would we always take the RMD at the end of the year? Of course not. If you need the RMD, you’d be better taking it monthly. If you had a designated use for the RMD, like an annual family vacation, or gifts to grandchildren, take it associated with the cash flow. If you had some terminal illness and death looked probable, the RMD would be better off taken before death to help the beneficiaries.

35 I. .C. 401(a)(9)(C)

36 IRS Uniform Lifetime Table

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Idea 50:

If you have employees and have your own business, seek a safe harbor.

This tip relates to folks who own their own businesses and have employees. In general, employers have to meet a variety of tests to have a 401(k) plan, including tests on the amounts groups of employees defer into their plan. The higher-compensated employees have their percentage of deferral limited by the amount the lower-paid group defers. Usually the business owner or key employees want to defer the maximum, so the IRS testing can be troublesome (and expensive).

One solution is a ‘Safe Harbor’ plan. This type of plan makes it easy for businesses to avoid the complex rules and allow maximum deferrals. If an employer has a Safe Harbor plan, they satisfy the nondiscrimination rules. There are two general Safe Harbor tests:

The employer makes a mandatory 3% of compensation contribution for each eligible non-highly compensated employee, or

The employer matches 100% of the first 3% of compensation and 50% of the next 2% of compensation.

All safe harbor contributions must be 100% vested. Lets’ do an example: Wilbur and Ed work together at Ed’s company. Ed makes $120,000 and Wilbur makes $30,000. Wilbur has a hard time making ends meet and can’t afford much to contribute to a 401(k) plan. If Ed is willing to contribute $900 to Wilbur’s account (3%), he can contribute the maximum ($18,000 or $24,000) to his own account and not have to bother with the nondiscrimination tests.


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ConclusionA 401(k) plan is a wonderful planning tool. A 401(k) can allow tax savings, wealth creation, beneficiary protection and even the creation of a family dynasty. We thought the attached 50 ideas would be helpful to you, whether you are an employee with a 401(k) plan at work, a business owner with a 401(k) plan, or a professional advisor. At LJPR Financial Advisors, we like to take a holistic view: To look at the whole picture of how your 401(k) plan integrates with the tax plan and the estate plan. How the investments in your 401(k) correspond to the outside investments. If you would like information on financial planning, suggestions on your 401(k), the tax planning aspects of 401(k)s or the estate planning consequences of 401(k)s, or if you’d like to experience a fiduciary, fee-only advisor, please feel free to contact us. We’ll try to answer any questions you may have.

LJPR Financial Advisors5480 Corporate Drive, #100Troy, MI 48098248.641.7400ljpr.com


LJPR Financial Advisors

1. Capitalism works. People want better lives for themselves and the next generations. Because of that, they will

work hard, invent new stuff, and come up with ways to improve theirs and others’ lives.

2. Abundance, not scarcity. Capitalism can and does create abundance. When something new is created (like cellphones),

someone wins (the cellphone manufacturer and the users), and someone loses (landline manufacturers). But most developments, because they are designed to make our lives better, provide way more than they take away. Cars put buggy-whip manufactures out of business, but created vastly more wealth.

3. Anybody can participate in capitalism. Stocks are cool: you can own one share of Apple and share in Apple’s success. You can buy one

share of an index fund and participate in 500 companies’ success.

4. There’s a whole world. The United States is the greatest country in the world, warts and all. However there are 22 times

more people who live outside of the US. They buy cars, cellphones, food, gas and soap. We need to invest globally to share in global capitalism.

5. Big stocks are big for a reason. Big stocks grew by doing something right (even though they might not still do it right today). We

want some big stocks. It’s like NFL players: they are in the NFL for a reason.

6. Little stocks are the next Apple. All big stocks were small once. A good opportunity for growth is in small stocks. However, small

stocks have more risk. So small stocks are like promising high school football players, midcap stocks are like promising college football players. If you want to have a football team for generations, you need some of all of them.

7. Don’t put all your eggs in one basket. Diversify. This is simple. There is some company right now that has the next big thing. Which

company, we don’t know. But if you own all of the stocks, you own the monster and some duds.

8. Infinity and hell’s basement. This is the “heads I win, tails I lose” fallacy. Berkshire Hathaway went public on 03/17/80 at $290

a share (if you were in the know, you got in back in 1957 for about $7). On January 12, 2017, it was $242,800 per share. That’s about an 83,700% rate of return. GM, Kmart, Enron all define ‘hell’s basement’: They went down 100%. That’s why investing works.

9. Fees Matter. We believe equity returns and fixed-income returns tend to migrate to an average, and that the

costs to provide such returns are a direct drag on performance. Any time you pay a mutual fund company, a broker, a bank or us, it reduces your rate of return. We take into consideration the costs of the manger or funds when selecting an ingredient in a portfolio. Furthermore, we feel sales-based fees (like A, B or C loads on mutual funds) are a further drag, and try to avoid or minimize any transaction-based costs.

10. Season to taste. The last point of the Creed is that you need to stay balanced. Investing is like riding a bicycle,

you need to keep your balance to move forward. We re-set the allocation periodically to reduce risk. Sometimes rebalancing increases return, but it always keep us on track.

Small Good ChoicesTM

Personal Finance for Young Professionals

Work or Retire?

Lump-Sum Distribution

Helping you identify the small things you can do to keep your financial plan on track.

Building Your Plan to Financial Independence

How to Analyze When to Retire if you have a Defined Benefit Plan

Considerations in a Lump-Sum Offer: Financial, Tax and Estate Planning Issues and Analysis

50 Good IRA Ideas

50 Good 401(k) Ideas

46 Good 403(b) Ideas

Estate Planning

Trustee Manual

Making the Best Use of IRAs: Tax, Investment, Estate Planning and Roth Ideas

Making the Best Use of 401(k) Plans: Tax, Investment, Estate Planning and Roth Ideas

Making the Best Use of 403(b) Plans: Tax, Investment, Estate Planning and Roth Ideas

Protecting What’s Yours for the People that Matter

Guidelines for the Successor Trustee of Your Living Trust

The 401(k) is a very powerful tool toward retirement. Where else can you pay yourself, take it off your taxes, invest it, and pay taxes later? What about an employer matching contribution? Free money is a rare sighting, but employer matching contributions are the closest thing to free money that you will encounter.

50 Good 401(k) Ideas is chock-full of ideas we’ve seen in our years in the business. We take a wide range of ideas, from simple ones on how to get more money in the plan (hint: give up a bad habit) to the value of dollar cost averaging, which lets you take advantage of market volatility. In this guide, you’ll see some ideas on:

• How simple small contributions, like $3 a day (a cup of coffee ) can add up to about $122,000 in 30 years.

How new tax rules can let certain plan participants contribute as much as $59,000 in a combination of pre-tax and after-tax contribution (that can later be rolled into a Roth IRA).

• Why plan loans sound good, but may be a bad idea.

• How markets going up and down can help your 401(k).

Plus 50 more ideas on beneficiaries, increasing contributions, rollovers and things you’ll want to know about this powerful tax planning vehicle.

We think you will find many of these ideas useful in building your financial future. Remember, it’s not how much you make, it’s how much you keep.

5480 Corporate Drive, #100Troy, Michigan 48098

248.641.7400ljpr.com

©2017, LJPR Financial Advisors, all rights reserved. Leon LaBrecque, JD, CPA, CFP®, CFA

Making the Best Use of 401(k) Plans

50 Good401(k) Ideas



Reducing Uncertainty®

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