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What’s the Difference Between 401(k) and 403(b) Retirement Plans?

Investing in your retirement early is the best way to ensure financial stability as you age, especially when it comes to understanding various retirement options. Getting started may feel overwhelming — luckily we’re here to help. We help break down the difference between 401(k) and 403(b) accounts, and how they can impact your financial life.

You may already know the value in adjusting your budget to make saving for a rainy day a priority. But are you also prioritizing your retirement savings? If you’re just getting started in the workforce and looking for ways to invest in yourself, 401(k) and 403(b) plans are great options to know about. And, the main difference between a 401(k) and a 403(b) is the company who’s offering them.

401(k) accounts are offered by for-profit companies and 403(b) accounts are offered by nonprofit, scientific, religious, research, or university companies. To understand the similarities and differences between plans in depth, skip to the sections below or keep reading for an in-depth explanation.

How a 401(k) Works
How a 403(b) Works
The Difference Between 401(k) and 403(b)
The Similarities Between 401(k) and 403(b)
5 Ways to Grow Your Retirement Savings
What is a 401(k) and 403(b)

How a 401(k) Works

A 401(k) is a retirement account set up by for-profit employers for employees to contribute before-tax earnings. Employer-sponsored 401(k) accounts give employees the opportunity to build retirement savings in different forms — including company stocks, before-tax earnings, and exchange-traded funds (ETFs).

Each company’s retirement plans may vary on benefits like employee matching, stock options, and more. In addition, you’re able to choose how much you’d like to contribute on a monthly basis. Keep in mind, both 401(k) and 403(b) plans have a yearly limit of $19,500 with your employer matches. Plus, most retirement funds have required minimum distributions (RMDs) by the time you turn 70. This essentially means you have to take a minimum amount of money out each month whether you want to or not.

In most cases, employers will offer 401(k) matching to encourage consistent contributions. For example, your employer match may be 50 cents of every dollar you contribute up to six percent of your salary. For example, with this employer match on a $40,000 salary, you would contribute $200 and your employer would contribute an additional $100 each month. This pattern would continue until your annual contributions hit $2,400 and your employer contributes $1,200.

Employee matching is essentially free money. You’re monetarily rewarded for your retirement payments. Be sure to pay attention to vesting periods when setting up your employer match. Vesting periods are an agreed amount of time you need to work at a company before you receive your 401(k) benefits. For example, some companies may require you to work for their team for a year before earning retirement benefits. Other employers may offer retirement benefits starting the day you start working with them.

How a 403(b) Works

A 403(b) is a retirement account made by employers for tax-exempt, charitable nonprofit, scientific, religious, research, or university employees. Organizations that qualify for 403(b) accounts include school boards, public schools, churches, hospitals, and more. This type of account is also known as a tax-sheltered annuity plan — they allow pre-tax income to be invested until taken out.

Employers that offer 403(b) retirement plans may offer a pool of provider options that undergo nondiscrimination testing. This allows employers that qualify for this account to shop around for plans that offer the best benefits and don’t discriminate in favor of highly compensated employees (HCEs). For instance, some 403(b) accounts may charge more administrative fees than others.

Employers are able to offer employee matching on 403(b) accounts if they decide to. To cut costs for nonprofit companies, 403(b) retirement plans generally cost less than 401(k) accounts. Costs associated with starting up these accounts may not affect you, but it may affect your employer.

Account Type 401(k) 403(b)
Yearly Contribution Limit $19,500 $19,500
Employer-Issued Packages For-profit employers:
Corporations, private establishments, etc. and sole proprietors
Non-profit, scientific, religious, research, or university employers:
School boards, public schools, hospitals, etc.
Minimum Withdrawal Age 59.5 years old 59.5 years old
Early Withdrawal Fees 10% penalty, tax, and additional fees may vary 10% penalty, tax, and additional fees may vary
Source: IRS.org

The Differences Between 401(k) and 403(b)

Both a 401(k) and 403(b) are similar in the way they operate, but they do have a few differences. Here are the biggest contrasts to be aware of:

  • Eligibility: 401(k) retirement plans are issued by for-profit employers and the self employed, 403(b) retirement plans are for tax-exempt, non-profit, scientific, religious, research, or university employees. As well as Hospitals and Charities.
  • Investment options: 401(k)s offer more investment opportunities than 403(b)s. 401(k) accounts may include mutual funds, annuities, stocks, and bonds, while 403(b) accounts only offer annuities and mutual funds. Each employer varies in retirement benefits — reach out to a trusted financial advisor if you have questions about your account.
  • Employer expenses: 401(k) accounts are generally more expensive than 403(b) accounts. For-profit 401(k) accounts may pay sales charges, management fees, recordkeeping, and other additional expenses. 403(b) plans may have lower administrative costs to avoid adding a burden for non-profit establishments. These costs vary depending on the employer.
  • Nondiscrimination testing: This form of testing ensures that 403(b) retirement plans are not offered in favor of highly compensated employees (HCEs). However, 401(k) plans do not require this test.

The Similarities Between 401(k) and 403(b)

Aside from their differences, both accounts are set up to aid employees in retirement savings. Here’s how:

  • Contribution limits: Both accounts cap your annual contributions at $19,500. In the event you contribute over this limit, your earnings will be distributed back to you by April 15th. If you’re under your retirement contributions by the time you’re 50 years old, you’re allowed to make catch-up contributions. This means that, if you’re eligible, you can contribute $6,500 more than the yearly contribution limit.
  • Withdrawal eligibility: You must be at least 59.5 years old before withdrawing your retirement savings. In the case of an emergency, you may be eligible for early withdrawal. However, you may be charged penalties, taxes, and fees for doing so.
  • Employer matching: Both retirement account options allow employers to match your contributions, but are not required to. When starting your retirement fund, ask your HR representative about potential benefits and employer matching.
  • Early withdrawal penalties: If you choose to withdraw your retirement savings early, you may be penalized. In most cases, you need a valid reason to withdraw your funds early. Eligible reasons may include outstanding debt, bankruptcy, foreclosure, or medical bills. In addition, you may be charged a 10 percent penalty fee, taxes, and other fees. During a downturned economy, as we’ve seen with the COVID-19 pandemic, fees may be waived.

5 Ways to Grow Your Retirement Savings

5 Ways to Grow Your Retirement Savings

Contributing to a 401(k) or 403(b) can help grow your investments at a reduced risk. You’re able to grow your non-taxed income to put towards your future goals. The more you contribute, the more you may have by the time you retire. Here are a few tips to get ahead of the game and invest in your financial future.

1. Create a Retirement Account Early

It’s never too late to start a retirement account. If you’re currently employed, but haven’t set up your retirement account, reach out to your HR representative. Ask about retirement plan options and their benefits. When employers offer retirement matches, consider contributing as much as you can to meet their match.

2. Set up Monthly Automatic Contributions

Save time and energy by setting up automatic contributions. You may feel less interested in contributing to your retirement as your payday approaches. Taking time to set up a retirement fund and budgeting for this change may be holding you back. To meet your retirement goals, consider setting up automatic payments through your employer. After a while, you may not even notice the slight budget adjustment.

3. Leverage Employer Matching

Employer matching is essentially free money. Employers may put money towards your future for nothing but your own contribution. This encourages employees to consistently put money towards their retirement savings. Not only are you able to earn extra money each month, but this “free money” will grow with interest over time. If you can, match your employer’s contribution percentage, if not more.

4. Avoid Early Withdrawal

Credit card balances, student loans, and mortgages can be stressful. Instead of withdrawing early from your retirement fund to pay for these, consider other debt payoff methods. If you’re eligible to withdraw from your retirement early, you may face penalty fees, taxes, and administrative expenses. This may hinder your savings potential or push back your desired retirement date.

5. Contribute Your Future Raises and Bonuses

If you’re saving less than $19,500 to your retirement fund this year, consider contributing more. If you earn a bonus or a raise, stick to your current budget and consider increasing your contributions. Ask your employer to increase your retirement payments right before you receive a bonus or raise. The more you contribute, the more interest you’ll accrue over time.

Whether your retirement funds are established through a 401(k) or a 403(b), these accounts offer you the chance to build your financial portfolio. Consistently funding your retirement account may better your financial plan and set you at ease. As your contributions age, so do your interest earnings. You’ll be able to make money on your pre-taxed income and set your future self up for success. Get started by checking in on your budget and carving out a specific amount to put towards your retirement each month.

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Mint Money Audit: Managing Money When You Make Enough

Anna’s email requesting help with her finances began with a unique confession.

“Farnoosh, my money problem garners little sympathy,” the 32-year-old wrote. “My issue is that I make too much of it.”

Now, THIS is interesting, I thought. I immediately followed up with many questions.

Here’s what I learned through our conversation:

The Denver-based Mint user earns $220,000 per year as an engineer. Anna’s also benefited from years of big bonuses and her net worth, not including her home equity, is close to a million dollars.

After paying taxes and health benefits and maxing out her 401(k), Anna takes home between $8,000 and $10,000 each month. Her expenses mainly consist of a $1,200 mortgage payment, car insurance, gas, food and utilities, amounting to maybe a few thousand dollars per month.

The rest either goes into savings where she stashes about $5,000 to $10,000 for unexpected expenses or into a brokerage account where she has roughly $800,000 invested. A wealth management firm manages that portfolio and charges, she says, an annual 1% fee.

Anna has no consumer debt, besides her mortgage, which amounts to about $338,000. It’s a 30-year fixed rate loan with a 2.85% interest rate. The home has appreciated in recent years with about $100,000 in equity (including Anna’s initial 20% down payment).

So, what is the problem, exactly?

“My big worry is that I don’t have the habits to manage money well,” Anna told me. Her sizeable bank balance has her feeling financially free, although she worries about getting carried away with spending sometimes.

“When I see money in my bank account I rationalize that ‘yea, that vacation is doable. I don’t hold back on the things that may seem frivolous,’” she says. But It seems she wants more financial grounding and to be able to evaluate expenditures and price tags more critically.

Anna’s situation may be unique, but I think relatable in the sense that we all would like to feel more thoughtful with how we spend, save and invest. And while some may do well with earning money, it should not be assumed that they can also manage that money well.

I applaud Anna for wanting to be sure that, even with an impressive net worth, she is actually making wise financial decisions.

Here’s my advice.

Take a Deep Breath

No need to panic when spending on things and experiences that you enjoy. From what I can tell Anna’s prioritizing the serious financial stuff first like contributing the max to her 401(k) and saving all of her annual bonuses in a brokerage account. She has no credit card debt and pays all her bills on time. That’s terrific.

Sometimes we just want to hear that we’re on the right track with our money and I have a very simple way to measure this:

If you manage each paycheck by saving, investing and paying all your bills first, then by all means, you’re entitled to have fun with whatever is left without any fear or regret. Am I right?

If you’ve done the good work of taking care of your future with your money, then don’t hesitate treating yourself and others with the remaining funds today. Splurge away and enjoy your hard-earned money. And remember to enjoy the moment.

Ditch Your Money Managers

I do think Anna could find a better home for her investments.

Paying one percent of her managed assets to this firm may not seem that high of an annual fee. But when you think about Anna’s balance of $800,000, that’s $8,000 this year. What about next year and the decades after that as she contributes more to the account? That fee, compounded over the next 30 years, will amount to – conservatively – over one million dollars. Ouch.

That doesn’t even factor in the expense ratios for each mutual fund that’s in her portfolio.

If all Anna seeks is investment assistance, she may be better suited stationing her money with an automated wealth platform or robo-advisor where her money is largely invested in low-fee index funds or exchange-traded funds (ETF) and the portfolio management fee is typically 0.50% or less.

Of course, breaking up with your financial advisor is not always so simple. It’s especially hard for Anna, as she equated her money managers to “father figures.”

If I were Anna, I would just explain to my advisors over email something like, “I want be more conservative with my money and that includes being extra mindful of the various fees that I’m paying. To that end, I’ve decided to manage my money more independently. I’m sure you can understand. I appreciate your help over the years. Please let me know next steps.”

Planners know the drill and are used to having clients end relationships.  Stay strong. Nobody can really argue with the fact that saving money is a good thing!

Establish Short and Long Term Goals

Anna wants to spend and save with more conviction. I think having some concrete, tangible goals can help.

For example, she shared that she’d like to get married, have a family and own two homes – one near her office downtown and another in the mountains as a getaway.

So, the next step is to understand what these goals cost. What are, say, the going prices on a vacation home in her state? How much might she want to stash in a separate account for the future down payment on this property? Knowing the underlying costs of her goals can better direct how much to spend elsewhere.

Next time she’s planning a vacation, she may be more inclined to price compare or hunt down better deals, as opposed to just judge whether the trip is financially “doable” by the amount of money in her bank account. Now she’ll have the image of that second home and its costs and will make a more informed choice.

Contribute to a Cause

Last but not least, when you feel you make more than enough, like Anna does, this is a great opportunity to be extra charitable. If she’s seeking a way to give her money more meaning and feel purposeful in her financial life, this is a truly wonderful way to go about it. Discover a cause that you’re passionate about and make an impact as a volunteer and donor.

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at farnoosh@farnoosh.tv (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

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3 Reasons to Set Up a Donor-Advised Fund to Maximize Your Charitable Tax Deductions

Using donor-advised funds is a more advanced tax strategy that has gotten more popular recently with the introduction of the Tax Cuts and Jobs Act (TCJA) in February 2020. The TCJA nearly doubled the amount of the standard deduction, which makes it less advantageous to itemize deductions such as charitable contributions. For people with a lot of charitable contributions, donor-advised funds are one option to still get a deduction for charitable contributions.

What is a donor-advised fund?

A donor-advised fund (DAF) is a registered 501(c)(3) charitable organization that accepts contributions and generally funds other charitable organizations. While the concept of a donor-advised fund has been around for nearly 100 years, they were typically only used by the ultra-wealthy. And while it is true that donor-advised funds are still not going to be useful for the vast majority of people, recent tax law changes have made their use more prevalent.

You can set up a donor-advised fund with most brokerages, including Fidelity, Vanguard, and Bank of America. You can donate cash, securities, or other types of assets to the DAF. The exact list of assets eligible for donation depends on the brokerage. After you have contributed, you can then make charitable contributions from the balance of your account.

You can maximize your charitable tax deductions in one year

One common reason that people set up donor-advised funds is to maximize their charitable tax deductions in a particular tax year. To show why this can be beneficial, I’ll use an example:

Our example family files their taxes married filing jointly and has regular charitable contributions of $20,000 per year. The standard deduction in 2020 for married filing jointly is $24,800. Because their amount of charitable deductions is less than the standard deduction, they may not see any tax benefit from their charitable contributions (depending on their amount of other itemized deductions). In 2021 they again plan to contribute $20,000 to charitable organizations and again are unlikely to see any tax benefit from doing so.

Now consider this same family now decides to set up a donor-advised fund in 2020. They have extra money sitting around in low-interest savings or checking account or in a taxable investment account. So they set up a donor-advised fund in 2020 and fund it with $40,000 in cash, stocks, or other assets. They are eligible to take the full $40,000 as an itemized deduction, even if they only use $20,000 to donate to the charity of their choice. Then in 2021, they can donate the remaining $20,000 to their preferred charity. They will not be able to deduct any charitable contributions in 2021 but can instead take the raised standard deduction amount.

You may be able to deduct the full value of stocks or other investments

Another reason you might want to set up a donor-advised fund is that you may be able to deduct the full value of stocks or other investments. Again, I’ll use an example to help illustrate the point.

Let’s say that you have shares that you purchased for $20,000 that are now worth $50,000. Many charities, especially smaller organizations, are not set up to accept donations of stocks or other investments. So if you want to donate that $50,000 to charity, you may have to liquidate your shares. This will mean that you will have to pay tax on the proceeds.

With a donor-advised fund, you can donate the shares to your fund and deduct the full fair market value of your shares. Then the fund can make the contribution to the charity of your choice.

Donate a wide range of assets

Another benefit to setting up a donor-advised fund is the ability to donate a wide range of different classes of assets. As we mentioned earlier, many charities are not set up in such a way to be able to accept non-cash donations. While the exact list of assets that a donor-advised fund can accept varies by the firm running the fund, it generally will include more types of assets than a typical charity.

Why you might not want to set up a donor-advised fund

While there are plenty of advantages to setting up a donor-advised fund, there are a few things that you might want to watch out for.

  • It’s definitely more complicated than just making charitable contributions on your own. You may find that the tax savings are not worth the extra hassle.
  • On top of the added layer of complexity, most firms with DAFs charge administrative fees that can cut into your rate of return.
  • You may be limited on the charities that you can donate to. Each donor-advised fund typically will have a list of eligible charities. So you may find that a charity that you want to donate to is not available.
  • You also lose control over the funds that you donate – the donation to the fund is irrevocable, meaning once you’ve donated to the fund you cannot get the donation back. While most advisors state that they will donate the money as you direct, they are not legally required to do so.
  • The money in a DAF is invested, so it may lose value. That means that the amount you were hoping to donate may be less than you were anticipating. You also typically have a limited range of investments available for your investment, and those funds also often come with fees.

It’s also important to keep in mind, the annual income tax deduction limits for gifts to donor-advised funds, are 60% of Adjusted Gross Income for contributions of cash, 30% of AGI for contributions of property that would qualify for capital gains tax treatment; 50% of AGI for blended contributions of cash and non-cash assets.

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What Is an Infopreneur: How to Ace the Modern Day Side Hustle

Over the course of the past two decades, the rise of the infopreneur has been exponential. Infopreneurship is a valuable way to earn passive income for anyone who is highly knowledgeable in one area. The best part is that anyone can be an infopreneur — although it won’t happen overnight. It might be the perfect side hustle for you.

What is an Infopreneur?

In short, an infopreneur is an entrepreneur who specializes in the sale and distribution of information and expertise. As soon as experts across various niches realized they could create “information products” and sell their knowledge online, infopreneurship took the Internet by storm.

Infopreneur pioneers like Tony Robbins and Amy Porterfield have paved the way for a generation of aspiring entrepreneurs in the information age. Robbins and Porterfield are just two examples of infopreneurs capitalizing on the desires of people in their respective niches — self-improvement and online marketing. Even though there is an immense amount of dedication required to become an authority in your niche, being a respected expert pays dividends in the long run.

Quote by Neil Patel about mastering your niche

Working towards becoming a thought leader sets you up for long-term financial success, but it doesn’t happen overnight. Creating your own website, online course, podcast, ebooks, or YouTube channel has never been easier, but these things still take time.

5 Reasons Why It Pays to Be an Infopreneur

Infopreneurship is one of the fastest ways to reach a massive number of people on the Internet with your expertise. To start, you have to choose how you’ll provide valuable free information. Next, you need to build a loyal audience and plan how you’ll eventually charge people for access to premium content. Being an infopreneur can be super rewarding — take a look at some of the perks:

1) You Contribute Real Value to People’s Lives

No matter your area of expertise, chances are that you’re ultimately helping others. This is a win-win situation because you’re earning extra cash while enjoying the gratification of helping someone improve in an area of their life.

2) You Have More Flexibility Working for Yourself

Infopreneurship can be the perfect side hustle. You can do it as a part-time gig as you work a full-time job, go to grad school, or juggle parenting responsibilities. This flexibility and the low stakes of infopreneurship give you a chance to achieve work-life balance. It’s empowering to be an infopreneur because you’re using your knowledge to produce wealth and ensure your own economic security.

Quote by Stephen R. Covey about financial independence

3) You Don’t Experience as Much Pressure as Other Entrepreneurs

Selling information online requires a small initial investment and it usually starts as a solo venture. Traditional entrepreneurship typically involves hiring at least an assistant, and there is a ton of pressure when it comes to selling time-based services or physical products. Meanwhile, a resourceful infopreneur can just outsource tasks as necessary.

4) You Can Strategically Streamline Your Workload

You will have to make the effort to do the work upfront to create your information products, set everything up, and market them, but once it is done, you can enjoy the benefits without having to keep up with tedious tasks. This provides a sense of freedom and allows for creativity in your work.

5) You Control How You Scale the Business

If you know your numbers, you can usually scale your business quickly as an infopreneur. Once you fully understand your target market, how to reach them, and how to present your material in a way that they like, you’re ready to scale. We’re living in the peak attention economy and information age, so the demand for your knowledge already exists.

Take a look at our visual guide below for more tips on stepping into the role of infopreneur to give both your bank account and your professional reputation a boost.

Infographic on the art of being an infopreneur

The concept of an infopreneur isn’t new, but it’s definitely more widespread than it was 10 years ago. The recent surge in popularity is likely connected to the increase in people working from home and freelancing more than ever before.

As an infopreneur, you can be your own boss without having to hire staff, invest in office space or equipment, or worry about other risky financial investments. If you’re looking for a way to keep your budget in check, becoming an infopreneur might be the right move for you.

Sources:

Small Biz Genius | Business Know-How | Quicksprout | GoodReads

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