Keeping track of your retirement plan contributions

Having a plan or road map as you accumulate your wealth is an extremely important first step but sometimes if you do not have a working knowledge of some of the investment vehicles that are available then it is prudent to seek help.  As we grow our needs change and with these life-changes the necessity to review your financial situation on a yearly basis makes more sense at the time we prepare our tax returns. 

While IRAs (Individual Retirement Accounts), Roth IRA, SEP IRA and Simple IRA are very useful as retirement accumulation vehicles, they come with a set of complicated rules and regulations that one has to abide by if one is to make use of the intended benefits.  Take for an example if in prior years one might have been eligible to make contributions to an IRA it is not a given that you can continue to do so in future years without checking your eligibility.  It is essential that you confirm your eligibility to make contribution in any given year before the funds are deposited into your IRA account and also that the corresponding deduction is appropriately reported on your tax return.   The Internal Revenue Service (IRS) permits you to correct erroneous contributions through a request for a withdrawal of excess contribution which you can make through your broker or mutual fund.  Whether this is done prior to filing your tax returns for the tax year in question or after and any corresponding earnings are reported in the tax year of the correction.  

While correcting over-funding might seem unnecessary work at first, it quickly becomes a costly oversight when taking the distribution out of your retirement you receive a Form 1099-R and the stated taxable amount is a lot higher than what you recall.  The IRS will require that you show proof of what amount is taxable and what amount is not taxable, failing to do this will result in the full amount being taxable.  No one wants to pay more taxes than is absolutely necessary but worse still you do not want to pay taxes twice because you failed to keep your adequate records.  

Items of special note:

IRA - Individual Retirement Account

SEP IRA

Roth IRA

Simple IRA

Form 1099-R

Return of Excess contribution

ACA - Individual Mandate vs Employer Mandate - who is responsible for your health insurance coverage?

Much has been said about the Affordable Care Act but it seems an injustice that the flood of information has left an uncomfortably high portion of society clueless at best.  For the average person they know the basics and how they interpret the information really depends on what side of the political isle one places themselves.  Take for an example the employer mandate was extended for another year but the individual mandate remains in play.  Some unfortunately read this as though they as an individual need to wait for their employer to decide.  This is sadly incorrect.

As individuals when it comes to issues that affect us personally sometimes it is more beneficial to look at things outside the political purview.  After all, neither your congressman nor your senator has an intimate knowledge of neither your finances nor your health.  Since Health insurance, like any other forms of insurance, is a vehicle used for risk management.  Why then would you give that much power to someone who has a macro view of your needs.  The only difference between the regular insurance we purchase for our houses and cars is that there is certainty that you will definitely use your health insurance to one extent or another.

I have a friend who had one of those catastrophic health plans– which in my world means “I have a card and that’s about it” (thankfully that was cancelled for not meeting basic needs).  With this plan you are not passing the risk onto to anyone – you are literally keeping all the risk but paying someone for a false sense confidence of coverage.  While some use the excuse that they are not buying into ACA because they are not comfortable with certain parts of the bill – seriously you will deny yourself health insurance coverage because you have issue with some woman down the street getting contraceptives? But all is not lost for you for it is still possible to buy health insurance outside the exchange.  Insurance Agents - National Association of Health Underwriters

Then others give the excuse I am waiting for my employer to make a decision – this is where ignorance reigns supreme.  So you are literally opting not to have coverage until your employer has had the chance to see how they can possible avoid offering you health insurance coverage.  If only we could concentrate on the things that affect us directly and partially listen to the things that irrelevant.  It is blatantly obvious that there is a huge amount of information out there – some information misguides people either by undermining the benefits or overselling benefits.  Some information is helpful but nonetheless all of it can be a systems overload for an ordinary person on the street to understand.  Nice thing about living in this digital age you can total streamline your search to only the specific things that matter to you.

Saving for retirement

A common mistake made by many is to think you need a certain amount of income before you can start saving for retirement.  Some will say “you need money to make money”; others use the excuse that they barely have enough to live on now.  But nothing could be further from the truth. When we are younger we have more flexibility on our ability to survive.  During retirement years there are too many variables like health that one needs to contend with.  Like a baby learning to walk, with saving you need to start with small concentrated steps, even though they may be unsure steps it is better start basic and build on it.  Even if you feel you are living from hand to mouth all of us have some room within our budget that one can work with – luxury items we can chip away at. 

With the benefits of “compound interest” even if you save say $10,000 between the age of 20 and 30,  stopping when you are starting your family, that amount if left untouched until your retirement will have grown to approximately $92,000, working with hypothetical interest of 6%.  The idea is that you are leaving any earnings along with the principle within the account.  Starting later will of course mean less money at your retirement but every penny counts.

There are many types of retirement vehicles available for one's use, depending of course on your income level, as well as how you earn it.  In prior years Defined Benefit plans were very popular in the private sector, along with your Social Security Benefits one was guaranteed of a comfortable retirement income.  Volatility, high employer costs coupled with responsibility for uncertain obligations have contributed to a significant move from Defined Benefit Plans to Defined Contribution Plans.  For the majority in the USA we have the 401(k) Plans, which are employer sponsored but also afford one the ability to elect a certain amount annually to be deferred into an account up to $17,500 but not more 100% for actual income earned.  For those 50 and over additional $5000 catch up provision is allowed.  Now just because the maximum is $17,500, it does not mean it’s that amount or nothing.  One should not be intimidate by the high amount but instead should defer an amount more in line with one’s own earnings.

It is important to realize that even if it is only $25 per pay period that you can afford, then that is where you begin.  Try this for at least a year or two.  You can then review on an annual basis and I can assure you, once you see how much you put away with the tax benefit of reducing your current taxable income you will increase the deferred amount.  Some employers will match your contribution and this will only increase the amount you are putting away.

The same concept can be applied with Individual Retirement Accounts (IRAs) but in this case the maximum you can put away is $5,500 for the 2013 tax year (catch up provision for those 50 and over being $1,000).  IRAs are privately held and have nothing to do with your employer.  You have until April 15th 2014 to make any IRA contributions - whether it is a traditional IRA or Roth IRA. The main difference between these being that the traditional IRA is funded with pre-tax tax money and Roth IRA is after tax, as well as all growth if withdrawals are qualified.  (Will cover these two in more detail over the next couple of weeks).   As long as you have earned income you can open an IRA account but the IRS does stipulate income limitations on its tax deductibility.   

For those with a lower income there are further retirement saving benefits worth taking into consideration prior to filing your 2013 tax returns.  The IRS (Internal Revenue Service)offers Saver's Credit, which can be up to $1,000 of tax credit for retirement savings of $2,000 for those within the stipulated AGI (adjusted gross income).  In short you are being paid for saving your own for retirement.