Here’s What To Think About When Deciding What To Do With Your Old 401k

April 11, 2025

If you have an old 401(k) account from an old job (or maybe even 2 or 3), you’re not alone – the number of people that work (or plan to work) for the same company for their entire career continues to shrink and that trend appears likely to continue. That doesn’t mean you shouldn’t be taking advantage of the opportunity to save in a tax-advantaged way through payroll deductions at each job. It just means you could have one more loose end to tie up when you switch jobs.

There are several options for your old 401(k) money – for some people the answer may be obvious, but for others a bit more nuanced. Let’s take a look at those options, along with the pros and cons of each to see which makes the most sense for you.

Option 1: Leave the account where it is

Many companies will allow you to keep your retirement savings in their plans after you leave your job (although most require your balance to be above a minimum level, typically $5,000). If you haven’t taken any action yet because you are deciding what to do next, this “default” option may work out fine as there are some good reasons to leave your account right where it is. The good news is that you can always change your mind and move it at a later time.

Reasons you’d choose this option:

  • Separation of service rules: If you leave your job in or after the year you turn 55, you are able to take withdrawals from your current 401(k) account without penalty prior to reaching age 59 ½, which is the normal age to access retirement savings without penalty.
  • Investment options: If you like the investment options within your former employer’s plan, you can stick with that familiarity. In some cases, that plan may offer unique investment options that you may not be able to hold in an IRA or your current job’s plan.
  • Lower costs: Many large employer-sponsored plans offer low-cost institutional share class mutual funds and index funds, which are generally less expensive to own than what’s available in individual accounts. While saving 0.5% each year on mutual fund expenses may not sound like much, it can really add up over a long period of time.

The thing to look out for:

  • Some employers opt to stop covering specific administrative fees for the accounts of former employees, so keep your eye on your statements after you’ve left, and if you start seeing a fee, that would be a reason to explore options 2 or 3.

Option 2: Roll it into your new employer’s plan

Rolling your account into the 401(k) plan with your new employer likely includes the same benefits as keeping it with the old plan. However, old retirement accounts are often neglected over time since you are no longer making contributions to the plan. Rolling (or transferring) the money into the new plan can offer some additional advantages as well.

Reasons you’d choose this option:

  • Simplicity: Having all your retirement savings together in your new plan could make it easier to track your progress while having everything under one log-in.
  • Ability to borrow: While borrowing from your retirement plan while still working is not usually recommended, many plans allow you to take 401(k) loans. Often this loan has a reasonable interest rate, and you pay the interest back to yourself, not the employer or 401(k) company. Rolling your old plan into your new one can give you a larger base from which to borrow should the need arise. Be careful though! Borrowing from your 401(k) comes with risk to your retirement and must be considered very carefully.

It should be noted that you will want to do this as a direct rollover, moving money directly from plan to plan. This makes your life easier by completing the rollover while also making sure the move does not become taxable.

Option 3: Roll over to an Individual Retirement Account (IRA)

Much like moving the funds to your new employer’s plan, you can instead roll the money directly into an IRA. The pre-tax money would be deposited into a traditional rollover IRA and Roth funds into a Roth IRA. Alternatively, you could roll pre-tax money into a Roth IRA, though it’s important to consider that rollover conversions of pre-tax money are taxed as income.

Reasons you’d choose this option:

  • Control: This option allows you to have the account at the financial institution of your choice. Many people like this idea as they feel they have more control of the funds and may have a larger selection of investment options beyond the limited menu of choices their employer’s plan may offer.

Reasons to NOT choose this option:

  • No separation of service rules: Once you move your money out of your 401(k) and into an IRA, you lose the ability to access the funds penalty-free if you left your job at or after age 55 – you’d have to wait until 59 ½.
  • Possible higher costs: Unless you work for a very small company with a limited 401(k) plan, your costs are likely to be higher overall with an IRA than with an employer-sponsored plan that can take advantage of institutional pricing.
  • The pro-rata rule for pre-tax IRAs: If you’ve ever considered using the “back-door” Roth IRA strategy, be aware that the presence of a pre-tax IRA can trigger tax consequences due to the pro-rata rule. Make sure you’re clear on how that works if you anticipate a higher income along with a desire to continue saving into a Roth IRA.

Option you should avoid unless absolutely necessary: Taking the money as a cash distribution

This is the least appealing option and should only be considered in the most extreme cases of financial hardship. Cash distributions are fully taxable and may be subject to a 10% penalty if you are under age 59 ½. This option is especially tempting when you have a small balance, but do your best to avoid it. Those small amounts add up!

So, if you are considering a job change – or have already made a change – consider all of your options in terms of the retirement account(s) you have left behind. And remember, you have time to make this decision, assuming your account balance exceeds the minimum rules.

NUA – One Overlooked Benefit Of Employer Stock In Your 401(k)

April 11, 2025

Should you own stock in your current or former employer? There are mixed opinions out there regarding the risk of holding too much stock in the same company that provides your paycheck, but before you liquidate a large holding in your 401(k), keep reading.

One little known benefit of holding company stock in a 401(k) plan is the ability to have the “net unrealized appreciation” of the stock or “NUA” taxed at a lower tax rate. Normally, when you take money out of a traditional 401(k), it’s taxed at your ordinary income tax rate. However, the gain in employer stock can be taxed at the lower long term capital gains rate if you meet several conditions:

Here’s how NUA works

1) You have to reach a triggering event. This can be death, disability, separation from service, or reaching age 59 ½. You can’t take advantage of this at any time. Most people take advantage of it upon retirement or after.

2) You have to take a lump sum distribution of the entire account. You can’t just withdraw the shares of stock. However, you can choose to roll the rest of the money into an IRA or another retirement account, while moving the company stock shares to a regular brokerage account.

3) The employer stock has to be distributed “in kind.” Basically, this means you can’t sell the shares and then withdraw the cash as you would typically withdraw money from a 401(k). Instead, you have to transfer the shares of stock into a brokerage firm.

If you meet the criteria above, then when you do a withdrawal of the company stock, you will pay ordinary income taxes on the cost basis of the stock (essentially the value of the stock when you purchased or received it) at that time. You may choose to hold the stock or liquidate some or all of it at that point. When you do so, you’ll pay taxes at the lower long term capital gains rate on any growth in the value of the shares beyond what you paid for them (regardless of how long you actually held them).

Be aware that withdrawing a large amount of stock could push you into a higher tax bracket for that year, so you’ll want to be strategic about when you make this move. However, removing the stock from your retirement account would also reduce the amount of required minimum distributions you’d have to take starting at age 73. (Incidentally, the capital gain would not be subject to the 3.8% Medicare surtax on investment income, but the stock would not benefit from a step-up in basis when you pass away.)

It’s about more than just the taxes

As the saying goes, don’t let the tax tail wag the dog. This is not a reason to load up on company stock. After all, individual stocks are always a lot riskier than diversified mutual funds since an individual stock can go to zero and never recover. This is even more true when it’s the company that your job is tied to. A good rule of thumb is to never have more than 10-15% of your portfolio in any one stock, especially your employer’s.

That being said, it could be a good reason to keep some money in company stock, especially if you already have shares that have appreciated quite a bit. In fact, this is one of the main reasons you may not want to roll a former employer’s retirement plan into an IRA or a new retirement plan while still working.

How to decide whether NUA is right for you

You can calculate the value of doing an NUA distribution versus an IRA rollover here. If you’re still not sure whether this makes sense for you, see if your employer offers access to an unbiased financial planner who can help you with what can be a complex decision, or consult your own financial advisor if not.

What To Do With Your Old Employer’s Retirement Plan

March 26, 2025

Have you ever had to leave a job and couldn’t decide what to do with your retirement plan? I recently got a Helpline call from a woman who was about to leave her company and had to make that exact decision. Let’s look at the pros and cons of the options:

Option 1: Cash it out

This is generally the worst decision since you have to pay taxes on anything you take out and possibly a 10% penalty if you’re under age 59 ½ and left your employer before the year you turned age 55. If you’re still working at a new job, the tax rate you pay is likely to be higher than it would be if you waited until retirement and if the balance is large enough, it could even push you into a higher tax bracket. You also lose the benefits of future tax-deferred growth.

That being said, if you absolutely need the money to get caught up on bills or to pay off debt, it may be your only choice.

Option 2: Roll it to an IRA

This option generally provides the most flexibility. It allows you to continue deferring the taxes while giving you more investment options than you may have in your current retirement plan. You also have the ability to use the money penalty-free for education expenses and for a first-time home purchase (up to $10k over your lifetime) or to convert it into a Roth IRA to grow potentially tax-free.

Option 3: Roll it into your new employer’s plan

If you want to keep things simple and consolidate everything into one account, this may be the choice for you. Just make sure the new plan allows it. It can also be the best choice if the new plan provides unique investment options that you’d like to take advantage of with this money or if you’d like to have the option of borrowing against it.

Option 4: Leave it where it is

As long as you have at least $5k in the account, most plans will allow you to keep the money there. If you have company stock or any unique investment options that you’d like to keep, this may be the best option for you. It also gives you time to decide during what is likely to be a hectic time in your life. After all, you can always roll it into an IRA or your new employer’s plan later. Just keep in mind that having too many retirement accounts in different places can make it harder to manage them.

In this particular case, the woman decided to simply leave it where it was because she had turned 55 and wanted to have the option to take penalty-free withdrawals if she needed to. If she rolled it into an IRA or a new employer’s plan, she would have had to wait until age 59 ½ to avoid the penalty.

That doesn’t mean it’s the best choice for everyone. Every situation is different. The key is to understand your options so you can make the best choice for you.

Commonly Used Tax Deductions

February 10, 2025

Income taxes are one of our largest expenses. They can also become one of our biggest financial planning stressors. While you can’t avoid paying taxes, you can try to minimize the total amount of income taxes that you owe. By paying less in taxes, you’ll have more money to save for your goals. The good news is that you can use popular tax deductions to help reduce your tax bill.

How income tax deductions work for you

Taxpayers can choose between the standard deduction, a fixed amount that reduces income automatically, or itemized deductions, which allow you to deduct specific expenses like mortgage interest, property taxes, and medical costs. The key is to determine which option provides the greatest tax savings, helping you keep more of your money to put toward your financial goals.

Standard Deduction 2024 (Returns Due April 2025)

Filing Status2024 Standard Deduction
Single$14,600
Married Filing Jointly$29,200
Qualified Widow(er)$29,200
Married Filing Separately$14,600
Head of Household$21,900
Note: If another taxpayer can claim you as a dependent in 2024, your standard deduction is limited to the greater of $1,300, or your earned income plus $450, up to the full standard deduction for your filing status.

Standard Deduction 2025 (Returns Due April 2026)

Filing Status2025 Standard Deduction
Single$15,000
Married Filing Jointly$30,000
Qualified Widow(er)$30,000
Married Filing Separately$15,000
Head of Household$22,500
Note: If another taxpayer can claim you as a dependent in 2025, your standard deduction is limited to the greater of $1,350, or your earned income plus $450, up to the full standard deduction for your filing status.

Additional Considerations:

  • The standard deduction is higher for those over 65 or blind, and even higher if you meet those conditions and your filing status is Single or Head of Household.
  • If your tax filing status is Married Filing Separately and your spouse itemizes deductions, you may not claim the standard deduction. If one spouse itemizes income tax deductions, then the other spouse must itemize to claim any deductions.
  • Non-resident aliens must itemize deductions on their tax returns as they are not eligible to claim the standard deduction.

Most commonly used tax deductions

Here are some of the most commonly used tax deductions you may be eligible to use when attempting to minimize your taxes:

Mortgage interest deduction – Homeowners can deduct their mortgage interest (subject to mortgage limits) on Schedule A of Form 1040. The limit for mortgage debt is dependent on when you took out the loan. For loans taken out on or before December 15, 2017, you can deduct home mortgage interest on up to $1,000,000 ($500,000 if you are married filing separately) of that debt. For loans taken after December 15, 2017, you can only deduct home mortgage interest on up to $750,000 ($375,000 if you are married filing separately) of that debt. No matter when the mortgage debt was incurred, you cannot deduct the interest from a loan secured by your home to the extent the loan proceeds were used for purposes other than to buy, build, or improve your home.

State and local taxes (SALT) – You can also deduct up to $10,000 of state, local, and property taxes (or sales and property taxes if you don’t live in a state with income taxes). This is an aggregate limit and is $5,000 for married couples filing separately. The so-called “SALT limitations” underscore the importance of limiting state and local taxes as much as possible.

Examples of state and local taxes that can be itemized on a tax return include the following:

  • Withholding for state and local income taxes as shown on Form W-2 or Form 1099.
  • Personal property taxes
  • Real estate taxes
  • Estimated tax payments you made during the year
  • Payments made during the year for taxes that arose in a previous year
  • Extension tax payments you made during the year

Charitable donations – The IRS agrees that it is better to give than to receive, and they offer some helpful tax savings for giving (if you itemized deductions). There are deductions available for cash and household items donated to charities.

For charitable contributions to be deductible, they must have been made to qualified organizations. Contributions to individuals are never deductible. You may determine if the organization you contributed to qualifies as a charitable organization for income tax deduction purposes by referring to the IRS Tax Exempt Organization Search tool. For more information, see  Publication 526,  Charitable Contributions and  Can I Deduct My Charitable Contributions?

Less frequent itemized deductions

Medical and dental expenses – You can deduct medical and dental expenses if they exceed 7.5% of your Adjusted Gross Income.

Moving expenses – If you are an active-duty member of the military and are required to move due to a military order, you may be eligible to deduct certain moving expenses associated with your relocation.

Home equity loan interest – Home equity loan interest is deductible to the extent loan proceeds were used to buy, build, or make significant improvements to the home. Interest attributed to loan amounts not used for these purposes is not deductible.

Casualty losses due to a disaster – You may be eligible to deduct casualty losses if they occurred due to an event officially declared a federal disaster.

Take Action

If you are not sure which deduction to claim, complete an estimate of your itemized deductions using Schedule A. If your itemized deductions exceed the standard deduction amount for your filing status, you will want to itemize. If you are using the standard deduction amount, you can focus your tax planning efforts on reducing or deferring your taxable income.

Buying A Home Personal Worksheet

February 09, 2025

Use this worksheet to get organized and make a plan for purchasing your new home. The following information can help you to start thinking about becoming a homeowner and what you need to do to make your dream a reality.

1. Make a Mini Wish List:

The top 3 things you absolutely must have for your dream house are:

  1. __________________________
  2. __________________________
  3. __________________________

2. Purchase Price:

The price range of the homes you are looking at is $ _________ to $ _________

3. Down payment and closing costs:

What percentage of the home’s price will you pay upfront?

_______% X $ _________ purchase price = $ _________ down payment amount

Remember: If you put down less than 20%, you may be required to pay Private Mortgage Insurance (PMI).

Don’t forget to allow for closing costs when deciding how much to have available for a down payment. Loan fees, escrow and title cost, transfer tax and other items due at closing can total one to five percent of the price of the home!

Where will you find the money for your down payment and other closing costs? Mark all that apply.

_____ Monthly savings

_____ Current assets/investments

_____ IRA

_____ Retirement plan loan

_____ Family members

_____ Other sources (list) ___________________________________________________

4. Your Mortgage:

You have determined your purchase price and down payment but you will probably still need to borrow money. How much will you need to borrow? (Purchase price of the home minus your down payment equals the amount you will need to borrow in the form of a mortgage loan.)

I will need to borrow $ _____________________________

A mortgage is usually the biggest loan you’ll take on in your lifetime. One rule of thumb lenders often use is that your total monthly debt payments (including car loan, credit cards, etc.) should not exceed 36% of your pre-tax monthly income.

What mortgage payment can you afford based on the 36% guideline? Find your income in the gross annual income column. Then add up your monthly car payment, credit card payments, and other loan payments and subtract that total from the amount in the column on the right. The amount left over is approximately the monthly mortgage payment you can afford.

Gross Annual IncomeMonthly IncomeAllowable Total Monthly Debt Payments
$30,000$2,500$900
$40,000$3,333$1,200
$50,000$4,167$1,500
$60,000$5,000$1,800
$70,000$5,833$2,100
$80,000$6,667$2,400
$90,000$7,500$2,700
$100,000$8,333$3,000
$110,000$9,167$3,300
$120,000$10,000$3,600
$150,000$12,500$4,500
$180,000$15,000$5,400

Example: Joe and Joan have a combined income of $70,000. They have a car payment of $320, student loan payment of $150 and a credit card payment of $80, for a total of $550. Their total allowable payment of $2,100 must be reduced by $550, so the maximum amount of their potential mortgage payment is $1,550.

5. Your Mortgage Payment:

Now that you know the monthly mortgage payment that you can afford, use the chart below to see the mortgage loan amount you may qualify for at different interest rates.

Mortgage Payment (30-year term)(Principal and Interest) at different interest rates
Mortgage Amount5.00%6.00%7.00%8.00%
$150,000$805$899$998$1,100
$200,000$1,074$1,199$1,331$1,468
$250,000$1,342$1,499$1,663$1,834
$300,000$1,610$1,799$1,996$2,201
$350,000$1,879$2,098$2,329$2,568
$400,000$2,147$2,398$2,661$2,935
$450,000$2,416$2,698$2,994$3,302
$500,000$2,684$2,998$3,327$3,669

Another rule of thumb is that your annual pre-tax salary should equal at least four times your annual mortgage payment. Do this quick calculation to see if you will meet this guideline. (Use the monthly mortgage payment amount from above and multiply by 12 to get the annual payment.)

Annual mortgage payment x 4 = $ _________________ , which should be less than your annual pre-tax salary.

6. Things to consider before taking on a mortgage:

A mortgage is a big financial commitment and before taking one on, be sure that you are ready. Answer these questions to see if the timing is right for you.

a. How would you describe your current financial situation?

_____________________________________________________________________

b. Any significant changes in the foreseeable future?

_____________________________________________________________________

c. How long do you think you will stay in your new home?

_____________________________________________________________________

d. How comfortable are you with a varying (instead of a fixed) mortgage payment?

_____________________________________________________________________

7. My estimated total monthly mortgage payment:

In addition to the principal and interest payments, your monthly mortgage payment can also include property taxes, homeowner’s insurance premiums, and Private Mortgage Insurance (PMI; if applicable), if you set up your monthly escrow to include these items. Even if you choose not to escrow your taxes and insurance, be sure to find out how much both will cost so you can budget accordingly.

Estimated property taxes for the home I wish to purchase:

Annual amount $ __________ Monthly amount $ __________

Estimated homeowner’s insurance for the property I want to buy: Annual amount $ __________ Monthly amount $ __________

If your down payment will be less than 20%, here is a guideline for estimating the annual amount for PMI:

  • PMI is .0078 times the loan amount with a 5% down payment
  • PMI is .0052 times the loan amount with a 10% down payment

Annual amount $ __________ Monthly amount $ __________

Now bring all the monthly amounts together to calculate your total monthly mortgage payment:

Principal and interest payment (from #5 above) $ _____________

Property Taxes $ _____________

Homeowner’s Insurance $ _____________

PMI (if applicable) $ _____________

MONTHLY TOTAL: $ _____________

Next Steps:

  • Get a copy of your credit report. (For a free one go to www.annualcreditreport.com.)
  • Line up professionals to help you.
  • Save for a down payment and closing costs.
  • Get pre-approved for a mortgage.
  • Begin to look for properties.

The 401(k) Self-Directed Brokerage Window

February 09, 2025

Are you a hands-on investor seeking investments beyond your 401(k) plan’s core list of investment choices? If so, you may have a self-directed brokerage account (SDBA) option in your retirement plan.

Who typically uses a self-directed brokerage account in a 401(k) plan?

SDBAs are intended for experienced investors who are comfortable making their own investment decisions. This option is generally popular among savers with larger retirement plan balances or who work with an outside financial advisor. For example, Schwab recently reported that the average account balance of those using this option is just over $273,000. Compare this to Fidelity’s reported average balance of all 401(k) participants, which is just under $104,000.

What does a self-directed brokerage account offer?

The main benefit is that SDBAs give you more flexibility regarding the investment options available. Wider access can be a refreshing alternative if you are generally unhappy with the currently available investment options.

For example, let’s say your 401(k) plan doesn’t include target-date or asset allocation funds. With the SDBA, you can add those funds to your retirement portfolio. This can be appealing if you’re trying to access asset classes not represented in your core portfolio. Examples include emerging market stocks, international small cap, and value or growth-oriented funds. SDBAs can even help you diversify with alternative asset classes such as real estate and commodities.

Beware of the paralysis of too many choices

But as behavioral finance studies on the paradox of choice have shown us, too many options can hinder participation. This is true for 401(k) plans as well. Choosing the right investments for your goals, risk tolerance, and time horizon also requires discipline. Most investors lack a written game plan or investment policy statement. As a result, many individual investors are prone to the “behavior gap” and underperform the actual funds they own due to mistakes related to emotional decision-making and market timing. 

Self-directed brokerage accounts are designed for advanced investors who know how to research and manage their investments. Bankrate warns investors that the additional choices commonly associated with self-directed accounts do not lead to better outcomes for most investors. In order to follow a disciplined investment plan, focus on things within your control, such as asset allocation, contribution rates, minimizing costs, and asset location (i.e., pre-tax vs. Roth 401(k)).

Pay attention to the fees

It’s important to note that while SDBAs offer greater investment flexibility, they may also come with higher fees. These fees can include transaction fees, account maintenance fees, and trading commissions. So, carefully consider the costs and benefits of an SDBA and your investment objectives and risk tolerance before opening one.

Minimizing your overall investment costs is one thing you have some control over as an investor. So, it’s equally important to understand all fees and expenses as it is to know your core 401(k) plan expenses.

Some 401(k) plans charge an annual maintenance fee for using the mutual fund or brokerage window. It is also necessary to identify if there are any commissions and transaction costs associated with trades made through SDBA accounts. You can check your plan’s fee disclosure to better understand the actual costs related to your 401(k) plan.

Check mutual fund expenses

In some cases, you may also see increased mutual fund expenses when you go outside your core investment options. This is because most funds available in the SDBA are retail share classes. Retail share classes tend to be much more expensive than the institutional funds many large retirement plans provide access to. On the other hand, if your 401(k) plan has expensive mutual funds, the self-directed brokerage account is a potential remedy.

How does its performance compare?

Finally, it is important to note that there is a reason self-directed brokerage accounts are underutilized. The average investor is often better served by simplifying their investments as much as possible. That is why it is important to establish benchmarks to track your performance.

Self-directed brokerage accounts give you an opportunity to try to outperform or diversify your plan’s core options. But if you choose to take the self-direct route and find that your investment performance consistently lags behind the core investment portfolio, you may need to take a simpler approach to your retirement savings plan.

Mega Roth Conversions

February 09, 2025

The Risks Of Employer Stock

February 09, 2025

One of the biggest risks lurking in people’s investments is having too much in a current or former employer’s company stock. What’s too much?

Rule of thumb

You should generally have no more than 10-15% of your investment portfolio in any single stock. It’s worth noting that an investment adviser can lose their license for recommending more than that.

More than just a stock when it’s your job

So why is this such a bad idea? What if your company stock is doing really well? Well, remember Enron, anyone? While it’s practically impossible for a well-diversified mutual fund to go to zero, that could easily happen with an individual stock. In that case, you could simultaneously be out of a job and a good bulk of your nest egg.

Now, I’m not saying your company is the next Enron. It could be perfectly managed and still run into trouble. That’s because you never know what effect a new technology, law, or competitor can have, regardless of how good a company it is.

Nor does the company have to go bankrupt to hurt your finances. Too much in an underperforming stock can drag down your overall returns, and even a well-performing stock can plummet in value just before you retire. As volatile as the stock market is as a whole, it’s nothing compared to that of an individual stock.

Why do we over-invest in our own companies?

So why do people have so much in company stock? There are two main reasons. Sometimes, it’s inadvertent and happens because you receive company stock or options as compensation. For example, your employer may use them to match your contributions to a sponsored retirement plan. Other times, it’s because people may feel more comfortable investing in the company they work for and know rather than a more diversified mutual fund they may know little about.

A general guideline is to minimize your ownership of employer stock. After all, the expected return is about the same as stocks as a whole (everyone has an argument about why their particular company will do better, just like every parent thinks their child is above average). Still, as mentioned before, the risks are more significant. That being said, there are some situations where it can make sense to have stock in your company:

When it might make sense to keep more than usual in company stock

1) You have no choice. For example, you may have restricted shares that you’re not allowed to sell. In that case, you may want to see if you can use options to hedge the risk. This can be complicated, so consider consulting with a professional investment adviser.

2) You can purchase employer stock at a discount. If you can get a 10% discount on buying your employer’s stock, that’s like getting an instant 10% return on your money. If so, you might want to take advantage of it but sell the shares as soon as possible and ensure they don’t exceed 10-15% of your portfolio.

3) Selling the stock will cause a considerable tax burden. Don’t hold on to a stock just because you don’t want to pay taxes on the sale, but if you have a particularly large position, you may want to gift it away or sell it over time. If you do the latter, you can use the same hedging strategies as above.

4) You have employer stock in a retirement account. This is a similar tax situation because if you sell the shares, you’ll pay ordinary income tax when you eventually withdraw it. However, if you keep the shares and later transfer them out in kind to a brokerage firm, you can pay a lower capital gains tax on the “net unrealized appreciation.” (You can estimate the tax benefit of doing so here.) In that case, you may want to keep some of the shares, but I’d still limit it to no more than 10-15% of your total portfolio.

5) You have a really good reason to think it’s a particularly good investment. For example, you work at a start-up that could be the proverbial next Google. It may be too small of a company for analysts to cover, so it may genuinely be a yet-to-be-discovered opportunity. In that case, go ahead and get some shares. You may strike it rich. But remember that high potential returns come with high risk so ensure you’ll still be financially okay if things don’t pan out as hoped.

The ups and downs of the stock market typically get all the media and attention. But your greatest investment risk may come from just one stock. So don’t put all your eggs in it.

Expense The Unexpected: The Emergency Fund

February 09, 2025

Finances are different for everyone, and so are the life events we all go through. An emergency fund is your financial line of defense against life’s lemons. Although there are many financial rules of thumb, there is no “normal” way to handle your emergency fund. However, there are some answers to common questions to help you financially prepare for unexpected expenses.

What is the reason for my emergency fund?

The emergency fund is your safety net to avoid getting into a difficult financial situation due to loss of income and significant, unexpected, one-time expenses. Having one in place can reduce stress, anxiety, and other emotions that could make handling the non-financial aspects of an emergency much more difficult.

It may seem a little obvious that an emergency fund is for emergencies. However, one of the challenging aspects of an emergency fund is knowing what expenses qualify as an emergency. This fund’s sole purpose is to prepare you for costs that you cannot or would not typically plan out. For example, oil changes and new tires are vehicle expenses you know you will have at some point. However, you wouldn’t typically plan for vehicle costs that could vary widely depending on the situation. Examples of this are towing costs, medical care, and insurance deductibles you might pay in a car accident, something you would not plan to happen.

How much do I need?

How much would a new furnace cost? If you could not work, how much would you need to cover essential expenses until you could? Asking yourself these kinds of questions will help you set a goal amount for your emergency fund. The Expense Tracker can help you add those expenses up, or you can use your online banking to crunch the numbers. That exercise can also help you figure out how much you can afford to save each month as you work up to your goal amount.

The general rule of thumb is three to six months of your expenses. However, you can always start with a goal you find achievable. Say, for example, $1,000. Once you reach that goal, aim for three months of rent, then three months of the following essential expense, and so on.

How do I save that much?

Start small – If you have not started your fund, consider putting $25 from every paycheck into a savings account. You can use the Daily Savings Calculator to see the impact that even a few dollars will make in the long run. Then, check your budget or spending plan to see how much you can save after you’ve paid essential expenses and before budgeting for discretionary spending.

Keep it separate, saver – Open a separate savings account to help you resist the temptation to dip into it. Remember, this account is for emergencies, so keep it away from your daily spending accounts and separate it from vacation and holiday savings. This method will help you stay organized, visualize your progress, and provide you peace of mind.

Automate your savings: Set up a direct deposit or automatic monthly transfer to your separate savings account. Your employer may be able to take money directly out of your check and deposit it for you. Otherwise, set up an automatic transfer from checking to savings on payday. This method will help you avoid adding a manual transfer to your list of to-do’s that you may end up not getting around to doing.

Will I ever need to change the amount?

As your life changes, the amount you need in your emergency fund will change as well. It’s a good idea to revisit your emergency fund plan every six months or any time you experience a life event that impacts your income. Marriage, starting or adding to your family, buying a home, and divorce are just a few examples of when you may need to increase your emergency fund. A good savings plan can roll with the punches right alongside you!

How do I prioritize emergency savings against debt and other goals?

Deciding whether you should pay down debt, increase cash savings, or invest is all about the big picture. Since everyone has different financials, that picture will not be the same for everyone. What is going to impact you the most financially? Paying down debt and saving money long term or having a plan B that allows you to keep making minimum payments if you lose income? There is no right or wrong answer. Perhaps a good compromise is to have one month’s worth of minimum credit card and loan payments before you start to pay down debt or invest aggressively. You will have peace of mind knowing that you won’t fall further into debt or face collection action, and you will have started your path to being debt-free!

Your emergency fund is there to help you expense the unexpected. So make a plan and use the above suggestions to be ready for whatever comes your way!

What Is An HSA And Why Should I Participate?

February 09, 2025

An HSA is a type of tax-deferred account designed to help you save for your health care costs for current and future years. An HSA essentially works like an IRA for medical expenses. However, it differs from a Flexible Spending Account (FSA) in that money not spent in a calendar year can remain in the account to be used in future years – or retirement.

HSAs are only available to you if you have coverage through a qualifying high-deductible major medical health plan, referred to as an HDHP. If you can participate in an HSA, you should know these facts:

  • HSAs can be funded with pre-tax income up to certain IRS limits. The money can be withdrawn tax-free for qualified medical expenses, including prescription drugs.
  • You can reimburse yourself right away for qualified medical expenses, or at any time in the future, as long as your HSA was open when the expense was incurred. Just hold on to your receipts, bills, or explanation of benefits.
  • You can also make contributions directly to an HSA via deposit for the prior tax year up until the tax filing deadline (generally April 15th).
  • You may not contribute to an HSA if you are covered by a non-high deductible medical plan including Medicare, TRICARE, a spouse’s family plan, or an FSA or HRA (yours or your spouse’s, unless it is limited purpose).
  • The amount of your HSA contribution directly reduces your taxable income for federal tax purposes, and in most states (CA and NJ are exceptions), so you will pay tax on less income overall.
  • Any money not spent in the year contributed grows tax-free (for federal and most states) in the investment funds you choose, if an investment option is available.
  • If withdrawn for non-qualified medical expenses before age 65, the money will be taxed as ordinary income and will incur a 20% penalty as well. However, once you turn 65, the money may be withdrawn for non-qualified medical expenses without this penalty (only the taxes will be due).
  • HSA accounts may be transferred if you change employers, similar to a rollover from one 401(k) to another.

ACTION ITEMS:

1. Consider participating in an HSA if you want to save money by paying for qualified medical expenses with tax-free dollars or you are looking for other ways to save for retirement on a tax-preferred basis.

2. Be aware that a high-deductible health plan with an HSA may not be the best option for those who have ongoing medical conditions and treatments, or for those who do not have sufficient funds set aside to pay the higher out-of-pocket costs.

3. If you plan to defer much of your HSA balance until retirement, make sure to invest for the long term among the investment options available to you.

Why You Should Max Out Your HSA Before Your 401(k)

February 09, 2025

Considering that most employers are offering a high-deductible HSA-eligible health insurance plan these days, chances are that you’ve at least heard of health saving accounts (“HSAs”) even if you’re not already enrolled in one. People who are used to more robust coverage under HMO or PPO plans may be hesitant to sign up for insurance that puts the first couple thousand dollars or more of health care expenses on them, but as the plans gain in popularity in the benefits world, more and more people are realizing the benefit of selecting an HSA plan over a PPO or other higher premium, lower deductible options.

For people with very low health costs, HSAs are almost a no-brainer, especially in situations where their employer contributes to their account to help offset the deductible (like mine does). If you don’t spend that money, it’s yours to keep and rolls over year after year for when you do eventually need it, perhaps in retirement to help pay Medicare Part B or long-term care insurance premiums.

Not just for super healthy people

But HSAs can still be a great deal even if you have higher health costs. I reached the out-of-pocket maximum in my healthcare plan last year, and yet I continue to choose the high-deductible plan solely because I want the ability to max out the HSA contribution. Higher income participants looking for any way to reduce taxable income appreciate the ability to exclude up to IRS limits each year. It beats the much lower FSA (flexible spending account) limit.

Even more tax benefits than your 401(k)

Because HSA rules allow funds to carryover indefinitely with the triple tax-free benefit of funds going in tax-free, growing tax-free and coming out tax-free for qualified medical expenses, I have yet to find a reason that someone wouldn’t choose to max out their HSA before funding their 401(k) or other retirement account beyond their employer’s match. Health care costs are one of the biggest uncertainties both while working and when it comes to retirement planning.

A large medical expense for people without adequate emergency savings often leads to 401(k) loans or even worse, early withdrawals, incurring additional tax and early withdrawal penalties to add to the financial woes. Directing that savings instead to an HSA helps ensure that not only are funds available when such expenses come up, but participants actually save on taxes rather than cause additional tax burdens.

Heading off future medical expenses

The same consideration goes for healthcare costs in retirement. Having tax-free funds available to pay those costs rather than requiring a taxable 401(k) or IRA distribution can make a huge difference to retirees with limited funds. Should you find yourself robustly healthy in your later years with little need for healthcare-specific savings, HSA funds are also accessible for distribution for any purpose without penalty once the owner reaches age 65. Non-qualified withdrawals are taxable, but so are withdrawals from pre-tax retirement accounts, making the HSA a fantastic alternative to saving for retirement.

Making the most of all your savings options

To summarize, when prioritizing long-term savings while enrolled in HSA-eligible healthcare plans, I would strongly suggest that the order of dollars should go as follows:

  1. Contribute enough to any workplace retirement plan to earn your maximum match.
  2. Then max out your HSA.
  3. Finally, go back and fund other retirement savings like a Roth IRA (if you’re eligible) or your workplace plan.

Contributing via payroll versus lump sum deposits

Remember that HSA contributions can be made via payroll deduction if your plan is through your employer, and contributions can be changed at any time. You can also make contributions via lump sum through your HSA provider, although funds deposited that way do not save you the 7.65% FICA tax as they would when depositing via payroll.

The bottom line is that when deciding between HSA healthcare plans and other plans, there’s more to consider than just current healthcare costs. An HSA can be an important part of your long-term retirement savings and have a big impact on your lifetime income tax bill. Ignore it at your peril.

Should You Contribute To Pre-Tax Or Roth 401k?

February 07, 2025

For all the efforts that companies undertake to make participating in their retirement plan benefits easy, there’s no simple way to help employees decide whether the money they contribute from their own paychecks should be traditional (also called pre-tax) or Roth (also sometimes called after-tax Roth). The answer can be very nuanced depending on your situation, and for the most part, we won’t know whether we chose correctly until it’s too late. We’ll only really know if we got the answer right when it comes time to withdraw and we actually know our taxable income, current tax brackets, and lifestyle needs.

Since my crystal ball seems to be broken, I’ve attempted to distill the various factors in a way that makes more sense. Keep in mind that many of the factors listed in the chart below are just different ways of saying the same thing, but the intention is to present it in the way that makes the most sense to you.

The biggest factor affecting this decision: taxes

If we all could just know what tax rates will be when we retire and start withdrawing from our retirement savings, along with what our own income will be at that point, this would be a simple choice – if you knew your tax rate would be lower when withdrawing from your retirement account, you’d choose pre-tax and avoid paying taxes on the money today so that you could pay at a lower rate in the future.

On the flip side, if you knew that tax rates would be higher when you’re withdrawing and you’d be paying more in taxes, choose Roth to pay today’s lower rates, then enjoy your savings without tax consequences in the future.

Predicting the future of tax rates

I’m personally making Roth contributions right now in my 401(k) because I believe that we are currently experiencing the lowest tax rates I’ll see in my lifetime. And while I very well may have a lower income in retirement, the tax brackets themselves may be different, so even if I have a lower income, I think I might have a higher tax rate in the future. (keep in mind that I could be wrong about this – reason tells me that tax rates will have to go up in the future, but Congress has surprised us before!)

I like that I can change this strategy at any time. For example, when my husband sold some stock he’d been given as a child for a big capital gain, I switched to pre-tax for the rest of that year in an effort to lower our overall taxable income.

Income limits and the ability to withdraw without taxes

I also like the idea of having investments available to me in retirement that I can liquidate and withdraw without concern for the tax consequences, and my husband and I have too high of a combined income to contribute to Roth IRAs, so I like that the Roth 401(k) doesn’t have an income limit.

Now, there is a way around those income limits using a “back-door” Roth IRA, but that doesn’t work for me because I also have a rather large rollover traditional IRA.

Another consideration: access to the contributions for early retirement

You can’t withdraw Roth 401(k) contributions before 59 1/2 without penalty. However, you can withdraw contributions to a Roth IRA early. If you’re lucky enough to retire before then, you can always roll your Roth 401(k) into a Roth IRA. Then, tap those contributions if necessary, without concern for taxes or early withdrawal penalties. That’s another reason you want to at least have some retirement savings as Roth, regardless of tax rates.

Factors to consider:

Factor:Traditional (pre-tax)Roth (after-tax)
You think your taxes are higher today than they’ll be when you withdrawMakes more senseMakes less sense
You think your taxes are lower today than they’ll be when you withdrawMakes less senseMakes more sense
You want to avoid required distributions after age 73Makes less senseMakes more sense, as long as you roll to a Roth IRA
You think your income tax bracket will be lower when you withdrawMakes more senseMakes less sense
You think your income tax bracket will be higher when you withdrawMakes less senseMakes more sense
You need more tax deductions todayMakes more senseMakes less sense
You have a long time until withdrawal and plan to invest aggressivelyMakes less senseMakes more sense
You’d like access to your contributions before the traditional retirement ageDoesn’t make senseMakes sense

Splitting the difference

If you’re unsure or thinking about it makes your head hurt, you could always split your contributions between the two. In other words, if you’re putting 10% away, you could do 5% pre-tax and 5% Roth. The contribution limit applies as a total for both. However, there’s no rule that you have to put your money into just one bucket or the other at a time.

One more thing to know

No matter your contribution type, any matching dollars or employer contributions will always be pre-tax, per IRS rules. So even if you put all your own contributions into Roth, you’ll still have pre-tax money if you receive any from your job. Now, you may be able to convert those contributions to Roth, depending on plan rules. But if you do that, you’ll have to pay taxes on the amount converted, so plan carefully.

How To Choose A Healthcare Plan

February 07, 2025

Depending on the choices you have, choosing a healthcare plan can be frustrating – with different plans that have different structures and costs, how will you know which one is best for you and your family?

Start with any tools your employer offers

Your benefit provider may offer access to tools that help with this decision, so check for that as a first step for a more personalized answer based on the plan options available to you. It may be some type of quiz or interactive process that asks you to make a rough prediction of your anticipated healthcare needs – if you have a tool like that, definitely start there. Doing so won’t commit you to a particular plan, but it can help you narrow the options based on your answers.

Beyond using the decision support tools that may be offered, there are a few key things to consider. Here’s how to choose.

It’s all about balance

Big picture, choosing the best plan for you and your family comes down to whichever plan balances your personal healthcare needs with care that you can afford – no one wants to find themselves underinsured, but lots of people end up over-insuring. In some cases, that’s intentional – lots of people tell us they’d rather know they are covered just in case, and we can’t argue with that if you know the trade-offs you’re making. If instead you’re trying to find the best value without overpaying, it may require a little more legwork.

What are the premiums?

Before you start comparing the details of each plan, make sure you factor in this cost, which is the one thing you can count on spending no matter what for your healthcare. It can be tempting to choose the lowest premium, and if you expect to use your plan very little beyond preventive care services (which are covered 100% under most plans), then that may be all you need to consider.

If you think there’s any chance you’ll need to use your healthcare, then keep looking beyond the premium.

How does the coverage differ under each plan?

Make sure the plan you choose actually covers your needs. If you want to keep your primary doctor and other providers, make sure they are in-network so you don’t end up paying more for their services. See the extent to which any procedures or prescription drugs you’re expecting to need over the next year are covered as well.

A few more things to consider:

  • If you or a dependent have chronic health issues and one spouse has access to a plan with lower deductibles and co-pays, make sure that child or spouse is on that plan.
  • If you have traditionally had your entire family on one plan but both spouses have health coverage available, you should start looking into whether your doctors and providers are in the networks of both plans. If so, see if it may make sense to go ahead and put the spouses on different plans. Even if your company isn’t charging a premium for “covered” spouses, it may be less expensive overall to be on different plans.
  • As always, take a good look at any pending issues such as braces, lasik, etc. that are in your family’s future and plan accordingly.

How much might you have to pay out-of-pocket?

It’s important to compare the different ways you’ll share the costs of your care with your insurance company through co-pays, deductibles and coinsurance. You may also want to compare out of pocket maximums if you anticipate large expenses for the year. 

Is there an HSA option?

If you’re looking for a healthcare option that also offers the ability to save for future medical expenses, even into retirement, you may want to pay special attention to any HSA-eligible plans.

Why give Health Savings Accounts a look?

If your employer is contributing to your HSA, that’s free money that can help to offset your out-of-pocket costs since your employer is essentially putting some of that money into your pocket. (Your HSA is your money so you can take it with you when you leave or retire.) If you plan to contribute to the HSA, calculate how much you can save in taxes. (You can get the same tax benefit by contributing to an FSA for health expenses, but the contribution limits are lower and you probably won’t want to contribute as much since the FSA is mostly “use it or lose it.”)

A case study: how one mom chose her plan for her family

As a real-life example, one of our coaches worked with someone who was trying to decide between a traditional PPO plan with a $1,000 family deductible versus an HSA-eligible plan with a $2,600 family deductible. The coverages would have been similar for her, but she was concerned by potentially having to spend so much out-of-pocket to reach her deductible under the HSA plan.

When we factored in the premium difference, we found that the PPO plan premiums were an extra $49 a month or $588 a year. In addition, her employer was willing to contribute $2,000 to her HSA. So, by choosing the HSA-eligible plan, she would basically be saving $2,588, which turned out to be more than the difference in the deductibles. Even if she spent the whole $2,600, she’d still be ahead under the high deductible plan.

In addition, if she decided to contribute an additional $3,000 to her HSA, she would save another $720 in federal taxes at the 24% tax bracket (not including state taxes or the tax savings on any future earnings in the account).

Of course, your numbers will be different, and your decision may not be as simple based on other factors. The lesson here is that you need to consider all of the factors, not just the premiums and the deductibles.

Choosing the ideal plan

Choosing a healthcare plan is a highly personal decision and there’s no perfect way to go about the decision without a crystal ball to tell you how the year ahead will go. Definitely take advantage of any decision-support tools your employer is offering, then check that against other possible scenarios in your life.

There are things you can anticipate such as braces, ongoing treatments or childbirth, but even the best laid plans can go awry with your health. The ideal plan for you is the one that covers the most likely scenarios you and your family will encounter without paying too much for coverage you don’t need.

Why You Should Treat Your HSA Like An IRA

February 07, 2025

Would you raid your Roth IRA or 401(k) to pay for car repair bills? I suppose if you have no other choice, you might. But ordinarily, we want to use our tax-advantaged retirement accounts only as a last resort because we want that money to grow tax-free or tax-deferred for as long as possible.

The HSA is the only account that allows us to make pre-tax contributions and withdraw them tax-free. Why then are we so willing to tap into our HSAs for medical expenses?

Making the most of your HSA

Yes, there’s no tax or penalty on those withdrawals since that’s what they’re meant to be used for. But HSAs can also be a tax-free retirement account since the money grows to be tax-free if used for medical expenses at any time, including retirement.

Since there’s a pretty good chance you’ll have some health care costs in retirement, you can count on being able to use that money tax-free. (If you keep the receipts for health care expenses you pay out-of-pocket, you can also withdraw that amount tax-free from the HSA later since there’s no time limit between the medical expense and the withdrawal.) You can also use the money penalty-free for any expense after age 65, although it would be taxable just like a pre-tax retirement account.

An example

Let’s say you contribute $3k per year to an HSA and don’t touch the money for 30 years. If you just earn an average of 1% in a savings account, you will have over $105k. But if you invest that $3k each year and earn a 7% average annual return, you’ll end up with over $300k or almost 3 times as much!

That’s why I recently decided to take advantage of our company’s switch to a new HSA custodian by transferring my HSA funds from a savings account to an HSA brokerage account. Since I don’t intend to touch this money for a few decades, I can invest it more aggressively and hopefully earn a higher rate of return. In the meantime, I’ll just pay my health care costs out of my regular income and savings.

Take care with any fees

One little hiccup that I noticed is that my custodian charges a $3 fee for the brokerage account if I don’t keep at least $5k in the savings account. At first glance, it’s tempting to keep $5k in the savings account to avoid that fee but the $36 a year in fees is only .72% of the $5k. That means if I can just earn more than an extra .72% in the brokerage account, I’ll be ahead. Given historical returns, I think that’s a pretty good bet.

Guidelines for making the most of your HSA

Here are some guidelines to make the best use of your HSA:

  1. First, make sure you have an adequate emergency fund to cover health care expenses. If not, ignore everything in this blog post until you do.
  2. If you have the option of a health care plan with an HSA, consider getting it. The premiums are lower so you generally save money in the long run if you’re in good health.
  3. Try to max out your contributions. (If you do it through payroll deductions into a section 125 cafeteria plan, you can also avoid FICA tax on the contributions). Aside from getting the match on your 401(k) and paying off high interest debt, this is generally the best use of your money because  the contributions are both pre-tax and can be withdrawn tax-free (for health care expenses).
  4. If you have a brokerage option, invest as much of your HSA as you can in a portfolio that’s appropriate for your time horizon and risk tolerance. (Make sure your expected returns justify any fees you may have to pay.)
  5. Don’t touch your HSA money unless you absolutely need to. Instead, use your regular savings (see #1) to cover medical expenses.
  6. Keep the receipts for any health care expenses you pay out-of-pocket since you can withdraw those amounts from your HSA tax-free anytime.
  7. Have tax-free money to help cover health care expenses in retirement!

The Ins And Outs Of Credit Scores

February 07, 2025

We sometimes view our credit scores the same way we look at household appliances or cars: we don’t think very much about how they work, but when we do, it’s usually because something has gone wrong and is causing us discomfort or inconvenience (often both). However, understanding how it works can help you maintain a better score (and better appliances) so when you need it, it will work best for you.

Here’s a closer look at what influences our personal credit scores and why this information is important.

Why does your credit score matter?

There is the obvious, of course. When you want to borrow money, good credit means you can get the loan you need and at a competitive rate. There are also some less obvious reasons to keep your credit score looking good, because your credit history can also affect:

  • Your ability to get the job you want
  • How much you pay for insurance
  • Renting an apartment or home
  • Paying a security deposit (or not) for utilities and cell phones

How credit scores are determined

Our friends at the credit reporting agencies here in the U.S. (Experian, Equifax, TransUnion) rely upon the following set of weighted credit behaviors when calculating credit scores:

  • Paying on time (35%) – Late payments hurt. Use your bank or credit union’s auto-pay feature to avoid late payments.
  • Utilization (30%) – Keep credit card balances below 30% of your credit limit. This is why carrying around a “maxed out” credit card hurts your score. Although keeping or opening a second card with a zero balance can help your overall utilization ratio, the maxed-out card can still hurt your score. Credit reporting agencies count your per-card utilization as well as your overall credit utilization.
  • Length of credit history (15%) – Having “older” loans and credit accounts helps your score because it indicates experience with managing credit. Closing older accounts and opening new lines of credit can lower your score because these actions reduce your average credit age.
  • Variety of credit lines (10%) – Having a combination of both installment loans (e.g., car or student loans) and revolving credit (e.g., credit cards) helps your score somewhat. However, this only accounts for 10% of your score, so opening up additional credit lines just to round out the mix isn’t going to help your score very much (and if not managed well, might hurt your score).
  • Number of inquiries (10%) – Whenever you apply for new credit (personal loan, auto, student loan, credit card, mortgage, etc.), this results in the lender performing a credit check. These credit checks are recorded on your credit history and can affect your score for up to one year. They only account for 10% of credit score, so the best practice here is to not open too many new lines of credit within a 12 month period.

Which actions and behaviors affect your score the most?

Whether you are trying to repair an iffy credit history or you simply want to make sure your stellar credit score remains that way, here is a breakdown of the major things we should and shouldn’t do in order to have good credit:

DEFINITELY DO:

  • Check your credit score for free at sites like CreditSesame or CreditKarma. Checking your own credit score does not count as an inquiry and will not lower your score.
  • Pay the bills on time, every time. This action alone affects your credit score more than anything else.
  • Keep revolving balances (credit cards) below 30% of the borrowing limit. Aim for paying them off in full every month so you don’t carry a balance and pay interest on it every month. Loan balances have the second largest impact on your credit score.
  • If you miss payments and a loan is sold to a collection agent, pay this off as fast as you can, even if it means selling possessions or taking on an extra job. Collections items are like a heavy anchor on your score and constitute a financial emergency.

AVOID DOING:

  • Opening additional lines of credit if you don’t need them.
  • Opening several new lines of credit all at once.
  • Ignoring late notices. The next step is often a call or letter from a collection agent (and a nosedive for your credit score).
  • Paying someone to “repair” your credit. This is an additional cost for doing something you can do yourself.
  • Borrowing from your retirement plan at work (401(k), 403(b), etc.) to pay off debt balances. There are exceptions, but avoid this unless you are facing more serious consequences, such as filing bankruptcy.

Like any good financial habit, creating and maintaining a healthy credit history (and therefore, a healthy credit score) requires some knowledge and effort. Fortunately, the two criteria that carry the most weight – paying on time and limiting balances – are well within our control.

How To Contribute to a Roth IRA If You Make Too Much

February 07, 2025

There are multiple reasons to contribute to a Roth IRA, but if you make too much money, the Roth may not seem to be an option. However, there are a few things to keep in mind before completely writing off the Roth IRA.

The limit is based on MAGI, not total income

One is that the income limits are based on MAGI (modified adjusted gross income). That means if you contribute enough to a pre-tax 401(k) or similar qualified retirement plan, you may be able to bring your MAGI below the income limits.

Income limits apply to contributions, but not to conversions

The bigger point here for people whose MAGI far exceeds the income limits is the fact that there is no income limit to converting a traditional IRA into a Roth IRA. This is the key that allows people who make too much money to put money directly into a Roth IRA to still participate.

How it works

You can simply contribute to a traditional IRA and then convert your traditional IRA into a Roth IRA. Anyone can contribute, regardless of income levels, but many people don’t because it’s not tax-deductible if you earn too much to contribute to an IRA and are covered by a retirement plan at work.

This is called a “backdoor” Roth IRA contribution. Since it’s really a conversion rather than a contribution, you may have to wait 5 years before you can withdraw the amount you converted penalty-free before age 59 1/2. You’ll have to file IRS Form 8606 to document the non-deducted contribution to the traditional IRA, which will offset the 1099-R form you’ll receive for the conversion.

If you already have a traditional IRA, beware the pro-rata rule

There is a potentially huge caveat to this strategy though. If you have other funds in a traditional (pre-tax) IRA already that you aren’t converting, you have to pay taxes on the same percentage of the conversion amount as you have in total IRA dollars that are pre-tax. That means you could end up owing taxes on the conversion even if all the money you convert was nondeductible and thus after-tax.

Here’s what I mean

For example, let’s say that you have an existing IRA with $95k of pre-tax money and you contribute $5k to a new IRA after-tax. Since 95% of your total IRA money is pre-tax (because it was already there before and presumably contributed pre-tax), 95% of any money you convert to a Roth IRA is taxable even if you convert the new IRA with all after-tax money.

In other words, the IRS looks at all of your IRAs as if they were one account and taxes your conversions on a pro-rata basis. In this case, you would owe taxes on 95% of the $5k you convert — basically you’d have $4,750 of taxable income. So you can still do it, and $250 would be converted without causing a tax effect. It’s just not a tax-free transaction.

One way to avoid the pro-rata rule

The good news is that there may be a way to avoid this. If your current job’s retirement plan will allow you to roll your existing IRA money into your existing employer’s retirement plan, then you’d be eliminating the need to pro-rate by no longer having an existing pre-tax IRA. If you move your IRA into your 401(k), then complete the “backdoor” transaction, the only IRA money you would have in this example would be the $5k after-tax IRA, so you won’t pay any taxes on the conversion since 0% of your total IRA money is pre-tax.

Still not a bad deal

Even if you can’t avoid the tax on the conversion, it’s not necessarily a bad deal. After all, you or your heirs will have to pay taxes on your IRA money someday. By converting some (or all) of it into a Roth, at least future earnings can grow tax-free. It’s probably not worth it if you have to withdraw money from the IRA to pay taxes on the conversion.

So there you have it. You can contribute to a Roth IRA one way or another as long as you have some type of earned income. Otherwise, you won’t be able to contribute to a traditional IRA either.

The Difference Between Federal And Private Student Loans

February 07, 2025

With the average cost of college steadily rising, student loans have become a big part of how families pay for college. Most student loans are classified as either federal or private. Federal student loans are loans made or guaranteed by the U.S. government, and private loans are essentially non-federal student loans made through lenders such as banks, credit unions, state agencies, or schools. There are important differences between these loan types and knowing the difference can help you make the most informed decision.

The main types of federal student loans are:

Direct Subsidized Loans – typically for undergraduate students with financial need. Student loan interest is paid by the government while the student is in school at least half-time, during the 6 month grace period after college and possibly if student loan payments are delayed.

Direct Unsubsidized Loans – can be used by undergraduate and graduate students regardless of financial need. Interest accrues while the students are in school, during the grace period and during any student loan payment delays and is added to the loan principal. You can pay the interest while you’re in school to mitigate this difference between direct and indirect if you are able.

Direct PLUS Loans – graduate or professional students and parents of dependent undergraduate students typically use this loan to pay for college. To qualify, the borrower must not have an adverse credit history and the student must be enrolled at least half time.

Federal loans typically offer more benefits than private loans such as:

  • Lower interest rates, in general
  • Loan forgiveness options based on public service employment, certain occupations or certain payment plans
  • A variety of options to modify payments if you experience a hardship such as permanent disability or financial hardship
  • Lack of credit checks, in general

However, these benefits also come with harsh consequences for default such as possible wage garnishments, difficulty discharging if you file for bankruptcy and even forfeited tax refunds and Social Security payments.

Private loans vary per lender, but typically private loans share these characteristics:

  • Interest rates tend to be higher than most federal student loans
  • Variety of interest rates and repayment periods
  • Loan forgiveness programs are not available
  • Fewer options if you find yourself going through a financial hardship. This varies per institution, so before getting a private loan ask about repayment programs if you experience a hardship
  • Credit check and/or a co-signer may be needed to get loan

As long as your loans are classified as student loans, the interest you pay may be eligible for a deduction, and that’s true for both federal and private loans. The bottom line is that before you opt for any student loans, make sure you know the difference. Many students find themselves learning about the difference the hard way, once it’s too late to go back and find other ways to pay.

How To Find A Real Estate Agent

February 07, 2025

Because this is the person who will be guiding you through the biggest financial and legal transaction of your life, search for your real estate agent with almost as much care as you hunt for your home.

Look around your neighborhood

Is there a name that you see over and over again in the neighborhood you’re buying or selling in? Chances are, that person has the inside scoop on what’s out there and can offer insights about the neighborhood that an agent unfamiliar with the area won’t have. Beware of an agent who is over-worked though — you may be spending more time with an assistant, while the lead agent makes all the money. You want all of your contact to be with the person whose name will be on the sign and on the contract.

Look online

If you’re moving out of town or aren’t able to identify any neighborhood experts, the National Association of Realtors® website is one place to search for agents in your area who use the registered designation of REALTOR® — that title identifies a real estate professional as a member of the association and someone who agrees to abide by their code of ethics and has passed the REALTOR® exam.

HomeGain.com is another online resource that lets you screen real estate agents. HomeGain founder Bradley Inman says buyers and sellers who use the site can expect to get about seven proposals from agents who want to represent them.

When using the Internet, be aware that agents pay for listings on some sites, so you may not be finding all of the best agents who could meet your needs. With that in mind, use the search results to check experience level, education and recent sales in your area. Then set up interviews with at least three candidates and be sure to check references.

Ask around for references

Ask everyone you know who has bought or sold a home for their recommendations — and ask specific questions such as:

  • What were the agent’s strengths and weaknesses?
  • Did the agent demonstrate knowledge of the home buying/selling process and the market?
  • Did the agent generate results (new properties for buyers to see or prospective buyers for a seller’s property)?
  • Was the agent attentive to clients’ specific needs and schedules?
  • Did the agent communicate well with the other party’s agent?
  • Most important, did the agent have integrity?

Don’t forget to ask other professionals who work with agents for their input. Check with your mortgage broker, banker, attorney and financial advisors. Ask other agents who they respect and why.

Know how your agent will be paid

When a real estate agent facilitates a purchase or sale of property, he or she receives a percentage of the sale amount as their compensation. Commissions generally run between 5 percent and 7 percent. By law, commissions are negotiable, but you’ll find that 6 percent is standard with most established agencies.

That commission is split between the listing agent and the buyer’s agent. The money comes from the seller, but you can be sure it’s built into the home’s price tag.

What to look for if you’re selling

If you’re selling your home, interview at least three agents, checking background and recent sales performance in your area, and expect each to outline his or her plans for marketing and selling your home. A listing, or seller’s, agent should also be able to advise you on ways to make your home more attractive to potential buyers.

Setting the price

Make sure your agent has a realistic (though perhaps optimistic) sales price target — setting the price too high can be as much of a problem as setting it too low. Your agent should be able to justify a particular asking price, providing support (comps, or comparable homes that have sold in the past few months) that it is in line with current market conditions.

The listing agreement

Once you decide on a listing agent, you will sign a listing agreement, which is a contract that shows what the agent is obligated to do, the price you want, the terms under which you will sell your home and the commission you will pay. The length of the agreement is negotiable, but make sure you understand that you may be giving the agent exclusive rights to sell the home until the agreement expires.

Going it alone

Eleven percent of home sellers sold their home without the assistance of a real estate agent. Some sellers find a middle ground, hiring professionals for flat fees to do some of the work, such as running open houses or listing the home on the local Multiple Listing Service (MLS) , while managing most of the sale themselves.

Whether you’re buying or selling, doing it yourself or not, you’ll need to build a team of professionals for at least some of the process. Make sure they’re the best.

How To Choose A Financial Planner

February 07, 2025

Before you set out to find a financial planner, take some time to think about what you want a planner to do for you. Once you have determined what you’re looking to get out of a relationship with a planner, it is easier to find one who offers the services you desire. So before you start contacting planners, take a moment to think about what you want to accomplish – investment help, retirement planning, or a comprehensive financial plan.

You’ll probably want to interview at least three planners before you choose the one to work with. You may want to consider asking people you know if they work with someone they would recommend. Ask your other advisors as well, your CPA or attorney may have a few planners that they work closely with.

To assist in your search, we have provided the following links to make finding a financial planner easier.

Find a CERTIFIED FINANCIAL PLANNER (CFP®) (800) 487-1497
Certified Divorce Financial Analyst (CDFA) (800) 875-1760
National Association of Personal Financial Advisors (NAPFA) (888) 333-6659
Find a CPA Personal Financial Specialist (CPA/PFS)

When you call each planner, here are ten questions to ask:

1. What are your credentials?

While there are no formal requirements to practice as a financial planner, there are several financial planning designations that will assure you of a minimum level of education and experience. A person holding the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation must pass five college-level courses that cover topics such as retirement planning, estate planning, tax planning, investment analysis, and employee benefits. Then they must pass a rigorous certification exam. Planners also must have a bachelor’s degree and meet experience requirements set by the CFP Board.

Another credential is the Certified Public Accountant/Personal Financial Specialist (CPA/PFS). These are CPAs who are members of the American Institute of Certified Public Accountants (AICPA), have at least 3 years of experience in financial planning, and pass a comprehensive and rigorous personal financial planning exam.

For a more complete description of different financial planning designations, check out this article.

2. Can you tell me about your experience?

It’s important to know how long the planner has been in practice, and with what companies. And you’ll want to know if they have experience working with clients who have financial issues like yours. If they have been with a number of different firms in a short period of time, ask why.

3. What services do you offer?

Find out what financial planning services they offer, as well as other services they provide. Some stockbrokers or insurance agents may earn a financial planning designation to appeal to more clients. Other planners may be fee-only, providing advice that may be limited to your planning needs, but they may not be able to provide specific investment options. Make sure you choose a planner that will meet all of your needs.

4. Do you specialize in a particular area?

Some planners work only with a particular type of client. Others focus on one or two planning areas, such as retirement or education planning. Because planners offer different services and have various fee structures, it’s a good idea to know what type of services you want so you can find out if the planner is a match.

5. Will others in your office be working with me?

Depending on the size of the planner’s practice, there may be other planners, paraplanners or other professionals you will also work with. Be sure to find out who will handle the maintenance of your account and who else will be involved in your financial planning relationship.

6. How are you compensated?

There is a wide variety of ways that planners get paid. It’s important to ask this question upfront, so there are no misunderstandings. A financial planning agreement, or engagement letter, should clearly spell out the compensation arrangement. Planners can be paid as fee-only, commission-only or fee-based, which is a combination of fees and commissions. Fee only arrangements can include a flat fee, hourly billing, or a fee based on a percentage of assets under management.

7. Do you recommend specific investments?

There is no right or wrong answer to this question, but you need to know if you will get this type of advice. Whether the planner receives a fee or commission for recommending a specific investment is less important than the quality of the advice. Ask what criteria they use to screen investments and if most of their clients hold the same stocks or investments.

8. Have you ever been disciplined for unprofessional behavior?

A number of regulatory agencies keep records on disciplinary actions of financial planners. These include the Financial Industry Regulatory Authority (FINRA), CFP Board of Standards (if the planner has a CFP® designation) and your state securities and insurance departments.

9. Can you give me references to some of your clients?

Many planners are happy to let you speak with a few of their clients to find out how their experience has been working with that planner. Other planners do not provide client references due to confidentiality issues. If you are able to check references, find out how often their planner calls them, how easy is it to get an appointment, and whether or not they would recommend their planner.

10. What questions do you have for me?

A good planner wants to know what your needs are, your work and family situation, and what kind of advice you are seeking. If a planner does NOT ask you a lot of questions when you call to interview them, it could be a red flag. You want a financial planner that focuses on your goals, not theirs.

After asking these questions of three or more planners, you may find one that clearly fits the bill. If not, don’t be afraid to keep looking for more referrals. As you talk to these planners, get a feel for their style – you want to make sure you’ll be comfortable revealing personal information to your planner.

4 Steps To Perform Your Own Investment Analysis

February 07, 2025

Two of the most common questions that I get as a financial coach are, “Do my investments make sense for me?” and, “Am I paying too much?” Generally, those are questions that I can’t answer in one minute, but with the right tools and a few minutes anyone can figure out the answer.

When I was a financial advisor trying to convince a potential client that I could do better than their existing advisor, here are the steps I would take – anyone can do them with the right knowledge.

How to do a self-analysis of your investments

Step 1 – Take a Risk Tolerance Assessment

You must know what amount of risk makes sense for you. I don’t care about your friends, relatives or co-workers. Does your mix of investments make sense for you?

To find out, this Risk Tolerance Assessment takes about 2 minutes or less, and will then offer you general guidelines as to how much money you should have in stocks, bonds and cash (aka money markets or stable value funds). If you have two entirely separate goals, such as a college fund that you need in 10 years and retirement in 25 years, then take the assessment more than once, each time with that specific goal in mind.

Step 2 – Figure out exactly what investments are held in your funds

Just because your fund says one thing in their objective doesn’t mean that it’s clear what your fund actually owns. If you really want to know, you can actually find out using a tool on Morningstar. Here’s how:

  1. Get a copy of your statement, then look for your account holdings. You are looking for fund names such as ABC Growth Fund Class R5. Even better, see if you can find the “ticker symbol” for each fund, which is a multi-letter code such as “ABCDE.”
  2. Go to Morningstar.com and enter the name or ticker symbol.
  3. Once you’ve found the Morningstar page for your fund, click on the tab labeled “Portfolio.”
  4. This tab will break down the mix in the fund by stocks, bonds and cash – keep in mind that Stocks include both US and non-US stocks, while bonds will simply be labeled as Bonds, and cash or money market will be listed as Cash.
  5. You can really geek out if you want by digging into how much is in large company stocks compared to mid and small sized companies or look at what sector of the economy your fund focuses on (such as technology or manufacturing, etc.) You may even find some fun in looking at the Top 10 holdings in each fund to see if you have an overload in a certain company.

The most important thing is that when you add up all the money in stocks based on this analysis it is close to what your risk tolerance suggests. The other key thing to check is that everything doesn’t look exactly the same. So if all of your funds are mostly large companies or all of them are US Stocks, then you may be out of balance.

Step 3 – Analyze fees

Once you have determined that your investments are or are not matching up with your risk, the next step is determining how much you are actually paying the mutual fund companies through fees, which are also called “expense ratios.”

While Morningstar has good info on that, the FINRA Fund Analyzer is a more helpful tool for this purpose. Here’s how:

  1. Again, enter the fund name or the ticker symbol into the analyzer, and when you’ve found your fund, click on “View Fund Details.”
  2. Scroll down to “Annual Operating Expenses” to see how the expenses for your fund stack up against its peers.
  3. Also look to see if you must pay a fee to get into or out of that fund.

Obviously, the ideal is to invest in funds where the fees built into the fund are at or below the average fee for that peer group.

Step 4 – Compare your advisor fees to benchmarks (if you have an advisor)

If you are a do-it-yourself investor, you can skip this last step, but if you have an investment advisor who is helping you with your investments then the last step is figuring out if you are paying them more than average.

Commission-based advisor

If you are investing in funds that showed a lot of up-front commissions or “Contingent Deferred Sales Charges” or “CDSCs” in Step 3, then that means your advisor is paid by commission. If so, then the key here is to make sure that the commissions are comparable to industry averages and that you are holding onto the funds – or at least staying in the same mutual fund company options – for about 7 years or longer in order to realize the value of the up front fees. This allows you to minimize the overall fees paid and avoids paying commissions too frequently.

“Fee-only” advisor

If your advisor is “fee-only,” then they don’t charge commissions, and instead they charge a management fee based on the total value of your investments. Generally, this is a fee that is collected quarterly, so in that case each quarter the fee is applied to your balance and then divided by 4. So, if you have a 1% fee on your $100,000 account, your fee would be $1,000 per year or $250 per quarter. Keep in mind that this is in addition to the fees you explored in Step 3, and will show up as a separate fee on your statement.

How much is too much?

As for what your fee should look like, a good rule of thumb is that if you are paying close to or above the average, then you should be receiving value for that in the form of other services such as financial planning, tax planning, etc. to justify the higher fee.

That said, it can vary quite a bit depending on the size of your account. In other words, the more money you have, the lower the percentage, but probably higher the dollar amount of your advisory fee.

Ultimately, it’s up to you to determine if you’re receiving proper value for any advisor-based fees. If you don’t think you are, then consider shopping around.

What about robo-advisors?

Today, there are lots of robo-advisors out there that will do most of the same things when it comes to managing your investments that a typical advisor would do, but the fees tend to be lower, ranging from 0.25 – 0.35%. Does that mean everyone should be using robo? Like anything else, some people are very comfortable with using technology as a tool and getting planning or guidance somewhere else. If that is you, then a lower-cost robo advisor may make sense.

If, however, you are like many folks and prefer someone you can call when you have questions who is intimately familiar with you and your situation, then paying up to that industry average may be worthwhile. Lastly, if you like your advisor but their fees are above average then you can always try to negotiate with them for lower fees and/or additional services like financial planning, retirement or college planning, etc.