401(k)s & IRAs For Dummies

Ted Benna is commonly referred to as the “father of 401(k)” because he created and gained IRS approval of the first 401(k) savings plan. Brenda Watson Newmann began her career as an Associated Press foreign correspondent and later moved to Silicon Valley as Managing Editor at 401k Forum/mPower.

Introduction 1

About This Book 1

Foolish Assumptions 3

Icons Used in This Book 4

Beyond the Book 4

Where to Go from Here 4

Part 1: The ABCs of 401(k)s and IRAs 7

Chapter 1: Explaining IRAs and 401(k)s 9

Exploring the Basics of Retirement Savings Plans 9

Getting down to 401(k) basics 10

Introducing IRAs 12

Comparing and Contrasting IRAs and 401(k)s 14

Accentuating the Positive 16

Saving up 16

Getting employer contributions 16

Chapter 2: Taxing Issues 19

Realizing the Reasons for Tax Breaks 19

What the government gains 20

What you gain 20

Talking Tax Terms 21

Earning your income 22

Combining your income 22

Adjusting your income with AGI 22

Figuring your marginal tax rate 23

Getting Credit for Contributions 24

Deducting IRA contributions 24

Paying attention if your spouse has a plan 25

Earning extra credit according to income 27

Taxing Income at Retirement 28

Staying Alert to Changes in Tax Law 31

Chapter 3: Naming Beneficiaries and Planning for the Future 33

Deciding Who Gets Your Savings When You’re Gone 34

Detailing the Distribution 35

Talking Timing and Taxes 36

Passing along Company Stock 37

Starting the Roth Clock 39

Qualifying Your Charitable Giving 39

Giving a good QCD 40

Linking RMDs and QCDs (and minding your Ps and Qs) 40

Giving tax free 41

Being a Beneficiary 42

Deciding — or being told — what to do with the money 42

Saying no to the money 43

Stretching an inherited IRA 43

Part 2: 401(k) Basics 45

Chapter 4: Checking the Benefits of a 401(k) 47

Realizing What a 401(k) Does for You 48

Lowers how much tax you pay 49

Gets you matching funds from your employer 53

Makes room for a little something extra: Employer non-matching contribution 55

Allows you to save without tears 56

Vesting: When Your Employer’s Contribution is Yours to Keep 57

Vesting of employer contributions 57

Making exceptions (You knew this was coming, right?) 58

Letting the Pros Work for You 59

Protecting Your Money 60

Meeting minimum standards 60

Avoiding losses in bankruptcy 61

Watching Out for Potential Pitfalls 62

Earning more may mean contributing less 62

Being at the mercy of your plan 62

Chapter 5: Signing Up for a 401(k) 63

Exploring Your Eligibility 63

Sometimes you play a waiting game 64

Sometimes you can’t join at all 65

Sometimes you’re automatically in 66

Making Your Entry Date 66

Deciding How to Invest Your Money 67

Chapter 6: Paying Attention to Administrative Issues 69

Figuring on the Fees 69

Finding the fees 70

Understanding the fees 71

Paying the fees 72

Paying extra for extra services 74

Checking on small business challenges 74

Considering Funding Issues 76

Making a mutual decision 76

Unwrapping wrap fees 77

Prospecting in the prospectus 78

Knowing What You Can Know 79

Working to Improve Your Plan 79

Upgrading investment performance 80

Searching out information 82

Questioning investment strategy 83

Chapter 7: Weighing Your Options When You Leave Your Employer 87

Taking Your Savings with You 88

A Rolling 401(k) Gathers No Taxes 88

Realizing that account size matters 89

Moving your money to your new employer’s plan 90

Waiting for the money to transfer 91

Leaving Money with Your Old Employer 91

Taking a Lump Sum 92

Taking Stock into Account 93

Part 3: Here Come the IRAs 95

Chapter 8: Investing in an IRA 97

Looking at the Basics of Your IRA 97

Staying traditional 98

Touching on Roth IRAs 99

Benefiting from a spousal IRA 100

Starting an IRA for a child 100

Setting Up Your IRA 101

Deciding where to invest your money 102

Opening your account 103

Maintaining Your IRA 104

Moving Your IRA 104

Chapter 9: To Roth or Not to Roth 107

Predicting Future Tax Rates 108

Calculating accurately 108

Talking tax breaks 109

The “Or Not to Roth” Section 110

Taking Money Out of Your Roth IRA 111

Converting to Roth 112

Chapter 10: Rolling Over an IRA 115

Rolling-Over Basics (How to Shake is Next) 115

Rolling through the Process 117

Rolling through a conduit 119

Rolling partially over 120

Rolling Roths with care 120

Calling a Roth Conversion: No, It’s Not a New Football Play 121

Paying 20 Percent 121

Part 4: Saving and Investing 123

Chapter 11: Setting Up Your Savings Plan 125

Targeting Your Retirement Date 126

Getting Your Hands on Your Money 127

Drawing on your Social Security 127

Tapping into other sources 131

Living the retirement life 133

Testing the waters in your gene pool 134

Developing Your Retirement Savings Plan 134

Cutting down on your expenses 134

Picturing your progress 136

Counting on compounding 140

Chapter 12: Determining How Much to Save 143

Improving Your Chances of an Ideal Retirement 143

Deciding How Much of Your Salary to Put Aside 144

Making use of your salary deferral agreement 144

Measuring your plan’s maximums 145

Being highly paid means different rules 146

Estimating what your budget can afford 148

Building Your Nest (Egg) 150

If you’re retiring in the near future 150

If your retirement is farther off 152

Using a retirement calculator 154

Chapter 13: Selecting Your Investments 155

Looking Over the Investment Menu 156

Money market funds: Show me the money 157

Keeping things reined in with stable value funds 159

Bonding your funds: Single portfolio seeks stable relationship 159

Deciding one and done: Balanced and TDF funds 160

Stock funds: A feather in your cap 160

Investing where you work: Company stock 164

Brokerage window: Don’t fence me in 165

Forging Your Own Investment Trail 167

Baking Your Asset Allocation Pie 168

Check your ingredients and avoid these common mistakes 170

Open the oven door once in a while to check your progress 174

Make sure that your pie complements the rest of the meal 174

Seeking Help from the Pros 175

Finding books and publications 175

Consulting a real live person 176

Going online for info 177

Going online for advice 178

Chapter 14: Taking Reasonable Investment Risks 179

Defining Some Investment Basics 180

Playing debt instruments and making equity investments 180

Taking a dip in the mutual fund pool 181

Watching the return of the mummy er money 182

Diversifying for fun and safety 183

Staying In It to Win It 185

Seizing the opportunity of a downturn 185

Buying more when prices are low 186

Classifying Different Types of Risk 187

Losing more than you can stand 187

Losing your entire investment 188

Owning too much company stock 189

Not having enough money to live on during your retirement 191

Understanding the Risk-Reward Relationship 191

Deciding How Much Risk You Can Stand 192

Part 5: Money In, Money Out 195

Chapter 15: Making Contributions 197

Checking Out How Much You Can Contribute 197

Gauging the limits of the law 198

Seeing what Uncle Sam allows (he’s extra generous if you’re 50 or older) 198

Paying attention to the percent-of-pay limit 199

Heeding limits on your personal IRA 200

Maxing Out Matching Contributions 200

Timing is Everything 201

Spreading out your 401(k) contributions 201

Spreading out your IRA contributions — or not 202

Chapter 16: Withdrawing Money Before You Retire 203

Taking Money from Your IRA 204

Accessing Your 401(k) Plan Money While Working 205

Facing Hardship with Your 401(k) at Your Side 206

Defining a hardship 206

Determining the amount 208

Calculating the tax you owe 209

Dipping into Your 401(k) Money to Buy Your First Home 210

Both a Borrower and a Lender Be 211

Giving one good reason 211

Figuring out how much you can borrow 212

Determining how much interest you pay 212

Paying the piper: Repayment rules 212

To Loan or Not to Loan (To Yourself, That Is) 213

Weighing a Hardship Withdrawal versus a Loan 214

Saying No to Yourself 215

Chapter 17: Managing Your Plans after Retirement 217

Looking Forward to Retirement 218

Decisions, Decisions: What to Do with Your 401(k) Money 218

Being older can save you money 220

Foiling the dreaded early withdrawal penalty 221

Leaving money with your former employer 222

Making Withdrawals from Your IRA 223

Paying Uncle Sam His Due: Required Withdrawals 224

Developing a Strategy to Deal with the Tax Man 227

Which comes first: Plucking the chicken or emptying the nest egg? 227

Dealing with that darned company stock 228

Managing Your Investments in Retirement 229

Live long and prosper 230

Stay practical 230

Managing Risk 231

Balancing investments 231

Buying an annuity 232

Consolidating Your Accounts 235

Tending to Your Nest Egg 236

Row, Row, Row Your Boat, Gently Down the Income Stream 237

Treating Your Home Like the Asset It is 239

Adding up the expenses 239

Making use of your equity 240

Part 6: Helping Small Employers 241

Chapter 18: Plans from a Small Employer’s Perspective 243

Putting in the Effort 243

Meeting Regular 401(k) Requirements is a Pain in the Pocketbook 244

Getting to know ERISA and her requirements 245

Dieting won’t help top heavy plans 245

Sticking up for the little guy: Nondiscrimination tests 247

Calculating the bottom line on employer contributions 249

Deciding on other bells and whistles 249

Comparing 401(k)s 250

Going it alone: The solo 401(k) 250

Choosing a safe harbor in a storm of requirements 251

Spelling out QACA 252

Finding Alternatives to a 401(k) Plan 253

Making it easy with payroll deductions 254

SIMPLE Simon met a pie man 256

Contributing the funds with a Simplified Employer Pension (SEP) 258

A Word about Cost 259

Chapter 19: Offering a 401(k) Plan 261

First Things First 262

Prioritizing employees: Being a fiduciary 263

Exploring the world of fees 264

Choosing a 401(k) Provider 267

Getting up close and personal — why you shouldn’t 268

Streamlining the process with outside help 268

Going to a third party (the second one was lame) 271

Choosing Investments and Advisors for Your 401(k) Plan 271

Small business seeking a 401(k) advisor 272

Selecting the investments 273

Figuring out what types of funds to offer 274

Wrapping Up a Package of 401(k) Plans 275

Joining Up: MEPs, PEPs, and PPPs 277

Seeking common ground: MEPs 277

Connecting PEPs and PPPs 278

A 401(k) is a Terrible Thing to Waste: Educating Employees 278

Chapter 20: Choosing a Plan for Your Business 279

Selecting a Plan That’s Right for You 279

Considering Real-Life Examples 282

Meeting a small business’s needs with a SEP 282

Reaching personal contribution goals with the SIMPLE plan 283

Adopting the standard 401(k) for a growing business 284

Attracting employees with a QACA 401(k) 285

Getting Credit to Set Up 286

Changing Service Providers 287

Part 7: The Part of Tens 291

Chapter 21: Ten + Two Ways to Save For Retirement 293

Join an Employer-Based Retirement Plan 293

Set Up Automatic Withdrawals 294

Start Young 294

Deposit Bonus Money in Your Retirement Account 294

Earmark $20 a Week for Your Retirement Fund 295

Deposit Your Tax Refund into Your Retirement Account 295

Cancel Subscriptions You No Longer Use 295

Refinance Your Mortgage 295

Shop for Better Insurance Rates 296

Resist Click Bait 296

Think Before You Spend 296

Reduce Your Transportation Costs 297

Chapter 22: Ten Questions about IRAs Answered 299

Where can I start an IRA? 299

Do I need to hire a broker or financial advisor to start an IRA? 300

How much can I contribute to my IRA? 300

What tax breaks do I get for having an IRA? 300

How do I take money out of my IRA? 300

How much tax do I have to pay when I withdraw money from my IRA? 301

What can I invest in through my IRA? 301

What’s the safest way to invest my IRA money? 301

Is my IRA insured? 302

Can I start an IRA for my spouse and/or children? 302

When do I have to start taking money out of my IRA? 303

Chapter 23: Ten Reasons to Participate in a 401(k) 305

You Can’t Afford Not To 305

The Stock Market Can Be Your Friend 306

You May Get Contributions from Your Employer 306

Your 401(k) Money is Placed Safely in a Trust 306

Any Plan is Better than No Plan 307

Your Account is Portable 307

You May Be Able to Take Out a Loan 307

Social Security Isn’t Enough 308

The Younger You Start, the More You Can Save 308

You Can Contribute More as You Get Older 309

Index 311