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Advantages of Opening a 401(k)

Advantages of Opening a 401(k)

You just started a new job and have come across information about your company’s 401(k) in your benefits paperwork. You may be wondering what exactly it is and whether you should sign up. The 401(k) plan got its name from the portion of the IRS tax code that governs its use. In the past, most employees received guaranteed monthly retirement income through an employer-funded pension plan. But those days are long gone, and the once common benefit has been largely replaced by the employer-sponsored, but employee-funded, 401(k). The good news is that 401(k)s offer a bevy of benefits and advantages all their own. And it’s important to fully understand them when deciding whether to enroll and how much of your income to contribute.

Employee match. Many employers match a portion of their workers’ 401(k) contributions up to a given amount. Sometimes, this is a dollar-for-dollar bonus; other times, it might be a percentage - up to a certain limit. For example, an employer might match $.50 on the dollar for employee contributions up to 6%. It’s important to speak with your HR department or benefits manager to understand what the policy is where you work because the 401(k) match is like getting free money in your retirement account, and you can’t find that guarantee anywhere else in the investment world.

Tax advantages. Pre-tax dollars fund your 401(k) contributions. That means with every contribution, you can lower your tax liability up to the allowable limits. This can help you save significantly over time. Additionally, your investment grows tax-deferred until you start making withdrawals, which are allowed without penalty once you reach age 59½. Contributions up to $19,500 are tax deductible in 2020.

After-tax contributions. It’s permissible to contribute even more than $19,500, although those additional dollars are not tax-deductible. In 2020, the IRS allows workers to contribute up to $57,000 in combined employee and employer contributions yearly to their 401(k) account. For those aged 50 and older, the limit goes up to $63,500.

Catch-up contributions. If you’ve fallen behind on your retirement-savings goals, you’re not alone. Fortunately, 401(k) regulations allow those over the age of 50 to contribute up to an extra $6,000 per year to help make up for lost time.

Fiduciary oversight. Since 401(k) plans are governed by the Employee Retirement Income Security Act (ERISA), your employer is mandated by law to put your interests above their own in terms of managing and administering your 401(k) investments. They’re obligated to make sure costs are reasonable and investment options are varied and appropriate. You may even have access to educational resources or professional investment advice.

Creditor protection.In most circumstances, 401(k) accounts cannot be seized by creditors. However, it’s important to note that there are some exceptions to this rule, particularly when it comes to IRS violations as well as other government garnishments or criminal fines.

Loan accessibility. Many programs allow participants to take a loan out against the funds in their account. However, if a loan is not paid back on time, it’s considered a taxable distribution and subject to the 10% early withdrawal penalty if you haven’t reached age 59½. The IRS permits those who leave their jobs in or after the year they reach age 55 to make withdrawals without penalty (although you must still pay income tax on that withdrawal). For qualified public safety employees, these distributions can occur if you separate from your employer in or after the year you turn 50. You may also be able to access your 401(k) funds without the 10% early withdrawal penalty in the event of a hardship, if you qualify.

Automatic savings. A number of 401(k) plans offer automatic enrollment as well as auto escalation of contributions. If you’re the kind of person who tends to put off making financial decisions, this can help you stay on track toward your retirement goals by getting on board early and raising your contribution levels regularly.

And if you’re worried about committing to making those contributions month after month, it’s important to remember that you can stop or reduce them if your circumstances change, so you’re not locked in. 401(k) plans offer numerous benefits for workers and can help them achieve their retirement goals - but only if they participate.

Sources:

1. https://www.irs.gov/taxtopics/tc558

2. https://money.usnews.com/money/retirement/401ks/articles/2018-09-13/5-benefits-of-a-401-k-plan-you-havent-considered

Hybrid Long-term Care Policies: A Flexible Alternative

Hybrid Long-term Care Policies: A Flexible Alternative

What if, one day, you can no longer dress yourself or tie your shoes? Someone turning 65 today has an almost 70% chance of needing some form of long-term care (LTC) sometime in the future. And while many receive in-home care from relatives, that’s not feasible for others. They may not have someone who’s able to help, or they may need more care than can be provided at home.

Finding long-term care is hard enough; paying for it can be an even bigger hurdle. Some elect to pay out of their savings. Others rely on a traditional LTC insurance policy; they pay a premium, and the policy pays a defined amount toward eligible in-home care, adult daycare, or Alzheimer’s support if they need it.

One downside of traditional, stand-alone LTC insurance is that, if the policy does not provide a fixed premium, the cost can escalate, sometimes exorbitantly, over time. And that time could be when you’re living on a fixed income and need the benefits.

Recently, a third option has emerged: the hybrid LTC policy, which combines life insurance or an annuity with long-term care. You can pay a lump sum upfront or a fixed premium over time, and you can receive one or the other benefit in return, depending on the policy you purchase. If you never need LTC, the policy can pay income like a traditional annuity or a death benefit like a traditional life insurance policy. If you do need LTC, the policy pays toward those costs in an amount you choose when you buy it. Depending on the policy, money provided for LTC would reduce the annuity or death benefits that you’d otherwise receive.

Return of premium riders on hybrid policies can also return most, if not all, of the premium cost in the death benefit or annuity. At the same time, the total available for LTC might be several times higher than the premium amount, offering additional value.

Hybrid LTC policies are also often purchasable with a lump sum of cash — something less available for traditional LTC insurance — and medical underwriting requirements may be less stringent.

But there are downsides to consider. Lump sum premiums that can run upwards of $50,000 to $100,000 are inaccessible for many individuals, and LTC policy payouts will reduce the cash value of a life insurance policy or the benefits paid to the beneficiary. In addition, with both traditional and hybrid LTC policies, you’re putting your future in the hands of an insurer — are you confident they’ll still be in business when you need them? Check their rating with AM Best, a credit-rating agency that evaluates insurers, before signing on the dotted line.

Sources:

1. https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html

2. https://www.kiplinger.com/article/retirement/T036-C032-S014-should-you-buy-hybrid-long-term-care-insurance.html

Short-Term and Long-Term Disability Insurance

Short-Term and Long-Term Disability Insurance

Most of us expect to work until we voluntarily retire from the workforce. But there are any number of things that can and do prevent people from working: severe accidents, life-threatening illnesses like cancer, or memory loss from Alzheimer’s disease. It’s a long list that’s not fun to think about. Fortunately, there are both short-term and long-term disability insurance policies that can help protect you financially.

What Does “Disabled” Mean?

A wide range of conditions might qualify you for disability benefits. If you’re unable to perform your regular duties more than 15% of the time you’re at work, or you must miss more than 10% of your scheduled work time, you may qualify for disability support. In most cases, you must have solid medical evidence to prove your disability before collecting benefits.

Short Term vs. Long Term

If it’s expected that you’ll recover from your condition within a year or two, that’s generally considered a short-term disability. However, if doctors believe your disability will last longer or is permanent, that may be considered a long-term disability. Short-term policies typically start paying benefits faster — roughly 0-14 days after approval — and benefits might continue for up to two years. Long-term disability policies often have a longer waiting period, but the payments usually cover a more extended period of time.

SSI and SSDI

There are two Social Security programs that provide disability benefits: SSI and SSDI. SSI is a needs-based program for those with lower incomes that the Social Security Administration manages, but its funding is not from the Social Security Trust Fund. Applicants need not have worked or paid Social Security taxes, but they must not have assets worth more than $2,000 ($3,000 for a couple) and earn below a certain threshold of income.

SSDI is a program for those who have a work history that includes paying Social Security (FICA) taxes and generally offers higher benefits than SSI. The longer you work and the more FICA taxes you pay, the higher your benefits can be. However, applicants can’t collect benefits until after a five-month waiting period.

Private Insurance

If you’re employed full time, you may have disability benefits provided by your employer. In California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico, employers must provide short-term disability insurance. Even if you’re in one of those states, however, you may want to purchase supplemental insurance. Check with your human resources department and make sure you understand your costs, the level of benefits promised, the waiting period before you can claim benefits, and the length of time you can receive benefits.

If your employer doesn’t provide disability insurance, consider purchasing a private policy. Ask the same questions as above. In addition, you want to know the strength of the insurance company (AM Best rates the health of insurance companies) and the conditions that govern the policy. Know whether your policy is non-cancelable (renews at the same price each year and can only be terminated if you don’t pay your premiums) — or whether it is guaranteed renewable (can’t be cancelled but can go up in price). Also ask whether the benefits are guaranteed for some limited number of years, or until your retirement age, or for life.

Is Disability Insurance Right For Me?

Like all insurance, you’re making a wager. You’re betting that, at some point, you might be out of work long enough to need financial help. The insurance company is betting that you won’t. The cost of the policy depends on how the insurance company views those chances and the options you select. Higher benefit levels and longer coverage raise the price.

For help deciding what kind of coverage you might need, set up an appointment with your financial advisor. Have a list of questions, such as how likely you think it is you’ll need disability payments, how much income you’d need and the coverage period you desire. Understanding your options now can help prevent panic decisions later.

Sources:

1. https://www.disabilitysecrets.com/page7-10.html

2. https://www.iii.org/article/what-are-types-disability-insurance

3. https://www.disabilitysecrets.com/page5-13.html

4. https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/stateswithstd.aspx


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