Tuesday, December 13, 2016

IRA, 401k, or Both?


A common question I'm asked is whether someone should be contributing to their IRA, employer 401k/403b, or should they do both?

Here are a few of the questions you should ask yourself first:
  • Does your 401k plan make matching contributions?
  • Up to how much of your contribution will they match?
  • After all expenses are paid how much money do you have to invest each month?
  • How long do you expect to be at your current job?


The first question that needs to be answered when determining where you should be investing your money is whether or not your employer is matching your 401k contributions. If they are, you want to contribute up to the amount that they match you and not a penny more. If your employer does not match your contributions then you would want to be contributing to your IRA/Roth IRA instead. When an employer matches your contributions that means they're giving you FREE money and you'd be a fool to pass up on that! When you receive no employer match on contributions in your 401k there's really no reason for you to invest your money there. It limits your investment selection to what's offered in the plan. An IRA gives you the freedom and flexibility of investing in many different financial instruments.

Now, if you're maxing out your IRA contributions each year ($5500 under age 50 and $6500 over age 50) then you would look to your 401k for additional means of investing for retirement. Again, there are far more benefits to an IRA than a 401k in my opinion, so unless you're making a full contribution to your IRA there's no reason to be contributing to a non-match 401k/403b plan. However, if you are currently maxing out your IRA contributions and looking for additional areas to save for retirement you can save as much as $18,000/year in a 401k/403b

Many employer plans that do offer a match incentive also carry a vesting element. Simply put, they require you to be employed with the company for 'X' years in order to receive the full value of your 401k. Any contributions you have made will always be taken with you if you decide to leave, but they can elect to withhold the portion they have contributed if you don't meet their vesting requirements. This is why the length of time you plan on being with a company is a factor when considering whether or not you should invest in their 401k. If you don't plan to stay with the company long enough to meet their vesting requirements, there's no sense in contributing to it, even if there is a match option.

In closing, the most ideal situation for anyone is to have the ability to make full contributions to their IRA each year while also contributing to their 401k. Unfortunately, not everyone has this luxury. Working with a financial planner allows you to budget your monthly expenses, determine the amount of match your  company plan offers and then decide how much, if any, amount should be allocated to an IRA.

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Friday, December 2, 2016

Who Said You Need To Be Rich To Build Wealth?

Perhaps the most common misconception I've encountered when working with new clients, particularly younger ones, is that investing requires a large amount of capital to begin. This couldn't be any further from the truth. I think most millennials (born 1980-2000) or Gen Xers (born 1960-1980) see the financial industry as a bunch of old men with grey hair in outdated suits. Furthermore, I believe these generations get the impression that advisors will never give them the time of day because they don't have nearly enough money to be considered relevant. While this attitude can certainly hold true in many firms, I've taken it upon myself to ensure that my firm doesn't fit this stereotype.
 
Not only do I think it is important for people to begin investing early but also that they're given the best advice whether they're investing $100,000 or $1,000. Establishing strong investing habits early on is extremely important to ensure investors reach their financial goals. Unfortunately, I can't say that many other firms in my industry share this belief. I've been to many conferences where I've heard older advisors say that they refuse to work with younger clients because of their lack of assets. While I think this grave mistake is going to cost them dearly later on, I see opportunity in their shortsighted vision.
 
I've worked with many clients in establishing an investment plan where they have begun by putting away small amounts each time they get paid. As an example, the maximum amount you may contribute to an IRA is $5500 per year (at age 50 it's raised to $6500/year). Let us assume you make an initial investment in your IRA of $700. If you can have an automatic deposit of $200 taken from your bank and put into your IRA every two weeks you'll stash away an additional $4800 per year, putting you right up to that maximum contribution limit. Or, suppose someone can only put $300 away monthly, this still gets them to $3600 a year, not bad! I have some clients who prefer to make a larger up front deposit and others that prefer a smaller one. Regardless of your preference the result is the same.
 
Sure, life would be a lot nicer if you could afford to make a one-time $5500 deposit each year but not everyone has that luxury and that's okay. We all have our expenses and financial priorities but building long term wealth should not be one that gets pushed to the back burner. Current investors are placed in a unique conundrum being that pensions are nearly extinct and many are questioning if social security will be around when it's their turn to collect. All the more reason why starting an IRA early and contributing to it regularly has become so vital to your financial health.
 
My firm has built a remarkable team complete with; CFP's, CPA's, attorneys, and insurance experts all in our network. I truly believe that in this day and age everyone deserves a comprehensive, all-inclusive team to service them and all their financial needs regardless of how much they're able to contribute to their accounts. With that said, I urge you, if you haven't done so already, to evaluate your current spending habits and find areas where you can redirect money into investments that will aid in building your wealth.