Get smart with your money
Dear Liz: As an employee of a public agency that offers a 457(b) account, it would be helpful to know if these accounts are insured in a manner similar to a 401(k).
Answer: Employer-provided, tax-deferred 457(b) accounts are quite similar to 401(k)s. Both allow employees to make pretax contributions to a retirement account that can be invested for future growth. The accounts aren’t insured the same way bank accounts are, but the money is kept in a separate trust that’s protected from creditors.
Dear Liz: I’m setting up accounts post-divorce, while learning personal finance on the fly. Is it “safe” or advisable to have all of my larger accounts — IRAs, 401(k), cash management — with the same institution, or should I spread them around? I have smaller checking and savings accounts with a good credit union.
Answer: Using a single investment firm is certainly convenient, and most people will be just fine having all their accounts in one place.
The Securities Investor Protection Corp. covers accounts up to $500,000, including up to $250,000 in cash. This insurance protects you if the brokerage fails and your cash or securities go missing.
Customers with multiple accounts often get more coverage. For example, IRAs and Roth IRAs would each get up to $500,000 in coverage, as do individual and joint brokerage accounts. A person with all four types of accounts would have $2 million in coverage. Accounts for corporations, trusts, estate executors and guardians of minors also get separate coverage. For more details, see SIPC’s brochure, “How SIPC Protects You.”
Your 401(k) has its own protections. Assets in 401(k)s are placed into trust accounts, separate from the investment firms that administer the plans and the employers that sponsor them. The money can’t be touched by creditors of either one.
Any 401(k) can help you save for retirement. A great 401(k) allows you to save a whole lot more.
The difference between a mediocre plan and a great one could translate into tens of thousands of dollars in future retirement money. Plus, a 401(k)’s quality can show how serious a company is about attracting and retaining good workers.
That’s not to say you should leave or turn down a job if it doesn’t offer a great 401(k). But knowing how to spot a best-in-class retirement plan can help you evaluate job offers, negotiate a raise to compensate for what you’re missing and perhaps encourage your employer to make its plan better. In my latest for the Associated Press, learn three features of great 401(k)s.
Dear Liz: I began converting two 401(k)s from previous employers to Roth IRAs. To lessen the huge tax hit, I decided to do the conversions over the course of seven years. Even with that, the tax hit is higher than I realized and too painful. Now that partial conversions have begun annually, am I required to complete the total conversion to 100%? Or can I stop midway and leave the remainder in the original accounts? Also, is there an age limit before which Roth conversions must be completed?
Answer: You don’t have to continue making conversions. (Before 2018, you could have even reversed conversions you already made, but that’s no longer possible.) There’s also no age limit for conversions, but the older you get, the less likely conversions are to make financial sense.
Conversions are a good bet if you expect to be in the same or a higher tax bracket in retirement. If you’re young and in a low tax bracket now, you can reasonably expect that to be the case.
As you approach retirement, though, the opposite may be true. Many people find their tax bracket drops once they retire. Why pay a big tax bill now if you can access the money at a lower tax rate later?
Then again, if you’re a good saver, you may discover you’ve accumulated so much that your tax bill will soar once you’re required to start taking minimum distributions at age 72. If that’s the case, then converting some of your retirement money might save you on taxes overall.
But you’ll want to discuss this with a tax pro or financial planner who can model how the conversions are likely to affect your overall finances, including any Medicare premiums, since those can increase with income.
Dear Liz: I recently changed jobs. Typically I max out my 401(k) contributions each year. I contributed $20,700 to my previous company’s plan before quitting. Eligibility for my new company’s 401(k) doesn’t kick in until after 12 months of continuous employment, so I won’t be able to access this benefit until 2023. Can I set up an IRA or Roth IRA to reach the $27,500 limit for people 50 and older? I am married, filing jointly and our combined income exceeds $214,000.
Answer: Please talk to your company about fixing this outmoded requirement, which is costing its workers enormously in lost matching funds and compounded returns. Most companies have much shorter waiting periods, and the most enlightened employers enroll workers immediately. It’s hard enough to save adequately for retirement without an arbitrary yearlong delay.
The limits for contributing to workplace plans are separate from those for IRAs and Roth IRAs. For 2022, the limits for 401(k)s are $20,500 for people under 50 and $27,500 for people 50 and older. The contribution limits for IRAs (regular or Roth) are $6,000 for people under 50 and $7,000 for people 50 and older.
If you had access to a workplace plan at any point during the year, your ability to deduct your contribution would phase out with modified adjusted gross income between $109,000 and $129,000 if you are married filing jointly, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. The phaseout is between $68,000 and $78,000 for single taxpayers.
Normally when you can’t deduct an IRA contribution, you’re better off contributing to a Roth IRA. Contributions to a Roth aren’t deductible but withdrawals are tax-free in retirement.
However, the ability to contribute to a Roth IRA phases out with modified adjusted gross incomes between $204,000 and $214,000 for married joint filers and between $129,000 and $144,000 for single filers.
If you can’t contribute directly to a Roth, you could consider what’s called a “back door” Roth contribution, in which you contribute to a regular IRA and then convert the money to a Roth. Although direct Roth contributions have income limits, Roth conversions do not. However, you are required to pay income taxes on a typical conversion, so this maneuver works best if you don’t already have a large pretax IRA.
Today’s top story: Crypto could be coming to your 401(k). Also in the news: When it comes to your car contract, the devil is in the details, the Travel Nerd on what oil prices mean for your summer travel, and the majority of adults support mandatory personal finance education in schools.
Crypto May Be Coming to Your 401(k) — Here’s What to Know Now
You may soon have access to Bitcoin as an investment in your 401(k). But think about how you react to losses before jumping in.
When It Comes to Your Car Contract, the Devil Is in the Details
Avoid bogus fees and additional charges in your car contract by reading carefully before you sign.
Ask a Travel Nerd: What Do Oil Prices Mean for My Summer Travel?
Airfares are rising, car rentals will cost you. Maybe try a city with good public transit?
88% of adults support requiring personal finance education in high school, survey finds
Starting off on the right foot.