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Tag: 401(k)s

  • More Americans Tapping 401(k)s Amid Financial Strain | Entrepreneur

    More Americans Tapping 401(k)s Amid Financial Strain | Entrepreneur

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    Bank of America’s recent data reveals a concerning trend: more Americans are tapping into their 401(k) accounts due to financial difficulties.

    In the second quarter of 2023, the number of people making hardship withdrawals increased by 36% compared to the same period in 2022, reaching 15,950 withdrawals. The trend has prompted worries from experts, such as LendingTree’s Matt Schulz, who told CNN it is “pretty troubling,” and emphasizes the high long-term costs of such withdrawals.

    “You understand why people do that in the heat of the moment, but the opportunity costs on that are really, really high over time,” he told the outlet.

    The report also shows a rise in participants borrowing from workplace plans and a decrease in average contributions.

    While overall employee contributions remained stable during the first half of the year, a larger portion of participants increased their contribution rates rather than decreasing them.

    Related: Here’s Everything You Need to Know About 401(k) Contribution Limits for 2023

    “The data from our report tells two stories – one of balance growth, optimism from younger employees and maintaining contributions, contrasted with a trend of increased plan withdrawals,” said Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America, in a statement. “This year, more employees are understandably prioritizing short-term expenses over long-term saving. However, it’s critical that employees continue to invest in life’s biggest expense – retirement.”

    The current economic landscape, marked by a robust labor market, overall economic growth, and increased consumer spending, is contrasted by the lingering effects of the global pandemic and persistently high inflation. Household finances have been strained, with household debt balances growing by nearly $3 trillion since 2019, according to New York Federal Reserve data for Q1 2023.

    Furthermore, a separate report from the New York Fed disclosed that U.S. households’ credit card debt has exceeded $1 trillion for the first time, which — combined with other forms of debt — pushed total household debt to $17.06 trillion by the end of the second quarter.

    “There’s only so much hard debt that people can handle before delinquencies really spike,” Schulz told CNN. “Ultimately, you just have a lot of people who are doing OK now, but it wouldn’t take a whole lot for them to find themselves in a pretty sticky situation financially, whether that is a medical emergency, job loss, or even just student loan payments restarting.”

    Related: Supreme Court Blocks Biden’s Student Loan Forgiveness Plan — Here’s How It May Affect the Economy

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    Madeline Garfinkle

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  • Should You Offer a 401(k) Match to Your Employees? Here Are 3 Things You Must Consider. | Entrepreneur

    Should You Offer a 401(k) Match to Your Employees? Here Are 3 Things You Must Consider. | Entrepreneur

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    Opinions expressed by Entrepreneur contributors are their own.

    Employer matching contributions to retirement plans are often seen as costly commitments by business owners. As it stands, 48% of private sector workers in the United States don’t have access to a 401(k) or pension plan, according to an AARP study. Yet, for employers, they are worth investing in.

    Companies are beginning to understand the positive effects that matching can have on employee loyalty. Offering a 401(k) matching program provides both employers and employees with countless benefits. For example, a 401(k) match might seem expensive, but it’s one of the most cost-effective benefits you can offer your employees. A match is tax-deductible for you, reducing your after-tax burden.

    Related: Searching for Talent? Consider Setting Up a 401(k) for Your Small Business to Keep Up in the Market.

    3 things to remember about 401(k) matching

    It’s important to take time to make an informed decision and set your company on the right path to providing a secure retirement plan for your team. Consider these three things when deciding whether or not to offer 401(k) matching to your employees:

    1. Consider how it will affect your recruitment and retention efforts

    Offering a matching contribution can be a great way to recruit and retain star employees. To an in-demand candidate, a matching contribution can make an employer stand out. A matching program can also jump-start an employee’s retirement savings. Savings of 10-15% are generally recommended for retirement, but when you kick in a contribution, this requirement lessens, making it much easier for employees to reach their retirement goals.

    Employers tend to offer a match-up to a certain percentage of an employee’s salary. Suppose someone earns $50,000 per year; a 3% match would be $1,500. Consider if your business can afford a match, but also remember that the cost is sometimes worth the loyalty.

    Because loyalty is a factor, many large, well-known companies participate in 401(k) matching programs and match certain percentages up to IRS contribution limits. For instance, Amazon and Apple match 50% of employee contributions for up to 4- 6%, respectively. Apple will match 50 or 100% of employee contributions for up to 6%, depending on how long an employee has been with the company. Netflix matches 100% of employee contributions for up to 4%.

    Related: 12 Pro Tips That Will Increase Company Retention

    2. Consider your cash flow and predictable business growth and expenses

    When it comes to your matching contribution, you have two primary options: You can pay for it on a per-payroll basis, or you can wait until the end of the year and fund it all at once. Depending on the financial flow of your business, either method might make sense. Generally, per payroll is preferable since you will need to account for the matching amount in your cash flow planning if you wait until the end of the year. Therefore, putting the money into accounts as you go is often easier.

    For per-payroll matches, if your company decides to match 50% for up to 6% of savings, an employee who contributes 6% in a paycheck would receive their 3% matching during the same payroll period. Employees often favor this as it gets their match dollars into their retirement accounts almost immediately. If an employee stops contributing at any point during the year, their employer would have nothing to match, resulting in no retirement deposit.

    For end-of-year matching, the plan reviews how much each employee contributed in total after the year is over. Using the match formula, the company calculates how much match the employee is due and makes the contribution all at once. These contributions usually happen in late winter or early spring of the following year, so it can be a long wait for employees. If they contribute in 2023, they may not get their match until well into 2024.

    The annual match does benefit some employees if they have swings in income. Someone who saves 10% for the first half of the year and then drops to 2% in the second half could get a full match. That may not work out as well on the per-payroll process.

    3. Consider whether now is the right time to start matching at all

    If your business is struggling, you may not be able to fund a 401(k) matching program. Turning on and off a match program is extremely hard to explain to employees — even if you warned them in advance. Ultimately, the value of an employee benefit is not defined by a business or its owners. It is determined by the employees themselves. Their experience trumps any owners’ or leaders’ beliefs, so make sure you consider how your employees feel before implementing anything.

    Alternatively, you could offer profit-sharing contributions when the company is doing well. Profit sharing is a component of your 401(k) plan where companies can make a discretionary deposit to employees. Companies may choose to go this route if they are in a volatile industry that has extreme highs and lows in cash flow. This can be a great way to ease concerns about 401(k) matching if you are unable to implement that benefit.

    Related: What Is a 401(k) and How Does It Work?

    When choosing the type of matching contribution that works best for your business, consider your budget and cash flow as well as the expectations of your employees. A 401(k) matching program can boost employee morale and encourage your team to save for retirement. It can also help you recruit and retain top talent. Take time to review all of the options available, and choose the type of matching that will work best for your organization.

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    Matt Baisden

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  • 10 Important Tax Numbers Every Business Owner Should Know to Save | Entrepreneur

    10 Important Tax Numbers Every Business Owner Should Know to Save | Entrepreneur

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    Opinions expressed by Entrepreneur contributors are their own.

    I’m a certified public accountant but my firm doesn’t prepare tax returns. However, I’m also a business owner. This means, like my best clients, I pay close attention to my taxes. Why? Because for a business owner, taxes are usually one of our biggest expenses. If you’re running a business, these are 10 federal tax numbers that are very important for all of us in 2023.

    $160,200

    This is the maximum amount of wages that can be taxed for social security (FICA) benefits at 6.2% (the 1.45% Medicare tax has no limit). Any wages paid over this amount are not subject to the FICA tax — employee or employer. This is important because if you raise an employee’s compensation above this amount, they’re receiving an added tax benefit which should be part of your salary considerations this year.

    Related: These Are the Top Tax Filing Mistakes Made by Small Business Owners (and How to Avoid Them)

    $6,500

    This is the amount you can contribute to an individual Roth IRA account. Roth IRAs often get ignored by my clients but they’re a fantastic way to put after-tax money away and watch it grow tax-free with no penalties or additional taxes on withdrawal. Because the stock market is down, I have a number of older clients taking distributions from their 401(k)s, paying the tax on a lower capital gain, and then transitioning those amounts to a Roth where the amounts are never taxed again. Everyone should be putting money into a Roth IRA.

    $7,500

    This is an added “catch-up” contribution that can be made to your 401(k) account if you’re over the age of 50 — which means that more than half of business owners in the U.S. are probably eligible. There’s also a $1,000 catch-up for individual IRAs for people in this age group. Thanks to the recently passed Secure 2.0, the 401(k) catch-up amount is going to rise to as much as $10,000 annually for those between the ages of 60 and 63 starting in 2025 and will then be adjusted for inflation each year.

    $66,000

    That’s the amount that can be contributed to a 401(k) plan this year which includes both employer and employee contributions and does not include any “catch-up” contributions. This amount is limited to your income and discrimination tests (see below).

    $150,000

    That’s the amount of compensation that defines a “highly compensated employee.” This is important because the number of people you have in your 401(k) retirement plan that earns over this amount will figure into your plan’s year-end discrimination testing and that may limit the amount you — and they — can save. The takeaway: The more employees —particularly non-highly compensated employees — that contribute to your 401(k) plan, the more you can contribute.

    Related: 3 Ways to Save Money on Taxes That Most Entrepreneurs Miss

    $0.655

    That’s the IRS-reimbursable mileage rate for 2023 and it changes every year based on the fluctuating costs of operating a vehicle. This is important because you can reimburse your employee for any miles traveled above the commute to your office (for example to a customer) and you’ll get a tax deduction — and the amount won’t be taxable to them. This is potentially a great added benefit to provide for your staff, particularly in these times of high gas costs.

    $300

    This is the amount you can pay your employees each month to reimburse for their commuting expenses. You’ll get a deduction and they won’t be taxed. If an employee drives to work, you can also pay them $300 to reimburse for their parking expenses with the same tax treatment. It’s another benefit to consider and could be a helpful enticement to get your people back into the office more often.

    $1,160,000

    That’s the maximum Section 179 deduction you can take this year for the acquisition of capital assets. This applies to both new and used assets like capital equipment, machinery, furniture and most computer software. There are “bonus” depreciation deductions that your business can take in addition to the Section 179 amounts. You can even finance these purchases and get these deductions — just make sure they’re “in service” by year-end.

    $12,920,000

    That’s the individual federal estate lifetime tax exemption which means that a married couple can leave more than $25 million of their assets upon their deaths tax-free to the beneficiaries. After that, most transfers of assets will be taxed at 40%. This exemption gets reduced to $7,000,000 individually in 2026.

    $17,000

    This is the amount you can gift this year and the recipient won’t be taxed. This is in addition to the lifetime addition above and applies to anyone, not just family members.

    You know what’s coming next, right? It’s the usual caveat where I write that your situation may be unique and you should always consult your tax professional before making any decisions based on the above numbers.

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    Gene Marks

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  • 401(k) Contribution Limits for 2023: Everything You Need to Know

    401(k) Contribution Limits for 2023: Everything You Need to Know

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    Contributing to a 401(k) may be one of the smartest things you can do to set yourself up for a comfortable retirement in your golden years.

    However, unlike simply stashing money in a savings account, you can only put so much into your 401(k) retirement plan each year due to 401(k) contribution limits.

    Unfortunately, things get a little more complex because the government changes the contribution limits for 401(k)s yearly. Here, you’ll get all the necessary information about 401(k) contribution limits for 2023.

    What are 401(k) contribution limits?

    Put simply, 401(k) contribution limits are federally capped maximum contribution amounts that you can put toward a 401(k) retirement plan. In other words, you can’t funnel every extra dollar you have in your salary toward your 401(k) plan beyond your annual contribution limit.

    There are tax advantages for retirement plans, and higher-paid workers can afford to allocate more funds toward 401(k) and other plans. Limits are put in place to prevent these wealthy individuals from disproportionately benefiting from these plans, which offer tax advantages at the expense of the U.S. Treasury.

    When you invest in a 401(k), you put money toward your future by:

    • Giving your money to the managers of a 401(k) retirement plan.
    • Those managers then use that money to invest in various stock market assets, like mutual funds.
    • 401(k) managers traditionally invest in relatively safe, slow-growth assets that aren’t ideal for earning a lot of money quickly. But they are beneficial to you in ensuring you have enough money to enjoy your golden years.

    Plan limits prevent individuals from gaming the system, especially by taking advantage of employer-matched contributions.

    The IRS also does this to prevent highly compensated employees (HCEs) from taking advantage of employee contributions to inflate their after-tax savings or to scheme the income tax system.

    Many 401(k) plans allow your employer to match your contribution to a set limit (usually a certain percentage or dollar amount).

    Related: 401(k) – Entrepreneur Small Business Encyclopedia

    For instance, if an employer volunteers to match your 401(k) contribution up to 3%, and you earn $2,000 every month for your salary, you can put 6% of that salary’s value toward your 401(k), or about $120.

    If there weren’t any compensation limits, people could try to take more money from their employers by contributing more and more money into their retirement accounts.

    To recap, 401(k) contribution limits stop people from taking advantage of 401(k) plans and their monetary benefits. However, contribution limits for 401(k)s don’t usually stay the same. Instead, they change continuously to keep up with inflation and other economic circumstances.

    Do These Limits Apply to Other Retirement Plans?

    Yes. Generally, 401(k) contribution limits apply to any other “defined contribution plans.”

    These are plans that have defined contribution limits or policies, and they include:

    • 403(b) plans, which are retirement plans typically used by nonprofit and educational workers.
    • 457 plans, which local and state government employees use.
    • Thrift Savings Plans, which the federal government offers.

    401(k) contribution limits for 2023

    With that said, it’s essential to know the 401(k) contribution limits for 2023 so you can plan for how much you’ll invest or how much you’ll deduct from your employment paychecks.

    Here’s a breakdown of the 2023 401(k) income limits:

    • $22,500 — maximum salary deferral or automatic contribution limit for workers.
    • $7,500 — maximum catch-up contributions for any workers aged 50 and up.
    • $66,000 — total contribution limit for the year overall.
    • $73,500 — total contribution limit, including the catch-up contribution mentioned above.

    In other words, you can divert a certain percentage of your salary with each paycheck up to $22,500 plus $7500 if you are 50 or older. However, your employer can contribute extra money to your 401(k) up to a maximum of $66,000.

    How did 401(k) contribution limits change from 2022?

    Because inflation has affected the US economy, the 401(k) contribution limits above have changed from 2022.

    For instance, the 2022 salary deferral limit for workers was $20,500, representing a $2,000 increase in 2023. Similarly, the catch-up contribution limit for all workers 50 and older was previously $6,500 but is now $7,500.

    The total contribution limit was $61,000 and $67,500 for total contribution limits and total contribution limits plus catch-up contributions, respectively. As you can see, the 401(k) contribution limits changed for 2023 by adding a few thousand dollars here and there.

    It’s not a massive change, but if you invested early and wisely, that money could be worth hundreds of thousands or millions of dollars by the time you withdraw it after retirement.

    Employer contribution limits for 2023

    In most 401(k) plans, employers contribute to their employees’ retirement plans up to a certain amount. Employers have much higher maximum contribution limits.

    The maximum amount you can contribute to a 401(k) plan (between you and your employer) is $66,000 in 2023. This limit was $61,000 in 2022.

    Because of this, employers can contribute much more money to your 401(k) plan than you can, but this isn’t typically what happens. Instead, most employers offer relatively meager or moderate 401(k) matching contributions.

    Related: 4 Questions Entrepreneurs Should Ask Their 401(K) Providers

    Don’t expect to add $66,000 to your 401(k) plan yearly. However, if an employer does offer a retirement benefit to this effect, consider taking them up on a job offer to maximize your retirement savings.

    Are there differences between traditional and Roth 401(k) contribution limits?

    No. Whether you have a traditional 401(k) or a Roth 401(k), your contribution limits are the same. The only difference between these two types of 401(k) retirement plans is whether you are taxed on your contributions or tax on your withdrawals.

    Related: Pros and Cons to Choosing a Roth 401(k) Over Traditional 401(k) — and Vice Versa

    Your contributions are tax-deferred with a traditional, employer-sponsored 401(k) plan, and you can deduct those contributions from your gross income each tax year. This elective deferral may let you max out your contributions each year.

    However, when you withdraw money from your traditional 401(k), you must pay taxes on those contributions.

    If you end up in a higher tax bracket when you retire because of how much money you have saved up, you could have to pay much more in taxes than if you had initially paid taxes on your deductions.

    Roth 401(k) plans are the opposite. With a Roth 401(k), you pay taxes on any of your retirement plan contributions in the tax years you earn them. In exchange, you don’t have to pay any taxes on your Roth 401(k) withdrawals later down the road.

    Therefore, Roth 401(k) plans are usually more profitable and affordable in the long run, but they place more of a financial burden on you in the short term. But remember, there aren’t any changes or differences in contribution limits between both plan types.

    What is the ideal amount to contribute to your 401(k) plan?

    Generally, you should contribute as much to your 401(k) plan as possible up to the contribution limit. But the ideal retirement contribution percentage can vary depending on your age, the cost of living, and your personal finances.

    For example, it may be a good idea to contribute between 10% and 15% of all your gross income toward retirement. You can contribute this amount toward a 401(k) or a 401(k) combined with an IRA (individual retirement account) in your 20s and 30s.

    If you are behind in retirement savings in your 40s or 50s, consider contributing more to your 401(k) account. If you’ve already hit your 401(k) plan limit, look into alternatives like IRAs or Roth IRAs.

    Related: 4 Reasons to Look Beyond a 401(k)

    Both IRAs and Roth IRAs also have contribution limits. But IRA contribution limits are separate from your 401(k) contribution limits. For instance, if you can only contribute $22,600 to your 401(k), you can still contribute another $6500 toward your IRA (the contribution limit for traditional IRA and Roth IRA accounts in 2023).

    Don’t forget Social Security, too. Depending on how many calendar years you worked and your taxable income, you could receive additional funds in retirement.

    Summary

    Contribution limits for 401(k) plans have increased since 2022. Since these limit changes are meant to keep up with inflation, that’s a good thing for millions of Americans who rely on 401(k)s to help them save money for retirement.

    Still, there’s much more to saving successfully for retirement than simply putting cash in your 401(k).

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    Entrepreneur Staff

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  • Everything You Know About Your 401(k) is Wrong. Here’s Why.

    Everything You Know About Your 401(k) is Wrong. Here’s Why.

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    Opinions expressed by Entrepreneur contributors are their own.

    Retirement savings is crucial for everyone because relying on social security is not enough to sustain yourself through your twilight years, especially considering that without any changes, the current social security system will only be able to pay benefits at 80% in 2035 and beyond. And the sooner you start, the better off you are.

    It’s true that tax-deferred accounts like traditional IRAs, 401(k)s, defined contribution plans and cash balance plans allow you to save a portion of each paycheck, tax-deferred, to live on once you hit retirement age. Still, everything you’ve learned about these types of accounts is wrong. And here’s the scary part — it’s not that the people spreading incorrect information are uninformed. Many of them absolutely do know that what they’re telling investors is wrong, but they continue because they have a financial incentive to do so.

    So in this article, I’m going to break down why what you know about your tax-deferred accounts is wrong and what you can do to ensure your retirement is spent living the life you love rather than struggling to make ends meet.

    Related: A 401(k) is Risky. Here’s a Safer Investment Strategy.

    Tax deferral plans only sound good in theory

    While most tax-deferred accounts may seem like a great thing, they actually come with a lot of severe disadvantages that adversely affect your investment and retirement goals.

    You’ll face higher taxes in the future

    You may get a perceived tax break right now by putting money into your tax-deferred accounts, but all you’re really doing is deferring your taxes. It’s true that this does allow you to accumulate a larger balance due to compounding, but that also means you’ll pay higher taxes when you eventually do begin withdrawing your money.

    As time goes on, there’s always the risk of higher tax rates when you take distributions. This alone should make you reconsider because you could easily end up paying more tax than you would now. In many cases, your tax-deferred compounding may not make up for the higher taxation, especially in the new economy of stagflation and higher interest rates.

    Most people today go through their daily lives with a false sense of security in their financial decisions. That’s both because we’ve all been misinformed by many in the financial industry and because most people have delegated their financial decisions to someone who has a vested interest in them investing in certain financial asset classes.

    It’s only much later in life, near or after retirement, when most people realize that they’ve made the wrong financial decisions, and by then, it’s usually too late.

    Related: Searching for Talent? Consider Setting Up a 401(k) for Your Small Business to Keep Up in the Market.

    Your money is locked until you’re 59.5 years old

    Any money you place into a tax-deferred account is locked until you reach age 59.5. This means that unless you want to pay a hefty penalty to access it earlier, you’re stuck letting Wall Street handle your funds. There’s no ability to access or use the money for a better investment opportunity that may come along.

    With few and limited exceptions, if you leave the workforce before age 59.5, you can’t live off of your investments if they’re all in a tax-deferred account. A Roth IRA will let you withdraw your contributions but not your earnings, providing some flexibility with those funds.

    You learn little to nothing about investing

    When you put your money into these tax-deferred accounts, you’re trusting your financial future to the financial advisors and money managers who have a vested interest in you following the status quo. Essentially, they make their money by getting you to invest in certain financial instruments and have no direct responsibility or liability for actual performance.

    This teaches you nothing about how to make the most of your wealth, how to use your assets to generate cash flow or how to ensure you’re making solid investments. This is, in my opinion, the biggest disadvantage that no one talks about: Abdication of your own financial future.

    If you discover a fund, stock or another investment that you want to buy, but your retirement plan doesn’t offer it — you’re simply out of luck. The limited choices are meant to keep administrative expenses low, but those limitations prevent you from having full control over the growth of your assets.

    Related: 4 Ways to Save for Retirement Without a 401(k)

    Loss of other tax benefits

    Other tax benefits, such as cost segregation, depreciation and long-term capital gain lower tax rates, are void inside these tax-deferred accounts. You also lose the stepped-up basis tax mitigation allowance for assets you wish to pass to heirs, which greatly reduces the ability to create generational wealth.

    Ridiculous fees and costs

    The small company match in your 401(k) isn’t much more than a little bit of extra compensation. If you’re only using a 401(k) for retirement, you’re doing yourself a disservice. They’re full of fees, from plan administration fees to investment fees to service fees and more. And the smaller the company you work for, the higher these fees tend to be.

    Even if your fee is just 0.5%, which is the absolute bottom of the fee range, you’re still paying far more for your 401(k) than you should, and that money could be invested in other places to help fuel your retirement growth. For example, if you’re maxing out your contributions at $19,500 per year, with an additional $3,000 in employer contributions, you’ll pay about $261,000 in fees, which translates to 9.5% of your returns.

    Opting out of a 401(k) retirement plan enables you to take that 9.5% and invest it in other more effective ways that will provide a higher return. But what should you do instead?

    Self-direction and Roth IRA conversion

    Qualified retirement accounts not tied to an employer-based plan may be “self-directed.” This means that you, the account owner, can choose from an unlimited number of investment assets, including alternatives such as real estate. Moving such accounts from your existing custodian to one that allows for full self-direction is easy to do and should be high on consideration for those who want more control over their investments.

    Roth conversions can be a great way to save money on future taxation. You can convert your traditional IRA into a Roth IRA, which means you will pay taxes on the money you convert in the year of conversion, but after conversion, your money will grow tax-free. This is a great way to save money on taxes in the long run since you won’t have to pay taxes on the money you withdraw from your Roth IRA in retirement.

    Don’t forget the J-Curve strategy

    The idea behind the J-Curve is that if a non-cash asset is converted from a traditional IRA to a Roth IRA and it experiences a temporary loss in market value, the tax on the asset conversion can be proportionally lowered based on the reduced asset value at the time of conversion.

    This strategy is available to anyone who’s invested in stocks, bonds, mutual funds and index funds and experienced a market loss. In the alternative space, however, the decreased valuation is based on information known in advance, with a plan based on a future value add to the asset. This means that while you don’t take a realized loss over the long term, you can benefit from a paper loss to reduce your tax exposure in the short term.

    The J-Curve strategy is underutilized, mainly because so few people know about it, but it can save you hundreds of thousands of dollars when properly applied.

    Ignore what you’ve been taught about retirement savings

    If you want to dramatically change the trajectory of your retirement and create generational wealth for your family, I have a simple piece of advice — ignore everything the financial industry has taught you about tax-deferred accounts.

    Take the time to learn about investing, and avoid the traditional tax-deferred accounts like traditional IRAs, 401(k)s, defined contribution plans, and cash balance plans — instead, leverage assets like Roth IRAs and real estate, which are superior in literally every way.

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    Dr. David Phelps

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