Category: 401k advice


Tax Preparation With A Local CPA

Filed Under: 401k advice by Don Weststein — Comments Off
December 28, 2011

There are a huge number of excellent Certified Public Accountants in the USA. As tax season looms large, it seems like a sensible option to be getting in touch with one of them. How do you go about making this choice? There are a whole lot of reasons for choosing an accountant, but not many think about one big one, and that is choosing local. For example, if you live in St George, maybe choosing an accountant in St George makes sense.

So just what is it about st george tax prep that is so special, you might be asking? Actually, the answer is nothing and everything. Tax law is a complicated beast and there are many subtle (and not so subtle) differences from state to state. It would be a shame to miss out on any particular tax deductions that you could have just because you chose a cpa who isn’t an expert in your state law.

Of course, the advantages go beyond simply knowing local tax law. Having an accountant that you can actually see regularly makes a big difference to overall financial strategy and actually encourages good habits.

For example, what about having someone look over your monthly bank statements in order to plan a budget with you? This is a great starting point for anyone’s finances. Or maybe you need help organizing your child’s college fund? This is perhaps even more important for the small businesses out there. A cpa can clean up your ledger and put you on the road to profitability with regular consultations.

Getting your taxes done by a local cpa makes sense. Making this the starting point for a tighter future collaboration is even better. This can really help put all of us from individuals to businesses on a much firmer financial footing over the years to come.

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Diversified Stock Allocation – Investing Strategy

Filed Under: 401k advice by Don Weststein — Comments Off
May 12, 2011

You should have a diversified investment portfolio.  It should not just be in stocks.  You should have a bit of bonds, some emerging markets, mutual funds, index funds, derivatives and options mixed in.  That is if you are a sophisticated investor.  As time goes on and you learn more about the financial markets, your investment strategy should reflect that as well.  Here is how places like Finance World would tell you how to diversify, at least in stocks.

There are many different types of stocks.  There are small, mid and large cap stocks, each with it’s size differences and associated risk profiles.  Then you have value or growth stocks that you can pick from.  You now also have options like ETF’s as well as the traditional mutual funds of the past.  Now if you engage in online stock market trading, you may not be so interested in this.  But if you are saving and investing for your retirement, you may want to have a listen.

Small cap stocks will get you the best chances of high returns.  Let me qualify that just a little bit.  Small cap value stocks will give you the best chance for the highest returns.  No, I didn’t say growth stocks.  That is because research is showing that value stocks actually perform better than growth ones.  That’s ironic, but it’s a fact.

Large cap stocks are good for conservative investors or ones who need to be conservative.  They are similar to bonds and may even give you income without you touching your capital.  But these are more for older folks who are retired and may not have the time to risk in a volatile security.

The moral of my story is to diversify among many different types of stocks.  Also, branch out into different sectors as well like technology stocks and some in utilities and some in financial companies.

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Did Your Stock Broker Give You A Little ‘Free’ 401k Investment Advice?

Filed Under: 401k advice by Don Weststein — Comments Off
December 7, 2010

This article addresses the danger of “free” 401k investment advice from your stock broker.

One of the most common reasons for failing to focus on your 401k plan investment options is that your stock broker took care of that already. The plan participants that have uttered these words honestly believe that this “free” advice settled the matter. More often than not, their broker responded to the frustration expressed by their client and either offered or was asked directly if the broker could help them choose from the funds on the main menu. However, when asked, the plan participant cannot remember discussing it with their broker ever again!

The misconception on the part of the plan participant is that they got some “free” advice. In truth, what they got was guidance. The difference being that advice is an ongoing relationship. Given the dynamic nature of the investment markets someone must be keeping watch and prudent adjustments are sometimes necessary. What sort of outcome would you expect if you had a 300 mile highway trip planed,set your cruse control to 65 mph and slept behind the wheel? Managing your 401k investments by putting them on autopilot is about the same thing.

What you may not realize (and quite possibly you broker did not realize at the time) is that the brokerage firm where your broker works has, in fact, an established policy in place that prohibits their representatives from helping you with your 401k. Why? The prohibition exists because they are trying to avoid the Fiduciary Liability that would come with such a discussion. In other words, you may be able to sue the brokerage firm if the initial advice was flawed or the account was neglected and losses were incurred after the fact.

As well intentioned as it may seem to a stock broker that engages in casual advice, a plan participant would do well to consider the following. To the extent you may offer your time and talent to some charity, ask yourself how much attention you dedicate to your specific service after the fact? I would guess very little ~ if at all. What makes you think you broker, who gave you a “free” service, will be any more attentive after the fact?

If you need just one more reason to re-evaluate the “free” advice you got from your broker, ask yourself: Did my broker call me about my plan assets at any time before, during or after the latest liquidity crisis? I would venture to guess the answer is no. Your broker, if she was making any calls at all, was calling her paying clients. No doubt you and your free 401k investment advice was not even on the list. No call. No advice. No change to your asset allocation strategies. Silence.

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Ways to save money: Buy that latte and think bigger

Filed Under: 401k advice by Don Weststein — Comments Off
November 26, 2010

Many of us has heard of the ‘latte factor.’  This is the idea that you can save enough for retirement by just foregoing the daily latte and putting that money towards savings.  This is wrong for so many reasons.  In fact, I am sitting in my favorite coffee shop drinking my favorite drink (soy latte) as I write this article.  Here are three reasons this idea needs to be eliminated from personal finance teachings.  When looking at your finances things like savings volume, savings discipline/accountability and daily quality of life need to be considered.

First, the volume of savings achieved by implementing the latte factor is not near enough to retire on.  I am all about reducing monthly expenses and if you buy a latte EVERY DAY from your neighborhood coffee shop you could ‘save’ up to $90 a month by bringing coffee from home.  Now, few of us go to the coffee shop every morning of the week and those that do are still not looking at saving that much money.  How about we concern ourselves with ‘supersize lattes’ (fixed monthly expenses) like high rents or mortgages, $500 car payments and exclusive gym memberships that go largely unused.  I have eliminated the supersize lattes and have gained much more saving volume potential in the process.

Second, saving discipline needs to be practiced if one is going to save money.  At $3-4 a day, maintain the discipline to save that latte money and not use it elsewhere throughout the day is nearly impossible.  Even the best intentions can be thwarted by other $3 distractions throughout the day.  By concentrating on the supersize lattes and automating saving through automatic savings plans we can eliminate the possibility of getting distracted and bring more discipline and accountability in to our savings strategies.

Third, let’s take a look at quality of life.  I LOVE my daily caffeine fix.  It is addicting, after all and I am never in any mood to put up with the headaches that come along with foregoing the daily latte.  It is also a relatively cheap way to contribute to my perceived quality of life.  I am much happier on a daily basis getting a coffee than I would ever be spending an extra $100 a month on a bit nicer car or a gym membership I never use.

Finally, so many personal finance experts get caught up in the little details of every day life.  I am challenging you to think bigger.  Focus on the supersize lattes in your life that do far more damage on the month’s bottom line.  Concentrate on savings volume, implement saving discipline and focus on increasing your daily quality of life and aim higher than saving $4 a day.  Now go out and have that latte, I know I will.

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How The Rule Of 72 Works

Filed Under: 401k advice by Don Weststein — Comments Off
June 19, 2010

Most people are familiar with the Rule of 72 but many are not sure exactly how it works. There are a few important things to understand about this rule.

In the simplest terms, the Rule of 72 is a term used to describe the best method for estimating the doubling time of an investment. The term is typically used in the field of finance, by accountants and other professionals. Even an average person can use this rule however, to quickly and quite easily estimate the doubling time on an investment.

For financial success this is one of the most important rules to remember. It allows you to estimate the growth of any investment you make and the math of this rule is easy to understand. You simply take the interest rate and divide that number by 72. As a result you get the number of years it will take for your investment to double.

This is the best rule for calculating compound interest and can help with all sorts of investments. Whether you are planning for retirement or just looking to go on a trip and want to save for that, it is nice to know you can easily figure out on your own how long it will take for you to double your investment. Make sure if you have any money in a savings plan that you are aware of the interest percentage you are making and other details so you can calculate your figure accurately.

The earlier you start saving the better off you will be in the long run. Even just by saving ten years earlier you can end up with hundreds of thousands of dollars more in your savings account.

For some math can be confusing. For more information you can speak to a professional accountant, financial advisor or other professional in the field.

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Mistakes to Avoid When 401k Investing

Filed Under: 401k advice by Don Weststein — Comments Off
May 10, 2010

Investing for your retirement is definitely a very wise thing to do. But there are right ways and wrong ways to go about it. The purpose of this article is to point out some of the mistakes best avoided with 401k investment strategies.

First of all, don’t load up on your own company’s stock. Putting all your investment eggs in the company basket is never a good idea, regardless of what your boss and the directors of the company might tell you! Yes, you might be able to get a good deal whereby the company will match your investment in its own stock for example, but risking your whole retirement fund on the performance of one company (even if it is the company you work for) is just not a good idea.

On a similar note, don’t invest all your funds into a small, closely related group of stocks. It’s always a good idea to diversify, so that if one sector or asset class is badly hit for whatever reason, you could still have other parts of your portfolio performing well.

Another piece of advice: Always check your 401k statements! If you fail to check your statements, you might miss some significant errors that could result in your pension fund being adversely impacted. And the longer that errors are left uncorrected, the more difficult it is to trace them back and correct them. So stay on top of your statements!

One mistake many people make is to pay too much into their 401k, thus leaving themselves short for liquid cash needed for things like emergency plumbing repairs for example. If you pay a little less into your 401k and instead place that money every month into a savings account, then you will have some cash set aside for emergencies. You don’t want to have to withdraw from your 401k because that will result in you being taxed heavily.

Finally, don’t rely solely on your 401k for your retirement income. If the stock market goes into a protracted bear run, it will result in you falling short of the money you need to fund your retirement. So if you can, look for other ways of securing passive income into your retirement, such as property rental for example.

If you avoid these mistakes, you should have a comfortable and happy retirement.

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Some 401k Rollover Rules

Filed Under: 401k advice by Don Weststein — Comments Off
April 23, 2010

Are you looking at a job transition? Whether you are one of the lucky people who is transitioning from one job or career to another or whether you have been downsized, you need to know the rules for 401k rollovers. Rules are standardized no matter your plan. Thanks to Uncle Sam we have not only the 401k option, but rules to guide borrowing against the account and rolling over to a new account.

The most important 401k rollover rule is one not imposed by the government, but one you need to impose on yourself: do not cash out the account. As you transition out of your old job, you can roll the money into a new 401k (generally at the new company); you can roll it into an IRA (double check 401k rollover IRA rules) or Roth account, and you can cash it out. If you were to cash out the money, these two rules go into effect: you owe taxes on the money, at your current tax bracket. The reason for this is that the money went into the 401k account pre-tax. Now that it is about to become cash in your wallet, the government wants its share. The second 401k rule is that you incur a 10% penalty for withdrawing the money before age 59.5.

If you are looking to jump start an IRA account, rolling the 401k to a new IRA is a great idea. The money does not count towards your limit for a yearly IRA contribution, so that means it is on top of whatever else you’ll contribute. This is great news if you are serious about funding retirement. IRA rollover/401k rules are clear and easy to understand, which is also great news. Before you roll to an IRA, be sure to research the fees that come with the new IRA account. Some places look great on the surface, but the fees will erode your retirement nest egg. Many people think that Roth 401k rollover rules must be different, but they are essentially the same as with an IRA.

Saving for retirement doesn’t have to be confusing. If you want to keep things simple for yourself, just make sure that you roll your 401k account from one job to the next. The paperwork to request a rollover is usually a single page document and one that your benefits administrator or Human Resources department can help you complete. Some people are serious about money and want to be active at every phase, other people would rather leave the details to someone else. Both are valid responses to retirement savings. Decide which kind of person you are and act accordingly. There is no need, not in this day and age, for you to try to be someone you are not. If you want to be active with your money, I recommend having a 401k and a Roth IRA, so that you have pre-tax and post-tax savings happening for retirement. People often miscalculate the amount of money they need for retirement because they forget about taxes. Don’t let this happen to you. Know the rules for 401ks and IRAs so that you don’t get an unwelcome surprise later in life.

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Traditional 401k vs Roth 401k

Filed Under: 401k advice by — Comments Off
December 3, 2009

Choosing which type of 401k to put your retirement funds into is a big choice that many people overlook.  There are a few key things to think about when making your choice.

The first thing you have to do is always put in at least the amount of the company match. Whether this is 4 or 5 % or whatever, the match is free money so get all that. If you do not then you are leaving free cash on the table. Any financial planner can tell you that.

With a traditional 401k you are not taxed on that income.  Your contribution reduces your taxable income giving you more money now. Think of it as save now and pay later when you pull the money out after 59.5, which is the age of retirement for 401 k plans.

A Roth 401k is different. You get no up front deduction, but you do not pay taxes on withdrawal after 59.5 years of age. Pay now and not later.

Basically, if you are younger most people would agree that a Roth 401k is better. We know that taxes probably will not get any cheaper, meaning the tax paid when we retire will cost much more than the savings you could get today.

Now, if you are close to 50 or so the choice is a bit tougher. Many recommend having a mixture at this age since you may be retiring soon.  Talking to a financial planner or tax expert can help you decide what is best.

You may not notice the extra money you get taken out of your check now with the Roth 401k.  It kind of just happens and you will not notice it much. Now, if you get taxed on 500,000 when you retire, I bet you will notice that!  If you are young go with the Roth for your long term investment goals.

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