The 401K maximum contribution limit for 2012 is $17,000. That means you can contribut a maximum of $17,000 into your 401K plan. If you are over the age of 50, you are able to contribute an additional $5,500 to the maximum 401K contribution limits. This is called the catch-up contributions because so many people are getting a late start in saving for their retirement. After having saved enough money for emergency cash reserves, this is a great way to invest and see you money grow fast. Why? Because of these three benefits:

• You contribute with money that hasn’t been taxed yet. Let’s say you earn $45,000 a year and you contribute $5,000 to your 401K plan, you will only have to pay income taxes on $40,000. You pocket the cash that you would have had to pay on that $5,000.
• You don’t have to pay tax on the earnings in a 401K account. Employee B invests $5,000 in a mutual fund in his 401K. At the end of the year, the mutual fund made a $200 profit and would have been taxed as a capital gain. But since the earnings were in a 401K, there is no tax.  In addition, every year after that, the profits compound over time. Many of my clients are in awe of how much their401K maximum balance has grown over time even though they had some bad years.
• Your employer may match your contributions up to a certain percentage. Let’s say ABC Corporation will match you up to 3% of your salary that you contribute to your 401K. So if Employee A contributes $3,000, ABC Corporation will also add $3,000 in his account. That is a 100% return on your money. It is hard to beat that kind of return, and foolish not to take advantage of it. Yet studies show that most Americans don’t contribute up to the matching amount.

Many people don’t like the fact that their money is tied up in the 401K plan until they are 59 and a half, but that was what the 401K plan was designed for- long term retirement account. Short term or emergency funds should be elsewhere. Because of the benefits described above you would be foolish not to take advantage of contributing to your 401K plan. Because contributions are taken right out of the paycheck, many clients don’t feel like they miss the money. You can also change your withholding exemptions when you contribute a lot to your 401K so you get a bigger paycheck instead of more tax refund. Your Financial Advisor or Wealth Coach can help you with this or refer you to some IRS worksheets.

Eve Kaplan, CFP(R) Practitioner, (Guest contributor)

The hard-earned dollars you defer each month into your 401(k) are about to get the money equivalent of a face lift in 2012. Why? Fees that affect your net 401(k) plan balance could drop on account of regulatory changes in 2012. These changes force providers to disclose all their fees to your employer and to you for the first time ever.

Knowing what you pay for something gives you the ability to lobby your plan administrator at prove he/she has selected a 401(k) plan that’s delivers good value for money. Plan administrators also can see if their current 401(k) plan is up to snuff.

Here’s how the changes will play out in your 401(k) account next year:

1. Dept of Labor Regulation 408(b)2 goes into effect April 1, 2012. This regulation requires plan providers (e.g. John Hancock, ING, Hewitt – whoever is listed at the top of your 401(k) statement) to disclose ALL their fees to your employer. (You might be thinking – “doesn’t my employer already know what I’m paying each month for my 401(k) plan”? The answer often is: Not often!)
2. Your employer also needs to demonstrate it has a process in place to evaluate your 401(k) plan and show it selected a plan with “reasonable and appropriate fees.” Your employer also should confirm if any plan advisors are fiduciaries on your plan or not. (Having an advisor that’s a fiduciary is a good thing for participants and employers because you receive a higher standard of care. Having a 3(38) fiduciary is the platinum standard in the 401(k) industry).
3. By autumn 2012 you’ll be able to see how much you personally pay for your plan in dollars and cents. Regulation 404(a)5 goes into effect on May 31, 2012, requiring full disclosure of plan fees to participants. By Q3 2012, you will see fees fully disclosed on your Q3 401(k) statement – e.g. $280 for the advisor, $430 for the underlying expense ratio of your investments, etc.

It’s clear the majority of Americans don’t have enough saved in their 401(k) plans to help cover retirement.  Greater fee disclosure and more pressure on employers to pick cost-effective plans should drive overall 401(k) plan costs down, promote transparency and possibly improve quality.

To understand the impact of fees on plan balances, compare Jerry and Lenore. Jerry’s 401(k) at ABC Company has annual plan fees totaling 1.4%. He has $100,000 in his 401(k), will defer $23,000 each year ($17,000 plus $6,000 company match) and will retire in 15 years. He projects his assets will grow by 5% per year, net of fees. Jerry should have $704,200 in pre-tax dollars when he retires in 15 years.

Lenore, by comparison, works at XYZ Company. Her annual plan fees are 2.4% per year (1% per year more than Jerry’s plan). She also has $100,000 in her 401(k), defers $23,000 each year and will retire in 15 years. Since she’s paying 1% more in fees per year than Jerry, her assets are projected to grow by only 4% per year (net of fees). When Lenore retires, she expects to have $640,636.

All things being equal, Jerry should earn $63,564 more in pre-tax dollars than Lenore because his 401(k) plan costs less. Perhaps Jerry will use this to retire 6 months earlier, or take a nice cruise to celebrate his retirement.

We haven’t even addressed a further +1-2% potential rate of return each year in 401(k) plans that have an effective fiduciary advisor present steering participants toward low cost, automatically rebalancing solutions. Automatically rebalanced investments help keep Jerry on track so his 401(k) plan doesn’t drift away from the model portfolio his advisor counseled him to retain. If Jerry has this advice advantage, the additional $64,564 advantage over Lenore could morph into $134,367 more than Lenore by the time he retires (a 6% annual return vs. Lenore’s 4%).

Everyone wins when both you and your employer are clear about 401(k) costs and quality. 2012 is a great time for plan administrators to make sure they are giving their employees a 401(k) plan that’s high in quality – not high in fees.

*Scared to open your 401K statement?

Financial Stress

*Don’t think you will ever recover from the losses?

*Too many investment choices and don’t know how to evaluate?

This ebook will help you open your statement, figure out your 401k contribution limits and gain confidence-knowing that your money is working for you- in your time frame, with your risk tolerance, and with the return you need to meet your goals.

You deserve to have confidence in choosing and maintaining the most valuable investment you own-your 401K plan.

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Your 401k contribution limits can always be profitable. But how? Think about what it takes to earn money. To be profitable your 401k contribution limits must keep up with inflation, and stay ahead of taxes. Your contributions do all of that and more–much more than any piece of real estate or outside brokerage account.

First, your 401K contribution limits are added to your 401K plan account without tax so right there you are saving money. Then the money that is invested in your 401k grows without tax. Again, you are saving money. No taxable brokerage account can grow as fast because you have to pay tax on interest, dividends, and capital gain distributions on the earnings inside of a regular brokerage account.

The higher your tax bracket, the more return you will need to keep up with inflation and taxes. With your money invested in a 401K, there are no taxes on the money contributed and no tax on the money earned, so right away you have more opportunity to keep up with taxes and inflation.

Make your 401k contribution limits profitable. Make the most of your 401K plan by contributing all that you can.

This analysis  didn’t surprise me. The old time pensions or defined benefit plans as they are called are actually better for employees than 401K plans. Note the paragraph at the end that tells why more employers aren’t using them:

http://www.workforce.com/section/news/article/analysis-finds-defined-benefit-plans-outpace-401k-returns.php

Make the most of what you have to make the most of your tomorrow. Your 401K contributions are your first investment dollars. Those dollars will grow more faster than any other investment because of the tax advantages that we discuss in detail here. Take advantage of the opportunity to contribute and put the maximum amount that you are allowed in the plan. Your future depends on it.

Many people were not allowed to convert their IRAs to a Roth IRA due to the income limitations. That has changed due to the Pension Protections Act of 2006. Now everyone is eligible to convert their 401ks to IRAs and then to a Roth IRA or from an IRA to a Roth IRA. But should you?

According to a Fidelity survey of 800 retirement plan holders with household income of $100,000 or more 83% who work with an advisor said they were unaware of the changes to the law and 54% said they didn’t know whether they would be eligible to convert. Many brokers and advisors are looking at this as an opportunity to talk to clients and get them to convert their money to a Roth that is managed by them, but is this a good deal for you?

What’s so attractive about the Roth IRA is that it allows tax free accumulation of earnings and you don’t have to pay tax when you withdraw the money.

For a thorough report on how to do a rollover from a 401k to an IRA and conversion to a Roth IRA, sign up in the box and you will get the free pdf download.

For more info listen to this teleseminar on Roth IRA Rules with Curtis Smith CFP®, a fee-only Financial Advisor with Interactive  Capital Management to find out how a Roth IRA works and if it is right for you.

RothIRA033010

I am pleased to highlight fee-only financial planners who really know their stuff. Curtis is from Sugarland, Texas and a real charmer who is very sharp on retirement planning.  Remember, it is only a half hour long and has valuable information that you need to know now.