A recent survey found that working households experiencing financial strain due to the pandemic have not been inclined to make withdrawals from their 401(k)s to help make ends meet. In fact, the vast majority haven’t even changed their rate of contributions. Instead, these households are relying on the “old standbys” of surviving during economic decline: Reduced spending, using savings or an emergency fund, and maxing out credit cards.1
A reduction in spending
shouldn’t be that difficult in the wake of today’s pandemic. After all, many
people have cancelled vacations, no longer commute to work, and don’t spend
nearly as much money going out to eat or for other entertainment activities.
Some folks are even keeping their college students out of school for a semester
or two, or at least taking the online route and saving on room and board. For
those who remain employed, it’s actually a good time to increase savings.2
The coronavirus pandemic
offers an ideal scenario to demonstrate the importance of diversifying
retirement savings accounts. While some workers may defer as much salary as
they can into a 401(k) to help reduce their current income taxes, others may
spread those contributions over a work retirement plan and an IRA. There are a
couple of strong reasons to consider including a Roth IRA in the mix. While
Roth contributions do not offer a current tax deduction, remember that there
are no tax consequences when you withdraw the money. Those funds have the
opportunity to grow tax-free, and you’re free to tap your contributions without
penalty when needed to supplement household income. However, keep in mind that
you should consult with a qualified professional before taking any withdrawals
from your retirement assets.
It’s also strategically key
right now as income taxes are historically low. The income taxes you currently
pay on Roth contributions now could be less than what you’ll have to pay on
401(k) distributions in the future. If you’d like to discuss ways to help
maximize your retirement savings — including financial vehicles that allow for
tax diversification and emergency funds for situations like pandemics — give us
a call. We can tailor recommendations for your situation.
The Employee Benefits
Security Administration (EBSA), which is an agency under the U.S. Department of
Labor, recently announced an interim final rule for employers offering
retirement plan benefits. The agency will require 401(k) and other types of
retirement plan sponsors to provide employees with annual lifetime income
illustrations. This is a customized statement designed to show each plan
participant how his current account assets would likely translate into monthly
income at a projected retirement age.3 This is
similar to the Social Security Statement which projects future payouts for
beneficiaries, updated annually.
The Labor Department also
proposed a new rule this summer that is designed to incentivize more investment
in fossil-fuel companies. Specifically, the rule would require pension and
401(k) plan wealth managers to always place economic interests ahead of
“non-pecuniary goals” when it comes to Environmental, Social, and Corporate
Governance (ESG) investing. Some money managers are investing more in renewable
energy companies out of concern for the environment and for the long-term
investment opportunities presented by sustainable power sources. While this new
rule reflects the current administration’s position on fossil fuels, many money
managers are concerned that the rule ignores evidence that ESG investing offers
strong potential for favorable returns.4
One final note on Americans
and their 401(k)s: Pay careful attention to how these plans are utilized in
divorce settlements. Normally, dividing such a plan requires a court order
separate from the divorce decree, called a Qualified Domestic Relations Order
(QDRO). Also bear in mind that some plan administrators will not officially
divide 401(k) assets until the plan participant retires.5
Another way to negotiate 401(k) assets in a divorce settlement is to allow one ex-spouse to retain the 401(k) plan while the other receives an asset of equal value (be sure to compare tax consequences and take those into account when determining equal value). Another option is to roll a portion of the 401(k) into a traditional IRA, which would avoid current penalties and tax liability and permit the ex-spouse to choose her own investments. However, this option is only available to those who have left their employer or are over age 59½.6 Not matter what route you choose, be sure to work with an experienced financial advisor, tax advisor and attorney to understand the full ramifications of splitting up a 401(k) account.
With a strong financial plan in place, we can help you prepare to leave the workforce and live comfortably. Take control of your financial future and give us a call at (734) 769-1719 today!
1 Mike Scarcella.
BenefitsPRO. Aug. 20, 2020. “New virus-era survey shows tapping 401(k)s is
‘last resort’ for most participants.” https://www.benefitspro.com/2020/08/20/new-virus-era-survey-shows-tapping-401ks-is-last-resort-for-most-participants/.
Accessed Sept. 2, 2020.
2 Fox Business. Sept. 1,
2020. “3 important 401(k) strategies to employ for the remainder of
2020.” https://www.foxbusiness.com/lifestyle/3-important-401k-strategies-to-employ-for-the-remainder-of-2020.
Accessed Sept. 2, 2020.
3 Allison Bell.
BenefitsPRO. Aug. 20, 2020. “5 things to know about the new 401(k) plan
illustration regs.” https://www.benefitspro.com/2020/08/20/5-things-to-know-about-the-new-401k-plan-illustration-regs-for-agents-412-102799/.
Accessed Sept. 2, 2020.
4 Tim Quinson. Bloomberg.
Aug. 31, 2020. “Trump Plan to Block Green 401(k)s Stirs Fund Industry
Fury.” https://www.bloomberg.com/news/articles/2020-08-31/trump-plan-to-limit-esg-investing-by-401-k-s-opposed-by-funds.
Accessed Sept. 2, 2020.
5 Steven Wittenberg.
Kiplinger. Sept. 1, 2020. “Tricky Divorce Issue: How to Divide 401(k)s, IRAs
and Annuities.” https://www.kiplinger.com/personal-finance/601321/tricky-divorce-issue-how-to-divide-401ks-iras-and-annuities.
Accessed Sept. 2, 2020.
6 Ibid.
Neither our firm nor its agents
or representatives may give tax or legal advice. Be sure to speak with a
qualified professional about your unique situation.
We are an independent firm
helping individuals create retirement strategies using a variety of insurance
and investment products to custom suit their needs and objectives. This
material is intended to provide general information to help you understand
basic financial planning strategies and should not be construed as financial or
investment advice. All investments are subject to risk including the potential
loss of principal. No investment strategy can guarantee a profit or protect
against loss in periods of declining values.
The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.
Investment Advisory Services are offered by Imber Financial Group,
LLC., a Registered Investment Adviser firm. Insurance services are offered
through Imber Wealth Advisors, Inc. Imber Financial Group, LLC. and Imber
Wealth Advisors, Inc. are affiliated companies
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