Section 401 covers qualified pension, profit-sharing, and stock bonus plans.  Section 401k of the Internal Revenue Code provides the foundation for cash or deferred arrangements and is about 10 pages long.  While the Code is rather complex, the gist of Section 401k is that it permits individuals to defer compensation by redirecting a portion of the earned income into a 401k plan on a pre-tax basis, thus lowering your taxable income.

To give a simplistic example, let’s say you earn $50,000 per year.  That would place you in the 25% tax bracket, ignoring all other exemptions and deductions, for 2012.  Putting 10% into your 401k, or $5,000, would effectively save you $1250 in taxes for the year.

While this is a nice benefit, I have been told, “I would rather have the extra $3750”.

But, there is more.  If your company matches your 401k contribution, there is an additional benefit.  While company plans vary, most plans match the first 3% of deferred salary. That would account for an extra %1500 in matching, putting your total contribution for the year at $6500.  Your taxable income is still reduced by the $1250.

This looks like a pretty good way to save some money.  But wait, it gets even better.  Your earnings, assuming there are some, also grow tax deferred, meaning that your dividends and capital gains are not taxed in the year that they occur.  In fact, they don’t really get taxed at all.

The down side is, that when you do take the money at retirement, your account is taxed at the ordinary (earned) income rate.  In effect, it becomes your retirement salary.  Between the match and the deferral you come out ahead.  Besides, it is better than not having a retirement account at all.

Putting $5,000 a year into a 401k plan for 20 years at an 8% average annual return would yield $270,419 versus $210,999 in a taxable account.  (Source:  http://wwwcalcxml.com/calculators).

These numbers reflect the $5000 annual deferral in the example, but does not include the company 401k match !  The after tax factor can be managed to minimize the effects of taxes.  The calculator does not explain how much was distributed or when.  This would be a very nice supplement to social security.

401k plans are easy to set and easy to participate in.

Don’t have a 401k option at work?  Contact us for other options and stay tuned for more articles in this series.

Own a small business and think a 401k plan is out of reach?  While it is true that 401k plans have historically been very expensive to administer, our 401k plans are surprisingly affordable and include all asset management, investment planning, enrollment and administrative, and third-party administrator services.  Contact us for more information.

Own a business without employees?  The individual 401k offers additional deferral possibilities, with minimal administrative requirement, and flexibility.  A must have for the start-up.

Compliments of Bud Cook, we have a website regarding disability that we hope you will find useful.

Council for Disability Awareness www.disabilitycanhappen.org

Overview

The CDA is a non-profit organization committed to informing and educating the American public about the widespread and growing frequency of disability, and the financial impact it can have.

Since it began in 2005, the Council for Disability Awareness has engaged in communications, research and education about disability. A large part of our mission is providing helpful resources and information to wage earners, their families, the media, employers and anyone concerned about disability and the devastating impact it can have on the finances and lifestyle of American families.

The first step is to be informed.  At CIGX Financial, we specialize in managing trust and conservatorship accounts.  If you or a loved one has special needs or is disabled, your financial picture has probably changed.  We can help improve your financial security.

Many caregivers or guardians are also responsible for managing the financial affairs of the incapacitated individual. In some cases, there might be no assets or income at all, while in others, there might be a large settlement from an insurance claim or other lawsuit, or inheritance. Insurance companies will try to have settlements structured or annuitized, but this limits access and is often not the best way to handle a settlement. On the other hand, there has to be a way to maximize access to and longevity of assets, and when an incapacitated individual is unable to handle their own financial affairs, a system does have to be put in place.

As any caregiver knows, even the smallest amount of additional resource can make a huge difference in the quality of life of an incapacitated or disabled individual. However, resources play a critical role in determining benefits under social security disability and Medicare/Medicaid, and the rules are complicated. Of course, no caregiver has the time to navigate this system and identify the rules.

The person in charge of the assets of a disabled or incapacitated individual usually takes one of two titles. They are called “conservator” if charged with the direct management of the financial affairs of disabled or incapacitated individual, or “trustee” if a trust is involved that has been established for the benefit of the disabled or incapacitated adult or child. Trustees are responsible for the beneficiary of the Trust. The conservator is responsible for the “ward”.

The duties of the conservator or trustee fall into the three main categories of asset management, record-keeping, and disbursement.

Asset management: Conservators and Trustees must manage the resources in the best interest of the ward or beneficiary. This might include divesting of assets to make sure social security and Medicaid are available. It also involves the duties of preserving capital and maximizing income.

Record-keeping: Conservators and Trustees must keep records of all of their activities, as they are beholden to some authority to justify they are operating in the best interest of the ward or beneficiary. Keeping records of transactions and notes for the reasons why certain decisions were made is critical.

Disbursement: The conservator or trustee is given a certain amount of discretion when managing the assets of the ward or beneficiary, as long as it is in their best interest. You may choose to pay the rent directly, put supplemental income on a gift card, and pay for medical treatment or therapy that is not covered by insurance. Any action taken must be well thought out and documented.

Caring for a disabled, incapacitated, or special needs individual is extremely difficult and extremely rewarding. While it is a pleasure to serve them and care for them, it usually leaves little time for anything else. Taking the time to set up conservatorship or trusteeship correctly, however, can make a huge difference in the ward’s or beneficiary’s life, as well as the caregivers.

Contact us to review your needs and stabilize your future.

Most of us do not bother to perform the retirement needs calculation. It’s intimidating and depressing, or so we think, so why endure the process. I remember doing my retirement needs calculation many years ago, and the calculator told me I needed to save just a tad more than I earned at the time, to reach what I considered very moderate retirement goals.

Today, thanks to the benefit of experience, I take a different approach. The fact is, that no matter how large or small your nest egg is, the vast majority of retired people depend primarily on social security for their income. In other words, the retirees with a substantial nest egg are not spending it, or only take very little to supplement their social security.

Maybe the better approach is to not try to figure out how much you will need in retirement. The better approach is to have the expense side covered, rather than to worry or focus on the income side. One clear primary goal is to retire debt free. Interest expense is damaging to your fiscal health. We should plan to have our homes paid off, or be in a reasonable position to downsize in retirement to ensure that no mortgage is payable.

The pre-retirement challenge then, is to budget and manage cash flows to achieve these two goals; purchase a house that can be paid off prior to retirement, or at least have enough equity to downsize with no mortgage payable, and have student loans and credit cards paid off.

With these two factors in place, retirement is no longer a challenge. Social Security will cover your needs in terms of car and groceries with ease.

Of course, we don’t just want to get by during our golden years. We want certain luxuries, like hobbies and travel, gifts for grandchildren, and more. The 401k and IRA is the ideal vehicle for this type of savings. Seen from this perspective, retirement savings are a way to improve retirement and provide a higher standard of living. In this case, every dollar makes a difference because it provides disposable income. Suddenly saving for retirement is fun, because we are really saving for that nice car, the Alaska cruise, and all of the other things we want to do.

We aren’t saving for retirement for our survival. We don’t have to save more than we earn or we’ll be paupers. It’s not a hopeless cause. Whether we save $50 per month or $500 per month, retirement saving will significantly improve our quality of life and it will provide luxuries that we will enjoy.

So, why save for retirement? For the security and joy that additional resources bring.

(We are focused on social security and medicare reform efforts and will update our insights accordingly).

By Erich Schwerd

If you are the caregiver for a disabled child or disabled adult, or an incapacitated adult or person of any age with special needs, you are an exceptional person.  The duties required are extremely taxing, and the personal relationship you have, whether it is a parent, a child, or a spouse, makes it even more difficult.  As guardian of the person, you are responsible for the day to day care of this person, ranging from medication maintenance to constant supervision and treatment of impairments.  Usually, this results in having no time for anything else.

Many caregivers or guardians are also responsible for managing the financial affairs of the incapacitated individual.  In some cases, there might be no assets or income at all, while in others, there might be a large settlement from an insurance claim or other lawsuit, or inheritance.  Insurance companies will try to have settlements structured or annuitized, but this limits access and is often not the best way to handle a settlement.  On the other hand, there has to be a way to maximize access to and longevity of assets, and when an incapacitated individual is unable to handle their own financial affairs, a system does have to be put in place.

As any caregiver knows, even the smallest amount of additional resource can make a huge difference in the quality of life of an incapacitated or disabled individual.  However, resources play a critical role in determining benefits under social security disability and Medicare/Medicaid, and the rules are complicated. Of course, no caregiver has the time to navigate this system and identify the rules.

The person in charge of the assets of a disabled or incapacitated individual usually takes one of two titles.  They are called “conservator” if charged with the direct management of the financial affairs of disabled or incapacitated individual, or “trustee” if a trust is involved that has been established for the benefit of the disabled or incapacitated adult or child.  Trustees are responsible for the beneficiary of the Trust.  The conservator is responsible for the “ward”.

The duties of the conservator or trustee fall into the three main categories of asset management, record-keeping, and disbursement.

Asset management:  Conservators and Trustees must manage the resources in the best interest of the ward or beneficiary.  This might include divesting of assets to make sure social security and Medicaid are available.  It also involves the duties of preserving capital and maximizing income.

Record-keeping:  Conservators and Trustees must keep records of all of their activities, as they are beholden to some authority to justify they are operating in the best interest of the ward or beneficiary.  Keeping records of transactions and notes for the reasons why certain decisions were made is critical.

Disbursement:  The conservator or trustee is given a certain amount of discretion when managing the assets of the ward or beneficiary, as long as it is in their best interest.  You may choose to pay the rent directly, put supplemental income on a gift card, and pay for medical treatment or therapy that is not covered by insurance.  Any action taken must be well thought out and documented.

Caring for a disabled, incapacitated, or special needs individual is extremely difficult and extremely rewarding.   While it is a pleasure to serve them and care for them, it usually leaves little time for anything else.  Taking the time to set up conservatorship or trusteeship correctly, however, can make a huge difference in the ward’s or beneficiary’s life, as well as the caregivers.