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What to Know About 401(k)s

One of the common retirement plans offered by employers is a 401(k) plan. These plans make saving for retirement convenient. But make sure you understand the basics so you can capitalize on plan options and determine how your 401(k) fits into your overall retirement strategy.

ELIGIBILITY RULES

Some employers allow new hires to enroll in the company 401(k) plan on day one, and some even offer automatic enrollment. But employers can have waiting periods of a few months to a year before you’re eligible to participate. To get the most from the plan, however, sign up as soon as you’re allowed.

IT’S A MATCH

Many companies offer a matching contribution to employees who participate in the company plan. While amounts vary, matching contributions are usually a fixed percentage on a predetermined portion of an employee’s annual salary. For example, an employer may contribute fifty cents for every dollar you contribute, up to 10% of your salary. So if you earn $60,000 per year, you could receive a $3,000 annual contribution from your employer, provided you contribute $6,000 each year.

KNOW YOUR LIMITS

The IRS places limits on the amount you can contribute to qualified retirement plans each year. For 2021, the limit is $19,500, but if you’re 50 or older you can contribute an additional $6,500. Any 401(k) plan can set its own contribution limits, which may be less than the IRS limits.

VESTING

The money you contribute to a 401(k) is yours to keep from day one. But the contributions from your employer may come with a contingency, also known as a vesting schedule. That means you may need to work for the company for a year or more before you gain 100% ownership of the company’s contributions.

TAKE OUT

Although you may not plan on tapping your 401(k) account before retirement, sometimes life’s events require you to do so. Some plans will let you take a loan that you repay with interest over time. Or you may be able to take a hardship withdrawal that doesn’t require repayment. But you’ll have to pay income tax on the amount withdrawn and if you are under age 59½ there is an additional 10% federal tax penalty. Consider this option as your last resort, because that money will no longer be there to grow for retirement.

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RMDs Return for 2021

After being suspended for 2020 via the CARES Act, required minimum distributions (RMD) are back for 2021.

RMDs are required for everyone with a traditional IRA or employer-sponsored plans like 401(k)s or Roth 401(k)s starting at age 72. If you’re turning 72 in 2021, you have until April 1, 2022, to make your RMD. But in each subsequent year, you’ll need to take your RMD by December 31. So that means if you delay taking your first RMD until April 1, you’ll have two withdrawals in 2022 and that could create a higher tax liability.

RMDs are taxable, so plan to have taxes taken out of your distribution to avoid underpayment penalties.

Failing to take your RMD by the due date comes with a 50% penalty. And if you don’t need the money, consider investing the distributions in a taxable account for continued growth or giving the RMD to a qualified charity.

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Financing Your New Small Business

You’ll have to make a lot of decisions when starting a new business. One of the bigger ones will be how you’ll fund it. The financing option you choose may have a significant impact on your company’s success.

BANK ON IT

Traditional bank loans may be the first place you look, especially if you have good personal credit. Start with your current bank. They can help you figure out what documents you’ll need to qualify and what options you have.

If you have a local community bank or credit union, check with them about borrowing. Their lending requirements might be more lenient because they have a strong interest in economic development within the community.

ANOTHER AVENUE

If a traditional bank loan isn’t an option, consider a loan backed by the Small Business Administration (SBA). The SBA offers traditional banks a federal guarantee on your loan. This makes it less risky for the bank to lend you start-up money. In addition, SBA loans often come with favorable interest rates and payment terms. Some loans come with continued support to help you start and run your business.

PUT YOUR FUTURE FIRST

Starting your business means starting your own retirement plan. Consider creating a solo 401(k) or SEP plan and roll over balances from other 401(k) plans or IRAs. Don’t be tempted to take funds out of your retirement plan to help start your business. Assuming your business idea is sound, you’ll be able to obtain funding elsewhere.

GRANT MONEY

Check into small business grants available in your community. Grants offer a way to finance your new business without worrying about repaying a loan. Grants are usually provided by nonprofit organizations or government agencies, which sometimes focus on serving specific companies, like minority, women or veteran-owned businesses. Although competition for grants can be fierce, the time you invest in searching and applying for grants can pay off in the long run.

DON’T USE CREDIT CARDS

With high interest rates and costly late fees, don’t be tempted to to use credit cards to fund your new venture.

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September 2021 Client Line

Financing Your New Small Business – one of the bigger decisions when starting a new business is how you’ll fund it.

RMDs Return for 2021 – required minimum distributions are back for 2021.

What to Know About 401(k)s – make sure you understand the basics so you can capitalize on plan options and determine how your 401(k) fits into your overall strategy.

September 2021 Client Profile

Cryptocurrency Basics – cryptocurrency is an alternative form of payment and works through a technology called blockchain.

Employee vs Independent Contractor: What’s the Difference? – consider income taxes when you need to hire help for your business.

September 2021 Questions & Answers

September 2021 Short Bits

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August 2021 Short Bits

COLLEGE ON HOLD

According to a recent survey by Junior Achievement and Citizens, one-quarter of 2020’s high school graduates delayed their college plans because parents or guardians were less able to provide financial support due to the financial strains of the COVID-19 pandemic. As education costs continue to rise, students’ perspectives about their future are changing. Another survey of high school students found that only 53% think attending a four-year school is a possibility. This is down from 71% in 2019.

BOTHERSOME TAXES

Many Americans are bothered by the US federal tax system. According to a Pew Research Center Study, 59% of Americans were concerned that some corporations and some wealthy people don’t pay their fair share. The complexity of the federal tax system is an issue for 47% of Americans while 49% believe that they pay more than their fair share of taxes considering what they get from the federal government in return.

FINANCIAL EDUCATION FOR VETS

The Veterans Administration is hosting free monthly financial education classes it calls Wellness Wednesday Financial Education, to help transition service members and their families. The classes are held online on the third Wednesday of every month. Previous classes have focused on budgeting, the importance of building an emergency fund and personal financial health.

BACK TO SCHOOL

According to the National Retail Federation, households spent an average of $800 on back-to-school supplies in 2020 while back-to-college households spent $1,059. Most of this was spent on electronics or computer-related equipment, with clothing seeing the second-highest spending amounts.

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August 2021 Questions and Answers

QUESTION:

How can my business build a credit score?

ANSWER:

If you haven’t already opened a business bank account, do this first. Next, apply for a business credit card. Although you may have to personally guarantee it, having a credit card in the company’s name will start to build your corporate credit history.

Ask your vendors whether they report payments to business credit bureaus. If they don’t, consider doing business with vendors that do. Then review your company credit report as you would your personal report, and correct any discrepancies.

QUESTION:

How do I know if I should be making estimated tax payments?

ANSWER:

Because the US uses a pay-as-you-earn tax system, you must pay your tax bill throughout the year. Generally, if you work a W-2 job, have a reasonable amount of tax withheld from your pay, and have no other significant source of income, estimated tax payments aren’t necessary.

Estimated tax payments are needed if you have self-employment income because you have no paycheck to withhold tax from. Also, if you have significant amounts of interest, dividends, alimony, or capital gains, then estimated payments may be necessary. Speak with your tax professional who can let you know whether you should be making estimated payments.

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Deduct Business Expenses

Not all business expenses are created equally. Only those that rise to the “ordinary and necessary” threshold become tax deductible.

IT’S OK TO BE ORDINARY

To qualify as an ordinary business expense, it must be normal, usual, or customary for the type of business. Some expenses that may only happen once in a business’s life cycle, like a lawsuit, have been deemed ordinary business expenses because businesses often face legal challenges.

DO YOU NEED IT?

Necessary business expenses are those deemed appropriate and helpful. Determining whether an expense is appropriate and helpful is generally a judgment call based upon the type of business and the industry in which the company operates.

A key factor in determining necessity is that the expense can’t be primarily personal. That means if you own a plumbing business and have a passion for racing dirt bikes, placing your company’s logo on the bike, the trailer or your race jersey likely won’t satisfy the appropriate-and-helpful criteria.

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Deduct Mortgage Interest

Buying a house in this red-hot housing market comes with tax perks for those who itemize deductions.

KNOW YOUR LIMITS

The interest you pay on the first $750,000 of acquisition debt is tax deductible. Acquisition debt is any debt used to acquire, construct or substantially improve a residence and is secured by the home.

Interest on acquisition debt for a second home may also qualify depending on whether you rent it out. If you rent your second home, you’ll also need to use it yourself. If you don’t use the home, it’ll be considered rental property with a different tax treatment. The rental property mortgage interest deduction also offers significant tax benefits.

LOOK AT THE DETAILS

If you take out a home equity loan, the interest may be deductible. You’ll have to look at the details of how the loan proceeds were used.

Suppose the proceeds were used to improve the house by remodeling the kitchen. In that case, the interest paid on the loan is deductible so long as the principal amount of the home equity loan and any other acquisition debt is below the $750,000 threshold.

But if you used the home equity loan to pay off student loans, for example, the interest isn’t deductible. Your tax professional can provide guidance for your situation.

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August 2021 Client Profile

At the suggestion of a friend, Bruce started day trading stocks in his brokerage account. He’s had fun and made quite a bit of money, but has also lost money. Then he received an unexpected $20,000 tax bill due to numerous wash sales.

To prevent taxpayers from selling securities for no other reason than to generate a loss that reduces their taxable income, the IRS created the wash sale rules. In short, if you sell a security at a loss and then within 30 days before or 30 days after that sale, you purchase the same or substantially the same security, you’ve generated a wash sale and triggered those rules.

Wash sale rules prevent you from immediately recognizing the loss. Instead, the loss is added to the cost of the repurchased securities. This, in effect, delays recognition of the loss until you sell the repurchased securities. So, if you’re counting on these types of short-term sales to offset your gains, like Bruce, you’ll be in for an unpleasant surprise at tax time.

Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.

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Negotiating Post-Covid Benefits

As companies open again, employers may have discovered that a new normal may increase employee satisfaction and productivity. For example, remote work may have worked best for some, while others prefer the socialization of the workplace. Here are some things to consider:

INCREASED FLEXIBILITY

Employees who have worked remotely for more than a year may be hesitant to return to the office full time, instead preferring a flexible or hybrid office schedule. If possible, offer employees the option to work from home a few days a week. This means your employees will be happier and it may allow you to reduce the footprint of your office space, saving your business money.

DON’T SWEAT THE SMALL STUFF

With employees requesting more flexibility, it might mean that perks — like an on-site gym or coffee bar — may not be valued as much by a workforce that doesn’t frequent the office. Some employees may elect to give up these small perks to have a flexible work schedule.

MONITOR PRODUCTIVITY

It might be easy to fall into the trap of requiring more from remote employees because they no longer have to commute. Don’t expect them to substitute their former commute time with more working hours. Demanding hyper-productivity can lead to burnout, frustration and negativity that may cause hard-working employees to quit. Respect normal working hours and avoid meetings or phone calls outside of that time frame.

BRING IT BACK IN

If you determine that you need your employees to return to the office, respect that some of them may have safety concerns.

Also acknowledge that returning to the office, after more than a year of remote work, will be an adjustment. Employees will need to acclimate to the high-stimulus environment of the worksite, with sounds and activity all around them. This can create sensory overload initially, so prepare for employees to ease back into the office. Every company is different and any changes need to work well for yours.