Financial Planning Archives - Page 3 of 8

Browse Category by Financial Planning

Financial Journey, Financial Planning, On Investing, Retirement Planning, Work and Career

After-Tax 401(k) Contributions (aka Mega Backdoor Roth)

If you live in the U.S. and work for a decent size employer, you’ve probably heard of a pretax 401(k) profit-sharing plan. You can read my previous articles on 401(k) by following this link here. In this article, I walk you through what are after-tax 401(k) contributions and how this is different from a traditional (pre-tax) 401(k) plan or Roth 401(k). I cover how this plan works and why might you want to make after-tax contributions to a 401(k), provided it’s available to you through your employer. I also share the insights my husband and I have learned regarding after-tax contributions, such as rollover options.

after tax 401 contributions mega backdoor Roth

I first read about after-tax contributions just about a year ago. I recall sharing that information with my husband afterward and we wished such an option was available to either one or both of us through our employers. To our surprise, our wish came true a few months later. My husband’s employer made the after-tax 401(k) contribution option available. Since then, both of us have learned a lot more about the rules that govern the after-tax 401(k).

What is an After-Tax 401(k) Contribution?

Sometimes, the after-tax 401(k) is also referred to as the mega backdoor Roth. This plan allows qualifying participants to set aside more money toward their retirement accounts, using after-tax money (that is, money they get paid that they’ve already paid tax on).

Currently, the maximum amount plan participants are allowed to contribute to a pre-tax 401(k) is $18,000. Just like like a traditional (pre-tax) 401(k), there are no income limits/restrictions. If your employer allows after-tax contributions to your 401(k), you may be allowed to save up to the $54,000 IRS limit for 2017. This amount is an overall cap, which includes your $18,000 pre-tax contributions plus any employer contributions.

Let’s say for year 2017, you plan to max your pre-tax 401(k) contribution plus 3% match on $100,000 salary. This combined number equals to $21,000. Subtracting this amount from $54,000 gives you $33,000 max to put toward your after-tax 401(k).

However, keep in mind that some employers who offer the after-tax contributions might not allow their employees to contribute up to the IRS limit for the year. For instance, your employer might set such a rule that you’re only allowed to contribute 10% of your income per pay period toward your after-tax contribution plan. Check with your HR and plan administer to learn what’s available to you.

After-Tax 401(k) Plan is Not the Same as a Roth 401(k)

Spread the message. Encourage others to begin their financial learning!

Financial Journey, Financial Planning, Retirement Planning, Work and Career

401(k) Direct Rollover

When I left my previous employment in early March 2017, I was eager to do a 401(k) direct rollover as soon as possible. In an earlier article, I shared that my 401(k) plan charged relatively high fees. I was also excited to have more control over my investment options. In this article, I’m sharing my experiences doing a 401(k) direct rollover to a traditional IRA. I hope you’ll find this article useful as you go on to learn what’s financially possible for you. I also wrote two comprehensive articles on 401(k) here and here if you’re interested in reading additional materials.

401k direct rollover

With a direct rollover, the funds are transferred directly from your 401(k) plan to your IRA custodian (or brokerage) and you will not pay an early withdrawal penalty or taxes. The check for the funds is made out to your IRA custodian, not you. For this reason, when you’re ready to do a 401(k) rollover, be sure you’ve already set up a traditional IRA account with the custodian of your choice. Then, when you speak with your previous employer and/or 401(k) plan administrator, be sure to let them know you’re doing a direct rollover and that the check won’t be made out to your name. If the check does get made out to your name, you might have to face taxes consequences immediately. Although you’ll be getting that money back after you filed your tax return (provided you’ve done the rollover correctly and remember to do your tax return correctly), the extra paperwork and hassle are unnecessary. Avoid this while you can. In my case, the check was made “payable to (my brokerage), For the Benefit Of (FBO) of Nina”.

Spread the message. Encourage others to begin their financial learning!

Financial Freedom, Financial Journey, Financial Planning, Investment, Lifestyle, Retirement Planning

March 2017 Non-W2 Income Report and First Quarter Recap

You can go here to read about why we’re sharing our non-W2 incomes on the blog. And you can visit this link to see our past non-W2 income reports.

As anticipated, March was a very great month for us. We received a total of $5,249.31 in non-W2 income. Our international stocks (many of which pay out dividends in larger amounts once a quarter) were responsible for the big jump.

march 2017 non-w2 income report

This month’s number plus the January 2017 and February 2017 numbers have brought our first quarter non-W2 income total to $8,906.89. The monthly average is $2,968.96. With our monthly expenses being around $4,000, this monthly average covers about 74% of our expenses.

We anticipate this percentage will be a little higher by the end of the calendar year. Some of our investments have large dividends/interest payouts bi-annually or annually. Additionally, we continue to make new contributions to most of our accounts. We’ll see as we continue to track these numbers.

April’s chart will look slightly different as I recently did a 401(k) rollover.

We use Personal Capital, a free financial tool, to track our net worth, view our investment performance, analyze our asset allocations and project our retirement goals. I wrote a comprehensive review of Personal Capital in another post. I encourage you to check it out.

Like what you’ve just read? Sign up for my free weekly newsletter to receive new post updates. Posts have been very sparse lately as my family and I are adjusting to a new lifestyle. I hope to resume posting two to three times weekly starting in May. In the meantime, feel free to connect with me on Twitter or Facebook. As always, thanks for reading.

Spread the message. Encourage others to begin their financial learning!

Financial Freedom, Financial Journey, Financial Planning, Investment, Lifestyle, Retirement Planning

Money Makes Money: February 2017 Non-W2 Income Report

It’s already April and I just got around to sharing our February non-W2 incomes report. A lot has happened in my family in the past month. Some of the changes and adventures included giving my resignation letter to my previous employer and possibly forever saying goodbye to W-2 employment and taking a road trip across the country.

february 2017 non-w2 income

There are two great things I’ve came to love about non-W2 incomes; one being having incomes coming in to cover my expenses while on vacation and that, two, these incomes are location independent (e.g., I can be anywhere in the world and still continue to receive dividend/interest payments.).

You’ve probably noticed the few “$0”s on the table above. First, I was surprised we didn’t receive any dividends/interest payments on either one of our Roth accounts. Second, there was no financial coaching income for February. We were busy preparing for taxes and for the adventure across the country.

All things considered, the total for February was only couple hundred dollars lower than that of January. We are optimistic that the March total will be much higher. Many of our investments either pay dividends/interests quarterly or pay out higher amounts on the quarter mark. Come back to the blog to see the March report soon. You can view my previous non-W2 income reports here.

Like what you’ve just read? Sign up for my free weekly newsletter to receive new post updates.

Spread the message. Encourage others to begin their financial learning!

Behavioral Finance, Financial Independence, Financial Journey, Financial Planning, Lifestyle, Retirement Planning

Calculate How Much Money You Need to Retire: How Safe is the 4% Withdrawal Rule

For years, my husband and I didn’t know how much money we would need to retire (you can read about our financial journey in an earlier article I wrote by clicking here). We had our guesses, with numbers anywhere between $3 million to $5 million dollars. Our logic was that by the time we’re ready to retire, our primary residence home would worth $1 million dollars (all in equity). We would also have $2 million or so dollars invested in the stock market and the dividends and interest yields from these investments would be enough to cover our annual expenses.

In that article, I also mentioned about having learned about the financial independence movement in the middle of 2016. Since then, my husband and I’ve decided that we would reach financial independence once our net worth meets 33X our annual expenses. However, in that article, I didn’t mention how we came up with the number, 33 or why we chose this particular number.

In this article, I’m sharing with you the 4% safe withdrawal rule (SWR) and what this number means for my family’s situation. In the past several months, I’ve read many written documents on the 4% SWR (some of them were more technical than others). It took me a while to understand the different strategies behind this financial planning tool. Feel free to ask me questions on the comment section below and I’ll try my best to respond and/or refer you to further readings.

The Origin of the 4% Safe Withdrawal Rule

After you’ve spent years saving toward retirement, how do you know how much money you can safely withdraw annually so that you will not outlive your money?

Spread the message. Encourage others to begin their financial learning!