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For all employers, offering retirement benefits can play a For all employers, offering retirement benefits can play a fundamental role in recruiting and retaining qualified employees. Yet, despite the obvious advantages that come with helping workers save for retirement, we believe, many not-for-profit organizations neglect to provide a retirement plan or do too little to assist workers in reaching their retirement savings goals.
One of the simplest options for nonprofits wishing to provide employees with access to a tax-advantaged retirement plan is the 403(b) arrangement, which can be attractive due to tax laws.
Available to public schools and organizations that qualify as nonprofits under section 501(c)(3) of the Internal Revenue Code. The 403(b) plan is often regarded as the equivalent of the 401(k) for the not-for-profit sector. Over the years, the tax laws have been amended to bring 403(b) plan features more into line with those of 401(k) plans, but important differences remain.
Because contributions to a 403(b) plan are typically made on a pre-tax basis, money going into the plan is deducted from the employee’s salary before federal income taxes. Consequently, by lowering taxable salary, participants are able to lower their federal income tax each year they participate in the plan. Money contributed to a 403(b) account grows tax-deferred until retirement, when qualified distributions are taxed as ordinary income.
Withdrawals from a 403(b) account prior to age 59½ are only available under certain circumstances, such as a participant becoming disabled or experiencing hardship. Early withdrawals may be subject to a 10% federal income tax penalty, unless a qualified exception applies.
Some 403(b) plans allow employees to borrow money from their accounts under certain circumstances, but these loans must be paid back with interest. Since January 2006, 403(b) providers may also give participants the option of making elective contributions using after-tax dollars to Roth 403(b) accounts, but is tax-free (including earnings) when distributed.
The Pension Protection Act of 2006 made permanent the previously enhanced annual contribution limit for both 401(k)s and 403(b)s, with adjustments for inflation. The 2022 elective deferral limit is set at $20,500 for workers under age 50, with a $6,500 annual catch-up contribution allowed for workers over age 50. In certain cases, employees who have been with eligible employers for at least 15 years also may be permitted to make an additional contribution.
The law further permits 403(b) plan providers to expand the circumstances under which participants may make hardship withdrawals without incurring penalties to include crises or hardships befalling not just participants and their dependents, but also domestic partners and certain non-dependents.
There are, however, some significant differences between 401(k) and 403(b) plans. For employers, establishing a 403(b) plan can be considerably easier than sponsoring a 401(k) plan. Unlike 401(k) plans, 403(b) arrangements are not necessarily governed by the complex requirements of the Employment Retirement Income Security Act.
To set up a 403(b) plan that receives only elective-deferral contributions, the nonprofit organization chooses the financial institutions that will be responsible for establishing and administering the accounts, arranges for the payroll administrator to deduct contributions from employees’ paychecks, notifies employees of their provider options, and explains to employees how salary deferrals can be arranged. The employer is generally required to offer all employees the opportunity to make 403(b) plan salary-deferral contributions.
Employers may choose to contribute to employee 403(b) accounts, usually by matching a percentage of employee contributions. But if the employer makes contributions, the 403(b) plan becomes subject to ERISA, which imposes discrimination testing, as well as other restrictions and reporting requirements.
Unlike many 401(k) plans, most 403(b) plans have no vesting schedule. The participant is, therefore, automatically entitled to all the funds in the account, including employer contributions, regardless of his or her length of service. Tax-free rollovers to IRAs and most employment-based retirement plans are allowed when the participant moves to another organization.
While 403(b) plan participants were originally permitted to invest their savings exclusively in variable or fixed annuity contracts with insurance companies, participants may now invest directly with mutual fund companies. Many nonprofits have a list of approved 403(b) investment product vendors from which participants may choose. But because many nonprofits have selected insurance companies as their primary approved 403(b) providers, participants often fail to take advantage of the mutual fund alternative, and continue to put most of their money in annuities.
Although nonprofits that offer employees access to 403(b) plans with no employer contributions do not have the same fiduciary responsibilities as 401(k) plan sponsors, organizations should nonetheless make an effort to educate employees participating in 403(b) plans about the fees, surrender charges, and risks associated with each investment option.
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Source Links:
https://www.ebri.org/docs/default-source/fast-facts/ff-318-k-40year-5nov18.pdf
This material waThis material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.
A 403(b) plan (tax-sheltered annuity plan or TSA) is a retirement plan offered by public schools and certain charities. It's similar to a 401(k) plan maintained by a for-profit entity. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary into individual accounts. The deferred salary is generally not subject to federal or state income tax until it's distributed. However, a 403(b) plan may also offer designated Roth accounts. Salary contributed to a Roth account is taxed currently but is tax-free (including earnings) when distributed.
Mutual funds are sold by prospectus only. Before investing, investors should carefully consider the investment objectives, risks, charges and expenses of a mutual fund. The fund prospectus provides this and other important information. Please contact your representative or the Company to obtain a prospectus. Please read the prospectus carefully before investing or sending money.
An annuity is a contract between you and an insurance company. All guarantees and protections are subject to the claims-paying ability of the issuing insurance company, but the guarantees do not apply to any variable accounts, which are subject to investment risk, including the possible loss of principal. For further information please consult your financial advisor.
Before rolling assets over from a qualified plan, you should consider various factors. These factors include but are not limited to the following: Investment Choices, Fees and Expenses, Services provided by new option, Penalty-Free withdrawals, Required Minimum Distributions, and Tax considerations. Speak to a tax professional about your individual situation before taking any action.
With 7x California State Championships and 17 Individual State Champions, the Buchanan High School Wrestling Team has the unique advantage of having such a rich history in the sport, and a fantastic district which strives to give the school the opportunity to be the best. We’re happy to support the Buchanan Bears and their pursuit of excellence. We recently participated in their 4th Annual Golf Tournament, where 100% of the profits were used to support all 55+ athletes on the roster. Supporting local community is important to us at Strong Valley.
Do you ever feel that no matter how much money you earn, it’s never enough? Do you spend beyond your means, but still aren’t satisfied?
Even financially successful people struggle with a sense of scarcity. We might say that money, status and success don’t lead to increased happiness, but many of us still unconsciously think that more is always better.
People of all incomes face social pressure and visions of a more expensive lifestyle. Getting bombarded by endless advertising encouraging consumption doesn’t help. As financial advisors, we often see people across a wide range of income levels living beyond their means and accumulating possessions or expensive habits that don’t bring genuine, long-lasting life satisfaction.
Here are some ways to avoid pursuing happiness through buying stuff.
Recognize that you have enough and know you are not alone. The annual Consumer Electronics Show in Las Vegas promotes the latest and greatest electronic gadgets. But interestingly, the new products don’t get people pumped to spend money. Research from the NPD group indicated 68% of consumers are just fine with their current gizmos and feel no need to spend any more of their hard-earned money on new devices. It turns out a lot of us already intuitively know what we want. And it’s not more.
Remind yourself that appreciation is an incredibly powerful tool. Next time you feel stressed about something, challenge yourself to sit down and literally count three blessings – and realize how fortunate you are.
If the Joneses have a better car and a bigger house, and you feel unlucky, you need to put things into perspective. Surrounded by so much, it’s easy to get a skewed perspective on what is enough.
Face your financial fears with care, awareness and careful judgment. To heal your relationship with money, you need to take a gentle approach to your financial fears. For so many of us, these fears are rooted in primal places. Our unconscious beliefs about money are often related to a sense of power and identity. The core of inner healing is about recovering the truth of who you are and what you desire.
We all deal with a variety of financial fears. Some people are often afraid to ask for a raise and avoid talking about their money concerns because they don’t want to feel like they are a burden on our families. There’s also a fear that you can suddenly become destitute. These fears make it harder to plan and live life to the fullest.
Feeling like you are incomplete or personally lacking is a big drain on your productivity and happiness. Invest a bit of time in thinking about what having enough means to you.
How long do you think you will live? How long does your money need to last? If you’re like most people, you get this age wrong.
The consequence? Faulty retirement planning, overspending now and running out of money before you actually reach your true longevity. Or spending too little now, depriving yourself of a comfortable retirement before your death.
Your longevity is the statistically expected number of years of life you have remaining at a given age – specifically, your current age. (Your longevity depends on other factors and you can find calculators with good insights into these by Googling “life expectancy calculator”).
There are two well-known tables for life expectancy managed by the Social Security Administration: the Social Security general population table and the Annuity Table. The tables constantly change with shifting demographics, lifestyles, medicines and other advances. Today’s tables may, therefore, understate longevity, especially for younger people.
Let’s look at a couple of examples to get a general sense of longevity, using the “Retirement & Survivors Benefits: Life Expectancy Calculator” created by the Social Security Administration. This chart, from the Social Security table, gives you a point of reference when thinking about how much longer your money needs to last.
While this might be decent guidance, keep this in mind: these figures do not take into account a wide number of factors such as current health, lifestyle, and family history that could increase or decrease life expectancy.
Let’s use another example, someone who is currently 85 years old. According to the Social Security Administration:
In other words, at age 85 you may have seven or more years remaining – illustrating the importance of understanding your life expectancy when you plan retirement spending.
Further, the “healthier” population subset enjoys a greater number of remaining expected years compared with Social Security’s general population. In some cases (depends on age), about 60% of the 70-year old “healthier” population may outlive members of the general population due to lifestyle choices, lack of accidents and other similar factors (including just plain luck).
That’s why many financial advisors suggest planning to age 95. Such advice can reduce how much you spend today just in case you live to 95.
Further, financial advisory best-practices suggest adjusting spending over time. Instead of guessing an age you think too old to imagine, anchor your expectations on how long your money needs to last using statistics for your population group. Update that expectation each year during your annual financial review.
Rather than fear outliving your money, embrace uncertainty through a structured process that incorporates uncertainty into your financial decisions. Life is full of uncertainty and forks in the road. You can prudently manage your retirement money surer than that.
The strong dollar is much in the news lately. But most Americans, other than tourists beyond our shores, don't focus on what that means to them. For U.S. investors, the upshot is not great. In fact, for most, currency fluctuations worldwide (and not just that of the dollar) are an invisible force that they don’t reckon with until it’s too late.
Calculating currency valuations from one country to another is complex and, if you’re like most people, you don’t give the subject much thought until you get ready to travel. You might visit your bank to swap greenbacks for a few euros, but usually you just plan to use a credit card to cover your tab on the Spanish Rivera or at the Tuscan villa.
For corporations and for your portfolio, though, fluctuating currency rates carry much more weight.
So what? Maybe you never plan to go to Europe. Your portfolio, likely containing international investments in its mutual funds, might still feel the fallout.
Let’s look at one past global monetary event back in 2015 when Switzerland reaffirmed the commitment to keep its franc at $1.20 to the European Union’s euro – then suddenly changed its position, sending the euro falling, the franc soaring and world markets reeling.
For one, German businesses suddenly found it much more expensive to buy Swiss watches, chocolates and cheese as Switzerland’s exporters were caught in a battle literally overnight. Meanwhile, Swiss citizens enjoyed welcome wealth.
Unlike Americans who may plan only an occasional trip to Paris, Swiss citizens commonly drive to France for the day. The currency move suddenly put an extra 15% to 20% of buying power into the hands of the Swiss who visit France.
We live in a global society, so understanding currency fluctuation means much more than calculating our travel costs and daily vacation spending. Exporters win or lose every time currency valuations change.
Keep in mind if the euro declines substantially against the U.S. dollar, for example, that new Mercedes is more affordable here but Apple iPhones cost much more in Germany than in this country.
Don’t feel too flush with the dollar’s comparative value. Nearly half the earnings in the Standard & Poor’s 500 come from companies based outside the U.S. Slowdown in global growth also dims outlooks for robust domestic growth as economists cite troubled overseas markets, volatile oil prices and, ironically, a stronger dollar.
For most of us, international investing, whether overt or hidden in our mutual funds, comes with pros and cons:
Pros: Variation in ups and downs of the world’s markets means your diversification enjoys a chance to work better. Mixing asset classes with low correlation to one another usually guards against portfolio-wide losses – and you won’t find lower correlation anywhere than across some pairings of global stock markets and indexes.
Cons: For the risks in international investing, look no further than headline political turmoil, border wars and other upheavals that send shock waves through almost all the world’s markets. Less grandiose but no less devastating: Exchange rate risk if your money must be converted before you can invest.
Like all financial decisions, such as investing and retirement planning, the further out you plan your trip, the more successful your journey.
Remember to add the world’s currencies to your budgeting and investing discussions with your financial advisor.
Developing effective strategies for achieving your goals within the limits of your particular financial circumstances can be difficult. Each stage of your life may create new financial challenges. Sending your child to college, remodeling your home, caring for an elderly relative, or starting your own business are objectives that may require a certain amount of capital, according to your needs.
Even when your overall financial situation appears to be positive, your available cash flow may be constrained. Should you be faced with a need for greater cash than what you have on hand, here are some alternatives you may want to consider:
You can take distributions from your traditional Individual Retirement Account (IRA) at any time. However, the full amount of your distribution will be subject to income tax. In addition, if you are under age 59½, your distributions may be subject to a 10% Federal income tax penalty. No tax penalties are incurred if early distributions are due to a qualifying exception, or if the withdrawal is part of a series of equal periodic payments based on your life expectancy. However, premature distributions may also hinder your ability to reach your retirement goals in the future.
Some employer-sponsored 401(k) plans allow participants to take an income tax-free loan from their accounts. Interest rates are generally comparable to those of commercial loans. But these loans are usually short term, and amounts not repaid on time are considered taxable withdrawals and could be subject to penalties. Should you leave the company, your employer may demand full repayment within 60 days, and you could owe taxes and penalties on the unpaid balance. In addition, as with IRA distributions, borrowing from your 401(k) can actually counter the plan’s ultimate purpose: building tax-deferred savings to help provide retirement income.
If you own a permanent life insurance policy, you may be able to borrow against the policy’s cash value. A policy loan is not a loan at all, but rather an advance of some of the cash value to which you, as policy owner, are entitled by contract. However, access to cash values through borrowing or partial surrenders can reduce the policy’s cash value and death benefit, can increase the chance that the policy will lapse, and may result in a tax liability if the policy is terminated before the death of the insured.
If you are a homeowner, you may be able to access the equity in your home through mortgages and equity loans. Although rates on such loans are traditionally low, it is important to keep in mind that, when you borrow against your home, you are pledging your house as collateral against the loan.
Should you be unable to repay the loan, the lender would have the right to force foreclosure, with the loan being repaid from the eventual sale of the property. So, you may want to avoid using such loans for “live-without” items, such as vacations, clothing, or jewelry.
Borrowing from a bank may be an alternative, if your credit history is good, you meet certain financial requirements, and your intended use of the borrowed funds is well-defined. Loans for education or start-up business expenses are fairly common. However, when considering loans from a bank, it is important to be sure you can meet the monthly loan payments.
The ever-increasing availability of credit card loans has resulted in a tempting, yet expensive, borrowing option. Credit cards can be a good source of quick cash when you are certain you are able to promptly repay the amount charged. But because credit card loans often carry high interest rates and finance charges, they can be expensive for longer-term debt.
Should you ever need to access one of these resources to meet a pressing cash need, it is important to weigh the relative benefits and potential drawbacks of each option to help determine the most appropriate course of action for your situation. Your financial advisor can also help give insight into your unique situation. Making a wise borrowing choice now may save you substantial time and money later.
For today’s business owner, continuation and estate planning go hand-in-hand. Without proper tax strategies, the time, hard work, and money you’ve invested in your business could yield little more than a significant tax bill for your heirs. Fortunately, with careful planning, there are numerous ways of reducing your family’s tax burden while keeping your business intact.
You are annually allowed to give assets valued up to $15,000 in 2020 to each of your children or grandchildren (or anyone else, for that matter) without incurring a tax penalty. A married couplecan transfer assets worth $30,000 in 2020 – $15,000 per adult.
Making gifts qualifying for this annual gift tax exclusion can help lower your estate’s taxable value and minimize estate taxes. In 2020, the federal estate tax generally applies when a person's assets exceed $11.58 million at the time of death and can be as high as 40%. Further, some states also assess estate tax.
Accordingly, above and beyond the annual gift tax exclusion, every individual has a lifetime gift tax exemption of $11.58 million in 2020, almost $180,000 more than it was in 2019. Most taxpayers will not reach the gift tax limit of $11.58 million over their lifetimes, but for some business owners, this amount is not enough to transfer an entire business. Furthermore, using the lifetime gift tax exemption will reduce what you can transfer tax free at death. So in order to substantially reduce your tax liabilities, further planning options should be explored.
For many estates, a trust is a cost-effective method of making gifts, which can often facilitate intergenerational transfers. In particular, the grantor retained annuity trust (GRAT) enables you to gift a substantial amount while retaining an income interest for a specified period of time. This significantly minimizes your gift tax liability or entirely eliminates your exposure. GRATs are especially useful if a business or estate assets will appreciate in value.
With a GRAT, you can put all or part of your company’s stock into an irrevocable trust that pays you, the business owner, a fixed income for a specified number of years.
Since the trust is irrevocable, once you place stock or other assets into the trust, they are there for good, or until the GRAT terminates and the assets pass to your designated beneficiaries.
Assets transferred to the trust are considered a gift for gift tax purposes. GRAT gifts do not qualify for the annual exclusion because the beneficiaries have a future interest, not a present interest, in the gift. Since you retain an income interest, the gift’s value is discounted, reducing your total gift tax liability. However any income is taxed to you as the grantor.
An applicable Federal interest rate determines your annuity (the income you receive as a percentage of assets transferred) value. GRATs are generally most attractive when interest rates are low because you may receive substantial transfer tax savings if the growth rate of assets transferred to the trust exceeds the federal interest rate. Your beneficiaries will receive any appreciation free of estate and gift tax, provided you survive the trust term. It is important to keep in mind that while reducing your transfer tax liability and possibly building wealth for your heirs, a GRAT also locks in a guaranteed income stream for yourself for a fixed time period.
It is important to emphasize one major drawback to using a GRAT: If the grantor dies before the trust term expires, then the trust’s full value falls back into the grantor’s estate. It is important to plan for a trust term you expect to outlive. Given this risk, older grantors may wish to specify shorter terms, or set up several trusts of varying durations, known as “laddering.”
Business owner estate planning is a multifaceted endeavor. Advance planning and carefully considered tax-efficient strategies may help maximize the transfer of wealth to your heirs.
Be sure to consult your financial advisor about your unique circumstances.