June ACap Recap – Your Financial Questions Answered
1. I work for a university with a 457b plan for highly compensated employees; should I contribute to the 457b plan?
There are two types of 457b plans: governmental and nongovernmental. Governmental 457b plans are for state and local government employees, while nongovernmental 457b plans are for highly compensated employees of nonprofits such as universities. Both plans allow you to double your annual pre-tax retirement contributions from the current $17,500 to $35,000, which is a great benefit for those who would like to reduce their taxable income. Unlike the governmental 457b plan, the university 457b plan cannot be rolled over to an IRA when you leave; it can only be rolled over to another nongovernmental 457b plan. In addition, if you leave the university before retirement, you will be paid out the entire 457b balance. Lastly, your contributions to your university’s 457b are not held in a separate trust for your benefit like a traditional 401k or a governmental 457b plan; instead, the value of your 457b plan is part of the general assets of the university and subject to creditor claims. Before deciding to contribute to your employer’s 457b plan, determine whether its benefits and costs are commensurate with your financial goals.
2. What is a Roth 401k?
Roth 401ks are relatively new and very few employers offer Roth 401ks (or Roth 403b), but the ones that do have lucky employees. Roth 401ks are similar to Roth IRAs but better. Unlike a Roth IRA which has income eligibility rules, anyone regardless of their income can participate in their employer’s Roth 401k. Additionally, the contribution limit of a Roth 401k is the same ($17,500) as a regular 401k so you can really stock-pile a lot of tax-free money. Just like a Roth IRA, Roth 401ks are post-tax so the contributions don’t reduce your current taxable income, but like the Roth IRA, the account grows tax-free. In addition, if you leave your employer, you can rollover your Roth 401ks to a Roth IRA. So what’s the downside? -The biggest disadvantage of the Roth 401k is that your contributions do not reduce your taxable income like a regular 401k does. Also, your employer’s matching contributions are pre-tax and not included in your Roth 401k account.
3. My company has a 401k match. How is that calculated?
Many employers offer 401k matching contributions to incentivize employees; but with all the formulas and percentages used, employees sometimes have a hard time understanding how much money they actually get. First off, your employer is not obligated to offer a 401k match, so definitely take the opportunity to further grow your nest egg if they are generous enough to offer it. That said, lets run through a few examples of common 401k match programs.
- 100% matching up to 3% of salary: Assume you earn $100,000 a year and your employer matches 100 percent of your 401k contributions up to 3 percent of your salary. If you maximize your 401k in 2013 by contributing $17,500, your employer will contribute $3,000 ($100,000 x .03). However, if you only contribute $2,000, your employer will only match $2,000 so you would have missed out on the additional $1,000 by not contributing at least 3 percent.
- 25% matching up to 3% of salary: You would need to contribute $12,000 ($3,000/.25) to fully benefit from the match. Therefore if you contribute $17,500, your employer will only match $3,000 ($100,000 x .03), but if you contribute $10,000, your employer will match $2,500 ($10,000 x .25).
- Fully vested: Lastly, if your employer says that your contributions are fully vested, that means if you were to leave the company, you can keep 100 percent of your employer’s contributions.
4. If I sell an investment, why is the cash not immediately available?
I received this question from a client recently who wanted to know why his cash was not immediately available for withdrawal from the sale of his mutual fund. When trading, there are two dates to keep in mind: transaction date and settlement date. The transaction date is when the trade occurred, but the settlement date is when the transaction is complete and can take up to 3 days from the transaction date. Some securities are 1 day, but regardless, the cash from the sale of a security is not available for withdrawal until the trade settles. Some brokerage houses will allow you to buy another investment prior to settlement, but not without a stern warning you that you are buying on unsettled funds per Regulation T of the Federal Reserve which dictates the rules for trading on unsettled funds.
Have a financial question? Contact ACap Asset Management at firstname.lastname@example.org or 818-272-8511.
Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Visit us at www.acapam.com