8 Biggest 401k mistakes and how to avoid them

401k Mistakes – Video Transcript

We’re going to talk to you today about the 401(k) and the eight biggest mistakes that you’ll bump into with respect to that 401(k).

We want to identify those for you because when the mistakes are made, oftentimes they are irrevocably done so and it can’t be fixed and other times they can so it’s important that we identify those for you and that you can avoid them because that’s ultimately the best way to fix the problem.

The balance of this is going to be through PowerPoint and what we’re going to do is take the eight biggest mistakes and split it up into two different modules. So, Module I is going to come here in a minute and you’ll hear my voiceover over the PowerPoint presentation and I’ll see you at the end. So, I look forward to talking with you and I hope you learn a lot. Thanks for joining us.

Okay. Well, as promised, my name is John Vucicevic and this is the PowerPoint presentation that we’re going to present to you about the eight biggest 401(k) mistakes and how to avoid them.

What are the 8 biggest 401k mistakes people make?

All right. So, let’s get into the meat of the program and talk about the eight biggest 401(k) mistakes and how to avoid them. We’ll talk about the eight biggest mistakes. Certainly, you understand that there are far more than just eight but these are the ones that we see the most and can cause the biggest problems.

401(k), let’s define what we’re discussing here.

These are retirement plans, deferred accounts, tax deductible investment vehicles and there’s a whole bunch of them and we will address some of the big ones throughout the course of this program as well but we wanted to make sure that a listener out there doesn’t understand only that we’re talking about 401(k)s.

These mistakes can happen in all the programs that are pertinent to your retirement and they can be avoided as well. So, let’s get started. Here’s the process that we’re going to undergo. I’ll talk a little bit about the basics initially then we’re going to move over to actually what is a rollover because this is where most of the mistakes occur.

We’re going to discuss the different types of plans and I’ll show you the most popular 401(k)-like vehicles that are out there. We’re going to talk about who’s eligible for transfers because this is where mistakes occur as well and then we’re going to talk about the eight biggest mistakes and that’s the meat of the program.

Whats a 401k rollover?

All right. First off is what is a rollover? A rollover is just simply a tax free transfer to another qualified plan, right. So, what I’m saying to you here is that if you leave your employer for instance and you can take your 401(k) with you.

Sometimes that doesn’t happen because people don’t understand that they have the availability to do that and it’s a tax free distribution of your program. As long as you put it into a like kind of program, it’s going to be a tax free transfer.

You can put it into another qualified plan like a 401(k) or you can put it into an IRA and there’s reasons to do both and we’ll discuss those as the program proceeds here.

Types of qualified plans are obviously the 401(k). This is the most common type and most known plan typically with publicly traded companies. Any company that has a stock ticker symbol they’re typically going to have a 401(k) type of program.

Privately-held companies will carry 401(k) plans as well, same thing with the privately held companies. This conjures up in me small business folks that aren’t necessarily traded or then aren’t traded on the stock exchanges, small CPA firms or legal counselors or doctor offices, things of that nature, any small business plumbers, electricians and then often with 401(k)s are a profit-sharing plan.

Now, in a 401(k), you’ll make a contribution predicated by what the IRS says you can do and what the plan allows you to do and then if you’re lucky, your employer will add money to that. They’ll make an additional contribution for you and it often has limits and they won’t go above a certain amount. Now, once they determine that the plan is going to make X, Y, Z contributions, those are pretty much concrete and will occur. The profit-sharing part on the other hand is not. That is a discretionary based on the employer or the plan custodian, the owner of the plan’s profits. All right.

So, the next kind of plan then will be the 403b. These are typically in not for profit organizations like schools, universities or charities.

You know, if you’re a teacher you have a 403b. 403bs are fairly conservative plans. They have a few different rules but they act similarly to the 401(k).

There’s a few different caveats associated with them but overall you put money in and deduct it from your taxes. 457 plans are for State and local governments.

These plans have caveats as well. They’re different than the 403b and the 401(k)s then we got the TSP plans. It stands for Thrift Savings Plans for government and military employees. This is a program that’s very similar to the 401(k) but simpler and has different caveats as well.

So, each, like I said earlier, each of the programs individually, each 401(k) is going to be different. Each TSP may not be different. They’re all be the same but they act in similar fashions.

And then there’s the IRA. This is a personal plan and it’s individual retirement account is that what that acronym stands for. And what we see with IRA’s is they come up in people that work for an employer that does not have a plan in place or for retirees that roll their plans over or even non-retirees.

As I said earlier, you can roll it over to a current plan or a new plan or you can roll it over into an IRA and there’s reasons why you would do both. There are many plans that work similarly to IRAs typically for the small business owner and there are simple IRAs and there are SEPs or Simplified Employer Pensions. Keoghs were the very first ones that came out.

Again, there’s many different types of plans out there. They all work similarly but what you see on your screen are the big ones.

When can you take money out of your 401k?

All right. So, let’s talk about the eligibility for rolling over your money. When are you able to access the money? That’s really what we’re discussing here.

One reason is that your company went out of business. If your company goes out of business, that’s a termination of the plan and you’re able to have access to that money and you can really have access to it if you want to but that would be disadvantageous if you were to cash it up.

So, like I said earlier, you can move that money into the new employer that you go to. Let’s say that you don’t have to physically move anywhere, your company just got bought out or sold and you’re still in the same building, you know, doing the same kind of functions.

It’s just kind of different name to it. Well, that would be a reason to have access to your money.

One plan changed and it goes into a new plan on the assumption that the new owners of your business have a plan. So, you can take your old 401(k) and move it into the new program.

A caution here: The one plan may have more favorable benefits than the other plan, the second plan. So, the plan you’re moving from may not be as beneficial as the plan you’re moving to. In that case, that’s good. What we see as a problem however is that the plan that you have currently is more beneficial than the plan that you’re moving to.

So, you think you have benefits that you don’t have anymore and then you implement on a cause issues. So, those can be mistakes that can be avoided simply by understanding where that money is going. Now, you can move your money to the plan that’s coming in with the new employer or to your new employer’s plan or you can move it to an IRA.

You have choices there and there’s reasons to do both depending on how old you are and your circumstances.

Now, you might be the one, your company is still in business but you want to change jobs and you want to go to a new company. Well, that’s a termination of employment and a reason to do a rollover. Now, you might just change jobs, move to a different employer or something and that’s in termination of employment thereby giving you an option to roll your plan over and same thing applies.

You can go to the new employer with the money and use their 401(k)s, just understand the rules or you can move it to an IRA. Okay. Retirement is another reason to making you eligible. That’s an obvious one. Now, in this case, you may not have a new employer to move your plan to.

What we see however and we believe is a mistake is that you leave your plan with your employer that you retired from. This often isn’t to your advantage to do so and requires some planning and guidance. So, retirement is another reason to making you eligible to have access to your money. And then illness of course, yeah, you may not want to terminate your plan but you just may get sick and that of course is a reason to access the funds.

Well, okay, let’s get into the meat of the program here and we’ll start talking about the mistakes. As you can see on your screen, the very first mistake that we see and it’s one of the biggest ones I think that can cause failure of any retirement plan is having too much in any one company stock.

Now, there are reasons why and I’m just going to bring up the next bullet point here is Enron. In the days of Enron, their corporate plan, their 401(k) plan only allowed Enron stock to be put in it. And those days are far gone and it’s predominantly because of this. Enron, it made a decision and as I said earlier, all 401(k)s have different caveats, the IRS has rules and as long they work within those rules, they’re okay. At this particular point in time, the people that worked at Enron could only have Enron stock in their company.

Today, there’s percentages that the IRS says that they can mandate. Okay. However, that still can lead to too much investment in the company that you’re working with and why that’s bad is glaring at you on the screen. Impropriety is the lie behind it. We never know when the next Enron is going to come.

So, if your company pays their matching contribution to you in stock, they might be on an annual basis in compliance with what the IRS mandates but over time could build up to a substantial amount and you could be heavy with respect to the investment in that particular company stock.

Holding too much company stock is actually worse than holding too much in a particular sector, technology sector, energy is a sector. And, you know, there’s different sectors with respect to what you can invest in. If you have two heavily weighted into one particular sector then, you know that’s the second biggest risk that you can come to because we never really know where the next bubble is going to be.

The housing bubble came up and bit us all somewhat by surprise and yet your 401(k) may not have had any investment in this particular sector but yet it affected you and it’s because that affects everything else.

So, we have to be very diligent and very conscious about where the money is positioned. In relationship to the company stock, there is unrealized appreciation. There’s two different kinds of taxes.

Long-term capital gains tax which currently is 15% and I believe Congress just extended that for a couple of years so we can reasonably expect that they stay at 15%. If your tax rate, income tax rate is lower than 15%, this doesn’t make any sense.

If it’s higher than 15%, you may want to capture some of those unrealized appreciations. What is that? That’s a stock that’s owned, let’s say it’s Enron, that you purchased for or you were paid with respect to their company contribution, their match and it was valued at a dollar.

Today, it’s worth $10. There’s a $9 unrealized appreciation. It grew in your 401(k), growing like that in a tax deferred basis. Well, if the tax rate you know as 15% and you’re in a 30% income tax bracket, it might make economic sense to take that stock out of the 401(k) and cash it in and pay the tax on it because 15% is better than 30% and then of course, you have all the strings that are eliminated from those dollars as well.

Now, having said what I just said, you’ve got to be careful. You have to be over 55 for certain. You’ve got to be under 59½ so you don’t get a 10% penalty.

Seeking advice of a professional that’s in the 401(k) or a qualified money business or your tax advisor would be the right and appropriate step to take care but it’s a strategy that can be used. Sometimes it makes a lot of sense to use. So, just something for you to think about.

Number three is a way to minimize taxes, eliminate the problems that are inherent inside of the 401(k)s with respect to mandatory distributions and all that.

So, it’s just a strategy that I wanted to present to you that makes sense for some folks. And then why do people invest in the company that they work with and solely in that company? It’s because of devotion. You know, they feel obligated or emotionally tied to the company for some reason and a investor money in it and over time this can come back to hurt you and bite you pretty hard. And we’ve seen it many times over and over again nationally throughout the country. So, that’s mistake number one, too much in company stock.

Okay. Well, mistake number two is asset allocation. No asset allocation. We spend a little time in mistake number one discussing this and what I’m referring to here is not having a wide mix of asset groupings that you’re invested in.

Only Enron stop obviously was a problem. That’s no asset allocation. Even today we still see this in many many programs. Poor asset allocation: What this is being referred to as is how do we pick what we’re putting our money in and we do several different things.

First and foremost we hear conversations in the office or in the shop or wherever it is you work and you talk to your neighbors in the next cubicle or around the coffee machine or water cooler and you discuss things like this.

So, you make decisions based on those types of discussions or you get to shake, you’re a little more diligent, you get to shake that the provider is giving to you when you look at the performance of all the funds that are there and you poke and hope for all practical purposes and you look at what it did last year and hopefully it’s going to do the same thing this year.

And there are studies that will prove that strategy false. It fails more times than it succeeds. So, if you’re picking what was good last year, the fund or the manager often in the coming years is on the bottom of the success pile if you will.

Poor asset allocation is taking advice or no advice and poking in the dark and hoping for good results. No strategy for growth: What this is referring to is having a plan to capture gains.

What plan did you have in 2008 to capture gains?

On October 9th of 2007, our marketplace hit a historic high. That’s historic, never been higher. We were making more money than ever but nobody has a strategy to exit and capture gains. Everything was left there for risk. Everything was left there to happenstance.

There was no strategy on the way up to capture any gains. My suggestion to you to avoid this mistake is to create a strategy for yourself. All investments, all brokerage, all investments have a safe place to put money and it’s typically on money market accounts.

So, you can put it there and keep it safe and then strategize from that point. So, have a plan to capture your gains. This one, number four, says no exit strategy. Have a plan to minimize losses. Most people don’t have a plan. They wait until it hurts bad enough to get out.

So, here’s what I’m saying to you. If you have a plan to capture your gains, you’re not really going to need too an aggressive of a plan to minimize losses because you will have captured money in a safe place and you can strategize from there.

The folks that are winning today are the ones that had a strategy. They were out of the market at or around the top of it and now that the market it’s at the bottom, they’re buying low and selling high. That’s the goal. How do you do it?

In one way, I’ll submit to you that if you have a strategy to capture gains, you’re not going to need a big strategy or an aggressive one to minimize losses. Those are just the realities of investing.

The goal is to buy low, sell high. Don’t be invested to have only in one anything and have a strategy to conquer your investment portfolios with respect to growth and minimize losses.

Mistake number 3, early withdrawal, this is – and most people understand that there’s a charge for getting out of the plan early but they don’t understand what that means.

Now because the money is tax deferred and deductible when you put it in, there’s a string attached. And this string says that if you’re below or younger than 59½, you are going to pay a 10% penalty.

It doesn’t sound too bad but if you take money out of a qualified account 401(k), all of the things we’ve been talking about, you’re going to pay tax plus a 10% penalty.

That’s called an early withdrawal charge. Now, it might be necessary that you do so but it’s certainly not advisable that you do so. It’s a pretty hefty charge on top of the taxes. Now, this applies to everybody except those folks in the 457 plan. It doesn’t apply to them.

So, this is a good thing if you’re a State and local and Federal employee, you got a 457 plan and you can technically take the money out at any time, pay tax but you won’t have a 10% penalty and that’s a good thing. So, if you’re 25 years old, let’s say you got a good investment portfolio.

You’ve been diligent about it, you can take money out and diversify outside of the 457 plan and not pay a penalty by doing so. So, if you put that back into a qualified plan as well, a like kind plan, in this case it would be an IRA, you won’t pay a 10% charge.

So, that’s just something, a little caveat that those 457 people should know about. And there is the age 55 rule. If you’re over 55 years old, most 401(k) plans today will allow you to avoid the 10% early withdrawal charge by giving you an option to have an in-service withdrawal.

This applies to 401(k)s with 403b plans. So, those of you that are over 55 or approaching retirement and you want an additional diversification with respect to your portfolio, you can take out a percentage of your 401(k) or 403b plan. It’s called an in-service withdrawal. You’re still working. You’re still contributing but you’re able to take a piece out. That’s what that refers to. Mistake number three is not knowing that you can do all that.

And mistake number four will just be the last one for this segment. It’s cashing out of the plan early. Why do people do this? Well, what we’ve seen is people cash out of their plans early to buy the hottest investment center on the marketplace.

We saw this in the early 2000s, mid 2000s with respect to the housing. People were investing money in houses because the returns were so good. And like any investment, if you’re making money some place, not everybody can make money, somebody is going to lose eventually and that’s referred to today as the housing bubble.

Now, there’s been a study done that said that most folks under the age of 65 that had $100,000 or less in their 401(k) cashed amount to chase the returns in the housing market. Now, hopefully, those succeeded but I’m certain that not all did. So, this is a mistake, chasing the hottest investment out there with your qualified money.

People do it. Real estate is one. I popped up on the screen there gold because this is just something that’s very pertinent with respect to the discussions today.

Today, gold is being sold as investment option. I’m not going to offer an opinion at this particular point in time but it’s a commodity so you need to understand your risks and what you’re buying, why you’re buying it. That’s the most important thing.

And then of course, what’s the next biggest and hottest investment that’s coming down the road? You know, I don’t have a crystal ball but I’m certain that there’s going to be one and you just going to make sure that you understand the risks involved and the cost of cashing out of your plan to chase hot investments.

Well, okay, we’ve just finished Module I of the eight biggest 401(k) mistakes and how to avoid them. I’ve enjoyed going through this module with you and I look forward to seeing you on Module II.

8 Biggest 401k Mistakes Part II

Video Transcript

You’re watching is Module II of the eight biggest 401(k) mistakes. Similar to Module I, how we’re going to do this is with a PowerPoint presentation and my voiceover on that presentation. So, we’re going to get started here with mistakes number five. Thanks for coming and I look forward to sharing this information with you.

We’re going to start with mistake number five.

So, we begin Module II with mistake number five rolling over after tax dollars. Now, why on earth would have after tax dollars in any qualified plan?

Well, some 401k’s as we learned in Module I allow rules. They have different rules. They allow some participants or all participants to invest excess money if they choose to.

So, you’ve contributed the maximum into your 401(k) and you have extra money and you want to invest it. So, you put into your 401(k). That money is going to go in on an after tax basis.

This is usually seen in higher income earners and the reason why they do it is so that the interest or the growth in the accounts are on a deferred basis so that that growth is not taxable. Here’s the problem. The problem is in the keeping the money separate. You got qualified money with non-qualified money and the difference between the two is glaring.

One goes in after tax, the other one goes in before tax. So, the accounting of that is critical.

If the plan custodian or the administrator of the plan or whoever is holding the proceeds, don’t keep a separate accounting of those two forms of assets, the end result is is that after tax money is going to get taxed twice when it comes out in the form of distribution.

That would happen when you’re 65 or at retirement or whenever you leave, guarantee it to happen at age 70½. So, if you roll this money over to a new plan because your employer went out of business for instance as you learned in Mod I, you can put that money into the new 401(k).

Well, that new 401(k) plan administrator needs to know which money is taxable and which money came in after tax. If they don’t, it is all deemed to be taxable or before tax money and as a result it’s going to come out all taxable.

So, the effect is that you’ve been taxed twice on those funds. How do you avoid this mistake? Not doing it. Inside of asset protection training modules, there are all kinds of places to put money that in excess contributions. So, you can put the money anywhere. So, just simply avoid this mistake and just don’t do it.

Okay. Mistake number six then is the beneficiary. We see all kinds of errors here and frankly I believe these are the ones that cause the biggest problems because everybody’s good intentions can be overridden by the wills or wants of beneficiaries.

So, beneficiary designations, first and foremost, you need to know that they override everything. Okay. If you created the will and you think that that’s the end of the deal, you’re mistaken. The beneficiary designation in your 401(k), your IRA and we’ll take this even deeper, annuities, life insurance, anything that has a beneficiary designation needs to be reviewed annually, life changes.

So, if your will says one thing but your beneficiary designation say something else, it’s the beneficiary designation that’s going to override anything that happens, trusts as well, divorce decrees and pre-nuptials.

In addition, oftentimes somebody is going to want to have a non-spousal beneficiary. Well, this could be a trust that’s a non-spousal beneficiary.

Once again, if a document that’s sending the money to a trust doesn’t specify that the beneficiary is not to be the spouse but supposed to be somebody else, the document, the 401(k) is going to override that.

You might want to bypass the spouse because the trust is going to take care of them and give these qualified dollars to your kids where you’re going to implement the kiddy tax. IRS doesn’t like generations skipping documents.

In fact, they feel like they’ve been cheated so the money gets taxed as if it were distributed to the original beneficiary and then it gets taxed again to the child beneficiary.

That’s called the kiddy tax. And what this does ultimately is just offer much fewer options from a planning standpoint. So, this can easily be fixed, easily be avoided simply by reviewing your beneficiaries on an annual basis.

All right. Mistake number seven are the advisors. This often is a very large mistake. First off, lots of folks with 401(k) specifically count on the employer.

Frankly, the Pension Protection Act of 2006 required the employer to be this thing called the fiduciary meaning that they have a responsibility to all plan participants to provide with advice.

However, if your employer is a plumber, that puts this upon somebody who is a plumber, not a financial advisor.

So, counting on your employer even though the law says he’s supposed to provide you, you know, with advice, really is a mistake and they need advice just as badly as you do and if you are the owner of the plumbing firm, understand that you have the responsibility providing your staff and your employees or the participants in your plan with advice.

Not doing so can cause you some pretty big problems so both sides of that fence. This is an issue that can be avoided by simply contacting or getting in contact with somebody who’s trained and educated in the 401(k) and specifically the qualified plan marketplace.

Co-workers: Well, what can I say about this?

If you work in cubicles, you hear somebody talking to their spouse or you talk to each other most likely or you’re standing around the water cooler or the coffee machines or outside smoking or whatever it is you do and you ask everybody what’s going on with their 401(k)s and what they’re doing and you tend to follow the herd and I call this the herd mentality, just doing what the other co-workers are doing and this is the same problem as having your employer be the advisor in your plan.

Those folks need as much advice as you do and can be very persuasive sometimes. Doing this however, is often a very big mistake.

Friends, family and relatives, I don’t think I need to say a lot more here. You know, you got a friend or a family member that’s also in the financial business and they have become an expert in something but it may not be in the taxation or the proper allocations or all the stuff that we’ve talked about through Module I and Module II.

I would caution taking advice from these folks even though they’re trusted and maybe very honorable people, the reality is this is a very complex area and requires a specific advice so seek that out and try to avoid specifically these three.

How about past performance of 401ks? We addressed this a little bit in Module I. Past performance is not indicative of future results. They say that for a reason. Past performance is not going to tell you what the future is going to hold.

In fact, there are studies done that prove otherwise. So, if the last fund that you picked was the best fund 10 years ago, it’s likely not to be the best fund in the future.

So, reviewing your 401(k) often is important, not just picking something and making sure or hoping that the best outcome comes from that. Past performance is often a very big mistake that people make. Typically what these co-workers we talked about and these friends and families are going to offer you from an advice standpoint because it kind of makes sense but from a testing perspective, it is the wrong thing to do.

And then unrelated advisors: Well, gosh, who’s unrelated to your 401(k)?

Your employer is related in some respects because they developed the plan but it’s your money so the ultimate (on this) is upon you to make sure that you’ve done the right things that fit your needs because you’re an employer and you may have different wants and goals, different tolerances to risk and all that, same thing with the co-workers.

Unrelated advisors certainly applies to the friends and family and relatives category. Other unrelated advisors are going to be your property and casualty agent that is in the life insurance business. All right. That’s an unrelated advisor. Taking advice from folks like that is a mistake. They don’t have a vested interest in your plan today. They do when you move it out.

For instance, when you terminate your employment for some reason like the employer stops the plan or you changed jobs, things of that nature. There’s an interest in it at that point but by then, you know, you hopefully have growth. So, unrelated advisors, all those people around you that provide you with advice that don’t have an interest in the specific plan that we’re talking about.

Let’s move on to mistake number eight then.

Mistake number eight is working with amateurs. I underlined that, working with amateurs, refer to step number seven. Specialists do exist. There are not many but they are out there and you can find them simply by Googling somebody in your area or landing on places like this website that you’re on, Asset Protection Training. Specialists do exist.

The qualified market, be that from an IRA all the way up to an ESAP, all of those have different aspects to them and different requirements and it requires someone who only does this kind of work. They exist even if you are a planned participant with a small account value. There are specialists out there that can advice you with respect to what you should do and how you should do your allocations to your 401(k).

So, pick somebody other than everything listed in mistake number seven. There are specialists out there. This is a great venue to find one, Asset Protection Training dot com. So, that’s going to end our tutorial for the day.

This is Module II and we start out with mistake number five. Okay. At the end of Module II, we concluded our eight biggest 401(k) mistakes program and how to avoid those mistakes.

I want to emphasize that there are far more than eight mistakes that can be made inside of any kind of qualified program and you really got to pay attention to what’s going on out there.

If you’re not qualified to do so, if you don’t feel like the people around you are advising you appropriately, there are places like this website to seek out good quality advice.

This is a big deal with respect to the qualified money and your future so making those decisions and making the right ones and avoiding really easy mistakes is really the goal of the course and hopefully you got something out of it. My name is John Vucicevic and thanks a lot for joining me today.

 

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IRA’s 101; the basics

I’m John and I represent Rob Lamberts and the Asset Protection Training Program.

We’re going to talk about IRA today and this is all the basic course, its IRA 101.

IRA is an acronym that stands for the Individual Retirement Agreement, in the agreement through the law which was establish in 1974 through erisa law, established a personal savings plan for the population to help themselves assist with any social programs available to them upon retiring. So the individual retirement agree that was giving birth if you will in 1974, though the erisa law, in the Bible is publication 590. IRA is the part of the law qualifies the money that is in there, it’s really just the taxes instrument you use to deduct the contributions to the tool. So that’s why you would do it. Back in 1974 you could put $1500 and there no reason to do that, unless you had a motive and the motive is to get a tax deduction for that year. so the contribution to go in tax deductible and all the income or interest that’s earn of whatever inside the IRA, is tax defer, that doesn’t mean you not got to pay tax on it, it means you’re going to pay until a future date down the road. Tax deductibility and tax deferral as motivations to invest in these tools.

The IRA the box underlying investments with earn interest or income are the tools are available, and those come from banks, mutual fund companies, they come for financial institutions. What I’m saying here, you can have any number of investments inside of an IRA, you can even have insurance company programs in there. In recent years real estate has become a very popular addition to the IRA, you can put real estate then and most recently you will see gold being counted as a tool that might be valuable to the IRA is as well. The less of investments side this box called the IRA is very vast. You can have anything in there as I mention, what you can’t have in there is a very short list and one that comes to mind is collectible kind of art. You can’t put that into the IRA, I don’t have an explanation to why, but is just the rule.

In 2011 how much can you contribute to an IRA is if you’re over 50 years old you can 5,000 dollars of contributions into your IRA. Over 50 you can up to 6,000 in the IRA, so here is example: if you have a working spouse and that spouse has an IRA you can have 2 IRA’s in the home and both of you under 50 can deducted $5,000, Over 50 you can both deduct $6,000. What if the spouse isn’t working, if the spouse isn’t working the deduction are the same we just call it something different, instead of an IRA, it’s a spouse IRA. That is if she or he is over 50, they could put up to $6,000 into one, Under 50 they can put on to $5,000. They don’t have to have earn income it would come from wager in that home. there’s some age limits 18 is when you can start having an IRA, a qualifying feature however is having a job hey there’s a another age is very important is 50 if you need to remove money from your IRA both for your half just like the investments there’s a very short list of things that allow you to do that, we will cover those a more detailed courses. There is very long list reason why you can’t do it, so if you do take it out before 59 and a half to say put your kids through college, you could buy a car whatever you’re. Going to pay a 10 percent penalty that is on top of the tax you will pay because as you recall, all the money in here has never been taxed. You’re going to pay 10 percent on the principal and interest in 10 percent on all the exits of those dollars from 59 and half. It’s called an early withdrawal penalty. I mention deferral, all of this money as you put it in over the years, maybe decades is going to be deferred. You don’t pay tax on it as it goes in, you do pay tax as it grows but Uncle Sam wants their money some point it time and its 70 and half special rules apply to qualified dollars inside the IRA where you have to take a minimum required distribution.

What kind of income can go into the IRA? Earned income, I mention this with the 18 year old, they have to have job or have to be working someplace paying taxes on money and again they can make $5000, they can deduct 100% of that in an IRA. will talk about the other types of IRA in a bit, passive income is money that you get or income that you earn passive investments, like CD interest, real estate rental property passive income. Unless it’s your business, if it’s your business it become taxable as a business and counted as income. The difference between the two is, one is you can have an IRA the other you can’t. Passive income is not counted for contributions are less it is the soul away that you earn income. Those are the basics of the IRA.

 

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