Simply Junior

A 401k retirement plan is what most employers opt to use for its employees. But what exactly is a 401k plan? Everyone has heard the term used over and over again, yet not many people understand what it is. This article will work to explain what a safe harbor 401k is and any other pertinent information related to it.

This retirement plan replaced the old pension plans that most people had twenty or more years ago. The reason is that it was hoped that the 401k plan would give the money invested by the employees more potential for growth.

So what is a 401k plan? It is simply a plan that employees and employers invest in. The money that is added to these plans is then invested in the stock market, bonds, mutual funds or other investments. The great thing about these plans are that they are not taxed by capital gains, dividends or interest until they are withdrawn, whether it be before or after retirement. Meanwhile, the tax is deferred on these plans meaning that over a course of time the 401k could be the difference between living the high life in Bermuda or simply making ends meet at your current home once you retire.

The great things about these plans is that since they are such a wide known used plan that when switching employers many times employees can transfer their 401k plans to a new employer. Or in many cases people choose to transfer the 401k to an IRA. Other people when switching their jobs may simply choose to cash out their 401k plan, however, this is not recommended.

Those who are offered safe harbor 401k plans by their employer should take the time and figure out what to invest in. Understanding your options and knowing how the plan works is the first step in making sure when you retire you have a substantial amount of money to retire on.

Average Joe Prediction #1: The economy will slump into another recession by the end of 2010. This is double trouble for the Average Joe. You combine a slowing economy with high unemployment, along with the end of tax cuts and you end up with a situation that will squeeze the middle class. To combat this problem, focus your effort on keeping a reserve of cash on hand, as well as current or future sources or ideas of generating extra income quickly.

Average Joe Prediction #2: The stock market will gyrate in wild up and down swings with mostly sideways movement, perhaps ending 2010 at the 8000-8500 level. The 2011 market may trend lower, to perhaps the 6000-6500 level by year end 2011. Media will not admit to continual signs of economic weakness and hope for a return of a bull market. People like “Cramer” on TV will insist the market is oversold and that now is the best time to buy.

For the Average Joe, you may want to consider investments that include financial stocks supported directly or indirectly by the government. These may be the only safe havens that can provide returns. Small and mid-capped stocks might get thrown under the bus since they do not have the strength to combat higher taxes, health care reform and slow markets.

Average Joe Prediction #3: Oil prices will go up, and gas will end 2010 at $3.25 per gallon on average, while 2011 will yield prices at the $4-$5.00 per gallon level. This might seem high, but considering the current BP disaster, the government in conjunction with the oil industry, will start price hikes for a number of reasons. The biggest reason will be to help pass legislation on cap and trade, to pressure the public that alternative energy is the best way to go. The other factor will be the BP disaster, and its inflated effect on the oil markets.

The rug will be pulled out from under the Average Joe in this case, with price hikes taking people by surprise. A good hedge for this problem is to simply conserve fuel by purchasing fuel efficient vehicles. 30 to 40 miles per gallon sub compact cars, as well as car pooling can keep this item in line on your budget.

Average Joe Prediction #4: Possible changes in currency/dollar value. In this case inflation or deflation may be the outcome by 2011. For the Average Joe, you can prepare for this scenario by forming alliances with other people and businesses that like to barter or trade goods and services, rather than paying for them with devalued or overvalued dollars.

2011 is a 4 Universal Year. ( 2+0+1+1=4) We have to look to the energy of the number 4 in order to understand the trend of global events in 2011.

The 4 Year is strongly associated with hard work and little freedom to pursue frivolous activities. It is a time to be practical, down to earth, follow the rules and be organized and efficient. Success can only be achieved through endurance and discipline. It is a Year that is instrumental for building a foundation for the future because the number 4 demands that we stabilize all areas of our life by working on the foundation upon which we live. On that note, the number 4 is strongly associated with Mother Earth.

Financially, it can be a challenging year because you have to be careful with your money in a 4 Year, being frugal and spending it wisely. There is also a warning about stress and health with the number 4.

The mood of the world is about to take a somber note and I suspect our sense of humor will be on hiatus in 2011. It is time for the world to work on our problems in a no-nonsense way.

The following are potential trends for 2011 based upon its being a 4 Universal Year and also observations on events in October.

1. Governments around the world will have to reign in their spending and you will find cuts to programs that would be considered to be expendable. It is time for our governments to be frugal. Whether it is on a federal, state or local level, budgets must be balanced and some of these budget cuts will be severe.
2. Products that are more efficient or that save money, for example fuel-efficient cars, will be invented or marketed. This would be an area to invest your money. Look for start-up companies of this nature. Also if you have extra money to invest, given the excellent buyers market in real estate, if you can invest in a rental property or something of that nature, this would be the best place to put your money rather than the stock market. It is not a year to take a risk.
3. More laws will be proposed and passed that on some level create limitations in our lives, perhaps even limiting our freedom. It will all about “law and order” in 2011. Our travel could be restricted in some way.
4. There will be a clash in ideologies where there is no middle ground. People will have strong opinions. This may cause more demonstrations or protests. People will become stressed and angry. Some incidents could potentially become violent.
5. Governments will either choose to or be forced (perhaps because of a natural disaster) to work on the infrastructures of their countries. Due to the fact the sun is in a solar maximum period, we face real danger with an interruption to our electricity for extended periods. There are plans in place to cut power in the event of a serious solar flare. This is based upon scientific facts and I encourage you to do your own research on the effects of this particular solar maximum period on you and your families. Be prepared.
6. People will feel the increasing costs of gas, food and necessities and have to make adjustments with their own budgets. There also could be protests over high prices. We can also expect shortages of products. You may want to stock up on basics and you might even consider it an investment as prices will continue to rise so you will be saving money in the long run by purchasing at a lower price.
7. Fashions and trends will be less colorful but more practical and there will be less emphasis on exorbitant spending and even Hollywood will tone down the usual “over the top” spending, glitz and glamour.
8. Companies who have been unethical by lying or misrepresenting their products will be exposed and held accountable. This would also include public individuals.
9. The increased trend in Earthquakes will continue in 2011. Because there was a 6.9 Earthquake in the Gulf of California in October, I have concern about that area. I also expect more tsunamis.
10. Industries that depend on a good economy such as the vacation and travel industry, restaurants, and high-end commerce will continue to suffer even more in 2011. People will not be as willing to part with their hard-earned dollar even if they have extra money.
11. The stock market may “flat line” in the sense that people will not be as willing to take a risk.
12. Unfortunately, job losses and unemployment will add to the financial limitations of many people in 2011. Many job losses will come from budget cuts made by the government for government funded organizations.
13. 2011 may be a difficult year for epidemics or pandemics. There is already evidence of this with cholera in Haiti, whooping cough, hand and foot disease and now news of the bird flu in China. Learn how to keep your immunity system healthy. Start taking Vitamin D and C and do some research on other options.
14. North Korea will continue to be a concern for their aggressive behavior and there will be more news which will cause alarm.
15. Weather will continue to break the records. Flooding, wind storms, tornados and “freak storms” will be in the news for 2011. Expect a few Nor’easters this year but generally a milder winter for the East and a difficult winter for the Midwest. I do not expect an active hurricane season in the Atlantic again in 2011.
16. Expect more and more unexplained phenomenon with the earth’s atmosphere in 2011 including meteorites, undiscovered anomalies, and strange behavior of the sun and yes, even UFOs.
17. Without question, the focus on a more spiritual approach to living will continue to grow and you can expect to see continued growth of this trend in TV, radio and all forms of media.

Alison Baughman

http://www.VisibleByNumbers.com

401k plans are usually the retirement plan that most employers offer. They have many advantages, however they also have disadvantages as well. These should be weighed carefully so that a person knows exactly what they are getting into.

First off, 401k plans do allow for people to withdraw money from them before retirement. However, on the downside this is expensive. Not only do you have to pay back the amount that you borrowed, but you must pay interest as well. If for some odd reason you cannot pay the money back then you risk losing your 401k plan and all the money that you have already invested.

Secondly, though many employers match what you put into the plan, it is not a requirement for employers to do. If you find yourself find yourself in this situation, your 401k will not grow as much as those whose employers do match deposits.

Since a 401k plan grows based upon the investment you choose, it can be risky if you choose the wrong investment. In addition since most 401ks are placed in the stock market. There is no real way to know how much you will receive once you retire. In fact, with the economic times as they are, many are finding that their 401k plan is not giving them as much as they need to survive.

Another disadvantage to 401k plans is that there is a limit to how much you can invest. Once this amount has been reached, you can longer put money in and your employer may stop matching your investments at a certain point. Those who just starting a 401k will find that the plan does not actually become their property for many years, instead it belongs to the company.

Though 401k plans are the retirement plan of choice for most people. It is vital to understand the disadvantages with the plan so that you can plan accordingly and know exactly what to expect.

Understanding Your Rental Property

Adding real estate to your portfolio can be a smart thing to do. Many do this by converting their first home into a rental when they can afford to acquire another principal residence. As I have discussed before, every portfolio should have 20% invested in the alpha rim (see “Do What the Hell I Tell You-Guide to Portfolio Building”). The alpha rim is the part of a portfolio that is not invested in stock market products. Therefore, it is not subject to market fluctuations and provides some risk protection to a given portfolio. When adding any new investment to our portfolio, we should take time to learn the basics so that we can make informed decisions over time. Adding real estate to a portfolio definitely requires an understanding of the fundamentals.

Let’s begin by taking our first town home. It was purchased right after we were married with the intent that we would one day live in a larger home. Because we were so good at saving, we did not need to sell the first home to get into the new place. We have made contributions to retirement plans and have savings on the outside of the retirement plans. The decision has been made to keep this town house and convert it to a rental property in order to begin investing in the alpha rim. It becomes necessary at this point to understand how a rental property works from its beginning, during its operation, and when a decision is made at the ending its existence in the portfolio.

Putting the Property in Service

If the property is being converted from personal use, as it is in this situation, we must take the lower of cost or market value in placing this property into service as a rental. If we purchased the home originally for $200,000 and its fair market value is $300,000 when we are ready to make the conversion, we will use the $200,000 original cost as our basis. If the fair market value was $150,000 at the conversion date, then this would become the basis for the rental property. Placing a property in service in this case means establishing how much will be available for depreciation and how much will be allocated to land. Let’s assume that $200,000 is our basis. We will need to allocate this basis to determine what can be depreciated and what must be land (not depreciated). I like to use the property bill assessment as it normally breaks down the property into what is building and what is land. After reviewing the property assessment, it is determined that 80% of the property’s value is building with the remaining 20% representing land value. This means that we will depreciate $160,000 over a 27.5 year life, or $5,818 per year. If we were to purchase this rental property as opposed to converting, our basis would be calculated based on cost plus settlement charges. Remember, each year that we take depreciation, we are reducing our tax basis in the property. This is important to know as we consider disposition of the property.

Operations of the Rental Property

As one might imagine, everything that relates to the property becomes a tax deduction. Mortgage interest, real estate taxes, repairs and maintenance, insurance, property management fees, and the like become ordinary and necessary expenses for the rental property. It should be noted here that the ideal situation is to have the rents charged to tenants equal not only debt service on the mortgage, but some built-in factor for repairs and upkeep. This of course, will be subject to fair market value rents in the neighborhood, but the goal should be to cover these expenses. In the event that the property operates at a loss, this loss will be able to offset other income on a tax return to the extent that adjusted gross income is $100,000 or less and the loss itself is not greater than $25,000. If adjusted gross income is $150,000 or more, the $25,000 loss limitation is reduced to zero which would make suspended any losses realized. Suspended losses are then carried forward to offset passive income in future years or to be recognized upon termination of the property. When starting a rental property, it is important to know the rules of the game as one might not get the tax benefits expected. If your adjusted gross income exceeds $150,000, you will not currently get any tax benefit from losses unless you have passive income from other sources. If you have a series of suspended loss carry-overs, you might consider adding a passive income generator to your portfolio (see my article, “The Most Complete Real Estate Article on the Internet”).

Disposition of the Rental Property

Now we are considering the disposition of our rental property. At the time, it is believed that we can get $400,000 for our investment. Do we have exposure to income taxes due to the gain of this property? Of course we do, don’t be silly. Let’s first calculate what our gain will be. We know our selling price, so we need to calculate our adjusted in the property. If the property has been depreciated for 10 years, our accumulated depreciation will be $58,180 ($5,818×10 years). This would bring a depreciable basis of $160,000 down to $101,820. We will add $40,000 to this for un-depreciated land basis bringing the adjusted basis up to $141,820. The gain exposure for this property is then calculated to be $258,180. This gain is section 1231 gain which will likely mean that it is long-term capital gain. However, this gain will have two tiers of tax. Because of the depreciation taken in prior years, the accumulated depreciation of $58,180 will have a 25% tax rate application. The balance of the gain, $200,000, will be taxed at the long-term capital gains rate of $15%. There is the potential to do a 1031 (like-kind) exchange on this property which would allow for the postponement of the gain providing that a property of greater or equal value is acquired. There is also the potential for netting the capital gain of this transaction with capital losses that might be in the portfolio. Does it make sense to sell outright or do a 1031 exchange? It depends on the facts and circumstances of this particular portfolio. If the alpha rim is well above the 20% mark, and with long-term capital gains at just 15%, it might make sense to just recognize the gain and pay the taxes (see my article on netting capital gains and losses). If we need to buy another property to maintain 20% in the alpha rim, the 1031 exchange could be the right solution. See what I mean when I say one must understand the fundamentals of owning real estate? My way is better.