TSP contribution limits 2021

TSP Contribution Limits for 2021

TSP contribution limits for 2021 is 19,500 per person. Additionally, all federal employees over the age of 50 can contribute a catch-up of $6,500 per year.

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What is TSP?

Thrift Saving Plan is a Federal retirement plan where both federal employees and agencies can make retirement contributions. Moreover, this retirement plan is one of the easiest and most effective ways for you to save for retirement. As a federal employee, you can make automatic contributions to your TSP directly through your employer’s payroll. You can choose the percentage of your salary that will go towards your retirement savings. TSP provides you with multiple investment options in stocks, fixed income, and lifecycle funds. Additionally, most agencies offer a TSP match up to a certain percentage. In most cases, you need to participate in the plan in order to get the match. For more information about investment options in your TSP account, check my article – “Grow your retirement savings with the Thrift Savings Plan.”

Who is Eligible to Participate in the TSP?

Most employees of the United States Government are eligible to participate in the Thrift Savings Plan. You are eligible if you are:

  • Federal Employees’ Retirement System (FERS) employees (started on or after January 1, 1984)
  • Civil Service Retirement System (CSRS) employees (started before January 1, 1984, and did not convert to FERS)
  • Members of the uniformed services (active duty or Ready Reserve)
  • Civilians in certain other categories of Government service

How much can I contribute to my TSP in 2021?

TSP contribution limits for 2021 stayed the same as change every year. IRS typically increases the maximum annual limit with the cost of living adjustment and inflation. These contribution limits apply to all employees who participate in the federal government’s Thrift Savings Plan,  401(k), 403(b), and 457 plans. Additionally, the limits apply to both tax-deferred and Roth contributions combined. 

  • Employees can contribute up to $19,500 to their TSP plan for 2021,  the same amount as  2020.
  • Employees of age 50 or over are eligible for an additional catch-up contribution of $6,500 in 2021, the same amount as  2020.
  • Employee compensation limit for calculating TSP contributions is $290,000, $5,000 more than 2020
  • For participants who contribute to both a civilian and a uniformed services TSP account during the year, the elective deferral and catch-up contribution limits apply to the combined amounts of traditional (tax-deferred) and Roth contributions in both accounts.
  • Members of the uniformed services, receiving tax-exempt pay (i.e., pay that is subject to the combat zone tax exclusion), your contributions from that pay will also be tax-exempt. Your total contributions from all types of pay must not exceed the combined limit of $58,000 per year.

There are two types of contributions – tax-deferred traditional TSP  and tax-exempt Roth TSP contributions.

Tax-deferred TSP

Most federal employees, typically, choose to make tax-deferred TSP contributions. These contributions are tax-deductible. They will lower your tax bill for the current tax year. Your investments will grow on a tax-deferred basis. Therefore, you will only owe federal and state taxes when you start withdrawing your savings.

Roth TSP

Roth TSP contributions are pretax. It means that you will pay all federal and state taxes before making your contributions. The advantage of Roth TSP is that your retirement savings will grow tax-free. As long as you keep your money until retirement, you will withdraw your gain tax-free. It’s a great alternative for young professionals and workers in a low tax bracket.

TSP Matching

Federal agencies can make a matching contribution up to the combined limit of $58,000 or $64,500 with the catch-up contribution. If you contribute the maximum allowed amount, your agency match cannot exceed $38,500 in 2021.

If you are an eligible FERS or BRS employee, you will receive matching contributions from your agency based on your regular employee contributions. Unlike most private companies, matching contributions are not subject to vesting requirements.

FERS or BRS participants receive matching contributions on the first 5% of your salary that you contribute each pay period. The first 3% of your contribution will receive a dollar-for-dollar match. The next 2% will be matched at 50 cents on the dollar. Contributions above 5% of your salary will not be matched.

Consider contributing at least 5% of your base salary to your TSP account so that you can receive the full amount of matching contributions.

Matching schedule

TSP Matching contribution
Source: tsp.gov

Opening your TSP account

FERS Employees

If you are a federal employee hired after July 31, 2010, your agency has automatically enrolled you in the TSP.  By default, 3% of your base salary will be deducted from your paycheck each pay period and deposited in the traditional balance of your TSP account.  If you decide, you have to make an election to change or stop your contributions.

If you are a FERS employee who started before August 1, 2010, you already have a TSP account with accruing 1% automatic contributions. In addition, you can make contributions to your account from your pay and receive additional matching contributions.

CSRS Employees

If you are a Federal civilian employee who started before January 1, 1984, your agency will establish your TSP account after you make a contribution election using your agency’s election system.

BRS Members of the Uniformed Services

Members of the uniformed services who began serving on or after January 1, 2018, will automatically enroll in the TSP once you serve 60 days. By default,  3% of your basic pay is deducted from your paycheck each pay period and deposited in the traditional balance of your TSP account. You have can always select to change or stop your contributions.

IRA Contribution Limits 2021

IRA Contribution Limits for 2021

The IRA contribution limits for 2021 are $6,000 per person with an additional $1,000 catch-up contribution for people who are 50 or older.

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What is an IRA?

IRA or Traditional IRA is a tax-deferred retirement savings account that allows you to make tax-deductible contributions to save towards retirement. Your savings grow tax-free. You do not owe taxes on dividends and capital gains. Once you reach retirement age, you can start taking money out of the account. All distributions from the IRA are taxable as ordinary income in the year of withdrawal.

IRA income limits for 2021

The tax-deductible IRA contribution limits for 2021 are based on your annual income. If you are single and earn $125,000 or less, you can contribute up to the full amount of $6,000 per year.  If your aggregated gross income is between $125,000 and $140,000 you can still make contributions but with a smaller amount.

Married couples filing jointly can contribute up to $6,000 each if your combined income is less than $198,000.  If your aggregated gross income is between $198,000 and $208,000 you can still make reduced contributions.

Spousal IRA

If you are married and not earning income, you can still make contributions. As long as your spouse earns income and you file a joint return, you may be able to contribute to an IRA even if you did not have taxable compensation. Keep in mind that, your combined contributions can’t be more than the taxable compensation reported on your joint return.

IRA vs 401k

IRA is an individual retirement account.  401k plan is a workplace retirement plan, which is established by your employer. You can contribute to a 401k plan if it’s offered by your company.  In comparison, anyone who is earning income can open and contribute to a traditional IRA regardless of your age.

IRA vs Roth IRA 

Traditional and Roth IRA have the same annual contribution limits.  The Traditional IRA contributions can be tax-deductible or after-tax depending on your income. In comparison. Roth IRA allows you to make after-tax contributions towards retirement. Another difference, your Traditional IRA retirement savings grow tax-deferred, while Roth IRA earnings are tax-free.

 

New Year Financial Resolutions for 2021

New Year Financial Resolutions for 2021

New Year Financial Resolutions for 2021. Let’s kick off 2021 with a bang. It’s time to hit the refresh button.  2020 was very challenging. The covid pandemic brought enormous shifts to our daily lives.  Social distancing. Working from home. Digital transformation. 5G. Many of these changes will stay with us permanently. It’s time to open a new chapter. Take control of your finances. Become financially independent

Here are your New Year Financial Resolutions for 2021

1. Set your financial goals

Your first  New Year Financial Resolutions for 2021 is to set your financial goals. Know where you are going. Build milestones of success.  Be in control of your journey. Setting and tracking your financial goals will help you make smart financial decisions in the future. It will help you define what is best for you in the long run.

2. Pay off debt

Americans owe $14.3 trillion in debt. The average household owes  $145,000 in total debt, $6,270 in credit cards, and $17,553 in auto loans. These figures are insane. If you are struggling to pay off your debts, 2021 is your year to change your life. Check out my article How to Pay off your debt before retirement. With interest rates are record low today, you can look into consolidating debt or refinancing your mortgage. Take advantage of these low-interest options. Even a small percentage cut of your interest can lead to massive savings and reductions of your monthly debt payments.

3. Automate bill payments

Are you frequently late on your bills? Are you getting hefty late penalty fees? It’s time to switch on automatic bill payments. It will save you time, frustration, and money. You should still review your bills for unexpected extra charges. But no need to worry about making your payments manually. Let technology do the heavy lifting for you.

4. Build an emergency fund

2020 taught us an important lesson. Life can be unpredictable. Economic conditions can change overnight. For that reason, you need to keep money on a rainy day. Your emergency fund should have enough cash to cover 6 to 12 months of essential expenses. Start with setting up a certain percentage of your wage that will automatically go to your savings account. Your rainy-day cash will hold you up if you lose your job or your ability to earn income. By maintaining an emergency fund, you could avoid taking debt and cover temporary gaps in your budget.

5. Monitor your credit score

In today’s world, everything is about data. Your credit score measures your financial health. It tells banks and other financial institutions your creditworthiness and ability to repay your debt. Often. The credit score methodology is not always perfect. That said, every lender and even some employers will check your credit score before extending a new line of credit or a job offer.

6. Budget

Do you find yourself spending more than you earn? Would you like to save more for your financial goals? If you are struggling to meet your milestones, 2021 will give you a chance to reshape your future. Budgeting should be your top New Year Financial Resolutions for 2021. There are many mobile apps and online tools alongside old fashion pen-and -aper to track and monitor your expenses. Effective budgeting will help you understand your spending habits and control impulse purchases.

7. Save more for retirement

One of your most important New Year Financial Resolutions for 2021 should be maximizing your retirement savings. I recommend that you save at least 10% of your earnings every year. If you want to be more aggressive, you can set aside 20% or 25%.  A lot depends on your overall income and spending lifestyle.

In 2021, you can contribute up to $19,500 in your 401k. If you are 50 and older, you can set an additional $6,500. Furthermore, you can add another $6,000 to your Roth IRA or Traditional IRA.

8. Plan your taxes

You probably heard the old phrase. It’s not about how much you earn but how much you keep. Taxes are the single highest expense that you pay every year. Whether you are a high-income earner or not, proper tax planning is always necessary to ensure that you keep your taxes in check and take advantage of tax savings opportunities. But remember, tax planning is not a daily race; it’s a multi-year marathon.

9. Review your investments

When was the last time you reviewed your investments? Have you recently checked your 401k plan? You will be shocked to know how many people keep their retirement savings in cash and low-interest earning mutual funds.  Sadly, sitting in cash is a losing strategy as inflation reduces your purchasing power. A dollar today is not equal to a dollar 10 years from now. While investing is risky, it will help you grow your wealth and protect you from inflation. Remember that time and time again; long-term investors get rewarded for their patience and persistence.

10. Protect your family finances from unexpected events

2020 taught us a big lesson. Life is unpredictable. Bad things can happen suddenly and unexpectedly. In 2021, take action to protect your family, your wealth, and yourself from abrupt events. Start with your estate plan. Make sure that you write your will and assign your beneficiaries, trustees, and health directives.

Laslly, you need to review your insurance coverage. Ensure that your life, disability, and other insurance will protect your family in times of emergency.

401k contribution limits 2021

401k contribution limits 2021

401k contribution limits for 2021 are $19,500 per person. All 401k participants over the age of 50 can add a catch-up contribution of $6,500.

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What is 401k?

401k plan is a workplace retirement plan where both employees and employers can make retirement contributions. These retirement plans can be one of the easiest and most effective ways to save for retirement. As an employee, you can make automatic contributions to your 401k directly through your company payroll. You can choose the percentage of your salary that will go towards your retirement savings, Most 401k will provide you with multiple investment options in stocks and fixed income. Additionally, most companies offer a 401k match up to a certain percentage. In most cases, you need to participate in the plan in order to get the match.

There are two types of contributions – traditional 401k tax-deferred and tax-exempt Roth 401k contributions.

Tax-deferred 401k

Most employees, typically, choose to make tax-deferred 401k contributions. These payments are tax-deductible. They will lower your tax bill for the current tax year. Your investments will grow on a tax-deferred basis. Therefore, you will only owe federal and state taxes when you start withdrawing your savings.

Roth 401k

Roth 401k contributions are pretax. It means that you will pay all federal and state taxes before making your contributions. The advantage of Roth 401k is that your retirement savings will grow tax-free. As long as you keep your money until retirement, you will withdraw your gain tax-free. It’s a great alternative for young professionals and workers in a low tax bracket.

How much can I contribute to my 401k in 2021?

401k contribution limits change every year. IRS typically increases the maximum annual limit with the cost of living adjustment and inflation. These contribution limits apply to all employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. Additionally, the limits apply to both tax-deferred and Roth contributions combined. 

  • Employees can contribute up to $19,500 to their 401(k) plan for 2021,  the same amount as  2020.
  • Employees of age 50 or over are eligible for an additional catch-up contribution of $6,500 in 2021, the same amount as  2020
  • The employee compensation limit for calculating 401k contributions is $290,000, $5,000 more than 2020
  • Companies can make a matching contribution up to the combined limit of $58,000 or $64,500 with the catch-up contribution. If an employee makes the maximum allowed contribution, the company match cannot exceed $38,500 in 2021.

Solo 401k contribution limits 2021

A solo 401k plan is a type of 401k plan with one participant. Those are usually solo entrepreneurs, consultants, freelancers, and other small business owners. Self-employed individuals can take advantage of solo 401k plans and save for retirement.

  • The maximum contribution limit in 2021 for a solo 401k plan is $58,000 or $64,500 with catch-up contributions. Solo entrepreneurs can make contributions both as an employee and an employer.
  • The employee contribution cannot exceed $19,500 in the solo 401(k) plan for 2021.
  • Self-employed 401k participants, age 50 or over are eligible for an additional catch-up contribution of $6,500 in 2021.
  • The total self-employed compensation limit for calculating solo 401k contributions is $290,000.
  • Employer contribution cannot exceed 25% of the compensation
  • If you participate in more than one 401k plan at the same time, you are subject to the same annual limits for all plans.

Please note that if you are self-employed and decide to hire other employees, they will have to be included in the 401k plan if they meet the plan eligibility requirements.

 

Roth IRA Contribution Limits 2021

Roth IRA Contribution Limits for 2021

The Roth IRA contribution limits for 2021 are $6,000 per person with an additional $1,000 catch-up contribution for people who are 50 or older.

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Roth IRA income limits for 2021

Roth IRA contribution limits for 2021 are based on your annual earnings. If you are single and earn $125,000 or less, you can contribute up to the full amount of $6,000 per year.  If your aggregated gross income is between $125,000 and $140,000 you can still make contributions but with a lower value.

Married couples filing jointly can contribute up to $6,000 each if your combined income is less than $198,000.  If your aggregated gross income is between $198,000 and $208,000 you can still make reduced contributions.

What is a Roth IRA?

Roth IRA is a tax-free retirement savings account that allows you to make after-tax contributions to save towards retirement. Your Roth investments grow tax-free. You will not owe taxes on dividends and capital gains. Once you reach retirement your withdrawals will be tax-free as well.

Roth vs Traditional IRA

Roth IRA allows you to make after-tax contributions towards retirement. In comparisons. Traditional IRA has the same annual contributions limits. The Traditional IRA contributions can be tax-deductible or after-tax depending on your income. Additionally, your Traditional IRA savings grow tax-deferred. Unlike Roth Roth, you will owe income taxes on your withdrawals.

Roth IRA Rules

The Roth IRA offers a lot of flexibility and few constraints.  There are Roth IRA rules that can help you maximize the benefits of your tax-free savings account.

Easy and convenient

Opening a Roth IRA account is a great way to start planning for your financial future. The plan is an excellent saving opportunity for many young professionals with limited access to workplace retirement plans. Even those who have 401k plans with their employer can open a Roth IRA.

Flexibility

There is no age limit for contributions. Minors and retired investors can invest in Roth IRA as well as long as they earn income.

No investment restrictions

There is no restriction on the type of investments in the account. Investors can invest in any asset class that suits their risk tolerance and financial goals.

No taxes

There are no taxes on the distributions from this account once you reach 59 ½. Your investments will grow tax-free. You will never pay taxes on your capital gains and dividends either.

No penalties if you withdraw your original investment

While not always recommended, Roth IRA allows you to withdraw your original dollar contributions (but not the return from them) before reaching retirement, penalty and tax-free. Say, you invested $5,000 several years ago. And now the account has grown to $15,000. You can withdraw your initial contribution of $5,000 without penalties.

Diversify your future tax exposure

Roth IRA is ideal for investors who are in a lower tax bracket but expect higher taxes in retirement. Since most retirement savings sit in 401k and investment accounts, Roth IRA adds a very flexible tax-advantaged component to your investments. Nobody knows how the tax laws will change by the time you need to take out money from your retirement accounts. That is why I highly recommend diversifying your mix of investment accounts and take full advantage of your Roth IRA.

No minimum distributions

Unlike 401k and IRA, Roth IRA doesn’t have any minimum distributions requirements. Investors have the freedom to withdraw their savings at their wish or keep them intact indefinitely.

Earnings cap

You can’t contribute more than what you earned for the year. If you made $4,000, you could only invest $4,000.

10 practical ways to pay off debt before retirement

Pay off debt before retirement

Pay off debt before retirement is a top priority for many of you who are planning to retire in the near future. In my article Retirement Checklist, I discussed a 12-step roadmap to planning a successful and carefree retirement. One of the most important steps was paying off your debt. According to the Federal Reserve, US households owe $4 trillion in non-housing loans and $10 trillion in mortgage debt. In today’s world, it is easy and effortless to get credit. Loan and credit card offers are lurking on every corner.

Why is it essential to pay off debt before retirement?

Being debt-free is a significant milestone in becoming financially independent. Retirement opens a new chapter in new life. You can no longer rely on your working wage. Your retirement income will come from a combination of steady income sources such as social security, pension, retirement savings, and possibly annuities.  Your income will drop, your healthcare cost will rise, and your debt payments will remain the same. Having a large amount of debt during retirement will reduce your disposable income and strain your financial strength.

For those of you who are committed to paying debt before retirement, I have created a multi-step guide that can help you navigate through the challenges of becoming debt-free

1. Set your goals

Setting your financial and retirement goals is an essential pathway in your life journey. Pay off debt before retirement starts with establishing up your goals. Having goals give you structure and will prepare you for the future. If you do not know where you are going, you can end up anywhere. Following your objectives will provide you with essential life milestones. Achieving your goals will give you a sense of accomplishment and boost your confidence.

2. Take control of your spending habits

If you are approaching retirement with considerable debt, you need to rein in spending habits. You can not be a big spender. Therefore, as long as you spend more than you earn, you will need to cut back. I know it is a painful task. It is not easy to make changes to your lifestyle. Still, think of it as a small and responsible sacrifice today so you can live a better tomorrow.

3. Create a budget

If you find yourself spending more than you make, you will need to set up a budget. Numerous websites and mobile apps can help you track your income and expenses by groups, categories, and periods. Regular budgeting can help you steer away from outsized spending and frivolous purchases.

4. Build an emergency fund

An emergency fund is the amount of cash you need to cover 6 to 12 months of essential expenses. Financially successful people maintain an emergency fund to cover high, unexpected costs. Your rainy-day stash can serve as a buffer if you lose your job or lose your ability to earn income. By maintaining an emergency fund, you could avoid taking debt and cover temporary gaps in your budget. Suppose you don’t have an emergency fund. Start with setting up a certain percentage of your wage that will automatically go to your savings account. Don’t get discouraged if it takes a long time to build your rainy-day fund.  It is okay. Look forward and keep saving.

5. Track your loans

Did you notice that the first four steps of becoming debt-free did not involve debt at all? I hope you will agree that building long-lasting financial habits is the key to financial independence.

So, if you have reviewed my first four recommendations, it is time to look at your debt.

Make a list of all your loans – credit cards, auto, mortgage, student, home equity, personal loans. Sort them by amount and interest rate. Pay attention to due dates and monthly interest charges. Do not miss payments. Late or missed payments can trigger enormous late fees and penalty charges. Stay on top of your loans. Track them daily and monthly.

6. Pay off higher interest loans first

I strongly recommend that you pay off your highest interest loans first. Credit cards tend to have the highest interest rates and the most punishing late fees. If you have credit card debt, there is a high chance that you need to tackle it first.  Remember, there are always exceptions to the rules, and every one case is different.

Another popular theory suggests that you pay off your smaller loans first and repay the bigger loans next. The reasoning behind this recommendation is that paying off even smaller loans awards you with the feeling of accomplishment. You can also focus on the big picture once you eliminate the smaller loans.

Mathematically, paying off your highest interest loans makes more sense. Emotionally, paying off the smaller debt first could be more effective. In the end, you can find a happy medium. Use the approach that works best for you and your specific situation.

7. Pay off or refinance your mortgage

I recommend that you pay off your mortgage by the time you retire. Owning your house without the burden of debt is the ultimate American dream and the secret to a happy retirement. In today’s world, there is nothing more liberating than owning your home. Your home is your fortress. It’s the place where you can be yourself. You can host your family and friends and enjoy your favorite hobby.

Now, if you are still making mortgage payments, you may want to look into refinancing options. With record-low interest rates, today offers an excellent opportunity to lower your monthly mortgage bill. It’s certainly will be easier to refinance your mortgage while still working and having regular income and paystubs. I highly recommend that you shop around for the best offer. Banks and mortgage brokers will offer you a wide range of interest rates, closing costs, and refinancing rules. Generally, stay away from bids with high closing costs. Evaluate your savings for each offer and choose the option that best suits your need.

8. Downsize and relocate

Another popular way to control your cost and pay off debt before retirement is downsizing and relocating. Sometimes you can do them both at the same time. Owning a big house requires high maintenance, bills, and possibly higher property taxes. Moving to a smaller home in a more affordable location can save you a lot of money in the long run. The USA offers a wide range of affordable locations in smaller states and communities. Choose a location that fits your budget, health insurance needs, and lifestyle.

9. Work longer

if you are approaching retirement age and holding debt, you may want to consider working longer. Working after retirement is no longer a stigma. Many retirees choose to work part-time, remain active, and earn an extra income.  The additional money can help your pay off your remaining loans. You can use the extra cash to maintain your emergency fund or support your current lifestyle.

10. Do not touch your retirement savings

Your retirement savings are sacred. They are your ticket to financial freedom. It can be tempting to pay your debt before retirement by tapping into your 401k or IRA. However, this strategy rarely ends very well.  Do not withdraw your 401k or IRA savings unless you are in dire need. Hold on to your retirement savings until you exhaust your other options.  One, when drawing from your retirement plan, you will need to pay taxes. Furthermore, you may have to pay a penalty charge if you are younger than 59 ½. Second, paying off debt without controlling your expense will only have a short-term impact. You will be back where you started in just a couple of months or years. And lastly, tapping your retirement savings now will reduce your future income. How confident are you that you can replace your lost revenue in the future?

Benefits and drawbacks to buying Indexed Universal Life Insurance

Indexed Universal Life Insurance IUL

Today, I am going off the beaten path for me and will discuss the pros and cons of buying Indexed Universal Life Insurance. As a fee-only advisor, I do not sell any insurance or commission-based products. However, on numerous occasions, I have received requests from clients to review their existing insurance coverage. I certainly do not know every IUL product out there. And I might be missing some of the nuances and differences between them. My observation is that IUL is not suitable for the average person due to its complexity and high cost. And yet, the IUL might be the right product for you if you can take advantage of the benefits that it offers. 

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What is an Indexed Universal Life Insurance (IUL)?

Indexed Universal Life is a popular insurance product that promises protection coverage with stock market-like performance and a zero-downside risk. Like other universal life insurance, IUL offers a death benefit and a cash value. Your cash value account can earn interest based on the performance of a specific stock market index such as the S&P 500, Dow Jones Industrial Average, the Nasdaq 100, and Russell 2000.

IUL Illustration rate

IUL policies use an illustration rate for advertising and hypothetically projecting the policy values in their sales materials. The Illustration rate is the fixed rate derived from historical performance. Usually, the illustration rate ranges between 5% and 10%.

Is IUL right for me?

On the surface, Indexed Universal Life Insurance sounds like a great deal. You receive a stock market upside with zero risks for losses. Nevertheless, IUL comes with some severe caveats.

Let’s break down the main benefits and drawbacks of IUL.

 Benefits of Indexed Universal Life Insurance

Tax-Deferred Accumulation

Index Universal Life Insurance allows you to grow your policy cash value and death benefit on a tax-deferred basis. Typically, you will not owe income taxes on the interest credited to your cash value and death benefit.

Tax-Free Distribution

Life Insurance, in general, is a lucrative tool for legacy planning. With IUL, your policy beneficiaries will receive the death benefit tax-free. As long as you maintain your insurance premiums and don’t take outsized loans, you can pass tax-free wealth to the next generation.

Access to a cash value

You can always withdraw your policy basis (original premiums paid) tax-free. In most cases, you can also access your cash value through tax-favorable policy loans or withdrawals. In case of emergency, you may borrow from your indexed universal life insurance policy. You can access your cash value without any penalty regardless of your age.

Supplemental Retirement Income

You can use the cash value from your policy as a source of supplemental retirement income.  You can also use it to cover future medical expenses.

Limited downside risk

IUL offers protection against stock market volatility. An IUL delivers stock market-linked gains without the risks of losing principal due to the stock market declines. With the IUL’s principal-protection guarantee, your annual gains are locked in. Your principal cash value remains the same, even if the stock market goes down.

A guaranteed minimum rate

Many IUL policies come with a guaranteed minimum annual interest rate. This rate is a floor of how much you can earn every year. The guaranteed allows you to receive a certain percentage regardless of how the market performs. This floor rate depends on the specific insurance, and it could vary between 0% and 2%.

Drawbacks of Indexed Universal Life Insurance

IUL is complex

IUL is an extremely complex insurance product. There are many moving parts in your UIL policy, making it confusing and hard to understand. Most sales illustration packages portray an ideal scenario with non-guaranteed average market performance figures. In reality, between your annual premiums, cap rates, floors, fees, market returns, cash value accumulation, riders, and so on, it is tough to predict the outcome of your insurance benefits.

Upfront Commissions

The people who sell IUL are highly trained sales professionals who may not be qualified to provide fiduciary financial advice. The IUL comes with a hefty upfront commission, which is often buried in the fine print and gets subtracted from your first premium payment.

IUL has high fees

The policy fees will shock you and eat your lunch literally. I have personally seen charges in the neighborhood of 11% to 13% annually. These fees will always reduce the benefits of your annual premium and earned interest.

Limited earnings potential

IUL policies will typically limit your stock market returns and will exclude all dividends. Most IULs offer some combination of participation rate and capped rate in comparison to the illustration rate used in their marketing materials.

Participation Rate is the percentage of positive index movement credited to the policy. For example, if the S&P 500 increased 10% and the IUL has an annual participation rate of 50%, your policy would receive 5% interest on the anniversary date.

Cap Rate is the maximum rate that you can earn annually. The cap rate can vary significantly from policy to policy and from insurance provider to the next.

 Why capped upside is an issue?

The problem with cap rates and participation rates is they limit your gains during, especially good years. Historically, the stock market returns are not linear and sequential, as the policy illustration rates suggest. In the 40 years between 1980 and 2019, the stock market earned an average of 11.27% per year. During this period, there were only eight years when the stock market had negative returns or 20% of that period. There were only seven years when the stock market posted returns between 0% and 10%. And there were 25 years when the stock market earned more than 10% per year. In 17 of those 25 periods, the stock market investors gained more than 20% or 42% of the time.

In other words, historically, the odds of outsized gains have been a lot higher than the odds of losses.

However, as humans, the pain of losing money is a lot stronger than the joy of gaining.

In effect, long-term IUL policyholders will give up the potential of earning these outsized profits to reduce their anxiety and stress of losing money.

Surrender charges

IULs have hefty surrender charges. If you change your mind in a couple of years and decide to cancel your policy, you may not be able to receive the full cash value. Before you get into a contract, please find out the surrender charges and when they expire.

Expensive Riders

Indexed Universal Life Insurance typically offers riders. The policy riders are contract add-ons that provide particular benefits in exchange for an additional fee. These provisions can include long-term care services, disability waivers, enhanced performance, children’s’ term insurance, no-lapse guarantee, and many more. The extra fee for each rider will reduce your cash value, similar to the regular policy fees. You need to assess each rider individually as the cumulative cost may outweigh your benefit and vice versa,

Cash value withdrawals reduce your death benefit

In most cases, you might be able to make a tax-free withdrawal from the cash value of your IUL policy. These withdrawals are often treated as loans. However, legacy-minded policyholders need to remember that withdrawing your cash value reduces your beneficiaries’ death benefit when you pass away.

Potential taxable income

There is still a chance to pay taxes on your IUL policy. If you let your policy lapse or decide to surrender it, the money you have withdrawn previously could be taxable. Withdrawals are treated as taxable when they exceed your original cost basis or paid premiums.

5 smart 401k moves to make in 2020

Smart 401k moves in 2020

5 smart 401k moves to make in 2020. Do you have a 401k? These five 401k moves will help you empower your retirement savings and ensure that you take full advantage of your 401k benefits.

2020 has been a challenging year in many aspects. Let’s make it count and put your 401k to work.

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What is a 401k plan?

401k plan is a workplace retirement plan that allows employees to build and grow their retirement savings. It is one of the most convenient and effective ways to save for retirement as both employees and employers can make retirement contributions. As an employee, you can set up automatic deductions to your 401k account directly through your company payroll.  You can choose the exact percentage of your salary that will go towards your retirement savings. Most 401k will provide you with multiple investment options in stocks and fixed income mutual funds and ETFs. Furthermore, most employers offer a 401k match up to a certain percentage. In most cases, you need to participate in the plan to receive the match.

1. Maximize your contributions

The smart way to ignite your retirement savings is to maximize your contributions each year.

Did you know that in 2020, you can contribute up to $19,500 to your 401k plan? If you are 50 or over, you are eligible for an additional catch-up contribution of $6,500 in 2020. Traditional 401k contributions are tax-deductible and will lower your overall tax bill in the current tax year.

Many employers offer a 401k match, which is free money for you. The only way to receive it is to participate in the plan. If you cannot max out your dollar contributions, try to deduct the highest possible percentage so that you can capture the entire match from your employer. For example, if your company offers a 4% match on every dollar, at the very minimum, you should contribute 4% to get the full match.

2. Review your investment options

When was the last time you reviewed the investment options inside your 401k plan? When is the last time you made any changes to your fund selection? With automatic contributions and investing, it is easy to get things on autopilot. But remember, this is your money and your retirement savings. With all the craziness in the economy and the stock market in 2020, now is the best time to get a grip on your 401k investments.

Look at your fund performance over the last 1, 3, 5, and 10 years. Make sure the fund returns are close or higher than their benchmark. Review the fund fees. Check if there have been new funds added to the line up recently.

3. Change your asset allocation

Asset allocation tells you how your investments are spread between stocks, bonds, money markets, and other asset classes. Stocks typically are riskier but offer great earnings potential. Bonds are considered a safer investment but provide a limited annual return.

Your ideal asset allocation depends on your age, investment horizon, risk tolerance, and specific individual circumstances.

Typically, younger plan participants have a longer investment horizon and can withstand portfolio swings to achieve higher returns in the future.  If you are one of these investors can choose a higher allocation of stocks in your 401k.

However, if you are approaching retirement, you would have a much shorter investment horizon and probably lower tolerance to investment losses. In this case, you should consider adding more bonds and cash to your asset allocation.

4. Consider contributing to Roth 401k

Are you worried that you would pay higher taxes in the future? The Roth 401k allows you to make pretax contributions and avoid taxes on your future earnings. All Roth contributions are made after paying all federal and state income taxes now. The advantage is that all your prospective earnings will grow tax-free. If you keep your money until retirement or reaching the age of 59 ½, you will withdraw your gains tax-free. If you are a young professional or you believe that your tax rate will grow higher in the future, Roth 401k is an excellent alternative to your traditional tax-deferred 401k savings.

5. Rollover an old 401k plan

Do you have an old 401k plan, stuck with your former employer? How often do you have a chance to review your balance? Unfortunately, many old 401k plans have become forgotten and ignored for many years.

It is a smart move to transfer an old 401k to a Rollover IRA.

The rollover is your chance to gain full control of your retirement savings. Furthermore, you will expand your investment options from the limited number of mutual funds to the entire universe of stocks, ETFs, and fund managers. Most importantly, you can manage your account according to your retirement goals.

Grow your retirement savings with the Thrift Savings Plan

Thrift Savings Plan

The Thrift Savings Plan (TSP) is a retirement savings plan for federal employees. The purpose of the TSP is to provide federal workers with a platform for long-term retirement savings where you can make regular monthly payroll contributions. In many ways, TSP resembles the 401k plans used by private corporations.

Retirement Calculator

TSP Eligibility

Most employees of the United States Government are eligible to participate in the Thrift Savings Plan. You qualify if you are:

  • Federal Employees’ Retirement System (FERS) employees (started on or after January 1, 1984)
  • Civil Service Retirement System (CSRS) employees (began before January 1, 1984, and did not convert to FERS)
  • Members of the uniformed services (active duty or Ready Reserve)
  • Civilians in specific other categories of Government service including some congressional positions and judges

Contribution Limits for 2020

Federal employees can contribute up to $19,500 in their Thrift Savings Plan in 2020. Additionally, all federal employees over the age of 50 can make a catch-up contribution of $6,500 per year.
Members of the uniformed services, receiving tax-exempt pay that is subject to the combat zone tax exclusion, can make contributions up to the combined limit of $57,000 per year.

TSP Matching

TSP participants receive matching contributions on the first 5% of your salary that you contribute each pay period. The first 3% of your contribution will get a dollar-for-dollar match. The next 2% will be matched at 50 cents on the dollar. Contributions above 5% of your salary do not receive an additional match.

Federal agencies can make a matching contribution up to the combined limit of $57,000 or $63,500 with the catch-up contribution. If you contribute the maximum allowed amount, your agency match cannot exceed $37,500 in 2020.  Receiving a match on your contributions is free money. You must contribute at least 5% of your base salary to your TSP account to get the full match from your agency.

Matching schedule

The table below illustrates how your agency makes a matching contribution to your TSP account based on your own selection. Even if you choose not to contribute to TSP, you will still receive 1% of your base pay. If you put aside 5% of base pay, you will get the full 5% match from your agency.

TSP Matching schedule

Source: opm.gov

TSP Vesting

For vesting purposes, there are two types of agency contributions.

Agency Automatic Contributions (1%)

All eligible TSP participants will automatically receive deposits into your account equal to 1% of your basic pay each pay period, even if you do not contribute your own money. After three years of Federal civilian service (or two years in some cases), you are vested in these contributions and their earnings.

Agency Matching Contributions (0% – 4%)

All eligible federal employees will receive a dollar for dollar matching contribution for the first 3% that you contribute each pay period. Each dollar of the next 2% of basic pay will be matched with 50 cents on the dollar. All matching contributions are vested immediately.

How to grow your retirement savings with TSP

The Thrift Savings Plan allows you to save for retirement and become financially independent. Even small annual contributions paired with the agency match can make a big difference in your financial future.

Here is an example:

Let’s assume that your base pay is $100,000 per year. You want to save for retirement and take advantage of your agency match. Saving 5% or $5,000 per year will guarantee you another (free) $5,000 in your TSP account. That is a total of $10,000 annually. Assuming a modest return of 7% every year, you will have savings worth $1,000,000 in your TSP in 30 years. (For the 30 years between 1990 and 2019, the US stock market has earned a 9.84% average annual return. By setting aside $150,000 in 30 years, you have the potential of making a million dollars in your retirement. Being patient and consistent in combination with the power of compounding can boost your financial freedom in the long run.

TSP Savings Growth

Tax Treatment

For tax purposes, there are two types of individual contributions.

Tax-deferred TSP

Most federal employees opt to make tax-deferred contributions to their Thrift Savings Plan account. These contributions are tax-deductible. They will lower your tax bill for the current tax year. Your TSP investments will grow on a tax-deferred basis. You will only owe federal and state taxes when you start withdrawing your retirement savings.
If you are a uniformed services member making tax-exempt contributions, your contributions will be tax-free; only your earnings will be subject to federal and state tax at withdrawal.

Roth TSP

Roth TSP contributions are pretax. You pay all federal and state taxes before making your contributions. The advantage of Roth TSP is that your retirement savings will grow tax-free. As long as you keep your money until retirement, you will withdraw your investment earnings tax-free. Roth TSP is an excellent alternative for young professionals and federal workers in a low tax bracket.

TSP Fund options

As a TSP participant, you can choose between several fund options.

TSP Fund Performance 2019

C Fund

The C fund tracks the performance of the S&P 500 Index; a broad market index made up of stocks of the top 500 largest U.S. companies. The C fund owns companies such as Apple, Microsoft, Amazon.com, Facebook, Berkshire Hathaway, JPMorgan Chase, Alphabet, Johnson & Johnson, and Visa. The fund has earned an annualized 13.59% average 10-year rate of return.

S Fund

The S fund matches the performance of the Dow Jones U.S. Completion Total Stock Market Index; a broad market index made up of stocks of small-to-medium size U.S. companies. These are stocks that are not included in the S&P 500 Index. The S fund owns companies like TSLA Tesla Motors, Blackstone Group, Lululemon Athletica, Workday, Splunk, Palo Alto Networks, CoStar Group, Square, Dexcom, and Liberty Broadband Corp. The fund has earned an annualized 13.08% average 10-year rate of return.

I Fund

The I fund invests in foreign stocks and follows the performance of the MSCI EAFE (Europe, Australasia, Far East) Index. The I fund owns companies such as Nestlé, Roche, Novartis, Toyota Motor, HSBC, SAP, Total, AstraZeneca, LVMH, and BP. The fund has earned an annualized 5.85% average 10-year rate of return.

F Fund

The F fund tracks the performance of the Bloomberg Barclays U.S. Aggregate Bond Index. The fund invests in a broad range of US bonds, including US treasuries, investment-grade corporate bonds, and agency mortgage pass-through bonds. Nearly 70% of the fund portfolio is in the highest quality AAA-rated bonds. The fund has earned an annualized 2.23% average 10-year rate of return.

G Fund

The G fund invests in nonmarketable US Treasury bonds specially issued to the TSP. The payment of G Fund principal and interest is guaranteed by the U.S. Government. The G fund is the most stable and safe investment option in the TSP fund list. It has an investment objective to produce a rate of return that is higher than inflation while avoiding market price fluctuations. The fund has earned an annualized 3.99% average 10-year rate of return.

The L Funds

The L funds are lifecycle funds that invest automatically according to a professionally designed mix of stocks, bonds, and government securities. You can select your L Fund based on your age and investment time horizon. Your expected future retirement date will determine which fund assignment. For example, if you plan to retire in 2039, you will be assigned to L 2040 fund.

The L Fund roaster includes L 2065, L 2060, L 2055, L 2050, L 2045, L 2040, L 2035, L 2030, L 2025, and L Income.

All L funds own a mix of the five individual funds. TSP participants with a longer investment horizon will own more stocks and fewer bods. Those approaching retirement will move to a higher allocation to bonds and a smaller allocation to stocks.

L Funds Glide Path

Investing your Thrift Savings Plan


The L fund is an easy and convenient investment option. If you choose the lifecycle fund, you do not have to spend too much time guessing the stock market and periodically rebalancing your retirement savings. Your savings will be invested automatically. Your asset allocation will move from more aggressive to more conservative as you get closer to retirement.

Individual fund mix

If you prefer a more active approach, then you can invest directly in any of the five individual funds. I recommend that you allocate your account depending on your age:

Recommended Fund Mix

You will notice that my recommendations differ considerably from the current L funds allocation. I established the age-based fund mix based on the actual fund performance and current economic conditions. Before investing, you need to consider your investment horizon, individual circumstances, and risk tolerance level. I assume that younger participants would have a long (30-40 years) investment horizon and high-risk tolerance. On the other hand, participants approaching retirement would have a much shorter investment horizon and lower risk tolerance as they will depend on their retirement savings in the near future. Choosing individual funds gives you the flexibility to make any changes at any point in time.

Plan Your Taxes

The physician’ roadmap to secure and healthy retirement

physician retirement

I talk to physicians every day and know that retirement is a sensitive subject. For many physicians retiring is an extremely personal decision. And it is not an easy choice to make. You must take into account a wide range of financial, professional, and individual factors before you make the final call.

Retirement will change your lifestyle dramatically. Your salary and healthcare benefits will be different. You might experience an unexpected change of pace. You may lose touch with colleagues and friends. At the same time, you can travel and do things that matter most to you. Your stress level will go down, and you will spend more time with your family and loved ones.

I compiled a list of suggestions that will help you prepare on your journey to retirement. Don’t wait until the last moment. Get ahead of the curve so that you can take the financial stress out of your retirement plans.

Take advantage of your employee benefits

The first step to a happy retirement is knowing your employee benefits inside and out. Most public and private healthcare systems offer competitive physician retirement benefits packages with a wide range of perks, including pension, 401k match, profit sharing, healthcare coverage, life insurance, disability insurance, and loan repayment. Some employers even offer an early retirement option at 55.

These benefit packages vary significantly from one employer to the next. Take some time to learn and understand your options. Ask your colleagues and attend benefit seminars. If retirement is your priority, consider an employer that will give you the best shot in achieving this goal.

Pay off your student loans

The US student debt has skyrocketed to $1.6 trillion. Seventy-five percent of medical students graduated in their class of 2018 with student debt. The average loan per student is $196,520. It’s not uncommon that some physician couples owe over half a million dollars in student debt.

A crucial step in your journey to a happy retirement is paying off ALL YOUR DEBT, including student loans, credit cards, and mortgage. It might seem like an uphill battle, but it’s not impossible.

There are several options you can consider when tackling your student loans – loan forgiveness, loan consolidation, refinancing with lower interest rates, and income-driven repayment. Find out what is the best option for you and get started.

Maximize your physician retirement savings

Some physicians are fortunate to have an employer who offers a pension plan. Others need to save aggressively for their own retirement. In many cases, a corporate pension and social security may not be enough to cover all your essential expenses after you retire.

One way to cover the gap is through your personal retirement savings. Most employers nowadays offer either a 401k, a 403b, or a 457-retirement plan. When you join your physician retirement plan, you can save up to $19,500 per year as of 2020. If you are 50 or older, you can save an additional $6,500 for a total of $26,000 per year. An additional benefit to you is that these contributions are tax-deductible and will lower your tax bill. Many employers also offer a match that can further boost your retirement savings.

Have an emergency fund

You need an emergency fund. Keep at least six months’ worth of essential living expenses in cash or a savings account. This emergency fund will serve you as a buffer in case of sudden and unexpected life events.

Secure your healthcare coverage

One of the main challenges, when planning your retirement, is healthcare coverage. Depending on your employer, some doctors have excellent medical and dental benefits. In some cases, these benefits are completely free or heavily subsidized by your employer.  In order to attract talent, some hospitals offer free lifetime healthcare if you commit to working for them for a certain number of years.

Do not underestimate healthcare costs. According to estimates, a 65-year old couple retiring in 2020 can expect to spend $290,000 in health care and medical expenses throughout retirement. For single retirees, the health care cost could reach $150,000 for women and $140,000 for men.

Consider working per diem

If you are short of retirement savings or bored of staying at home, you may consider working per diem or locum tenens. You can work on an hourly basis at your own pace. The extra work will boost your retirement income and will keep your knowledge up to date.

Create a budget

You must adhere to a budget before and after you retire. Before retirement, you need to pay off your debt and save for retirement aggressively. Depending on your earnings, these payments can cut through your family budget. You may have to make some tough choices to avoid or delay large purchases and curb discretionary spending.

Once you retire, your income may go down. True, you don’t have to drive to work, but some of your expenses might still be the same.

Have a plan

A happy retirement comes with a good plan. It may require some self-discovery but ultimately will lead to finding a purpose and fulfilling your life dreams. You can travel and volunteer. Write a book. Teach. Learn a new hobby or language. Find out what makes you happy outside of your daily routine and make the most out of your free time.

The bottom line

Physician retirement is an achievable goal that requires a great deal of planning and some personal sacrifice. If you want to retire one day, you need to start planning now. Don’t leave some of the most critical decisions for the final stretch of your career.

Your family can be a big influencer for your decision to retire.  You might have a partner who wants to stay active. Perhaps, you have children who are going to college. Every family is different, and every situation is unique. Be proactive, plan ahead, do the number crunching, and find what makes the most sense to you.