By now, you’ve probably broken one or more of your New Year’s resolutions. College kids have gone back to school – and many have already started counting down to spring break. Guacamole Day is almost upon us – and, oh yeah, there’s some kind of football game happening that evening, isn’t there? Unfortunately, it’s also that time of year when you need to start thinking about your taxes.
We asked Jim McEnerney, financial advisor extraordinaire, to give us some of his top tax-related tips to help you survive the season with as little stress – and as much money staying in your pocket – as possible.
1. Don’t Not File
Most folks who expect to get a check from the government probably don’t delay filing their taxes. But those who aren’t sure how last year’s finances will shake out, or who know they’re going to owe Uncle Sam, might be tempted to stick their head in the sand until tax season is over.
Jim McEnerney cautions that filing your taxes and paying your taxes aren’t the same. Legally, you have to file a tax return. You could face civil and even criminal charges if you do not. Even if you do not have the money to pay those taxes, it’s imperative to file anyway.
In most cases, the government will work out an arrangement with you, usually by granting an extension. So there’s really no reason to risk the consequences of not filing.
2. Report All of Your Income
Here’s another area, Jim McEnerney says, where people sometimes think they can fudge the numbers or “forget” about some of their taxable income. McEnerney cautions you not to make that mistake. Remember that employers, financial institutions, and any entity that you’ve done business with during the previous fiscal year are required to provide both you and the IRS with proper documentation. So unless you were paid under the table (which is against the law, of course), there’s a record of all wages, payments, and other monies that you have received. That means Uncle Sam will know about it. (Somewhat like Santa, he sees you when you’re earning; he knows when you’re employed.) Eventually, the IRS will catch up with your undeclared income, and you’ll have to pay the taxes – as well as a penalty.
Neglecting to report income could result in criminal charges such as willful evasion of tax or failure to supply information, among others.
3. Be Smart About Deductions
There are two kinds of people in the world when it comes to deductions: those who scour their records looking for ways to get a leg up each April, and those who are content to take the standard deduction because they don’t think that investigational effort will be worth the payoff. Jim McEnerney encourages his clients – and you – to become the first type of person. You may discover that a little detective work will yield some very pleasant surprises.
Technically, there is a third category, and these folks might the smartest of all. They’re the ones who hire a financial advisor or tax preparer to scour their records for them – it’s the best of both worlds. These experienced professionals can also tip you off to little-known deductions that might apply to your situation.
4. Get Tax Credit Where Tax Credit’s Due
Deductions are used to reduce the amount of income that you can be taxed on, while tax credits directly offset the amount you owe. Dollar for dollar, they are therefore more valuable.
In addition to tax credits for dependents, there are also credits for adoption expenses, energy-saving appliances, some health care costs, saving money for retirement, and even hiring military veterans.
5. Maximize Expenses Whenever Possible
If you operate a non-incorporated business, remember to maximize your business deductions. Jim McEnerny advises that some of the expenses that you can claim include:
- Wages and benefits paid to others
- Rent and utilities
- Products purchased for resale
- Cars or vans used for the business
- Office furniture
- Computers and associated costs
- Office supplies
- There’s No Need to Dread Tax Season
Unfortunately, Jim McEnerney explains, far too many people consider tax preparation to be a chore at best, and a traumatic experience at worst. For that reason, they tend to speed through the process as quickly as they can, simply to get it all over and done with.
But it doesn’t have to be that way. If you slow down and approach the task carefully and systematically – or if you rely on the services of a professional – this transaction with the government can be made much more manageable and even lucrative!
Welcome back to this two-part article, in which financial whiz Jim McEnerney of the investment advisory firm The McEnerney Group explains what can be done with 401(k) funds that are associated with a previous position. In Part I of this post, McEnerney discussed two of the four options for dealing with an old 401(k): leaving it where it is or moving the funds to your current employer. Today, we’re taking a look at the other two options.
Option 3: Indirect Rollovers
What can you do if you don’t want to leave your 401(k) where it is, with your former employers, nor transfer the money to an account associated with your current job? A new 401(k) might not even be possible; perhaps you have decided to work as a freelancer or independent contractor, your new employer doesn’t offer it, or you’re retiring.
An indirect rollover is one way to go, explains Jim McEnerney, but it’s a bit (OK, a lot) tricker than its direct counterpart. With this option, you receive a check for the amount in your account, but then you’re obliged to take care of moving the funds into the new 401(k) or to an IRA. Fail to do so in a timely fashion, and you’ll be on the hook for income tax as well as a 10% penalty tax.
In addition, your former employer will deduct 20% of the distribution for taxes, and therefore you will be responsible for covering the shortfall in order to roll over the entire amount of your assets. You’ll get it back come tax time, but it may represent a hardship to part with that much cash even temporarily.
However, Jim McEnerney says, it doesn’t really make any sense to take this option if you’re moving savings into a new 401(k); there’s just too much risk that something will go awry. If you can afford to front yourself that 20%, however, consider establishing an IRA. All of your separate 401(k) retirement accounts, if you have more than one, can go into the IRA. So can future savings. An IRA will also afford you more freedom to invest your money as you wish.
Option 4: Taking a Cash Distribution
Lastly, you can opt to cash in the 401(k). It is a tempting option, to be sure, but it’s really a hail mary; unless you are facing a true financial hardship that could be solved with an infusion of cash — we’re talking eviction, foreclosure, or repossession here, not “it’s been a while since I’ve had a vacation” or “wouldn’t a new Range Rover be nice” — don’t even consider a cash distribution.
According to Jim McEnerney, here are a few reasons to avoid this scenario, and they’re all very good ones. First, this is your retirement we’re talking about here. Even if your financial future is bright, and you anticipate being able to sock away plenty of money to replace your existing 401(k) by the time you are ready to retire, you will still be losing the interest and dividends that your savings are currently reaping.
On top of that, you will have to pay taxes on your funds if you take the cash value. The sudden spike in your “income” may also be significant enough to push you into a higher tax bracket. If you are under the age of 59½ , the IRS will also slap you with a 10% penalty tax. In some situations, you could see the value of your 401(k) plummet, slashed almost in half by taxes and fees when all is said and done. If you truly need the money, you may be willing to forfeit that amount; otherwise, it’s just a dumb decision, plain and simple.
Wrapping Up with Jim McEnerney
Naturally, there are many factors to consider when making a decision about an old 401(k) account. No one solution will be right for everyone. Jim McEnerney recommends doing plenty of research, speaking with your financial manager, and exercising caution before making your choice.
No matter which of these alternatives you opt for, be sure you understand all of the potential penalties, tax burdens, requirements, and restrictions. The last thing you want is to pay taxes or face a financial penalty because you rushed through the decision.
Was one of your New Year’s resolutions to get your finances in order? Or have you recently accepted a position with a new employer? Either way, you’re probably wondering what to do with old 401k accounts. We asked James McEnerney, Director of Marketing for investment advisory firm The McEnerney Group, for some expert advice. There are essentially four different paths you can take with a 401(k) account that was established by an old employer. In this post, we cover two of those four options; next week, we’ll tackle the remainder in Part II.
First and foremost, McEnerney emphasizes the importance of a careful decision. Of course, no action you take regarding your finances should be poorly considered or impulsive, but when it comes to your retirement savings, choosing the wrong route can cost you – big time. So be sure to research the topic thoroughly, take some time to read up on the options, and consult with your financial advisor to learn if your personal circumstances might point you in a particular direction.
Option 1: Leave Your 401(k) In Place with Your Previous Employer | Jim McEnerney
According to James McEnerney, the first option is a form of benign neglect; you simply leave your 401(k) where it is. Why might this option be beneficial? It’s less work than the other possibilities, to be sure, but you may simply be happy with it. If the fees are relatively low, and/or if you like the investment options it offers (such as access to institutional share class mutual funds and low-cost index funds), then treat it like the proverbial unbroken toaster and don’t bother trying to fix it.
Another potential advantage has to do with a lesser-known provision of the IRS called “separation from service.” It allows you to start taking distributions from your plan, penalty-free, if you leave that company in the same year or any year after you turn 55 (age 50 for police, firefighters, and medics).
In most cases, you’ll need a minimum balance to leave your 401(k) in place – usually $5,000. James McEnerney cautions you to double-check with your former employer.
Bring the 401(k) Assets Along to Your Current Employer
Then again, that option might not be so simple after all. Since you will no longer be making contributions to that fund, the retirement savings from that particular 401(k) could very well languish in obscurity. You could even forget about it, especially if it’s a drop in your financial bucket – but of course, every drop counts. So why not streamline things and transfer into your current employer’s plan?
If the new plan allows borrowing from your assets, the logic of merging the two accounts makes a good deal of sense, explains James McEnerney, as it will provide you a larger base for that loan.
First, find out if the employer offers a defined contribution plan, usually a 401(k) or a 403(b), that accepts rollovers. If you have already decided that you are pleased with the new plan’s investment options, then it’s time to contact your current employer’s HR department. Once they provide you with the instructions to complete a rollover transfer and acquire the necessary details from you, get in touch with the folks at your former company to initiate a direct rollover or a trustee-to-trustee transfer.
Next week, in Part II of James McEnerney’s primer on how to handle 401(k) accounts from previous jobs, we’ll take a look at the other two options: an indirect rollover or taking a cash distribution. Stay tuned!
Jim L. McEnerney, Director of Marketing for The McEnerney Group, has been in the financial advisory game for years, and he’s got the experience and skills to prove it. Out of all his accomplishments associated with financial advising, mastering the Supernova Model and subsequently introducing it to districts all over the country is among the top.
Jim L. McEnerney worked for the prestigious Merrill Lynch (now known as simply Merrill, legally known as Merrill Lynch, Pierce, Fenner & Smith Incorporated), a wealth and investment management company. Working for Merrill Lynch, Jim L. McEnerney was the recipient of the Downey’s Award, promoted to the Midwest region “A” team, and received a performance rating of “far exceeds requirements”.
The Supernova Model, Jim L. McEnerney explains, was first implemented by financial advisors of Merrill Lynch. Rob Knapp, the leader of this movement, went on to author two books on the subject: The Supernova Advisor, and The Supernova Multiplayer: 7 Strategies for Financial Advisors to Grow Their Practices.
In a nutshell, the Supernova Model, Jim L. McEnerney clarifies, is about reducing the number of your clients based on the 80/20 principle: 80% of a company’s profits come from 20% of their clients. Going along with this line of thinking, the focus should be made on that 20 % of clients in order to maximize the amount of profit you can obtain from them. This isn’t to sound too impersonal, Jim L. McEnerney says: by placing your focus on a smaller amount of clients, you gain the opportunity to build longer-lasting, more solid relationships with them based on trust and continued business.
In shifting your company’s focus, Jim L. McEnerney tells us, there must come a sacrifice. You can’t expect to retain the same number of clients while deciding to ignore a large portion of them-following the Supernova Model, you’re expected to drop a significant portion of your clients in order to properly refocus your efforts into your quality clients. This may seem a bit counterintuitive, Jim L. McEnerney admits: having fewer clients just doesn’t sound ideal for a company on paper. However, when you realize the name of the game is quality over quantity, and begin to see real financial successes based on these changes, you’ll have no doubt in your mind that the Supernova Model actually does work wonders.
The Supernova Model also extolls the 12/4/2 contact rule, Jim L. McEnerney teaches. This rule states that each client should have at least 12 scheduled contacts per year, with 4 of those contacts involving quarterly reviews, and at least 2 of those contacts being face-to-face meetings.
Of course, there’s a lot more to it than this simple explanation, but the basic gist of it is easy to grasp. Having introduced this business concept to districts country-wide and witnessed the fruits of his labor for himself, Jim L. McEnerney is proud to say he is a huge proponent of this system.