The 401(k) plan has become the leader in today’s retirement savings vehicles. Most employers have a 401(k) or company plan that they set up for employees, with a potential for a company match. In today’s episode Victor will let you know how you can set up your retirement plan to not only get you into retirement, but take you where you want to go once you’re in retirement.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and Certified Elder Law Attorney (CELA®) and Certified Financial Planner™ professional (CFP). Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
For more information, visit Medina Law Group or Palante Wealth Advisors.
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Victor J. Medina: Everybody, welcome back. This is Make It Last. I’m your host, Victor Medina. I’m so glad you could join us this Wednesday morning as we continue with the newest program initiative on WCTC 1450AM, New Jersey. That’s sound advice, part of a new programming for them, where they take local experts. They bring them into talk to you about things you should know about.
I am their local expert on retirement planning, both as a legal and financial matters. As a CFP and C‑E‑L‑A CELA, I’m just somebody that knows a little bit about elder law, estate planning and certified financial clinics. I’m a lawyer with estate planning practice. I’m a certified financial planner. I’ve got some designations for retirement, as well.
Look, here’s the thing. I’m going to talk to you for the next hour or so about something that I think is important for you. It’s going to be a topic that is going to be enlightening for most people.
The show is not only here to provide you with knowledge about 401(k)s and the potential benefits of rolling one a 401(k) into an IRA. It’s also meant to help you think differently once you get closer to retirement. That’s what we’re going to focus on here today.
We’re going to be talking about the fact that you’ve built this nice nest egg. You’ve got a 401(k) that you’ve created. Now, it’s time to take control of your money because a 401(k) has been at the forefront of today’s retirement savings vehicles. Most employers have got some form of a 401(k) or a company plan that they set up for their employees. If you’re lucky enough, you receive a company match. That could be a nice feature of the plan that you’re in.
For some people this may be great, but I tell you old school pension plans may even seem better for those getting ready to retire. My mom and dad, they were school teachers. They worked their entire lives. They knew at the end of it, they’d be receiving a pension.
For them, that was an excellent way to think about retirement planning. It was going to provide for them an income stream for the rest of their life no matter how long they lived. In fact, they’re enjoying that right now. They’ve got a great income. It gets deposited into their account every second day of the month. They know when they’re getting paid. It’s there forever and ever. Now, unfortunately pension plans are becoming a thing of the past.
They were definitely there for private companies for any number of years, but as the times change, they’re only there for public entities. Again, my parents are school teachers. My wife’s in the school system. She’s working towards a pension plan.
Instead what companies are doing is they create these 401(k) plans. These are company plans that everyone is retiring with. I’m going to talk to you today about those plans and how to make them work for you in retirement. They can be great vehicles to get you to retirement. If they’re not set up properly, they may not be able to help you get to where you want in retirement.
A few questions that are going to tie into today’s show. One of them is, how and when would you do an in‑service roll over on your 401(k) or a company plan? Can you still contribute to your company plan if you roll the money over?
Next question might be, what are the tax consequences of doing a roll over into an IRA? Some people might want to know what the difference between a defined contribution plan is and a defined benefit plan.
People want to know what their fees are and how they find that out in terms of their 401(k) plan. What are they paying? Where can they discover that information? Another question is, should you change your mindset, from accumulation to preservation and distribution? If the answer is yes, when should that happen?
For you, as you’re thinking about your 401(k) plan, are you looking to draw income from that? Are you just going to live on social security and some other form of income? If you have to draw from income, what does that look like?
Some people want to know what an orphan account is. They want to know what their consequences are for rolling over an old employer plan. We’re going to talk a little bit about how many employers are getting rid of their pension plans altogether. I mentioned that a little bit earlier. Those are some questions that we’re going to be coming into.
Look, I think that this issue is important for a number of reasons. The first one is that for the last 20, 30, or even 40 years of your life, you have been trying to grow and build your retirement nest egg and investments. That’s great. You’ve done that diligently.
By the way, as you get closer to retirement, what you’ve got that’s what you’ve got. We don’t have any other opportunity to add to that. As you see retirement in the near future, of course, you need to start thinking about your money a little bit differently because you’re going to need that money to live off of.
When I sit down with clients and perspective clients, when they sit down and meet with us, one of the questions we ask them is, what do you want your money to do for you? I’ll tell you what’s interesting. [laughs] Majority of the time, what’s the one word that comes out of their mouth. That’s grow. That’s what they say. “I want my money to grow.”
I think that’s more of a conditioned response because in those last 20, 30, 40 years retirement as you’ve been working and putting money away, you’ve been hoping that it grows. In fact it has grown whether or not the economy was up or down, the fact that you added into it meant that it was growing larger.
That’s what your mind knows. Today, I think I want to help you think a little differently about these hardening dollars that you’ve worked your entire life to accumulate.
Look, if you’ve got any questions regarding today’s show. I’d love to have you come in to our office for a complimentary consultation with our team.
To do so, you simply just give us a call at 609‑818‑0068. Again the number is 609‑818‑0068. You come in, you sit down and talk with our team. Have a cup of coffee and a chat. We’re going to cover some holistic topics like what this retirement look like for you, and do you have the right approach towards taxes? How about estate planning?
That will help us walkthrough a retirement roadmap. Put together a bit of report card for what you got going on. All right, if you know that you have that opportunity, let’s actually go into today’s show. I’m going to ask you first have you thought about how your money will be invested once you retire. Maybe you are retired, have you changed the way that you were invested before you started?
If you not, that’s OK there’s still time. But before we dive into details rolling over 401(k) into an IRA, I want you to think about your mindset going into retirement. As I said, at this stage of your life, is it more important for your money to grow or is it more important to make sure that you either preserve that money, or you use that money so that it can provide income? We want you to be prepared for retirement.
Again, if you’re interested in a complimentary consultation, call us now at 609‑818‑0068. Leave a message or actually I’m getting so used having been doing this show on Saturdays for so long. I could use the fact that I leave a number and the truth of the matter is that nobody is in the office that time.
But, guess what? It’s Wednesday at 11, through somebody here, you want to call us? We’ll be able to pick up the phone. You can call us at 609‑818‑0068. If you’re listening to this on a podcast, give us a call during business hours. Or, if you call us on a weekend leave a message and we’ll give you a call back.
All right, look, let’s start with the 401(k), OK? How it originated? It was first started when conquerors passed the Revenue Act of 1978, which include a provision that was added to IRS code. What you would now and not going to be surprised to be section 401(k). It allowed employees to avoid being taxed on deferred compensation.
Shortly after that, in 1980, there was a benefit’s consultant named Ted Benna. He referred to section 401(k) when researching ways designed more tax friendly retirement programs for a client. He came up with this idea to allow employees to save money pre‑tax into a retirement plan while also receiving an employer match which I remember this is originally just a way of deferring taxes or voiding taxes on deferred compensation.
This guy Ted Benna created this idea to basically save money pre‑tax and put it into a retirement plan while receiving an employer’s match. Does this sound familiar? Do you think that the plan was accepted? Well, the idea was rejected.
He started his own company called, the Johnson Companies. He became the first company to provide a 401(k) plan to its workers. In 1981, the following year the IRS issued new rules that allowed employees to fund their 401(k) through payroll deductions which kick started the 401(k)’s popularity.
Now, today, the 401(k) is the front runner of all other retirement savings vehicles. Now many employers also offer employers or company match which can be very beneficial if you take advantage of it.
Let’s say an employer offers a six percent match that means that you can elect to defer six percent of your salary into your 401(k). Then your employer will match your contributions up to that amount. This is one of main benefits of a 401(k) plan that can be really attractive to employees because it’s like free money.
The company is going to help you save for your retirement. By the way, this was/is a lot cheaper than when companies had to fund their pension plans where they take care of their employees after they had spent a lifetime with them.
This is very attractive to them because if they just put together a six percent match, that’s not the same thing as trying to put together a pension that might replace 70 percent of their income for the rest of their lives.
Now, despite the benefits of the 401(k), there are a lot of hidden fees. They play a negative role early on. For a long time, which started this 1980ish…for a long time, nobody knew what fees were being charged on this 401(k) plans.
In fact, it took all the way 2012 before the Department of Labor finalized this participant fee, disclosure rules. That’s 30 years. Let that soak in, 30 years went by that 401(k)s went on with no fees being disclosed. The consequence of that is pretty far reaching.
I remember there was a study. I think it was in 2015 or so through the National Association of Retirement Plan Participants. I always remember that acronym because it spells NARPP. Anyway, they started a whole bunch of participants.
I want to say, if memory serves me, that about 90 percent of the participants ‑‑ I think there’s probably four or five, six thousand participants to this survey ‑‑ 90 percent of those could not correctly calculate their account fees. In fact, I want to say that maybe 40 or 50 percent of them didn’t know that they were paying fees at all.
They thought that it was just a free savings account. About 60 percent of those participants were unaware that the fees were being automatically deducted for their account rather than being something they paid. It’s just going to be taken out.
If I haven’t’ thrown enough statistics. Actually, let’s throw one more scenario out there. If you’re at all paying attention to these numbers, these are probably the most important ones to listen to. Go to the Department of Labor website and it gives you a great example.
Assume that you are an employee with 35 years until retirement and a current 401(k) balance of just $25,000. A retirement is 35 years down the road, you’ve got $25,000 in your 401(k) account. If the returns on your investments over the next 35 years, average seven percent and the fees and expenses in your average return, reduce it by half a percent, half a percent.
It’s going average seven percent but you’re going to pay half a percent in fees in there. At the end of those 35 years with no other contributions, your account’s is going to go about $227,000. No further contributions, just the return, the power of compounding. Your $25,000 turned into $227,000 in retirement.
If the fees and expenses are just one percent higher, if they’re one‑and‑a‑half percent, your account balance will shrink to a $163,000. That one percent difference in fees and expenses would reduce your account balance by nearly a third, nearly a third.
That right there shows why it’s so important for participants to be aware of the fees that they are paying inside of each one of the accounts that you have especially your 401(k) or company plans. There are a host of fees that are in there.
Plan administration fees, investment fees, individual service fees, sales charges which are sometimes called sales loads or commissions. These are all fees that can add up inside of your accounts. If you’re learning anything today, make sure you’re aware of the fees that are inside your investment or retirement accounts.
Here’s the thing that is sneaky about it. In a prior life, I used to be a lawyer for school districts. A public school district would hire me and my firm. I would sit at board meetings and I would help their business department’s bill, the schools. It was a great, great practice while I had it. Nothing really happened. I just transitioned to estate planning. It’s a lot of fun.
One of the things that we did is we started analyze some of the 403(b) plans that they had, very similar to 401(k)s. The thing was, they would say, “Look. We invite all of these people to come in and talk to us.”
While I started to get a list of the names, they were these very large insurance companies that what we call captive. They’re not independent. They are just these huge conglomerates. These companies that…they do insurance. It’s all they do is insurance but their salespeople only work for them.
They can’t sell anything but what they have to offer. They provide all these proprietary products, things that you can only…first of all not just buy from them but they’re the only things that they’ll sell to you.
Because of that, once we started diving into the fees, we started calculating that the embedded fees started to climb close to the two percent. We did this real work. I said to my clients at that time, these people have developed to be friends with me.
I said, “Look. You have to start talking about this with your constituents because these teachers are going to get together and they’re going to string you up by your toes.” Once they realize…because this information is coming. This information cannot be hidden any longer.
Consumers are getting smarter and smarter about their investing. When they discover this, they’re going to run a rope over a tree limb, tie it to your toes and pull hard. They’re going to be justified in doing that because you let it in these people to sell them this really crappy retirement plans.
Now, it wasn’t crappy because the returns are crappy. It’s crappy because the fees were high on that. I told them that they should start to do that. What you saw afterward ‑‑ this is a number of years ago ‑‑ but what you saw afterward is your time started running all of these specials.
They did it week after week after week for about three months just about teachers. How crappy it was for a teacher to be looking at retirement because the system wasn’t signing them up to be successful, that their 403(b) plans and all these fees.
They started to really investigate some specific providers and their acts. Being one of them TIAA, CREF being another. It just highlights the practical crossroads between…
Victor J.: …this thing, I’m talking about fees and actual people that you know because you know teachers and you know people in school districts. I’m telling you that these fees are hidden. There are things that people don’t know about. The sooner they know about it, the better that they can make a change about the future.
Listen. We’re going to take a quick break. When we come back, I’m going to give you four potential benefits of rolling over your 401(k) into an IRA. You’re not going to want to miss this. Stick with us. We’re going to be right back after this quick break.
Victor J.: Hey, welcome back to Make It Last. We were talking today about the idea of a 401(k), and should you roll it over into an IRA. I spent some time in the first segment talking to people about why their mindset in retirement needs to change a little bit.
Too often we’re conditioned to think about investment and retirement as being the thing that makes our money grow, when really as we get close to retirement, we start to think about preserving that money and making sure that it lasts. It does what we need it to do. One of the ways that you can do that is think differently about your 401(k).
We talked in the last segment about the high fees that are inside a 401(k), many times hidden. Most people are unaware of it. If you don’t like that, we’ve given you plenty background on the 401(k). Let’s jump in and talk about the potential benefits of either doing an in‑service withdrawal or rolling over your 401(k) to an IRA.
Generally speaking, once you reach age 59.5, you can do an in‑service withdrawal without any penalties, without any tax penalties, and without any early‑withdrawal penalties. Even if you’re still working, you can take a portion of your 401(k) plan and roll that into an IRA, something that you manage.
Another reason why you may want to do an in‑service withdrawal is because you have an old 401(k) sitting with a company that you used to work for. We’d call this an orphan account. I mentioned that question at the beginning of the show, at the top of the show.
You’re no longer contributing to the account. It’s sitting there. It might be a good idea to roll that orphan account into an IRA. Let’s go ahead and adopt that account. You’re going to be a new mommy and daddy over that account.
Let’s go ahead and let’s get into what I believe are four primary benefits of rolling over a 401(k) or a company plan into an IRA.
The first benefit is that it puts you in control of your money. In my opinion, this is the most important benefit of rolling over your 401(k). Why? Well, because inside these 401(k)s and company plans, we’re limited in what we can invest in. Not only do you have a limited amount of investing options, but you have no control over the 401(k), the plan administrator does.
I had a prospective client come in a few months ago with questions about his 401(k) and possibly wanting to roll it over. He was unable to for a certain period because that plan had a blackout period that froze the employees’ accounts. He was unable to do anything in that account during that period.
On the other side of the coin, if he’d had an IRA, it would have put him in control of his money. He could have chosen to invest in whatever he wanted to, not just the investment options that are given inside of your 401(k). You can make changes to your account when you want to. You don’t have to worry about blackout periods, so you’re gaining control.
The second benefit is related to the first one. It’s going to give you more investing options. Like I mentioned in the first benefit, you’re very limited into what you can invest into a 401(k) or a company plan. Many 401(k)s offer you some small‑cap options, mid‑cap, large‑cap.
Until the fee disclosure in 2012, many 401(k) plans only offered mutual funds, not index funds, which are generally more cost efficient. Why? The mutual funds could have embedded sales charges and operating expenses that helped pay the advising adviser or the adviser company that set it up with the company, and didn’t keep more money in your pocket.
It didn’t benefit them to offer you cheaper options. It benefited them to offer you more expensive options that they got paid on, so they weren’t even in there. Of course once we started getting more information about that, consumers got a little smarter. They started to offer a few index options, but they’re not the only ones.
With an IRA though, you have the entire financial universe at your fingertips. You can invest in the stock market, buying anything you want, mutual funds, stocks themselves, ETFs. You can invest in bank products. You can buy a series of CDs with a bank and hold them inside of an IRA. You can include insurance products. You can buy annuities. You can buy income‑based annuities off of that.
You can invest all kinds of things, and there’s nothing better than that. You can put retirement in trust if you, excuse me, real estate trust, if you like them, in investment trust. I don’t like either of those two by the way, personally, but they’re there. You could buy them if you wanted to.
When you see retirement in the near future, this benefit is extremely important. It gives you the flexibility to tailor your financial strategy and investments to exactly what you need. Not only that, but it’s a great opportunity for you to invest in lower cost vehicles that don’t eat away at your earnings like many of the options in the 401(k) company plans.
Remember, we talked about one percent difference in what you are charged in your retirement planning can impact it to 30 percent on returns over the long haul. We want to find low‑cost vehicles in there, but again, you have a greater number of investing options.
The third benefit is also related to options, but we’re going to talk about strategy which inside of that. There are going to be more options. The third benefit is the fact that it’s going to be more options for conservative financial vehicles.
Those of you who are more conservative and have a 401(k) plan, you probably know exactly what conservative options are inside those accounts. Maybe they’ll call it a stable value fund or a bond fund.
Being more aggressive in the stock market option is a great choice when you are working towards and building your nest egg for retirement. Once you start to see the light at the end of the tunnel, it’s really ill‑advised to have all of your money sitting in stock market, at risk. There are reasons for that, reasons that I’ve talked about in prior shows, something called sequence of returns.
It’s basically you jumping off the roller coaster while it’s moving, and at the bottom making it difficult for that roller coaster or your investments to make it all the way back to the top again. If you have all of it in the stock market and there’s a correction, are you willing to have all of that money subject to the correction? Probably not.
For that reason alone, it shows the importance of reducing the market risk in your portfolio as you get closer to your retirement. With an IRA, you can allocate your money to more conservative vehicles. We talked about the bank CDs that would be available. We’ve talked about annuities which may be available as well. That’s the benefit of thinking about it more conservatively.
There’s this whole line of thought that says as you get closer to retirement, you don’t want to be making that decision to go conservative, and be forced to make that decision in one moment when you’re actually retired.
You may want to think about starting to go more conservative with your investments as you approach retirement, so that if a market correction happens two or three years out, you’re not rethinking should you retire or do you have enough money. You are already positioned to do that.
Again, moving the money into an IRA ahead of retirement, before you’re actually retired, and then taking advantage of more conservative investment vehicles, that’s a good benefit of using an IRA.
The final benefit is that it can be automatically set up as a multi‑generational IRA, or what I would call a stretch IRA. That’s a term that lawyers use about their planning. The idea here is that rather than leaving a large tax liability for your beneficiaries when you pass away, a form of a stretch IRA or a multi‑generation IRA can help alleviate that tax burden.
Here’s the way that that works. Most of you know if you’re an individual that owns an IRA, you have to make something called required minimum distributions or RMDs from your account, once you hit age 70.5.
The amount that’s supposed to be taken out is based on your life expectancy ‑‑ which is not something you get to choose by the way, it’s on the table ‑‑ and the value of the account on December 31st of the year before. That’s how much you have to take out regardless.
With a multi‑generation IRA, what you’re trying to do is allow your beneficiaries to stretch that tax liability over their life expectancy the way you do with RMDs.
Many people take RMDs because they have to, not because they need that money. What you want to do is be able to leave that money behind to the next generation and provide them the opportunity to stretch that out over their life expectancy to minimize the tax burden.
Although this may be the most complex benefit of rolling over a 401(k) to an IRA, it is hugely impactful. The power of this can’t be overstated.
When you start rolling over a 401(k) to an IRA and you minimize the tax burden on how much you have to take out, you’re leaving behind this account that your kids or your grandkids are able to move over into an inherited IRA for them, continue to take the minimum out.
They can grow the other component of that, the rest of it that they didn’t have to take out, on a compounded tax‑deferred basis over their life expectancy. That is absolutely huge. Absolutely huge, because the power that they will have in terms of being able to let that grow…
When they get it, if they’re 40 years old, they only have to take one‑and‑a‑half, two percent out. That’s it. The rest of it they can leave invested.
We can use any number you want in terms of projecting the way that it’s going to grow. You’re going to go really conservative and watch that grow over the long haul between three and four percent, or are you going to be more aggressive and watch that grow over seven and eight percent?
Whatever number you choose, it’s going to grow faster than what you’re taking out, because you don’t have to take out four percent until you get almost 75 years old. Even on a conservative basis, we’re adding more money to the pile for these beneficiaries to be able to use in retirement.
Let’s start to think about that a little bit more creatively. Most people set up their IRA to be left to their kids. If your kids need the money and you want to give it to them, bravo. Totally fine.
There are some people where their kids are OK. They’re in there, they’re in their 60s, 70s, 80s. Their kids are OK. Their kids are heading towards retirement. Their kids did good planning, good, safe planning on them, with their money by the way, and they don’t need it. They don’t need the retirement.
What they’ll do is they’ll go ahead and leave it for the grandkids instead. Think about the power of that.
People are saying that this generation, these millennial, these younger kids, this is going to be the first generation that will fail to out‑earn their parents. It’ll be the first generation where they won’t be able to make more money than their parents.
We’ve exhausted all the ways that they could have done that. We’ve gone from one income to two incomes. We started working longer. We started leveraging our home. The interest rates are lower, and so we can borrow more money and live higher on the haul.
We’ve squeezed out all of the ways that we can make more money, and it’s really difficult for people to get and hold on to jobs that are going to pay more than what their parents were getting or will project to do that.
One idea is essentially to let the IRA become the retirement account that these grandkids would be unable to create on their own. If you leave it to them outright without the ability to stretch out that IRA, you cut the value of that, I don’t know, by 33 percent, maybe 40 or 50 percent depending on the tax liability that’s in there. We didn’t give them a good head start on life.
If we leave it as a multi‑generational IRA, what we’re going to give them is a running start. They’re going to hit the ground running with this money. The opportunity to do that within an IRA is much greater than it would be through a company‑sponsored plan.
Let’s go over those four benefits again. There are four benefits to rolling over your 401(k) either as an in‑service matter or as an orphan account that you have.
Many people have got 401(k)s sprinkled around an old job because we move around jobs more around these days. There’s four benefits to doing that. The first benefit puts you in control of your money.
The second benefit is it gives you more investing options. You’ll be able to choose from a wider array of things, which can include lower costing. We’ve already talked about how powerful that is, how much you will add to your earnings.
The third benefit is there are going to be more options for conservative financial vehicles, because many times since the aim of the 401(k) is to watch this thing grow, the vehicles that the plan administrator has selected for you are the more aggressive kind.
If you have the opportunity to roll into an IRA, you can choose more conservative finance vehicles. Then finally, you can be setting up as a multi‑generational IRA.
Those are the four benefits of rolling over into a 401(k), and we’ve covered a lot of information there. I want to take this opportunity that if you need to learn more, because there’s no way that we’ve covered everything about your specific situation.
If you need to learn more about this, I want to take the opportunity to invite you to come into our office for a complimentary planning consultation with one member of our team.
At that session, you can expect to go through a retirement roadmap, get a report card about what you have going on, see how it works. Not just on the investment side on the 401(k) although that might be what drives you based on what we talked about today, but taking a look at your estate planning, taking a look at your elder law plan.
What happens if you need long‑term care, taking a look at your income tax, are you doing that smartly?
Victor J.: In order to do that, you have to call our office and set up an appointment. You can do that by calling 609‑818‑0068. You can call that at any time of business hours, you can leave a message, after which we’ll call you back. Again, that number is 609‑818‑0068. We look forward to seeing you there.
When we come back, I’m going to cover new tax laws in New Jersey that might be impacting your life. Stick with us, we’ll be right back after this quick break.
Victor J.: Welcome back to Make It Last. We’ve covered four reasons why you should consider rolling your 401(k) into an IRA.
We’ve talked about benefits like getting more control over your money, being able to invest in a greater number of investment vehicles, having a wider choice of those investments, and more conservative vehicles whether it be bank CDs or annuities, and then obviously being able to set things up for the next generation. All great reasons to do that.
Again, if you’re interested in following up with us, reach out to our firm and give us a call at 609‑818‑0068 to set up a complimentary consultation. Come in and talk about your retirement situation, see if that’s not something that we can help you with.
Now, before we close up for today, the last segment I want to go over, 19 new New Jersey laws in 2019 that can change your life. We’re starting in the beginning of the year and these could impact you, I don’t know. I don’t know a lot about your life, so let’s go try to figure this out.
The first one is a beach smoking ban. Governor Phil Murphy, by the way, signed a bill that banned smoking at all beaches and parks and boardwalks beginning January 16. Me, I’m not a smoker, I’m not really into smoking.
I like this one, it’s going to make it a lot more comfortable to be walking around. But the law will charge violators $250 for a first offense, $500 for a second offense, and $1,000 for each subsequent offense.
You thought cigarettes were expensive before? Oh my goodness. The smoking ban will not include beach parking lots. The municipalities can actually designate about 15 percent of a beach for permitted smoking. That’s up to them.
This surely gives a tremendous beginning, and Governor Murphy’s [laughs] said it’s an effort to get the butts off the beach. I’ve liked that one.
All right. Next one is the minimum wage is rising. If you’ve taken a side job in your retirement, this is good news for you. New Jersey’s minimum wage is going to rise to $8.85 an hour beginning very shortly.
The increase comes after Governor Murphy tried to reach an agreement to raise the minimum wage to $15 an hour.
If you didn’t know what the minimum wage was before, let me look at it. Sit down. You are making 25 cents more an hour [laughs] but at least it’s better. At least it’s better.
Next one after that is there are now Uber and Lyft taxes. There’s a bill that imposes a 50 cent tax on solo trip and 25 cents on shared trips. That’s going to be collected and be deposited into the property tax relief fund to be used, and also be used as aid for school districts.
Also related to that, the Internet has taken over the way that we live. No more taxis, there are Ubers. No more hotels, there are Airbnbs.
There is going to be a bill that will impose the same taxes and fees that hotels and motels have to pay on to the state transit accommodations, which is what they’re calling Airbnbs. It’ll just add this tax on there.
Permanent resident rentals would be exempt, but the idea is that you’re going to see taxes like hotel occupancy fee, Atlantic City luxury tax.
The idea is just to try to keep up to date with the changes being brought about by new technology and level the playing field between the people that had to play by those tax rules before Airbnb, which is just like home sharing.
The millennials are quite angry at this one. They liked being able to scrape the system. Airbnbs just seems like sharing, and now they’re going to have to pay taxes on that.
The Internet. The Senate approved legislation that will help restore tax fairness for New Jersey businesses which have been operating at a competitive disadvantage, as out of state online sellers that have avoided collecting sales tax.
This is going to follow through in a decision about the US Supreme Court that’s going to close a loophole that has allowed online competitors to ignore sales tax in states where they don’t have a physical presence.
What it means is that people are going to have to charge sales tax for Internet sales in New Jersey. You’re not going to get a break off of that. Now everything will be competing on that.
Let’s see the other one. Corporate business tax hike. There is a corporate business tax surcharge that averages two percent over the next four years. In the first two years, the surcharge is 2.5 percent. It’s going to provide $425 million.
The third and fourth year to be one‑and‑a‑half percent. Again, averaging about two percent over four years.
There’s the reinstatement of Expired Urban Enterprise Zones. This law reinstates urban enterprise zones and extends the deadline on all of those scheduled to expire until the year 2023.
What is this? This allows businesses to charge half of the state sales tax rate on exempt sales if you’re in one of these zones. Right now these zones are Bayonne, Elizabeth, Jersey City, Millville, Orange, Roselle, Vineland and a few more of them, Wildwood. That’s in place.
There’s a new New Jersey Health Insurance Market Preservation Act. This is another new one. It establishes the New Jersey Health Insurance Market Preservation Act, creating a tax and basically reinstating the individual mandate in New Jersey that Congress eliminated, to encourage residents to sign up for health insurance.
Now, I want to take a break here. Let’s put politics to a side. I really don’t want to get into the discussion about whether or not we should have an Affordable Care Act or we shouldn’t.
The idea that insurance works, it works largely on the rules around large numbers. Large numbers and risk pools. Health insurance works on the basis that we all pay because the chances of us getting sick is low, but the cost of getting sick is super high.
That’s what insurance is, therefore. It’s when the risk of the occurrence is low, but the consequence of that risk is really high. That’s the definition when you insure something.
The thing is, though, if you knock out the individual mandate, essentially what you get is a risk pool of people who are going to go for insurance that are the only ones that need it.
The consequence of that is that health insurance is going to be super expensive because you’re not going to be pulling the large numbers that balance out with that risk. It could mean you’re just going to have a lot of people that are going to get sick all the time. Their money is not going to go very far. They might as well not have insurance at all.
When you restore the individual mandate, you just increase the size of the risk pool so that you’re just agnostic about who’s joining it. Everyone’s joining.
By the way, we can’t really predict if we’re going to need it or not. Just the people that know that they need it make sure that they are going to take advantage of those taxes. This is mere taxes but the coverage…
The idea is, though, by increasing the individual mandate, we’re actually going to overall get cheaper insurance or more effective insurance. It’s not a politics question, this is an economics question. This is the way that insurance works.
A few other changes I want to go over with you. Governor Murphy and the lawmakers signed tax legislation changes that might impact how you file this year. Pay attention, this is going to be for you people filing income taxes in 2019.
They’ve increased the earned income tax credit and the property tax deduction. They’ve created a new credit for child and dependent care expenses.
They’ve actually increased the tax rate on individual income over $5 million. You listeners that are making over $5 million, I want to let you know that your taxes are going up. I’m sorry about that. Look, you’re not listening to my show. You’re out there making whatever it takes to make more than $5 million a year.
You’re also going to provide for taxation on the uncertain investment management services. Here’s the way that will work. Let’s go through the earned income tax credit.
Qualified taxpayers were eligible for a New Jersey earned income tax credit equal to 35 percent of their federal earned income tax credit. This law actually increases that percentage to 37 percent.
The child and dependent care expenses, eligible taxpayers with income of $60,000 or less who received the federal tax credit will be granted a gross income tax credit non‑refundable, meaning that the offset to the tax can’t reduce it below zero, but it’s going to be there for you if you qualify.
There’s an income tax rate at those $5 million person. They are going to start paying 10.75 percent regardless of their filing status. It’s also going to require employers to do withholding at every higher numbers. Then the higher withholding rate, essentially…Well, let’s skip that one.
There’s actually a 90‑day state tax amnesty period. There’s only about a week of this left. The division of taxation, or maybe it’s just about a day of it left, has allowed a 90‑day tax period that allows you to pay back taxes without the penalties and fees that are associated with it.
A few other ones that might be important for you, if you’re interested, with your grandkids going on school buses. There are six new bills on school bus safety.
One requires school bus operations in the state to comply with federal regulations concerning safety noise emissions.
Another one requires all permanent and substitute school bus drivers and aids to undergo safety education programs twice a year.
Another one requires bus driver licensed people to submit a medical report by a certified medical examiner. It also requires bus drivers over the age of 70 to provide proof of physical fitness every year.
Those bus drivers that are over 75 have to submit the proof every six months. If you’re out there shaking your fist at bus drivers that look a little bit older, saying they should take away their license, look, they’re testing these people over 70 once a year, and over 75 every six months.
Then lastly, and I’m not sure why this one didn’t exist. It’s going to require the department of education that when they get notified their school bus driver had their bus driver license suspended, that requires that the school district verifies that they’re not working there any longer.
That’s a quick recap of 19 new laws that are going into place in New Jersey that could change your life. Really do pay attention to some of those, especially the minimum wage rate increase. Let’s do that one again.
Also, some of the other ones on filing your taxes. Here we are beginning in the middle of January. You know that your tax information is going to be coming out. Be on the lookout for that. They start flowing in as soon as the investment management people can get those done.
You’re looking for 1099s from various investment vehicles. Start to collect that. One of the things that I often recommend is to put a shoe box or a folder together and just put them into one place. Collect them there so that you know that they’re there when you need them.
This is a different world. This is a different income tax world. We’re going to be filing differently this year. This is the difference with the state and local income tax credit.
It used to be that you could write off property taxes, but as a federal matter that’s capped off. Your itemized deductions are going to be capped off at $10,000, and then you’re going to have some increased standard deductions.
At the end of the day, most people are expecting that their taxes are going to go up, at least most of my clients, the way that they’re looking at it. There are certainly some people that will see their taxes go down slightly because of the rate changes.
This is a good opportunity for you to re‑investigate your income tax profile given the new laws, and it’s one of the services that we provide for clients. We call it proactive income tax planning.
What we’re doing when we meet with these people, is to take a look at the landscape and take the bull by the horns. Many people look at their taxes, and for the vast majority of folks, their 2018 taxes are already set.
What they’re going to pay is just going to be a matter of what they file. There’s not much they can do to change that outcome.
But 2019 is fresh. The idea that you can go through 2019 without thinking about your income taxes until the end, I think that’s an old idea. You should really be focusing on proactively managing your income taxes, managing it to tax rates.
In this new tax law, we’ve dropped some of these rates. What was a 15 percent rate is a 12 percent rate. What was a 25 percent rate is a 22 percent rate. The difference between those two, by the way, the 12 and the 22 percent, not to be overly simplistic, is 10 percent.
If you’re managing your income taxes well, you can avoid paying 10 cents on the dollar more to Uncle Sam for what you’re doing. But you’ve got to get ahead of it, you’ve got to be managing it.
A lot of that is driven by the investment choices that you make because sometimes the investment choices that you make draw off certain income. Then other times, it’s driven by what you withdraw from certain accounts.
We’re talking about 401(k)s and IRAs. Those are taxable accounts. If you’re controlling that, you’re going to have the opportunity to control a little better what your taxes are going to be.
Finally, finally, finally, I did want to remind you about something that we talked about last week. We offer workshops for people that are thinking about planning and want to get started with planning. These are focused mostly in the estate planning and the elder law world.
If you’re wanting to know whether or not you’ve got your ducks in a row, or what it takes to get your ducks in a row, I can recommend for you a workshop that we’re going to be holding in February at our offices.
It’s absolutely free, it’s absolutely no obligation, no pressure. It’s a public service that we offer. It’s a workshop that’s held in our offices. Now, space is limited because our meeting space is limited to about 40 people, so starting to fill up.
If you’re interested in attending it, this is probably the best hour, an hour‑an‑a‑half that you will spend learning about estate planning and asset protection planning. We cover both of those areas. I know it probably sounds as exciting, but as a root canal, but I’m telling you that this is worth attending.
We make the workshop fun, we make it accessible so that you are understanding what we’re talking about. You’re going to walk away with a much greater degree of knowledge about how to set up your estate to make sure that you don’t inadvertently step on any landmines.
If you’re interested in doing that, we’ve got two times set aside for that. One’s during the day and one is in the evening. The one during the day is February 7th at 1:00 PM in our offices here in Pennington, New Jersey. It’s about an hour, an hour‑and‑a‑half. We provide the cookies, you come and you learn.
If you’re working during that time but you still want to learn about this, we can offer you a slot at our 6:00 PM seminar on February 12th. That’s Tuesday, February 12th at 6:00 PM. We’ll be holding the same seminar again. Same workshop in our offices in Pennington.
What you need to do though, is you need to pre‑register. You cannot just show up, we do have limited space. What I’ll encourage you to do is call our office 609‑818‑0068. Again, that number is 609‑818‑0068.
I encourage you to call the office and book your slots. Tell us which of those days. Is it going to be Thursday, February 7th at 1:00 PM, or is it going to be Tuesday, February 12th at 6:00 PM? Pick one of those slots.
You are permitted to bring guests with you many times. As Elder Law Planning, we’re helping you figure out how you’re going to avoid being in a nursing home or having that money take away your own money, all of those things.
You often want to come with family members. You often want to come with siblings on that. I encourage you to bring those people with you and attend the seminar so that you can all get the same education at the same time.
As a last inducement to get you to come, I’ve written three books on planning. One of them is “How to get, and Keep, Your Legal Ducks in a Row.” It’s about basic foundational estate planning.
One of them is “Ensuring Your Nest Egg Is Around as Long As You Are.” That’s on basic retirement planning. The other one’s “Protecting Your Family From The Costs of Aging.” We might put that in the category of elder law planning.
If you come to the seminar, we will offer you the opportunity to get a copy of one of those books absolutely free as my gift. It will give you the opportunity to get ahead of the curve.
For instance, that Ducks in a Row book, “How to Get, and Keep, Your Legal Ducks in a Row,” that has got a section in there that talks about interview questions for your estate planning attorney. With this, you’re going to have 19 questions.
I included some model answers, but you can use those questions to help you understand, is the person that you’re sitting across, are they going to match what you need for your estate planning? Because just having a law degree isn’t enough.
Even saying that you’re an estate planning attorney isn’t enough. We want to make sure that the planning that they do philosophically matches what you have.
I talked today a little bit about proprietary products. In that other book, Ensuring Your Nest Egg Is Around as Long As You Are, there’s a chapter in there that talks about what proprietary products are and why you need to avoid them.
There’s also a chapter on the proactive income tax planning. I just talked in this segment a little bit about why you want to take the bull by the horns for your own income tax planning.
This is going to give you four reasons why you should do that. Whether it’s talking about making your inheritance more tax efficient, whether it’s making sure that you keep more money when one spouse dies and you start filing single and making sure that you don’t pay money at a higher tax rate by controlling that.
Making sure that your RMDs aren’t taxed at the wrong bracket, or a bracket that could have been avoided, or whether or not you want to make a Roth conversion and get that to tax‑free income.
Those are all reasons to think about proactive income tax planning and definitely something that we encourage our clients to look at every year, something we help them with. I would encourage that for you as well.
Then finally, on the Protect your Family Against the Cost of Aging book, we go through strategies to make sure that you don’t die broke in the nursing home. That’s the goal of the planning that we’re doing. That’s another thing that you could learn by getting a free copy of one of those books.
You’ve got to come in and attend the seminar in order to be able to do that in those workshops. As I’ve said, visiting our offices. It’s going to either be February 7th at 1:00 PM. That’s a Thursday or Tuesday, February 12th at 6:00 PM. You’ve got to register by calling our number at 609‑818‑0068 and register for the seminar.
Recap, we talked about four reasons that you want to roll your 401(k) over to an IRA. Gets you better control, better investment options, more conservative financial products and then the potential to stretch that out over multi‑generations, then 19 laws have changed for 2019 that could impact you and your beach trips are going be a little less irritating if you’re irritated by smokers. Those are it for today.
If you’d like to come in and talk to us about our 401(k) rollover options or just to generally chat about your retirement, give us a call again, 609‑818‑0068. Come back in.
Victor J.: Start that process with us. Otherwise, this has been Make It Last with Victor Medina, where we help you keep your legal ducks in a row and your financial nest eggs secure. We’ll catch you next Wednesday at 11 o’clock. Goodbye.