Thursday, August 21, 2008

Anticipating Grad School - Recommended Reading: Ahead of the Curve

Well, there are just 4 more days of freedom left before my masters in taxation program kicks off. I will be honest, I am slightly nervous for the grueling days and long nights promised by my program's chair.

In order to prepare me for what grad school will bring, I have been reading a book called Ahead of the Curve, by Philip Delves Broughton.

This book centers around Broughton's personal experience as a student at the Harvard Business School. He reveals everything from his gripes with the demeanor of a class who already consider themselves the "business elite," to his struggles to keep up with the competition. He talks about the curriculum he went through and shares details of the assignments he faced.

I am only half way through reading this book, but I will tell you that so far I have been thoroughly entertained. Not to mention, I have learned interesting solutions to case studies in accounting, organizational behavior, finance, and analytics that I may never have had the opportunity to encounter had I not read this book- granted this is Harvard.

Another noteworthy attribute of Ahead of the Curve, is Broughton's recount of the invaluable anticdotes delivered in speeches to the Harvard MBAs. These words of wisdom, which Philip recorded in his memoirs, were conveyed by various celebrated personalities in the business world, such as Margaret Whitman, CEO of Ebay.

I recommend this book for anyone that is considering pursuing their MBA, or even anyone interested in the inner workings of Harvard Business School.

I should probably be charging Philip an endorsement fee for the fine marketing push am giving him here, but that's alright. This one is on me, Broughton. Pay it forward.

Tuesday, August 19, 2008

What happens to your 401k plan when you leave your employer?

My job will offer me a 401k plan after 3 months of working for them. Great! But I doubt I will work in the rigorous and demanding environment of big four public accounting for the rest of my life (or maybe I will, who knows?...but lets get pessimistic for a moment). Ok... so I will have put in a great deal of money into my firm's 401k, but then what happens if I decide to make a run for it to save my social life? What happens to my cushy dream of Tahiti and Mai Tai's at the ripe age of 80?

Answer: My savings can stay safe!

When you leave your employer, with whom you have your 401k you often have 4 choices:

1) Leave your money where it is
This is probably not the best solution because leaving it there restricts you from contributing further to the plan and you do not have access to it for a loan. In addition, many employers will charge administrative and other fees to manage your account after you have left, which can be costly.

2) Cash out
This is probably the worst decision you could make. Doing this is financial suicide, as you would not only be hit with the income tax on the lump distribution but you would be hit with the 10% penalty for early withdrawal as well. In some cases, this could leave you with a meager half the value of your plan.

3) Rollover your 401k into your new employer's plan
This is a good idea given your new plan allows it. A direct rollover (or "trustee-to-trustee" transfer) is the best option if it is available. That is, the check must not be made out to you. It should be made from the trustee of your old account to the custodian of your new account. It is the least cumbersome option and leaves no room for the IRS to consider it an early withdrawal.

Alternatively, you can have the check made out to you, as long as you deposit the check in your vehicle within 60 days (indirect rollover). This is not as favorable an option. With an indirect rollover your previous employer is required to withhold 20% for federal income taxes. You get a credit for this amount on your income tax return for the year, but you must come up with the 20% out-of-pocket to contribute into your new plan. Otherwise, that 20% is considered a taxable distribution and subject to the 10% early withdrawal penalty (Yikes!).

4) Rollover your 401k into an IRA.
This is your best option if you do not have a 401k plan with your new employer. Similar to rolling it into a new 401k, a direct rollover is the best option if available. If you hope to have a 401k plan in the future, I recommend opening a separate IRA (different from one you may already have open) and do not make any more contributions into this account. This way, you have the option to rollover this account into any 401k you may have with a future employer.

And there you have it! See, no need to fret. If correctly executed, your savings will be as safe as an SUV in a head on collision with a bicycle.

Monday, August 18, 2008

401k vs. IRA: Deciding the Best Way to Save for Retirement

I have been giving my future a great deal of thought as I face the reality that my life is bound to take a dramatic shift next fall as I graduate grad school and enter the "real world." I have been taking a look at my offer packet from the firm I will be working for and, like anyone, have taken great interest in the section entitled "Employee Benefits." This is the part where my eyes, glazed over from reading the dry code of conduct section, perk up. (This must be why they call them "perks").

I was pleased to see that my future employer offers a 401k retirement plan. But, having learned a great deal about IRAs, I often wondered which would be the better choice for me to invest in going forward?

I thought I would share what I have learned.

401k vs. IRA

-Employers often offer matching contributions to your 401k. For instance, my company offers 25 cents on the dollar for up to 6% of the employee's salary. Many company's will offer more. That is free money! (IRAs do not have this benefit)

- You can borrow money from your 401k without penalty, as long as you pay it back. (You cannot do this with an IRA)

- Typically, IRAs offer a wider variety of investment options than 401ks.
- IRAs allow you to readily open and close positions in various investments, 401k plans often only allow you to switch investments once every 3 months

- Some mutual funds will forgo their typical sales fee when investing through a 401k.

- As far as tax deductions go, 401ks and IRAs are equal, although many are confused by this.
- As discussed in my previous post, with a Traditional IRA any allowable contribution is tax deductible. In the case of a 401k, any money contributed (up to its annual limit of course) is automatically taken out of your paycheck, thus reducing the taxable income that is reported on your tax return. Therefore in effect, both are giving you a tax break on your contributions.

- The annual contribution limit for 401ks are higher than that of IRAs. In 2008 the annual limit for IRAs was $5,000 and the limit for 401ks was $15,500.
- Note: This fact could be misleading as sometimes employers place limits on employee annual contributions as well. For example, your employer could limit your contributions to 10% of your salary. If you make $50,000, then your limit would be $5,000, which then proves no benefit over the IRA.

Bottom Line:
If given the choice, invest in a 401k, as they offer more advantages to IRAs.

Free Advice :

1) Diversify your investments (do not invest solely in your company's stock, even if your plan is with your firm. It will not impress them. Lack of diversification violates the #1 principal of prudent investing)

2) At a minimum, contribute the contribution amount that your employer will match (there is no reason to turn down free money)

4) If you have the option of investing in a 401k. Do it.

NEXT: What happens to your 401k plan when you leave your employer?

Friday, August 15, 2008

Traditional IRA vs. Roth IRA: Deciding the Best way to Save for Retirement

Ever since I began college I have heard the same daunting words "Your generation can't depend on Social Security. You better start planning for retirement now."

The words Traditional IRA, Roth IRA and 401k have been thrown around too many times to count. But what do these series of letters and numbers truly mean? More importantly, which will leave me the best situated for living out my golden years on the shores of Tahiti?

I will be writing a short series of blogs to outline the pro's and con's of each retirement plan so that you can decide for yourself.

Traditional IRA vs. Roth IRA:

Tax Benefits:
For sake of illustration, you could think of it as the opposite of a credit card...Would you rather save now, or save later? (Its much more complicated than that but lets keep it simple for the sake of general concept.)

-A traditional IRA allows a tax deduction on annual contributions, but when you take the money out upon retirement (age 59 1/2 or later) you must pay taxes on all capital gains, interest, dividends etc. earned.
-A Roth IRA does not give you a deduction for your contribution but all retirement withdrawals are 100% tax-fee.

Annual Contribution Limit:
Both have a limit on the amount of pre-tax dollars that can be placed in them per year, in 2008 the annual limit was $5,000.

Penalties for Early Withdrawl:
-Traditional IRAs will hit you with a 10% penalty for any withdrawal before age 59 1/2.
-Roth IRAs have no penalty on early withdrawal of principal (that principal has already been taxed as income).

Distribution Age:
-Traditional IRAs will allow withdrawals free of penalty after age 59 1/2. Withdrawals are mandatory after age 70 1/2. ( aren't mature enough until halfway through the year apparently. The IRS loves mid-month conventions.)
- Roth IRAs allow withdrawal of interest free of penalty after age 59 1/2, but have no mandatory distribution age.

Investment Options:
Both funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.).

The overall benefits are looking good for the Roth IRA supporters... but here is the kicker...

-Roth IRAs are only allowed for single filers with up to $101,000 income (to qualify for a full contribution); $101,000-$116,000 (to be eligible for a partial contribution). Joint filers up to $159,000 (to qualify for a full contribution); $159,000-$169,000 (to be eligible for a partial contribution).
-Traditional IRAs are available to everyone.

NEXT: Will 401k's beat IRA's in the battle of the best way to save for retirement?

Thursday, August 14, 2008

CPA Exam Application Process

Exactly 8 weeks after the submission of my application to the CA Board of Accountancy to sit as a first time applicant for the CPA Exam, I finally got my "e-mail of approval." Granted this is after 3 months of studying for the FAR portion of the exam with hope to sit at the end of August. After this time I will be submerging myself in the boot camp known as the summer session for my Masters. If you are familiar at all with the process of applying for the CPA exam, you know that this approval means I am still on step 4 of 10. Not to mention, September is a blackout month. In other words, I am SOL. The soonest I can take the exam is October 1, which would also be the middle of my Masters Program. Great.

Words of wisdom to first time CPA Exam applicants:

If you plan to sit as soon as you graduate:
- Put a rush order on the posting of your degree if your University allows this.
- Give your admissions office a prepaid next day envelope to ensure quickest delivery
- Make sure you send all transcripts from all colleges attended (including summer school courses at a junior college)

- Travel. Do not stress out about the exam at the start of summer. Take a break, celebrate your accomplishment!
- Plan your studies to sit in August if you graduate in May. Otherwise, more than likely October is your best bet.
- Use a professional review course.
- I recommend starting with FAR (Financial Accounting & Reporting), as in my opinion, this is the hardest of the 4 parts. You have 18 months to pass all 4. Might as well not start counting until you pass the toughest section.

The Application Process:

1) 1st send your transcripts to your state board of accountancy
2) Set up an Personal Client Account online (link for CA residents).
3) Complete Client Account info, print, sign, and submit the Application Remittance Form
4) Mail with remittance form your application fee of $100.
- Plan 6 to 8 weeks for your initial application approval
-After approval from the board, you must wait 5 more days for approval from NASBA.
5) Select which tests you plan to take within a 9 month period.
- If you do not plan to take all 4 parts w/in 9 months you have to pay a $50 reapplication fee
6) You will then be sent a payment coupon by NASBA.
7) Submit payment via phone (expedites the process) by calling (866) 696-2722.
8) Receive your coveted Notice to Schedule (NTS).
9) Schedule your exam date with Prometric.
10) Take your Exam!!!

As if there wasn't enough to worry about to pass the exam!

When planning your test date do not forget that there are blackout months in which the test is not offered.
Blackout months:

For more information on the application process visit: Uniform CPA Examination Handbook

Good luck and God Speed.

First Post!

So, this is exciting. My first post on my very own blog! My IT social networking guru of a boyfriend has been trying to get me to start one of these things for months. At first I shrugged him off, thinking of it as a cute ploy for him to get me more involved in his field of passion. Besides I have never been much of a journaler in the past, why start now? But after discovering the phenomenon of RSS feeds I have been subscribing to blogs left and right and finding a wealth of information right on my homepage. Yeah Google. Being in the midst of studying for my CPA exam and on the verge of entering the scary world of Big 4 Public Accounting in one year's time, I was disappointed to find very few blogs on the subject. So...I caved. Here I am.