Smart Money: Outsmart Scammers, and 401(k) Waiting Periods
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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s episode starts with some tips on outsmarting student debt cancellation money scams.
Then we pivot to this week’s money question from Nina, who wrote us an email: “I recently upgraded jobs, but in my new company, I won’t be eligible to participate in the 401(k) program for a year. I don’t want to miss out on retirement savings in that year and want to know what you think is the best vehicle to save until I’m eligible. I have typically invested in a Roth IRA, but thanks to a recent marriage and job upgrade, I don’t think we will be eligible for the nice Roth tax treatment. I max out my HSA [health savings account] every year and regularly invest in a taxable brokerage account. Is a traditional IRA pretty much the last or best option? Let me know what you think.”
Check out this episode on any of these platforms:
Our take on outsmarting debt cancellation scams
Student debt scams have become increasingly sophisticated, but you can still outwit fraudsters by being aware of scams’ telltale signs. First, the Department of Education and student loan servicers do not call borrowers to help them with debt cancellation. Borrowers with eligible student loans must apply for debt cancellation online at studentaid.gov. If you receive a call from someone alleging to be affiliated with either organization, it’s almost certainly a scammer.
Another red flag: an offer to help you do something that you can easily do yourself. The debt relief application is free and takes minutes to fill out. Finally, be extremely wary if someone asks for personal, highly sensitive information such as your email address, Federal Student Aid ID or Social Security number. A bad actor can use this information to access your financial accounts or create new ones in your name.
If you suspect that you’ve been contacted by a scammer, file a report with the Federal Trade Commission.
Our take on 401(k) waiting periods
Federal law allows employers to defer their employees’ participation in 401(k) retirement plans for up to a year. However, it’s possible — and advisable — to find another way to save for retirement until you’re eligible to contribute to a company plan. If you make less than $144,000 as a single filer or $214,000 for married couples filing jointly in 2022, you can set up a Roth IRA, highly favored among many people because withdrawals in retirement are tax-free.
A traditional IRA or a backdoor Roth IRA may be a better fit for higher income earners. There is no income restriction on a traditional IRA, and contributions may be tax-deductible, but the withdrawals in retirement are taxed. It is possible to have both a Roth IRA and a traditional IRA, but the combined contribution limit in 2022 is $6,000, or $7,000 for those 50 or older. With a backdoor Roth IRA, contributions are placed in a traditional IRA first and then converted to a Roth IRA. While Roth IRA withdrawals are tax-free, you’ll pay taxes on the contributions. Or, if you already deducted the contributions on a tax return, you’ll have to pay it back.
Our tips
- Look at the whole package: Before accepting a job offer, scrutinize the benefits package and see if you can negotiate better terms.
- Know your retirement options: If you don’t have access to a 401(k), look into traditional or Roth IRA accounts.
- Commit to saving: No matter which vehicle you choose, make a plan to invest for your retirement.
Have a money question? Text or call us at 901-730-6373. Or you can email us at podcast@nerdwallet.com. To hear previous episodes, go to the podcast homepage.
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