Author: Andrew Green

Business

Everything You Need to Know About 401(k) Blackout Periods

Andrew Green

You’ve probably heard of a 401(k) plan blackout period – but do you know exactly what it is and how to explain it to your employees? Read on for answers to the most frequently asked questions about blackout periods.

What is a blackout period?

A blackout period is a time when participants are not able to access their 401(k) accounts because a major plan change is being made. During this time, they are not allowed to direct their investments, change their contribution rate or amount, make transfers, or take loans or distributions. However, plan assets remain invested during the blackout period. In addition, participants can continue to make contributions and loan repayments, which will continue to be invested according to the latest elections on file. Participants will be able to see these inflows and any earnings in their accounts once the blackout period has ended.

When is a blackout period necessary?

Typically, a blackout period is necessary when:

401(k) plan assets and records are being moved from one retirement plan provider to another New employees are added to a company’s plan during a merger or acquisitionAvailable investment options are being modified

Blackout periods are a normal and necessary part of 401(k) administration during such events to ensure that records and assets are accurately accounted for and reconciled. In these circumstances, participant accounts must be valued (and potentially liquidated) so that funds can be reinvested in new options. In the event of a plan provider change, the former provider must formally pass the data and assets to the new plan provider. Therefore, accounts must be frozen on a temporary basis before the transition.

How long does a blackout period last?

A blackout period usually lasts about 10 business days. However, it may need to be extended due to unforeseen circumstances, which are rare; but there is no legal maximum limit for a blackout period. Regardless, you must give advance notice to your employees that a blackout is on the horizon.

What kind of notice do I have to give my employees about a blackout period?

Is your blackout going to last for more than three days? If so, you’re required by federal law to send a written notice of the blackout period to all of your plan participants and beneficiaries. The notice must be sent at least 30 days – but no more than 60 days – prior to the start of the blackout.

Typically, your plan provider will provide you with language so that you can send an appropriate blackout notice to your plan participants. If you are moving your plan from another provider to Betterment, we will coordinate with your previous recordkeeper to establish a timeline for the transfer, including the timing and expected duration of the blackout period. Betterment will draft a blackout notice on your behalf to provide to your employees, which will include the following:

Reason for the blackoutIdentification of any investments subject to the blackout periodDescription of the rights otherwise available to participants and beneficiaries under the plan that will be temporarily suspended, limited, or restrictedThe expected beginning and ending date of the blackoutA statement that participants should evaluate the appropriateness of their current investment decisions in light of their inability to direct or diversify assets during the blackout periodIf at least 30 days-notice cannot be given, an explanation of why advance notice could not be providedThe name, address, and telephone number of the plan administrator or other individual who can answer questions about the blackout

Who should receive the blackout notice?

All employees with a balance should receive the blackout notice, regardless of their employment status. In addition, we suggest sending the notice to eligible active employees, even if they currently don’t have a balance, since they may wish to start contributing and should be made aware of the upcoming blackout period.

What should I say if my employees are concerned about an upcoming blackout period?

Reassure your employees that a blackout period is normal and that it’s a necessary event that happens when significant plan changes are made. Also, encourage them to look at their accounts and make any changes they see fit prior to the start of the blackout period.

Thinking about changing plan providers?

If you’re thinking about changing plan providers, but are concerned about the ramifications of a blackout period, worry no more. Switching plan providers is easier than you think, and Betterment is committed to making the transition as seamless as possible for you and your participants.

Want a better 401(k)?
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https://diyinvestorresources.com/?p=521

Business

4 Ways Betterment Can Help Limit the Tax Impact Of Your Investments

Andrew Green

In the US, approximately 33% of households have a taxable investment account—often referred to as a brokerage account—and approximately 50% of households also have at least one retirement account, like an IRA or an employer-sponsored retirement account.

We know that the medley of account types can make it challenging for you to decide which account to contribute to or withdraw from at any given time.

Let’s dive right in to get a further understanding of:

What accounts are available and why you might choose them.The benefits of receiving dividends.Betterment’s powerful tax-sensitive features.

How Are Different Investment Accounts Taxed?

Taxable Accounts

Taxable investment accounts are typically the easiest to set up and have the least amount of restrictions.

Although you can easily contribute and withdraw at any time from the account, there are trade-offs. A taxable account is funded with after-tax dollars, and any capital gains you incur by selling assets, as well as any dividends you receive, are taxable on an annual basis. 

While there is no deferral of income like in a retirement plan, there are special tax benefits only available in taxable accounts such as reduced rates on long-term gains, qualified dividends, and municipal bond income.

Key Considerations 

You would like the option to withdraw at any time with no IRS penalties.You already contributed the maximum amount to all tax-advantaged retirement accounts.

Traditional Accounts

Traditional accounts include Traditional IRAs, Traditional 401(k)s, Traditional 403(b)s, Traditional 457 Governmental Plans, and Traditional Thrift Savings Plans (TSPs).

Traditional investment accounts for retirement are generally funded with pre-tax dollars. The investment income received is deferred until the time of distribution from the plan. Assuming all the contributions are funded with pre-tax dollars, the distributions are fully taxable as ordinary income. For investors under age 59.5, there may be an additional 10% early withdrawal penalty unless an exemption applies.

Key Considerations 

You expect your tax rate to be lower in retirement than it is now.You recognize and accept the possibility of an early withdrawal penalty.

Roth Accounts

Includes Roth IRAs, Roth 401(k)s, Roth 403(b)s, Roth 457 Governmental Plans, and Roth Thrift Saving Plans (TSPs)

Roth type investment accounts for retirement are always funded with after-tax dollars. Qualified distributions are tax-free. For investors under age 59.5, there may be ordinary income taxes on earnings and an additional 10% early withdrawal penalty on the earnings unless an exemption applies.

Key Considerations

You expect your tax rate to be higher in retirement than it is right now.You expect your modified adjusted gross income (AGI) to be below $140k (or $208k filing jointly).You desire the option to withdraw contributions without being taxed.You recognize the possibility of a penalty on earnings withdrawn early.

Beyond account type decisions, we also use your dividends to keep your tax impact as small as possible.

Four Strategies Betterment Uses To Help You Limit Your Tax Impact

1. We use any additional cash to rebalance your portfolio.

When your account receives any cash—whether through a dividend or deposit—we automatically identify how to use the money to help you get back to your target weighting for each asset class.

Dividends are your portion of a company’s earnings. Not all companies pay dividends, but as a Betterment investor, you almost always receive some because your money is invested across thousands of companies in the world.

Your dividends are an essential ingredient in our tax-efficient rebalancing process. When you receive a dividend into your Betterment account, you are not only making money as an investor—your portfolio is also getting a quick micro-rebalance that helps keep your tax bill down at the end of the year.

And, when market movements cause your portfolio’s actual allocation to drift away from your target allocation, we automatically use any incoming dividends or deposits to buy more shares of the lagging part of your portfolio.

This helps to get the portfolio back to its target asset allocation without having to sell off shares. This is a sophisticated financial planning technique that traditionally has only been available to larger accounts, but our automation makes it possible to do it with any size account.

Beyond dividends, Betterment also has a number of features to help you optimize for taxes. Let’s demystify these three powerful strategies.

Performance of S&P 500 With Dividends Reinvested

Source: Bloomberg. Performance is provided for illustrative purposes to represent broad market returns for the U.S. Stock Market. The performance is not attributable to any actual Betterment portfolio nor does it reflect any specific Betterment performance. As such, it is not net of any management fees. The performance of specific U.S. Stock Market funds in the Betterment portfolio will differ from the performance of the broad market returns reflected here.

2. Tax loss harvesting.

Tax loss harvesting can lower your tax bill by “harvesting” investment losses for tax reporting purposes while keeping you fully invested.

When selling an investment that has increased in value, you will owe taxes on the gains, known as capital gains tax. Fortunately, the tax code considers your gains and losses across all your investments together when assessing capital gains tax, which means that any losses (even in other investments) will reduce your gains and your tax bill.

In fact, if losses outpace gains in a tax year you can eliminate your capital gains bill entirely. Any losses leftover can be used to reduce your taxable income by up to $3,000. Finally, any losses not used in the current tax year can be carried over indefinitely to reduce capital gains and taxable income in subsequent years.

How do I do it?

When an investment drops below its initial value—something that is very likely to happen to even the best investment at some point during your investment horizon—you sell that investment to realize a loss for tax purposes and buy a related investment to maintain your market exposure.

Ideally, you would buy back the same investment you just sold. After all, you still think it’s a good investment. However, IRS rules prevent you from recognizing the tax loss if you buy back the same investment within 30 days of the sale. So, in order to keep your overall investment exposure, you buy a related but different investment. Think of selling Coke stock and then buying Pepsi stock.

Overall, tax loss harvesting can help lower your tax bill by recognizing losses while keeping your overall market exposure. At Betterment, all you have to do is turn on Tax Loss Harvesting+ in your account.

3. Asset location.

Asset location is a strategy where you put your most tax-inefficient investments (usually bonds) into a tax-efficient account (IRA or 401k) while maintaining your overall portfolio mix.

For example, an investor may be saving for retirement in both an IRA and taxable account and has an overall portfolio mix of 60% stocks and 40% bonds. Instead of holding a 60/40 mix in both accounts, an investor using an asset location strategy would put tax-inefficient bonds in the IRA and put more tax-efficient stocks in the taxable account.

In doing so, interest income from bonds—which is normally treated as ordinary income and subject to a higher tax rate—is shielded from taxes in the IRA. Meanwhile, qualified dividends from stocks in the taxable account are taxed at a lower rate, capital gains tax rates instead of ordinary income tax rates. The entire portfolio still maintains the 60/40 mix, but the underlying accounts have moved assets between each other to lower the portfolio’s tax burden.

Here’s what asset location looks like in action:

A visual example of what asset location looks like in a taxable account, Traditional IRA, and Roth IRA

4. We use ETFs instead of mutual funds.

Have you ever paid capital gain taxes on a mutual fund that was down over the year? This frustrating situation happens when the fund sells investments inside the fund for a gain, even if the overall fund lost value. IRS rules mandate that the tax on these gains is passed through to the end investor, you.

While the same rule applies to exchange traded funds (ETFs), the ETF fund structure makes such tax bills much less likely. In fact, most of the largest stock ETFs have not passed through any capital gains in over 10 years. In most cases, you can find ETFs with investment strategies that are similar or identical to a mutual fund, often with lower fees.

We go the extra mile for your money.

Following these four strategies can help eliminate or reduce your tax bill, depending on your situation.

At Betterment, we’ve automated these and other tax strategies, which means tax loss harvesting and asset location are as easy as clicking a button to enable it. We do the work, and your wallet can stay a little fuller.

Learn more about how Betterment helps you maximize your after-tax returns.

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Investment

Important 401(k) Compliance Dates and Deadlines

Andrew Green

Key 401(k) Compliance Dates

While many of these responsibilities are handled by Betterment, as a 401(k) plan sponsor it’s important that you are aware of important dates and deadlines associated with administering your plan.

DateResponsibilityPrevious Plan YearCurrent Plan YearJan 31BettermentIRS Forms 1099-R available to participants.Feb 10BettermentAnnual Return of Withheld Federal Income Tax (Form 945) due.Mar 1ParticipantDeadline for employees who participated in multiple plans to notify sponsors of excess deferrals (402(g) excess).Mar 15BettermentDeadline for refunds to participants for failed ADP/ACP tests(s). Failure to meet this deadline could result in a 10% tax penalty for plan sponsors.Mar 15Plan SponsorEmployer contributions (e.g., profit sharing, match, safe harbor) due for deductibility for incorporated entities.¹ Failure to meet this deadline could preclude plan sponsor from tax deductibility.Deadline to establish plan for the prior tax yearApr 1Plan SponsorDeadline to confirm that Initial Required Minimum Distributions (RMDs) were taken by participants who: turned 72 ² before previous year-end; are retired/terminated; and have a balanceApr 15 ³Plan SponsorEmployer contributions (e.g., profit sharing, match, safe harbor) due for deductibility for LLCs, LLPs, sole proprietorships (unincorporated entities).¹ Failure to meet this deadline could preclude plan sponsors from tax deductibility.Apr 15BettermentDeadline to complete corrective distributions for 402(g) excess deferrals.Jul 29 ⁴Plan SponsorDeadline to distribute Summary of Material Modifications (SMM) to participants (only if plan was amended).Jul 31 ³Betterment ⁴Deadline to electronically submit Form 5500 (and third-party audit if applicable) OR request an extension (Form 5558).Sep 30Plan SponsorDeadline to distribute Summary Annual Report (SAR) to participants and beneficiaries (unless Form 5500 extension filed; deadline to distribute will be December 15).Oct 1Plan SponsorDeadline to establish a new safe harbor match 401(k) plan.Oct 15 ³Plan SponsorDeadline to electronically submit Form 5500 and third-party audit, if applicable, if granted a Form 5558 extension.Dec 1Plan Sponsor (Notices prepared by Betterment)Deadline to distribute supplemental safe harbor notice to participants for safe harbor (“maybe”) plans. ⁵Dec 1Plan Sponsor (Notices prepared by Betterment)If applicable, distribute to participants for next plan year: Safe harbor notice, Qualified default investment alternative (QDIA) notice, Automatic enrollment noticeDec 1Plan Sponsor (Amendment drafted by Betterment)Deadline to execute amendment to make a traditional plan any type of safe harbor plan (match or nonelective).Deadline to execute amendment to make a traditional plan a safe harbor match plan for following plan yearDec 15Plan Sponsor (SAR prepared by Betterment)Deadline to distribute Summary Annual Report (SAR) to participants, if granted a Form 5558 extension.Dec 31Plan SponsorDeadline to make safe harbor and other fixed employer contributions.Deadline for Annual Required Minimum Distributions (RMDs). ArtDec 31Plan SponsorDeadline to execute amendment to make traditional plan a 3% safe harbor nonelective plan for the current plan year

 

¹ Assumes calendar tax year. Additionally, if your company files a tax extension, you have until the extension deadline to fund the contributions.

² This was increased from 70½ in 2019 and earlier years.

³ Or first business day thereafter.

⁴ 210 days after the year end of the effective amended date, which is July 28 in leap years.

⁵ Safe harbor “maybe” Plans (specified in the plan document) are able to adopt a safe harbor nonelective plan 30 days before the end of the plan year. Please review your plan document to confirm if the plan has adopted such a provision.

Did you miss our previous article…
https://diyinvestorresources.com/?p=481

Financial

What are New Comparability Profit Sharing Plans?

Andrew Green

To retain their tax-qualified status, 401(k) plans are prohibited from discriminating in favor of key owners, officers, and highly compensated employees. Some small businesses that want to help their employees save for retirement may put off offering profit sharing contributions due to the financial burden of a “pro-rata” allocation compared to what the owners might get.

For these types of small businesses, a specific profit sharing plan design may provide the solution. Called new comparability, it allows businesses to remain in compliance while making larger contributions to its older participants, typically owners and highly compensated employees.

Different Testing Approach

Most profit sharing plans (i.e., pro rata, integrated plans), are deemed to pass nondiscrimination automatically using the safe harbor approach, while new comparability plans are required to pass the general test to prove its not discriminating against non-highly compensated employees.

New comparability allows employees to be segmented into more groups so that owners can be considered separately from, say, non-owner HCEs.  In addition, testing is based on projected benefits at retirement that are derived from contributions, rather than on the contributions themselves. This “cross-testing” is a bit of a hybrid approach whereby the 401(k) (a defined contribution plan) is tested as if it were a traditional pension (i.e., defined benefit) plan.

Plans using this method are able to pass testing and be compliant because younger NHCEs have more time until retirement, and so their projected benefit based on lower contributions falls within an acceptable range of the projected benefit of older HCEs receiving a larger contribution.

Using the new comparability plan design, a plan could, for instance, make 401(k) contributions of 10% to owners and 6% to NHCEs. Or contribute 10% to one owner, 8% to another owner, and 5% to NHCEs.

Minimum “gateway requirement”

To take advantage of the new comparability profit sharing plan design, the contribution to all NHCEs must be a minimum of:

One-third of the highest contribution rate given to any HCE; or5% of the participants gross compensation

Firms Well-Suited to New Comparability

The new comparability profit sharing plan design is a good solution for companies with fewer than 50 employees that have a group of older owners and/or HCEs that are important to the success of their organization.

Companies that tend to implement this design feature include:

Law FirmsMedical PracticesAccounting FirmsService Companies

Plan sponsors interested in this feature can include the profit sharing contribution in their plan documents as discretionary, meaning they are never obligated to make a contribution in any given year.  This is helpful, too, since your employee demographics will likely change from year to year and so may your profit sharing allocation decisions.

In addition to the benefits that a retirement plan provides to employees, profit sharing plans provide real benefits to small business owners. Profit sharing contributions are tax deductible and not subject to payroll taxes (e.g. FICA).

The new comparability profit plan design gives small business owners significant flexibility to offer a 401(k) that meets the needs of their organization.

Want a better 401(k)?
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Financial

Latinx At Betterment Members Share Generational Financial Advice

Andrew Green

Latinx people aren’t a monolith—we come from a variety of countries, speak many different languages, and are part of every racial group. But even so, when it comes to being Latinx and living in the U.S, we share experiences rooted in generational cultures, family, and social and economic strife due to the immigrant experience.

In honor of Hispanic American Heritage Month (HHM), we asked our Latinx employees to share their experiences with personal finance and how they give back to their community through the advice they’ve learned.

What advice did you receive from your parents and elders about managing money?

Gabriel Talavera, Software Engineer: My mom always taught me to maintain good savings. You never know when something will come up—like car trouble or any other unforeseen incident—where having good savings in place will help you get out of a tough spot.

Kenny Reets, Sales Development Representative: When I was younger my mother always mentioned to never spend every dollar in your pocket, because you don’t know if you’ll get another one tomorrow. Growing up and being a person of color (POC), as well as Latinx, I’ve always wanted to be financially independent and not be in the “rat race,” as some would call it.

Natalie Rodriguez-Jackson, Software Engineer: My dad always told me that I should be tracking my finances. He’s not computer savvy, so instead of using Google Sheets or Excel, he actually drew spreadsheets on a notebook instead. The cool thing is that now, the notebook is about 35 years old so it’s filled with some interesting data. Today I use an app to track my spending and savings rates.

Nicole Ramos, Sr. FP&A Analyst: Growing up, I did not receive much financial advice. My parents struggled to manage their cash and expenses. They often came to me and my sister for help understanding different aspects of finances that they had not learned or were having trouble understanding. They had strong feelings about needing to have cash and not going into debt as a result of their personal experiences.

Michael Mayaguari, Junior Software Engineer: Since a very young age, my mom always taught me the importance of budgeting, saving, and spending on necessities only. She always said “every penny counts,” teaching me that no matter how small things are, they matter. Growing up in Ecuador had an impact on this advice because I realized how my mom was talking from her own experiences with money management and raising four children with a limited budget.

Jackeny De Los Santos, Sr. Operations Associate: I come from a very poor farm, so “money talks” were uncommon. We relied on land goods for consumption and funds my mother would send from NYC to DR as income resources.

How does being Latinx impact your personal financial planning?

Nicole Ramos, Sr. FP&A Analyst: They say that millennials are poised to inherit the largest intergenerational wealth transfer in history of $30 trillion. I will not be receiving anything. Growing up, my family lived paycheck to paycheck and their income combined is less than I make now—all as they supported a family of 8+. Living without a safety net and being the only one of my immediate siblings who has completed college, I have to be very mindful of my expenses and savings. For me, personal financial planning is more than just personal, it’s familial. I need to ensure I am planning for the unexpected not just for me, but for my siblings as well.

Michael Mayaguari, Junior Software Engineer: Moving from Ecuador to the US exposed me to the differences in lifestyles, culture, and habits. As a first generation, I was not exposed to the importance of long term investments until my high school teacher told my class to buy bonds or stocks once we turned 18. This advice was a huge factor in my interest to investigate, learn, and put into practice my personal financial planning and investments.

Jackeny De Los Santos, Senior Operations Associate: Budgeting includes sending money to immediate relatives (within and outside of the US). It was something I saw growing up, so it is an expected behavior.

Kenny Reets, Sales Development Representative: My financial planning revolves around building generational wealth, which requires me to be disciplined.

Tiana Duran, CX Associate: Every move I make I take into account that I have to financially help my three siblings, parents, and great grandmother, on top of making sure I am financially stable.

What financial advice do you give to your community now?

Jackeny De Los Santos, Senior Operations Associate: Pay yourself first, in terms of personal growth and investments. My immediate community in NYC was in the projects. Revolving debt and lack of resources for personal development was a reoccurring factor that impedes progress.

Natalie Rodriguez-Jackson, Software Engineer: Do some auditing of where all your money is. Credit card balances, available credit, income, expenses, liquid cash in bank or investment accounts, etc. Make a list of it all so you know what you have and what you’re working with. Do the same thing for all of your debts too. Get clear on your numbers so you know what you need to do to get to where you want to go.

Tiana Duran, CX Associate: I tell my younger siblings that it is never too early to set yourself up financially for the future, especially when you don’t have a lot of financial responsibilities.

Michael Mayaguari, Junior Software Engineer: Invest for the long term and in yourself.

“I tell my family and friends to build yourself a base of assets to fund your life of leisure…Investing in your future has to be first always.”

-Kenny Reets

Nicole Ramos, Sr. FP&A Analyst: Please prioritize paying off your credit cards. Do not be scared to invest your money for the long term. Be careful with day trading as that is not how the rich get rich and there are a lot of taxes associated with that. Think about what you are spending your money on and why.

Gabriel Talavera, Software Engineer: I always recommend setting goals for yourself. For instance when I was going to college and working, I would set savings goals for myself. I would try to get and maintain $800 in my savings, and then $1000, and so on until I felt like I had enough breathing room. Even now as I’m still kind of early into my career, I am working on various goals: Getting rid of student debt, saving for a house, etc.

What does financial stability mean to you?

Kenny Reets, Sales Development Representative: Financial stability means having complete control over my time and helping future generations gain time as well.

Michael Mayaguari, Junior Software Engineer: Freedom and peace of mind.

Gabriel Talavera, Software Engineer: It means to be able to live comfortably. To be able to not worry about having to go to the mechanic if your car is making noises cause you’re afraid of the bill. It means being able to afford to go on vacation and explore the world. Being financially stable means to have the ability to live life to the fullest and be comfortable doing so.

Jackeny De Los Santos, Senior Operations Associate: The ability to afford your cost of living without the need for employment.

Nicole Ramos, Sr. FP&A Analyst: It means having enough money to not struggle financially. To be comfortable enough to enjoy life and not live in fear or stress of how I will eat or where I will sleep next month. To feel confident that setbacks will be minor and not catastrophic. It also means having enough so that all of the above extends to my sibling as well.

Tiana Duran, CX Associate: To me financial stability means being able to live comfortably without having to sacrifice things like a work life balance just to support myself.

Natalie Rodriguez-Jackson, Software Engineer: Being financially stable means that my family and I have all that we need to thrive: To have enough to cover things like helping extended family, vacations, and educational experiences that will help my family and I live fuller and richer lives.

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If you’re interested in joining our team, check out the Betterment careers page! We’re always looking for passionate candidates to join our company.

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Economics

The 60/40 Portfolio is Dead. Again.

Andrew Green


Welcome to the latest episode of The Compound & Friends, a new podcast from your favorite financial and investing commentators. This week, Michael Batnick, Blair duQuesnay, Eddy Elfenbein and Downtown Josh Brown discuss:
►How did Blackrock get so big?
►Uh oh, the 60/40 portfolio is about to die again…
►Project Thunder is hilarious
►Where did all the red flags go?
►Social Security benefits to increase by 5…

The post The 60/40 Portfolio is Dead. Again. appeared first on The Reformed Broker.