Business

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

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.

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https://diyinvestorresources.com/?p=521

Business

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

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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Business

Helping Latinx Employees With Their Unique Retirement Needs

National Hispanic American Heritage Month spans from September 15 through October 15 and, as a part of this month of recognition, we asked ourselves at Betterment for Business: What are the unique challenges facing Latinx-American employees today? How can we learn about these challenges and address them as a part of our ongoing effort to promote Diversity, Equity and Inclusion at Betterment?

It turns out that not only do Latinx-Americans—the largest ethnic group in the U.S.—have disproportionately low retirement savings, but they also have disproportionately low access to savings. Plus gender and age also play a factor.

For employers committed to building out a financial wellness program that helps all employees, understanding the intersectional issues and how Latinx employees have unique needs and challenges is key. In this article, we’ll cover three important learnings that can help inform your wellness programs, and build support for Latinx employees during this National Hispanic American Heritage Month and beyond.

Latinx Employee Savings Lag Behind White Employees

According to a 2018 report by Unidos US and the National Institute of Retirement Security, “four out of five Latino households have less than $10,000 in retirement savings, compared to one out of two White households.”

And when comparing otherwise similar White and Latino households, researchers also found that “69% of working Latinos do not own any assets in a retirement account, compared to 37% of White households.”

When Latino families are saving for retirement, they are saving significantly less money than their White counterparts. That said, younger Latinxs are eager to save. For example, they are 25% more likely to own an investment property than non-Hispanic White households, according to the Hispanic Wealth Project.

Encourage Latinx employees to continue to diversify their investments and to set aside retirement savings in addition to their other assets—especially if you offer an employer-sponsored match that can help them reach their goals even faster.

ccess to Employer-Sponsored Retirement Plans is Also an Issue

For Latinx-Americans, access to retirement-sponsored retirement plans is “significantly” lower than it is for White workers. Overall, about 31% of Latinx workers participate in a retirement plan, compared to 53% of White workers.

But, to put this into further context, when Latinxs have access and are eligible to participate in a plan, “they show slightly higher take-up rates when compared to other races and ethnicities.”

In other words, when a retirement plan is offered, Latinxs are more likely to take advantage, but they are significantly less likely to have that access in the first place.

As such, Latinx-Americans, particularly younger populations, feel the pressure of providing a social safety net to their families and loved ones. They are 77% more likely to live in multi-generational households than non-Hispanic White households and, when surveyed, one half agreed that it was more important to help friends and family members now than to save for their own retirement.

It is important to offer a full-picture financial wellness solution that helps to address the unique needs of Latinx workers, which can include planning for the retirement of their loved ones or investing in additional real estate for their growing families.

Older Women are Disproportionately Affected

More than one in five Latinx women over the age of 65 live in poverty. And without the income from work, this population would not be able to meet the cost of basic living expenses.

Separately, Black and Latinx women make up a disproportionate share of domestic workers, with Latinx women making up over 29% of domestic workers as compared to only 17% of all other workers. Only 19% of domestic workers have access to health or retirement benefits, compared to 49% of other workers.

COVID-19 exacerbated this disparity. According to the UN, domestic workers were particularly vulnerable to the economic effects of COVID-19 globally, causing 46% of Latinx survey respondents (compared to 42% of non-Hispanic Whites) to draw from their savings to cover expenses since the beginning of the pandemic.

Consider your employee population and how factors like the pandemic may have affected them and the members of their household. Offer financial planning services and remind them that it’s never too late to get started with their savings, debt repayment, or other financial goals.

Did you miss our previous article…
https://diyinvestorresources.com/?p=407

Business

Bogle in the streets, Batnick in the sheets


Welcome to the latest episode of The Compound & Friends, a new podcast from your favorite financial and investing commentators. This week, Michael Batnick, Dan Egan and Downtown Josh Brown discuss:
►Where delta fades, growth returns
►Oh look, another bubble. This one has vampires.
►When Do Investors Freak Out?
►Beijing’s Behavioral Finance
►Fractional shares
►Target-date Funds
►What is the office good…

The post Bogle in the streets, Batnick in the sheets appeared first on The Reformed Broker.

Business

Betterment Raises $160 Million in Growth Capital

Today, we’re announcing that Betterment has secured $160 million in growth capital comprised of a $60 million Series F equity round and a $100 million credit facility. This moment comes as Betterment is the largest independent digital investment advisor with $32 billion in assets under management and nearly 700,000 clients.

The Series F round was led by Treasury, with participation from existing investors, including Kinnevik, Bessemer Venture Partners, Francisco Partners, Menlo Ventures, Anthemis Group, Globespan Capital Partners, Citi Ventures, and The Private Shares Fund, as well as new investors Aflac Ventures and ID8 Investments. The financing valued the company at nearly $1.3 billion.

The $100 million credit facility was established with ORIX Corporation USA’s Growth Capital group and Runway Growth Capital. ORIX’s Growth Capital group acted as lead arranger and agent.

The additional funding will be used to accelerate the record growth Betterment has delivered year-to-date across its core retail investment products and advisor solutions, and particularly its rapidly growing 401(k) offering for small and medium sized businesses.

“From day one, Betterment’s mission has been to make people’s lives better with easy-to-use, personalized investment solutions. The record growth and demand for Betterment products and services proves how well we deliver,” said Sarah Levy, Betterment’s CEO. “We are thrilled to have the support of new and existing investors who believe in our business model and are excited by the opportunity to support our growth. We’re using these funds to further cement our category leadership with rapid innovation on top of our already differentiated product suite and unique, multi-pronged distribution model that serves retail investors, advisors and small businesses.”

“I’ve seen first hand the strength of Betterment’s business model since its founding over a decade ago. Participating in Betterment’s next chapter as an investor is an exceptional opportunity,” said Eli Broverman, a co-founder of Betterment and a founder of Treasury. “I believe in Betterment’s team and vision, and we are thrilled to support the company’s future success.”

To all of our customers, we couldn’t have achieved this without you. Thank you!

Did you miss our previous article…
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