Many large companies offer employees a 401(k) plan with some degree of matching contribution. Although this is a good employee benefit to have, you always should pay attention to the fees involved in your plan. Your plan provider charges various fees to invest, manage and administer the plan, and those fees are passed on to the participants who invest.

The Center for Retirement Research at Boston College reports that, in recent years, the fees charged by actively managed mutual funds — including those in 401(k) plans — have dropped. Since 2015, the average fee dropped from 0.78 percent to 0.75 percent. Around 15 years ago, fees averaged about 1 percent. However, fees for passively managed index mutual funds, generally referred to as index funds, average significantly less at 0.17 percent. Index funds passively track the investments of a specific market index; there is no manager actively choosing investments for the fund on a day-to-day basis.1

If you have a 401(k) plan through a current or former employer, I’d happy to help you determine what you are paying in fees and help you assess your financial situation. In many cases, the more investors learn about fees, the more they start choosing investments that cost less. The Center for Retirement Research suggests this by sharing that U.S. investors withdrew $627 billion from actively managed funds that charged the highest fees and invested $429 billion into lower-fee index funds in 2015 and 2016.2

The Department of Labor’s fiduciary rule, which took partial effect in June, has made it easier for investors to know what they are paying for by requiring the disclosure of all fees and commissions. This information must be in dollar form.3 In addition, FINRA, a self-regulatory organization that regulates broker-dealers in the United States, offers a Fund Analyzer tool on its website that can help investors estimate the impact of fees and expenses on an investment and research applicable fees and available discounts for specific funds.4

Are fees really that important? It can depend. If you are paying a money management firm to select investments and it does a great job of providing consistent performance over time, it may be worth what you pay in fees. But it may also be worth considering how your investments compare with the overall market. For example, over the past three years, the S&P 500 has increased by 26 percent (as of mid-June 2017).5 If you were invested in a low-expense S&P 500 index fund, you would have experienced impressive returns. But if you had been paying a high fee for an active manager yielding the same performance, it may not have been worth the expense.

Speaking of fees, be aware that the IRS permits investors to deduct certain expenses incurred on taxable investments, such as:

• Fees for investment counsel, including subscriptions to financial publications
• IRA or Keogh custodial fees (if paid by cash outside the account)
• Transportation to your broker’s or investment advisor’s office
• Safety deposit box rent if you use it to store certificates or investment-related paperwork

If you have a 401(k) plan through a current or former employer and would like help determining what you are paying in fees, I’m happy to help you assess your financial situation. Using a variety of investments, I can create a financial strategy that can help put you on the path toward your financial goals.

Content prepared by Kara Stefan Communications.

1 Center for Retirement Research at Boston College. June 29, 2017. “Mutual Fund Fees: Here’s What Matters.” http://squaredawayblog.bc.edu/squared-away/mutual-fund-fees-heres-what-matters/. Accessed July 5, 2017.

2 Ibid.

3 Investopedia. July 5, 2017. “DOL Fiduciary Rule Explained as of July 5th, 2017.” http://www.investopedia.com/updates/dol-fiduciary-rule/. Accessed July 13, 2017.

4 FINRA. “Fund Analyzer.” http://apps.finra.org/fundanalyzer/1/fa.aspx. Accessed July 5, 2017.

5 Dayana Yochim. Atlanta Journal Constitution. July 5, 2017. “This May Be Why You’re Down in an Up Market.” http://www.ajc.com/business/consumer-advice/this-may-why-you-down-market/hQWTwwUWlBhEKX8tJoyNHL/. Accessed July 5, 2017.

6 Rande Spiegelman. Charles Schwab. March 15, 2017. “Investment Expenses: What’s Tax Deductible?” http://www.schwab.com/insights/taxes/investment-expenses-whats-tax-deductible. Accessed July 5, 2017.

Neither the firm nor its agents or representatives may give tax advice. Be sure to speak with a qualified professional about your unique situation.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.
 

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Over the years, you may have heard it’s good to have different “kinds” of money as you head into retirement. A financial advisor may recommend a combination of tax-deferred and tax-exempt accounts, diversifying your money to help take advantage of the tax benefits both types of products provide.

What many people don’t understand, however, is why it’s important to take advantage of the different types of accounts available. What are the potential benefits of utilizing both tax-deferred and tax-exempt accounts? First, let’s take a look at the difference between the two.

A tax-deferred financial accounts means simply that: You owe taxes on the money, but those taxes have been deferred or pushed back. You haven’t paid any taxes on the contributions or the growth that’s occurred over the life of the account. When you take money out of it, those distributions are 100 percent taxable at ordinary income rates.1 Withdrawals taken prior to age 59 1/2 may also be subject to an additional 10 percent federal tax.

What types of financial accounts are tax-deferred? A 401(k), 403(b) or traditional IRA are all examples of tax-deferred investment accounts. Growth in some types of annuities or life insurance policies may also be tax-deferred.2

Tax-exempt means no taxes are owed on qualified distributions made from the account. A Roth IRA or Roth 401(k) is a good example of a tax-exempt account. Contributions to a Roth are made with money that’s already been taxed.3

So why can it be beneficial to have a mix of tax-deferred and tax-exempt accounts in your financial strategy? Mostly, it gives you flexibility in how you take distributions during your retirement. For example, you might use distributions from tax-deferred accounts to pay for your fixed expenses every month. If you have expenses that are outside of your “normal” spending -- such as a vacation or a large purchase -- you could use money from a tax-exempt accounts and not incur a taxable event.

While it could be tempting to go heavy in tax-exempt accounts when you’re establishing a financial strategy, using a tax-deferred accounts may put more money in your pocket in the long run. Many people are in a lower tax bracket during their retirement years. If that is the case, you may pay less taxes on distributions during retirement than if you were paying taxes on your contributions up front while still working.4

What’s the right mix of tax-deferred and tax-exempt accounts for you? Every situation is unique. If you’re not sure what types of accounts you should be using, give us a call. We can look at your existing financial strategy and make recommendations based on your specific circumstances.

Content prepared by Amy Ragland

1 The Balance. “What is a Tax-Deferred Investment Account?” https://www.thebalance.com/tax-deferred-savings-account-and-investments-2388988. Accessed May 31, 2017.

2 Prudential. “Tax Strategies: Tax-Deferred Annuities.” http://www.prudential.com/view/page/public/12609?param=12624. Accessed June 1, 2017.

3 Teresa Mears. U.S. News & World Report. Dec. 19, 2014. “7 Retirement Savings Accounts You Should Consider.” http://money.usnews.com/money/personal-finance/articles/2014/12/19/7-retirement-savings-accounts-you-should-consider. Accessed May 31, 2017.

4 Arthur Pinkasovitch. Investopedia. “Retirement Savings: Tax-Deferred or Tax-Exempt?” Updated April 5, 2017. http://www.investopedia.com/articles/taxes/11/tax-deferred-tax-exempt.asp. Accessed May 31, 2017.

We are not permitted to offer, and no statement contained herein shall constitute, tax or legal advice. Individuals are encouraged to consult with a qualified professional before making any decisions about their personal situation.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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The evidence-based approach originated in the medical field to promote the use of clinical experience and the best available research to make decisions about individual patient care.1

In the investing world, this translates to a goal of using current evidence to help maximize an individual’s investment returns while minimizing risk from market downturns.2 In more simplistic terms, evidence-based investing (EBI) means that whatever you decide to do, make sure you have an evidence-based reason for doing it, and always be prepared to amend your plan when the evidence necessitates a change.3

While we’re happy to explain to our clients various investing and wealth management approaches, including EBI, please keep in mind that our advice is tailored to each person’s needs. What works for one client may not work as well for another. We’d love to talk with you about our individual approach to investing – give us a call, and we’ll be happy to set up an appointment.

Financial professionals who use evidence-based investing typically take a four-step decision-making process:4

1. Eliminate meaningless questions.
2. Ask meaningful questions.
3. Apply the evidence.
4. Monitor for effectiveness.

Another significant distinction about EBI is that it is commonly misinterpreted as passive investing. However, EBI is not so much about active versus passive management but rather is about keeping an eye on how much you pay for each investment and determining if what you’ve gotten in return is worth the price.5

Please remember that investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Content prepared by Kara Stefan Communications.

1 Michael Chamberlain. Investopedia. March. 28, 2017. “Comparing Traditional to Evidence-Based Investing.” http://www.investopedia.com/advisor-network/articles/comparing-traditional-evidencebased-investing/. Accessed May 26, 2017.

2 Michael Finke. ThinkAdvisor. Spring 2017. “The Rise of Evidence-Based Investing.” http://www.researchmagdigital.com/researchmag/april_2017?utm_campaign=Q22017%20Thought%20Leadership&utm_content=52019654&utm_medium=social&utm_source=twitter&pg=14#pg14. Accessed May 26, 2017.

3 Robin Powell. The Evidence-Based Investor. April 25, 2017. “Bob Seawright: Behavioral Finance Is as Much a Part of EBI as Indexing.” http://www.evidenceinvestor.co.uk/bob-seawright-behavioural-finance-much-part-ebi-indexing/?platform=hootsuite. Accessed May 26, 2017.                                                                                                     

4 Michael Finke. ThinkAdvisor. Spring 2017. “The Rise of Evidence-Based Investing.” http://www.researchmagdigital.com/researchmag/april_2017?utm_campaign=Q22017%20Thought%20Leadership&utm_content=52019654&utm_medium=social&utm_source=twitter&pg=14#pg14. Accessed May 26, 2017.

5 Corey Hoffstein. Newfound Research. Nov. 18, 2016. “What I Learned at the Evidence-Based Investing Conference.” https://blog.thinknewfound.com/2016/11/4-lessons-ritholtz-wealth-evidence-based-investing-conference/. Accessed May 26, 2017.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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The White House recently introduced what it billed the “biggest tax cut” in U.S. history. While a presidential tax proposal is not likely to get passed without significant changes, the fact that Republicans dominate both chambers of Congress suggests 2017 may well be a year in which significant tax reform is engineered.1

One thing should be perfectly clear: The U.S. tax code is highly complicated.2 There may not be anyone who understands it all off the top of their head. CPAs and tax professionals must conduct thorough due diligence to tailor strategies and complete returns for taxpayers with complex situations.

Because of this, we recommend our clients who require tax advice work directly with an experienced and qualified tax professional. However, we also believe financial and tax professionals should not work in a vacuum, and therefore are more than happy to work in concert with our clients’ tax advisors to help align their financial strategy with their tax situation.

This is particularly important when it comes to retirement planning, because you want to save as much as possible before you retire, which may include tax-deferred financial vehicles such as a 401(k) or IRA, but you don’t want to get hit with a big tax bill on untaxed earnings once you’re in retirement.3 This is a delicate balance that requires experience and collaboration from both a financial professional and a tax professional.

One tax issue each of us deals with is the federal income tax rate. Our annual earnings determine which federal tax bracket we land in, but that tax bracket isn’t the tax rate applied to our entire income. Instead, we pay every tax rate on income blocks up to our individual bracket. Like many things about filing taxes, this can be highly confusing for many people.

It may be easier to understand this through a hypothetical example. Let’s say Joe, who is single, had $92,000 of taxable income in 2016, which landed him in the 28 percent tax bracket. This is how his total tax is calculated:4

• He pays 10% on the first $9,275 (tax of $927.50)
• He pays 15% on the next $28,375 (tax of $4,256.25)
•  He pays 25% on the next $53,500 (tax of $13,375)
•  He pays 28% on the final $850 (tax of $238)
  • Total tax bill of $18,796.75

As you can see, Joe doesn’t pay 28 percent on the full amount of his taxable income; his taxable amount progresses through each income bracket and their respective tax rates until it reaches his total taxable income for the year. Therefore, a person who falls in the highest tax bracket is only paying that higher tax rate on a portion of his or her income.

This is an important distinction to remember as the U.S. works toward tax reform. On one hand, reducing the number of tax rates from seven to three (Trump’s proposal: 10 percent, 25 percent, 35 percent)5 looks to simplify tax filings, but for many people, this could mean paying a higher tax rate on larger blocks of income. Let’s take the hypothetical example of Joe again, using the same income brackets (to date, no tax rate income brackets have been proposed). Here’s how Joe’s scenario might break down:

• He pays 10% on the first $9,275 (tax of $927.50)
• He pays 25% on the next $81,875 (tax of $20,468.75)
• He pays 35% on the final $850 (tax of $297.50)
  • Total tax bill of $21,693.75

This example simply illustrates how a progressive income tax works. Obviously, it doesn’t take into consideration credits and deductions, which vary substantially among taxpayers. Nor does it include payroll taxes.6

Federal income brackets and their respective tax rates are the most fundamental issues Americans are subject to when filing taxes. But as you can see, there’s nothing straightforward about them. This is worth remembering as tax reforms continue to be proposed and debated moving forward: Nothing concerning taxes is simple, and there are usually layers that impact us that the average layperson isn’t likely to see.

Content prepared by Kara Stefan Communications

1 Fox News. April 26, 2017. “Mnuchin vows ‘biggest tax cut’ in US history, confirms plan to slash business rate.” http://www.foxnews.com/politics/2017/04/26/mnuchin-vows-biggest-tax-cut-in-us-history-confirms-plan-to-slash-corporate-rate.html. Accessed May 5, 2017.

2 Vanessa Williamson. The Atlantic. April 18, 2017. “How the Tax-Filing Process Confuses Americans about Tax Policy.” https://www.theatlantic.com/business/archive/2017/04/paying-taxes-confusion-policy-1040/523287/. Accessed May 5, 2017.

3 Fidelity. March 1, 2017. “How to invest tax efficiently.” https://www.fidelity.com/viewpoints/investing-ideas/tax-strategy. Accessed May 5, 2017.

4 Tina Orem. Nerd Wallet. Sept. 8, 2016. “2016 Federal Income Tax Brackets.” https://www.nerdwallet.com/blog/taxes/federal-income-tax-brackets/. Accessed May 5, 2017.

5 Martha C. White. NBC News. May 2, 2017. “Even Families Making $100K Won’t Be Better Off Under New Tax Plan.” http://www.nbcnews.com/business/taxes/even-families-making-100k-won-t-be-better-under-new-n753941. Accessed May 5, 2017.

6 NPR. 2017. “On Tax Day, an Economist Outlines How the Payroll Tax Works.” http://nhpr.org/post/tax-day-economist-outlines-how-payroll-tax-works#stream/0. Accessed May 5, 2017.

These hypothetical examples are for illustrative purposes only. This information is not intended to provide tax advice. Be sure to speak with qualified professionals about your unique situation.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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