Roth 401(k)s have become an increasingly popular alternative to traditional 401(k)s, allowing you to make after-tax salary deferrals to your employer plan. You may have the opportunity to contribute to a designated Roth account in your 401(k), but are uncertain about the best savings strategy for your personal circumstance.
This flowchart helps guide you through a series of considerations that will help in your decision on whether to contribute to a Roth 401(k), and covers:
Future tax rate expectations
Roth IRA eligibility
Employer matching considerations
RMDs and future rollover options
Additional savings opportunities through backdoor Roth contributions
The end of the year provides a number of planning opportunities and issues. Year-end topics can include tax planning, investment and retirement accounts, charitable giving, cash flow and savings, insurance and estate planning.
In this checklist, we cover a number of planning issues that you need to consider prior to year-end to ensure you stay on track, including:
Various issues surrounding investment and retirement accounts including matching capital gains against any investment losses in taxable investment accounts and confirming that all RMDs are taken.
Tax planning issues including strategies dependent upon your prospects for higher or lower income in the future. You will also want to review where you sit relative to your tax bracket as this is a good time to make moves to fill out brackets for the current year that also might prove beneficial down the road.
For those who are charitably inclined, there are several strategies that will also help reduce your tax liability that can be considered based upon your situation.
For those who own a business, tax reform has created some opportunities surrounding pass-through income from your business to your personal return. Accelerating or deferring business expenses presents another solid planning opportunity.
It’s wise to review your cash flow situation as you near year-end to see if you can fund a 529 plan for children or grandchildren or to see if you can save more in an employer-sponsored retirement plan like a 401(k).
This is a comprehensive checklist of the types of year-end planning issues that should be considered to ensure you take advantage of opportunities in the current year and beyond.
If you follow financial media at all, it is likely that you have seen news about Schwab buying TD Ameritrade in a $26 billion all-stock deal.
Because I custody assets for many of my clients at TD Ameritrade (see postscript for a brief explanation of what a custodian does), some have asked what this deal will mean for them. I am writing this brief post to help address that question. If this subject is of interest to you, please note the following points.
The deal is not final. Although Charles Schwab announced plans to buy TD Ameritrade, the deal has yet to be approved by antitrust regulators. This means it is too early to speculate about what the terms will specifically mean.
It will take time. Pending regulatory approval, the integration of the two firms is expected to take 18 to 36 months* after the deal is closed. This means it will likely be a significant amount of time before any clients will be affected by this merger.
There may be advantages. Some analysts believe the combined firm may be able to cut costs, stream new revenue opportunities and improve the platform. Only time will tell.
Let’s stay focused on what we can control. When it comes to serving the financial needs of clients, it’s important to stay focused on what can be controlled. We cannot control the markets, the economy, or this merger. We can control the goals we set, the plans we make, and the perspectives we maintain. To that end, please be assured that I will keep looking out for your best interests and will inform you the moment I perceive something that may directly affect you, or if any adjustments need to be made.
Thank you for the confidence you have placed in me. I consider it an honor and a privilege to serve you!
P.S. A custodian is a financial institution that holds securities for safekeeping in order to minimize risks associated with theft or loss.
“Open a store credit card and get XX% off every purchase!!!”
It’s so freaking tempting! We can have our cake today but pay for it tomorrow when we can really afford it.
Most of us are aware of the tradeoffs of taking on financial debt. Using tomorrow’s dollars to pay for today’s enjoyment requires a potentially dangerous assumption though…that tomorrow will play out exactly as we expect it to today. That our jobs are secure…that our incomes will remain stable or even increase…that other expenses will decrease as we expect them to…that we stay healthy in the future. But what if we don’t…
Tomorrow is by no means guaranteed and neither are the plans that we build for it in our minds. Debt requires a balance with the uncertainties of tomorrow.
Why? Debt has a negative compounding effect. For one, interest is being paid to someone else over time. So that $20,000 car purchase that we agreed upon actually becomes a $23,000 purchase after it’s all said and done. Secondly, few people want to or choose to carry a balance on their credit cards when they first start out, but one small debt stacks on top of another small debt which again stacks on top of another until the point that we can no longer afford to pay them off each month. Forcing us to carry a balance one month to the next, and slowly and unknowingly the balance begins to grow to unmanageable levels. Putting strains on our monthly cashflows and, even, our personal relationships. It’s a slippery slope…and the uncertainties of tomorrow only serve to accelerate that potential slide.
Clearly, you know my general feelings towards debt at this point…but it’s not all bad. It can and does occasionally serve a good purpose, but only when it’s used carefully and strategically, for instance, to buy a home for our families…or to pay for an education that will increase our future earnings potential…or to start or buy a business. All of these debts have a common theme though, they’re used to “buy” something that will hopefully hold or increase in value themselves or increase our ability to earn more in the future, which helps provide a balance to the potential dangers that the uncertainties of tomorrow could bring.
Debt can be a springboard to a better future if used cautiously…or it can be a roadblock to it if used unmindfully.
“Markets take the stairs up and the elevator down” is one of the first lessons learned in the self-study course that is Behavioral Finance 101.
Progress and the climb up tends to feel slow and hardly noticeable, while drops tend to happen more quickly inducing feelings of uncertainty, fear, panic, and a race to the emergency exit.
Patience and perspective are crucial to successful investing, though. Take the graphs above, for example.
Graph #1 (above, top) shows the return of the US stock market (S&P 500 Index) over the last 12 months. If you watched the markets or listened to the news at all over the last 12 months, there were plenty of reasons to feel uncertain or fearful or even panicked to the point of racing for the exit. Truth is these past 12 months have been a pretty typical representation of the “normal” market journey. Up, down, up, down some more, then a slow steady climb back up. It can feel like a roller coaster if you watch it every day.
However, if you change your perspective and zoom out a little, a much different picture is painted. Graph #2 (above, bottom) shows the return of the US stock market (S&P 500 Index) over the last 10 years. The roller coaster ride becomes much more steady and much more palatable.
Markets will go down. EVERY investor will feel the urge to want to head for the exit, but markets are resilient in the long run. The markets reward the patient investor who can look past the choppy waters beneath them and keep their eyes focused on the horizon.
Have you ever felt so clueless about a decision or purchase that you have to do a Google search just to figure out what questions you need to be asking or considering?
And, then, after armed with the best questions that Google can supply, you realize that even if you get the answers to your “7 Best Questions to Ask a Fencing Contractor”, you still don’t know what the answer means or why you should be asking it.
I know nothing about fences. I know that I’d like a fence to keep my kids safe from the unattended pools of my neighbors. I know that I’d like to keep my dog from occasionally wandering off our property. I know that I don’t want the fence to look cheap.
So, I did what Google said. I interviewed two contractors. I went in cluelessly prepared with the “7 Best Questions to Ask a Fencing Contractor”. As a result, we surprisingly picked the one that cost 20% more…and it was the right decision.
Fencing Contractor #1: “300 linear feet at $9 per foot…it’ll run about $3,100. Call us when you’re ready.”
Fencing Contractor #2: “The area measures 300 linear feet. It’ll run about $3,700. We’re going to cost more than most because we set every post in concrete where most others drive them in…this will prevent the posts from leaning and needing to be reset 4-5 years from now, and we add a tension wire at the bottom of the fence that makes it easier to trim the grass under the fence. Another thing we need to consider is the positioning of the gates…”
I asked questions not even knowing what answers I needed or wanted to hear, but it was how my questions were answered and the answers to questions not asked that made the choice clear.
Did I make the best financial decision? Maybe, maybe not…it depends on your priorities, but I’m good with it. I feel confident that the questions and concerns that I still don’t know to ask have already been answered and accounted for, and I’m less concerned about the future issues that may pop up and the additional costs to fix them.
Sometimes the price isn’t the real cost. Sometimes it’s worth paying more now to avoid paying more later. Sometimes it’s worth paying for quality and paying the “peace of mind” premium.
Here are the stories that caught my eye this week:
MONEY: Wealth Is The Stuff You Can’t See (A Wealth of Common Sense) “It may not feel like it to everyone, but the developed world now has more money to spend but less time to do it. The problem is these numbers are averages which helps explain why so many people have a hard time ever saving money. Trying to keep up with people that make more money than you is a never-ending game because there will always be people willing to outspend you.”
LIFE: At 98, D-Day Veteran Medic Returns To Normandy To Remember A Generation’s Sacrifice(NPR) “For much of his life, Ray Lambert wouldn’t talk about World War II. But then the 98-year-old veteran army medic began returning to Normandy, where, on June 6, 1944, he led a unit of medics as a 24-year-old staff sergeant in the Allied invasion of western Europe.”
“Alexa, what should I pack for vacation?” “Swimsuits…beach towels…beach chairs…beach toys…sunscreen…”
Helpful? Maybe…if you want to go to the beach.
But what if you want to go on a four-day camping and hiking trip? Mostly useless.
If your destination isn’t defined, the well-intentioned advice of others may leave you perfectly prepared for someone else’s trip.
Whether vacationing or investing…for more effective advice and better results, define your destination first, then start packing.
Here are the stories that caught my eye this week:
MONEY: Not Efficient, But Effective (Of Dollars And Data) “Most of your financial success is going to come down to one simple metric: your savings rate. It might seem absurd, but it’s true. If you can save enough money, none of the other financial advice on this blog will matter. Why? Because with a high enough savings rate, you will never need to worry about your asset returns.”
LIFE: A sense of purpose could prolong your life (Quartz) “The meaning of life is a question that has plagued philosophers for millennia, and there is no single correct answer. But increasingly, scientists are finding that having a sense of purpose, whatever yours may be, is key to well-being.”
A friend of mine quit his job recently. He was good at his job. He made good money. He had autonomy over his schedule. He had unlimited vacation. His job had many of the qualities that we all think we want. But he quit anyway.
He had lost the sense of fulfillment in his work some time ago. He always had another “itch” that he wanted to scratch, but every time he worked up the nerve to consider quitting, the money or the offering of new incentives had a way of reeling him back in. It wasn’t that the money and incentives were SO GOOD that he couldn’t ignore them, but they were just enough to make the pain of staying a little less.
This “Do I stay or do I go?” dance has played out repeatedly in some capacity over the last several years. For years, though, the decision was always one requiring a huge leap of faith to throw away the comfortable, known quantity of the current path for one of potential excitement but filled with uncertainty.
But then…something happened that disrupted the equation and closed the gap of uncertainty between the familiar path and the new unknown. Suddenly, the familiar was less familiar and year’s of contemplating the unknown had in some way made it feel more comfortable…and what was once a giant leap of faith was now a much less intimidating step.
A case could be made that he was lucky. Lucky that a change in circumstance nudged him to make the change.
A case could be made that he was courageous. Courageous that he threw away the easy, comfortable path for the path of uncertainty.
The truth is likely somewhere in between, but what many people don’t get to see are the years of mental and financial preparation happening behind the scenes to put himself in a better position to take the leap when the time was right.
Quitting isn’t always the right answer, especially when it’s done emotionally or impulsively. But, sometimes quitting and change is the right choice in the long run when it’s planned, calculated, and well-thought-out.
Here’s what caught my eye this week:
MONEY: How to Teach Your Kids About Money (MintLife) “There’s a specific conversation I frequently have with people around my age. As they get closer to middle adulthood and look back on everything they’ve learned about money, they start to wonder – why didn’t they teach us this stuff in school?”
LIFE: Men Have No Friends (Bonefide Wealth) “Over the weekend my wife shared an article with me from Harper’s BAZAAR titled “Men Have No Friends and Women Bear the Burden” by Melanie Hamlett. It’s a stellar examination of the emotional lives of men if not masculinity itself. It details why so many men are terrible at making friends, expressing themselves to other men and why we believe that women are the only people we can turn to for emotional support.”
It’s May. It’s the end of the school year. It’s graduation time. Summer-itis is taking over.
If you’re a teacher (as I know some of you are), you may have had the thought recently, “what can I do to keep these kids occupied (errr…out of trouble) for these last few days or weeks?”
Well, if this is you, I have a recommendation: Build Your Stax. I may be a bit biased in this suggestion…I am a financial planner after all…but, nonetheless, it’s a great way to introduce older kids (or even adults, for that matter) to some invaluable life lessons around personal finance and money management through an interactive, gaming experience.
It’s a free, online game that teaches kids how to invest through the experience of making 20 years of investment decisions in….20 minutes. The goal is to build the most wealth over time while interactively competing against the computer and/or classmates. Play it alone or play it in a group, but, for best results, play it repetitively.
Kids will learn why having an emergency fund is important as “life happens” via unexpected surprises, like hospital bills, loan repayments, wedding expenses, etc. They will learn that diversification matters in protecting and growing your wealth by building a portfolio consisting of savings, CD’s, stocks, bonds, and/or index funds. They will learn how compounding interest works and how crucial it is to building wealth over time. They will learn that life can be unpredictable and so can the stock market. But most importantly, they will learn that patience most often triumphs over emotion in creating wealth.
Give it a try…with your students, with your family, or even by yourself. Play, learn, adapt, then play it again!
Here’s what caught my eye this week:
MONEY: Financial Superpowers (A Wealth of Common Sense) “While trying to boil down the many reasons for Warren Buffett’s long-term success, Alan Greenspan once told the Oracle, “Warren, it strikes me that if you did nothing else you never sell. That is, if you can grit your teeth through and just disregard short-term declines in the market or even long-term declines in the market, you will come out well.”
MONEY: How does the stock market work? (TED) *VIDEO* “In the 1600s, the Dutch East India Company employed hundreds of ships to trade goods around the globe. In order to fund their voyages, the company turned to private citizens to invest money to support trips in exchange for a share of the profits. In doing so, they unknowingly invented the world’s first stock market. So how do companies and investors use the market today?”
LIFE: PARENTS: Don’t Sacrifice Yourselves On The Altar Of Your Children’s Education (Tim Maurer) “Parents have sacrificed their financial futures on the altar of their children’s education. Fueled by easy federal money and self-interested colleges, the result is a student loan crisis that appears already to be eclipsing the catastrophic proportions of mortgage indebtedness leading up to the financial collapse of 2008.”
I don’t gamble often. I prefer my risk-taking to be less boom-or-bust and my outcomes more predictable…but being a Kentuckian, it’s practically a state law that you have to bet on the Kentucky Derby, so, in accordance with the authorities and my heritage, I oblige.
Several years ago, I decided that, instead of blindly choosing a horse for the sole purpose of having a rooting interest in the race, I’d create a spreadsheet to research and sift through data looking for any historical trends, patterns, or qualities that may be consistent from year-to-year and decade-to-decade, in an attempt to find a predictable pattern for picking the Derby winner (…or for hitting the trifecta). There’s so much data available, there’s got to be a predictable trend, right?
Out of this curiosity, an annual tradition was born, and in year one, I did it…pay dirt. My time and effort paid off. I found the hidden formula, and I won a “not-insignificant” amount of money.
If you have enough data, there’s almost always a historical trend to be found, but there’s a problem with historical trends. They tend to be backward-looking and not always causal in nature. Sometimes they’re just convenient stories and fortunate coincidences we find that happen to fit our narrative and fill the gap in our storylines…and where, in reality, there is only luck, we perceive a newfound skill.
Now, fast forward several years and if you were to track the success of my Derby picks, my hours of research, number-crunching, and trend-following was probably no more effective a strategy than if I had let my kids pick the horses based on their favorite names. Where there was “skill”, now I see the “luck”.
The same principle can be true in investing. Investors who try to be stock pickers or trend followers (i.e. tech stocks in the ‘90s, cryptocurrency, pot stocks, etc.) and try to actively “beat the market” may find short-term success, but a lot of times that success is more attributable to luck than skill (right place, right time). This short-term luck and newfound “skill” create a perceived sense of control, though, that only serves to undermine habits that lead to less risky, more predictable long-term success.
“The company (Slack) was valued at $5 billion after its last round of fundraising, making founder (Stewart) Butterfield a rich man. On a recent episode of How I Built This with Guy Raz, Butterfield was asked how this enormous wealth has impacted his life. He told Raz, ‘beyond a certain level of wealth it doesn’t make your life any better.'”
“With 2.5 billion GB of information being created each day, we have to continually ask ourselves, “What information can I trust?” This is why becoming a purveyor of signal in a world drowned by noise is the ultimate reputational asset. With it, you will easily be able to differentiate yourself from your peers. How do I know? Because most people don’t check anything.”
You are now leaving the Pivot Point Wealth Planning website and will be entering the Charles Schwab & Co., Inc. (“Schwab”) website.
Schwab is a registered broker-dealer, and is not affiliated with Pivot Point Wealth Planning or any advisor(s) whose name(s) appear(s) on this website. Pivot Point Wealth Planning is/are independently owned and operated. Regardless of any referral or recommendation, Schwab does not endorse or recommend the investment strategy of any advisor. Schwab has agreements with Pivot Point Wealth Planning under which Schwab provides Pivot Point Wealth Planning with services related to your account. Schwab does not review the Pivot Point Wealth Planning website(s), and makes no representation regarding information contained in the Pivot Point Wealth Planning website, which should not be considered to be either a recommendation by Schwab or a solicitation of any offer to purchase or sell any securities.
