Traditional or Roth 401(k)?

Traditional or Roth 401(k)?

Often employers offer the option of contributing to a traditional 401(k) or a Roth 401(k). Do you know which one is right for you?

The primary difference is in the tax treatment. The traditional 401(k) gets a tax benefit at the time of contribution, because money contributed to such an account is not taxed. Moving forward, the earnings in your traditional 401(k) are not taxed as long as the funds remain in the account. When you begin to make withdrawals in retirement, the funds withdrawn are taxed as ordinary income.

Roth 401(k)s are taxed the reverse way. In these accounts, money is taxed when the contribution is made. Earnings on investments in your Roth 401(k) account are not subject to tax, and the money is not taxed when it’s withdrawn.

If the investor’s marginal tax rate is the same at the time of contributions and withdrawals, the traditional and Roth accounts would produce the same results.

Because of these differences in tax treatment, taxpayers in the lowest tax brackets should contribute to Roth accounts, while taxpayers in higher tax brackets will want to use traditional retirement accounts. As a general strategy:

When you’re in the 12% tax rate or lower: Contributions should be made to a Roth 401(k).

When you start moving into the 22% tax bracket: 50% of contributions be made to a traditional 401(k), and 50% to a Roth 401(k).

In your peak earning years: As you move into years with marginal tax rates above 22%, most or all retirement contributions should be made into a traditional 401(k) instead of the Roth.

If you’re still not sure which option is right for you, we’re happy to help.

Five Warning Signs It’s Time to Review Your Home and Auto Insurance (and What to Do About It)

Five Warning Signs It’s Time to Review Your Home and Auto Insurance (and What to Do About It)


As Wealth Advisors, we provide advice on all aspects of your financial situation, and we work with a network of carefully selected professionals in taxes, estate planning and insurance to devise appropriate solutions that will help you achieve your goals. This article is a collaboration between Merriman Advisor Chris Waclawik and Amy Deforeest, personal risk advisor at Willis Towers Watson, who is one such member of our professional network team.

Many of us set our home and auto insurance when we initially purchase it, and then we forget about it. Unfortunately, we may not realize we’ve made a mistake until it’s too late. (more…)

Merriman’s Take on Recent Tax Legislation

Merriman’s Take on Recent Tax Legislation

In December, Congress passed sweeping tax changes, and the President signed them into law. This legislation will impact many tax planning strategies going forward.

This document summarizes some of the major provisions most likely to impact the families we work with. As always, your advisor can answer questions and provide guidance specific to you.

Most of the individual provisions will remain until 2025, after which they are scheduled to expire and revert to current law. Here are some key highlights of the legislation: (more…)

Ask Merriman: SIPC Coverage

Q: Brokerage houses have additional insurance that covers certain events relative to my deposit. Should I be concerned when the funds on deposit at a major brokerage exceed the insurance limits?

Let’s assume this refers to SIPC coverage brokerage firms use. While loosely similar to the more familiar FDIC insurance to cover bank deposits, SIPC insurance is much more limited in scope.

Essentially, SIPC insurance provides coverage from loss due to the brokerage firm going out of business. It provides up to $500,000 of protection on securities and up to $250,000 in cash in excess of what is recovered. It does not provide coverage from a decline in the value of investments.

To help visualize an example of when SIPC would come into play, let’s use an example of a $5 million client account:

· Assume the brokerage firm fails, resulting in $5 billion of client claims on assets.

· Assume 90% of clients’ assets ($4.5 billion) are recovered. The actual historical recovery rate is 98.7% according to SIPC.

· The client in this example holding $5 million in SIPC eligible assets would receive $4.5 million from recovered assets and $500,000 from SIPC. The loss to the $5 million client account would be zero.

It’s exceedingly rare for a client to be entitled to recover damages under SIPC and not be made whole because of the $500,000 limit.

Also, most large brokerage firms purchase “excess of SIPC” insurance, which insures clients for any losses above the $500,000 limit.

Ultimately, clients do not need to be concerned when funds at a brokerage exceed the coverage limits.

More detailed information about SIPC coverage can be found here.


 

Do you have a question about investments, taxes, retirement or insurance? Send it to “Ask Merriman” and one of our financial advisors will help you find an answer.