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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 When you begin to make withdrawals in retirement, the funds withdrawn are taxed as ordinary income.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 Earnings on investments in your Roth 401(k) account are not subject to tax, and the money is not taxed when it’s withdrawn.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.
Merriman’s Take | How We Pick Investments
Merriman is an independent investment advisor. That means we don’t receive any income or financial benefit from the companies whose products we recommend for you. This keeps us on the same side of the table with you, allowing us to fulfill our fiduciary responsibility to act in the best interest of our clients, and we take that responsibility seriously.
Our research department reviews the available investment options and selects investments based on the following key principles. read more…
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The Washington Guaranteed Education Trust (GET) is a prepaid college tuition plan that is guaranteed to keep pace with the cost of college tuition. The GET account is measured and purchased in units, where 100 units equals the cost of one year of resident, undergraduate tuition and state-mandated fees at Washington’s most expensive public university. It can be used nationwide, and those who sign up for GET can purchase current units at a premium, to lock in the guarantee. GET units today cost $113, and their current value is $104. read more…
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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. read more…
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This post was co-authored by Wealth Advisor Lowell Parker, CFP® and Information Systems Manager Rodney Gonzales.
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Having your personal information compromised isn’t a matter of “if,” but “when.” It’s less expensive to take preventative measures than it is to investigate and eliminate threats. It’s imperative that you take the right precautions both externally, with your vendors and service providers, as well as internally with your home computers and networked systems. read more…
Why Advisors Need Advisors
Have you ever heard the proverb about the cobbler’s children? It essentially states that the cobbler’s children, although surrounded by well-made shoes, have the most worn out shoes. Or that doctors are the worst patients? The same can be said for wealth advisors. We’re not immune to the common mistakes that exist in the financial world, and even we can benefit from the financial guidance we provide for others.
As a new advisor, I had an epiphany. Yes, an epiphany, as corny as that sounds. I realized that although I could adequately pick investments, decide on a savings plan and develop a strategy for myself, I wasn’t following through with it. While at a client meeting, my coworker explained it best by saying, “We help hold you accountable to your goals.” Duh! That was the thing I was not giving myself. I could make the best laid plan, but I wasn’t following through and doing the actions I needed to do to be successful. I had the knowledge, but needed accountability. The very next day I hired my first advisor. read more…
