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Financial Planner, Betterment
Andrew Westlin is a financial planning professional at Betterment, where he provides personalized advice to customers. Passionate about financial planning and analysis, Andrew answers customer questions every day over the phone or via Betterment's mobile app.
Articles by Andrew Westlin
What’s an IRA and How Does It Work?
Learn more about this investment account with tax advantages that help you prepare for ...What’s an IRA and How Does It Work? Learn more about this investment account with tax advantages that help you prepare for retirement. An Individual Retirement Account (IRA) is a type of investment account with tax advantages that helps you prepare for retirement. Depending on the type of IRA you invest in, you can make tax-free withdrawals when you retire, earn tax-free interest, or put off paying taxes until retirement. The sooner you start investing in an IRA, the more time you have to accrue interest before you reach retirement age. But an IRA isn’t the only kind of investment account for retirement planning. And there are multiple types of IRAs available. If you’re planning for retirement, it’s important to understand your options and learn how to maximize your tax benefits. If your employer offers a 401(k), it may be a better option than investing in an IRA. While anyone can open an IRA, employers typically match a portion of your contribution to a 401(k) account, helping your investment grow faster. In this article, we’ll walk you through: What makes an IRA different from a 401(k) The types of IRAs How to choose between a Roth IRA and a Traditional IRA Timing your IRA contributions IRA recharacterizations Roth IRA conversions Let’s start by looking at what makes an Individual Retirement Account different from a 401(k). How is an IRA different from a 401(k)? When it comes to retirement planning, the two most common investment accounts people talk about are IRAs and 401(k)s. 401(k)s offer similar tax advantages to IRAs, but not everyone has this option. Anyone can start an IRA, but a 401(k) is what’s known as an employer-sponsored retirement plan. It’s only available through an employer. Other differences between these two types of accounts are that: Employers often match a percentage of your contributions to a 401(k) 401(k) contributions come right out of your paycheck 401(k) contribution limits are significantly higher If your employer matches contributions to a 401(k), they’re basically giving you free money you wouldn’t otherwise receive. It’s typically wise to take advantage of this match before looking to an IRA. With an Individual Retirement Account, you determine exactly when to make contributions. You can put money into an IRA at any time over the course of the year, whereas a 401(k) has to come from every paycheck. Note that annual IRA contributions can be made up until that year’s tax filing deadline, whereas the contribution deadline for 401(k)s is at the end of each calendar year. Learning how to time your IRA contributions can significantly increase your earnings over time. Every year, you’re only allowed to put a fixed amount of money into a retirement account, and the exact amount often changes year-to-year. For an IRA, the contribution limit for 2022 is $6,000 if you’re under 50, or $7,000 if you’re 50 or older. For a 401(k), the contribution limit for 2022 is $20,500 if you’re under 50, or $27,000. These contribution limits are separate, so it’s not uncommon for investors to have both a 401(k) and an IRA. What are the types of IRAs? The challenge for most people looking into IRAs is understanding which kind of IRA is most advantageous for them. For many, this boils down to Roth and/or Traditional. The advantages of each can shift over time as tax laws and your income level changes, so this is a common periodic question for even advanced investors. As a side note, there are other IRA options suited for the self-employed or small business owner, such as the SEP IRA, but we won’t go into those here. As mentioned in the section above, IRA contributions are not made directly from your paycheck. That means that the money you are contributing to an IRA has already been taxed. When you contribute to a Traditional IRA, your contribution may be tax-deductible. Whether you are eligible to take a full, partial, or any deduction at all depends on if you or your spouse is covered by an employer retirement plan (i.e. a 401(k)) and your income level (more on these limitations later). Once funds are in your Traditional IRA, you will not pay any income taxes on investment earnings until you begin to withdraw from the account. This means that you benefit from “tax-deferred” growth. If you were able to deduct your contributions, you will pay income tax on the contributions as well as earnings at the time of withdrawal. If you were not eligible to take a deduction on your contributions, then you generally will only pay taxes on the earnings at the time of withdrawal. This is done on a “pro-rata” basis. Comparatively, contributions to a Roth IRA are not tax deductible. When it comes time to withdraw from your Roth IRA, your withdrawals will generally be tax free—even the interest you’ve accumulated. How to choose between a Roth IRA and a Traditional IRA For most people, choosing an Individual Retirement Account is a matter of deciding between a Roth IRA and a Traditional IRA. Neither option is inherently better: it depends on your income and your tax bracket now and in retirement. Your income determines whether you can contribute to a Roth IRA, and also whether you are eligible to deduct contributions made to a Traditional IRA. However, the IRS doesn’t use your gross income; they look at your modified adjusted gross income, which can be different from taxable income. With Roth IRAs, your ability to contribute is phased out when your modified adjusted gross income (MAGI) reaches a certain level. If you’re eligible for both types of IRAs, the choice often comes down to what tax bracket you’re in now, and what tax bracket you think you’ll be in when you retire. If you think you’ll be in a lower tax bracket when you retire, postponing taxes with a Traditional IRA will likely result in you keeping more of your money. If you expect to be in a higher tax bracket when you retire, using a Roth IRA to pay taxes now may be the better choice. The best type of account for you may change over time, but making a choice now doesn’t lock you into one option forever. So as you start retirement planning, focus on where you are now and where you’d like to be then. It’s healthy to re-evaluate your position periodically, especially when you go through major financial transitions such as getting a new job, losing a job, receiving a promotion, or creating an additional revenue stream. Timing IRA contributions: why earlier is better Regardless of which type of IRA you select, it helps to understand how the timing of your contributions impacts your investment returns. It’s your choice to either make a maximum contribution early in the year, contribute over time, or wait until the deadline. By timing your contribution to be as early as possible, you can maximize your time in the market, which could help you gain more returns over time. Consider the difference between making a maximum contribution on January 1 and making it on December 1 each year. Then suppose, hypothetically, that your annual growth rate is 10%. Here’s what the difference could look like between an IRA with early contributions and an IRA with late contributions: This figure represents the scenarios mentioned above.‘Deposit Early’ indicates depositing $6,000 on January 1 of each calendar year, whereas ‘Deposit Late’ indicates depositing $6,000 on December 1 of the same calendar year, both every year for a ten-year period. Calculations assume a hypothetical growth rate of 10% annually. The hypothetical growth rate is not based on, and should not be interpreted to reflect, any Betterment portfolio, or any other investment or portfolio, and is purely an arbitrary number. Further, the results are solely based on the calculations mentioned in the preceding sentences. These figures do not take into account any dividend reinvestment, taxes, market changes, or any fees charged. The illustration does not reflect the chance for loss or gain, and actual returns can vary from those above. Hypothetical examples are for illustrative purposes only, and market conditions can and will impact performance. What’s an IRA recharacterization? You might contribute to an IRA before you have started filing your taxes and may not know exactly what your Modified Adjusted Gross Income will be for that year. Therefore, you may not know whether you will be eligible to contribute to a Roth IRA, or if you will be able to deduct your contributions to a Traditional IRA. In some cases, the IRS allows you to reclassify your IRA contributions. A recharacterization changes your contributions (plus the gains or minus the losses attributed to them) from a Traditional IRA to a Roth IRA, or, from a Roth IRA to a Traditional IRA. It’s most common to recharacterize a Roth IRA to a Traditional IRA. Generally, there are no taxes associated with a recharacterization if the amount you recharacterize includes gains or excludes dollars lost. Here are three instances where a recharacterization may be right for you: If you made a Roth contribution during the year but discovered later that your income was high enough to reduce the amount you were allowed to contribute—or prohibit you from contributing at all. If you contributed to a Traditional IRA because you thought your income would be above the allowed limits for a Roth IRA contribution, but your income ended up lower than you’d expected. If you contributed to a Roth IRA, but while preparing your tax return, you realize that you’d benefit more from the immediate tax deduction a Traditional IRA contribution would potentially provide. Additionally, we have listed a few methods that can be used to correct an over-contribution to an IRA in this FAQ resource. You cannot recharacterize an amount that’s more than your allowable maximum annual contribution. You have until each year’s tax filing deadline to recharacterize—unless you file for an extension or you file an amended tax return. What’s a Roth conversion? A Roth conversion is a one-way street. It’s a potentially taxable event where funds are transferred from a Traditional IRA to a Roth IRA. There is no such thing as a Roth to Traditional conversion. It is different from a recharacterization because you are not changing the type of IRA that you contributed to for that particular year. There is no cap on the amount that’s eligible to be converted, so the sky’s the limit for those that choose to convert. We go into Roth conversions in more detail in our Help Center.
How To Make A Mega Backdoor Roth 401(k) Contribution
Looking to boost your retirement savings? Contributing above the limit through after-tax ...How To Make A Mega Backdoor Roth 401(k) Contribution Looking to boost your retirement savings? Contributing above the limit through after-tax contributions into a traditional 401(k) can help you maximize your savings with potentially great tax benefits. For most people that participate in a 401(k) plan through their employer, $19,500 is the maximum contribution (pre-tax and Roth) you can make to your 401(k) in 2021 (those age 50 and older get an additional $6,500 catch-up contribution). This “standard” contribution is considered to be an employee elective deferral. But what if your 401(k) plan could allow you to contribute more than this amount? And how much more? Potentially up to $38,500 more in 2021. After-tax traditional 401(k) contributions are less commonly offered by employers, but for heavy savers or high-income earners who do have this option, after-tax traditional contributions are a great way to try and maximize your overall retirement contributions. “Super-size Me”: 401(k) 2020 Contribution Limits 401(k) plans are a type of defined contribution plan where you, as the employee, make your own contributions to your retirement. In 2021, the total annual contribution limit to defined contribution plans is $58,000 (or $64,500, if age 50 and older). This $58,000 limit consists of your $19,500 contribution (combination of pre-tax and Roth), as well as any matching contributions your employer makes, employer profit-sharing, and after-tax traditional 401(k) contributions made. Any employer match would potentially reduce the amount of after-tax contributions you could make into a traditional 401(k). But if your employer does not provide any matching contributions nor profit-sharing, you could contribute up to an extra $38,500 on an after-tax basis to your 401(k). Tax alert – Even if your employer offers after-tax traditional 401(k) contributions, you may not be able to fully maximize the contribution due to plan limits and nondiscrimination testing for highly compensated employees. How Do After-Tax Contributions Work? Now that we’ve covered different types of contributions that could be made to your 401(k), how do they all work? The $19,500 salary contribution can generally be made as either pre-tax (traditional), or post-tax (Roth): When you make pre-tax contributions, the amount contributed to your retirement plan reduces your taxable income for that year, so that you get a tax break in the year contributing. When you withdraw in the future, you will pay ordinary income taxes on the full amount of the withdrawal, basis and earnings included. With post-tax Roth contributions, the amount contributed does not reduce your taxable income for that year, as you pay tax on the money before it is contributed. As long as you meet general requirements, withdrawals will be free of tax, earnings included. After-tax contributions into a traditional 401(k) are not tax deductible and grow tax-deferred, meaning that earnings will be taxed as ordinary income upon withdrawal. This is unlike general Roth 401(k) contributions, where earnings and withdrawals are tax-free. You might be wondering what happens to after-tax traditional 401(k) contributions after you retire or leave your company. IRS Notice 2014-54 states that earnings from these contributions while they are in the 401(k) would be rolled into a traditional IRA, where you will pay tax upon withdrawal. However, the original after-tax traditional contributions in your 401(k) are able to be rolled into a Roth IRA without paying taxes (since you already paid tax on the dollars contributed), where future growth and withdrawals are tax-free. Benefit To After-Tax Contributions For those who have the option and are able to make these contributions, it enables extra savings to be made into an account that grows tax-deferred rather than being saved to a taxable account, where you will owe annual taxes on dividends. After-tax traditional contributions allow you to indirectly contribute money to Roth-style accounts when you may not have been able to otherwise. For example, your income may be too high to make direct Roth IRA contributions or you may choose not to make Roth 401(k) contributions with your elective deferral because you’d prefer to make pre-tax contributions to reduce your taxable income. If that’s the case, the only other way you’d be able to get money into a Roth IRA for tax-free growth is to execute a Roth conversion, which may require you to pay income tax upon converting. The In-Plan Roth rollover Here is a strategy for how you can further amplify the benefits of after-tax traditional 401(k) contributions. If your employer allows you to make In-Plan Roth rollovers (not all plans offer the feature) – where you can effectively convert your traditional 401(k) to a Roth 401(k) – you can start the tax-free growth on your after-tax contributions even earlier. Any earnings on the after-tax traditional contributions would be considered taxable at the time of the In-Plan Roth rollover. The sooner this process is completed after the contribution is made, it would minimize taxable earnings. In other words, you don’t have to wait until you retire to get your after-tax contributions into a Roth 401(k). Steps To Take For Your Retirement Planning To see if your 401(k) plan offers after-tax traditional contributions, we recommend contacting your plan administrator. Note that Betterment for Business 401(k) plans currently do not offer the ability for you to make after-tax contributions to your Traditional 401(k), nor the ability to convert Traditional funds to Roth funds while the plan is active. Depending on each individual plan, these options could increase non-discrimination testing complexity and lead to unexpected refunds. Over time, we’ll continue to evaluate the value of these additional capabilities to our customers who hold Betterment 401(k) plans through their employer. For those that do have this option, you will want to consider all of the retirement accounts you have at your disposal, the tax benefits each offer, and your overall savings plan and cash-flow needs. If interested, you can speak with a financial planner to help you make the best decision for your retirement plan. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. This article is provided solely for educational purposes. It does not address the details of your personal situation and is not intended to be an individualized recommendation that you take any particular action, including rolling over an existing account. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. Specific factors that may be relevant to you include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account, consult tax and other advisors with any questions about your personal situation, and review our Form CRS relationship summary and other disclosures. If you currently participate in a 401(k) plan administered or advised by Betterment (or its affiliate), please understand that this article is part of a general educational offering and that neither Betterment nor any of its affiliates are acting as a fiduciary, or providing investment advice or recommendations, with respect to your decision to roll over assets in your 401(k) account or any other retirement account.
The Benefits of Rolling Over Your 401(k) or 403(b) into an IRA
Rolling over an old employer-sponsored retirement plan into an IRA can be highly ...The Benefits of Rolling Over Your 401(k) or 403(b) into an IRA Rolling over an old employer-sponsored retirement plan into an IRA can be highly beneficial. Here are three reasons to consider rolling over a 401(k) or 403(b). It might be easy to forget about 401(k)s from past employers, but you'll pay for it in the long run. Here are some reasons to consider rolling them over into one IRA. When you’ve switched jobs multiple times in your career, you may have participated in several employer-sponsored retirement plans, such as 401(k) and 403(b) plans. 401(k)s are generally provided by many for-profit employers, while 403(b) plans are most often used by the nonprofit sector. What many people don’t know is that when you leave a job, it’s important to consider carefully what you do next with your employer-sponsored plan. While working, one of the best ways to save for retirement is to fund an employer-offered plan because they often have important tax advantages and higher contribution limits than individual retirement accounts. But after you leave a job, there are several important reasons to consider rolling over funds from your 401(k) or 403(b). In this article, we’ll run through some of those reasons. 1. Accessing more investment options One of the main benefits of an IRA is that there are often more investment options than a 401(k) or 403(b) plan. If you contribute to your employer’s retirement plan, you might end up with only a few options chosen by the plan administrator. You might have to be heavily invested in company stock or you might have a limited number of high cost mutual funds to choose from. We don’t bring this up as a way of lambasting your administrator—they're simply trying to pick the options they believe should be made available to all employees—but many people don’t realize just how limiting these options can be. If you have an account with a previous employer, you may not have any worthwhile reasons to stay with the limited investment choices within the plan, and that’s one reason to consider rolling into an IRA. An IRA held at a brokerage or investment advisor, like Betterment, enables you to access a much broader universe of funds. For some investors, having the ability to pick and choose any variety of funds is important to them. At Betterment, our investment advice for an IRA (and any account type) is based on research-backed portfolio construction that pursues a high expected return for the risk you’re willing to take on, while maintaining global diversification and low costs. 2. Lowering Your Investment Fees The fees with an IRA can sometimes be lower than what is charged by your plan administrator. In many 401(k) and 403(b) plans, the expense ratios (i.e. fees) on mutual funds and ETFs can be much higher than those available within IRAs. Also, depending on your plan, by keeping funds within your 401(k) plan after leaving your employer, you may be subject to management fees. Moving to an IRA may involve taking on fees for investment advice and management or trading costs, but all-in, when you do the cost analysis, an IRA can often be less expensive than a 401(k) plan. When evaluating fees, do keep in mind, that if your current employer-sponsored plan is among the nation’s top plans, it could also be worth your while to hold your funds there. 3. Managing Your Portfolio in One Place For many investors, part of the value of rolling over to an IRA comes from the peace of mind of having all of their past retirement contributions (and other investments) in one place, rather than spread out across multiple old employer-sponsored plans and investment providers. When you understand the full picture of your retirement savings, you can often make better estimates of what your future retirement budget could look like. Furthermore, depending on your situation, if you move your retirement assets to one provider, you can also improve the tax-efficiency of your taxable investments using asset location. You can learn more about how Betterment’s Tax Coordination of IRAs and taxable accounts helps increase potential after-tax returns here. Roll over correctly, and you probably won’t need to worry about taxes. Even with the above benefits of rolling over, many people hesitate on the fear of causing themselves extra taxes. The good news is that when rolling over a 401(k)/403(b) or any other employer sponsored plan, we use the direct rollover method to prevent any withholding or negative tax consequences. There are two important things to remember in regards to taxes when rolling over: Be sure to designate a withdrawal from your current provider as a rollover. A rollover from a traditional 401(k) or 403(b) should enter a traditional IRA. A rollover from a Roth 401(k) or 403(b), should end up in a Roth IRA. If you withdraw from a traditional 401(k) or 403(b) as a non-rollover before age 59 ½, you will face a 10% penalty for an early withdrawal. If you rollover from a traditional plan into a Roth IRA, you will have to pay income taxes on the money. Both of these situations are unnecessary for most investors, except in certain circumstances. The key is that when deciding whether to rollover a retirement account, you should carefully consider your personal situation and preferences. In this article, we’ve provided three general reasons to consider rolling over to an IRA, but as an individual investor, your situation is unique. This article is not an individualized recommendation that you take any particular action—just useful information for you to think about. As suggested above, there are a variety of factors to consider when evaluating the choice to make a rollover. In addition to the points above, you might want to consider: The investment options you have access to The current and future fees and expenses you face The investment services you need (and could gain or lose) Any penalties you could face when withdrawing your money Protections from creditors and legal judgments Required minimum distributions associated with certain accounts The treatment of employer stock within your employer plan The world of retirement planning is complicated, no doubt about that. So, before deciding to roll over an employer-sponsored plan, you should research the details of your current account and consult tax professionals and other advisors with any questions about your specific personal situation.
What’s A Checking Account, And How Does It Work?
A checking account is a bank account for your normal money: the cash you might need day ...What’s A Checking Account, And How Does It Work? A checking account is a bank account for your normal money: the cash you might need day to day. Here’s everything you need to know about how they work. Checking accounts are at the core of all of our financial lives. Like many folks, I’ve had a checking account since I was 18, and while I’ve personally bounced between several banks (mostly because of geographical needs), one thing has remained constant. My checking account is the first thing I turn to for my daily needs: whether that be to pay my energy bill (which is continuously rising in this NYC heat), or to withdraw a $20 bill for pizza and some ice cream. Checking accounts are for your daily or monthly money. Because of this intimate relationship, your checking account should have some key functionalities. Below, you will find Betterment’s guide to checking accounts and the details you should consider when selecting what’s right for you. Please note that Betterment is not a bank and this information is intended to be purely educational. What are checking accounts good for? Monthly Transactions: Checking accounts generally do not have limits on the number of monthly transactions you can make electronically, through your debit card, or at the ATM. On the other hand, with savings accounts, you may be limited. Variety of ways to use: You can use your debit card at merchants around the globe, withdraw cash from an ATM, make electronic transactions, and even write checks. Automatic transfers to other financial institutions: With a checking account, you can easily transfer money between your own personal accounts or to others. FDIC Insurance: If your bank is an FDIC member, your money in a checking account is insured by the U.S. Government for up to $250,000. See the FDIC's website for more information. What are checking accounts not good for? Interest Rates: Banks pay an average of 0.06% on checking accounts, and most pay as little as 0.01%. Because of this, you should consider limiting the amount of funds that you keep in your checking account to cover daily or monthly expenses. Keeping too much cash may harm you in the long run due to inflation. What kind of fees can be expected with a checking account? Monthly Maintenance Fees: Most checking accounts come with a monthly maintenance fee. The fee varies by bank, but is generally in the range of $0-20. Oftentimes there are easy ways to get around this fee, by maintaining a certain average daily balance (set by each bank), or by establishing and maintaining a direct deposit to your account. This can come right from your paycheck. Overdraft Fees: If you withdraw more than the available balance in your checking account, you may be subject to overdraft or Non-Sufficient Fund fees. These fees are generally in the range of $35. Many banks offer overdraft protection, which allows you to link another account (i.e. savings account or credit card) to your checking to prevent overdrafts. ATM Fees: If you withdraw from an ATM outside of your bank’s network, you may be charged a fee, generally $2.50-$3, sometimes more. If you believe that you’ll frequently be in need of physical cash, you might choose to open an account with a bank that has several ATM locations in your area. Some Things To Know When Opening A Checking Account Requirements: To get your account open, you’ll generally need a government-issued ID. You may need to provide proof of address as well through a copy of a bill. Some checking accounts require a minimum deposit upon opening (can be as low as $25). If you are under 18, you’ll need a cosigner to open. Features: Many of these are listed in the bullet points above, but are all factors you should consider when choosing a checking account. What are the fees associated with your bank? What are the balance requirements? Do you have any withdrawal restrictions? Are there ATMs near where you live or work? Your everyday money doesn’t need all the thrills, but needs to fit in with your lifestyle. Promotions: Some banks will offer promotions for moving over a certain amount of funds or opening multiple accounts at the same time. Of course, this shouldn’t be the only factor you consider, and you shouldn’t keep too much cash in your checking account just to get a bonus. Make sure to read the fine print and familiarize yourself with the promotional details so that you know what you’re signing up for. Recommended Use Of A Checking Account A checking account should be used to pay bills and for your day-to-day transactions. Therefore, you need to keep enough to cover these expenses—Betterment estimates that you need five weeks’ worth of expenses in your checking account. Basically, enough to cover one month of bills and other expenses in advance. Some customers may ask: why not more? We recommend limiting your checking balance for the following reasons: Limits Excessive Spending: The more “free cash” you have, the more likely it is to be spent. Maintaining an appropriate checking balance can help you stay within your spending range. Make Your Money Work Harder: As we reviewed earlier, checking accounts pay a nominal interest rate, making them a poor option for you to grow your money. For the five weeks’ worth of expenses, we are sacrificing growth for every day needs. For longer term financial goals, consider opening a Betterment investment account that can help you grow your money further. Betterment’s Solution: Checking A checking account is the core to personal finance. Betterment’s mission has always been to help our customers do more with their money so that they can live better. Because of that, being our customers’ primary financial relationship has always been a key part in achieving that mission. With the launch of Checking, we’ll be one step closer to that. Below are some of the highlights of Checking, made specifically to align with your best interests: No minimum balance. No monthly maintenance fees. Unlimited worldwide ATM reimbursements using your Betterment Visa Debit card. Direct deposit from your paychecks. Ability to fund Checking from external bank accounts. Transfer directly to and from Betterment Checking to Betterment investment goals $250,000 in FDIC insurance Join us as we redefine the future of banking services to meet the needs of everyday consumers.
5 Financial Steps To Take After Getting A Raise
When you get a raise at work, consider how you can maximize your earnings to identify new ...5 Financial Steps To Take After Getting A Raise When you get a raise at work, consider how you can maximize your earnings to identify new financial opportunities. If you’ve recently received a raise, congratulations! You worked many long hours to deserve this, and now your hard work has paid off. Whether this pay increase was expected or whether it was a complete surprise, you may have many thoughts running through your mind, including calling your spouse or your Mom, deciding what restaurant you are dining at for a celebration, or how your new salary will give you more freedom to take that vacation you’ve been wanting to go on. While you should be excited, it’s important to take a step back to reassess your new pay and how it impacts your financial situation. Without doing so, you might find that your raise is more harmful than when you were making less money. To avoid having “raise-regret”, consider these five tips. 5 Things To Do After Receiving A Raise 1. Understand your new salary. While you deserve to celebrate, you may want to hold off on making any large purchases that were unplanned and not saved for with your new cash flow. Unlike a bonus, where you receive a lump sum, your raise is going to be broken out across all pay periods. Additionally, your raise is going to be stated as an increase to your gross pay. In other words, if you receive a $5,000 annual raise, that does not mean that you are pocketing $5,000 over the course of the next year because we have to pay taxes. If you aren’t familiar with the amount of taxes you pay, it could be worthwhile to check your last few pay stubs to determine how much was going to taxes versus how much you were keeping. Also note that depending on the amount of your raise and the time of year, it may push you into a higher tax bracket. You may want to speak with your Human Resources and Payroll departments to discuss your tax withholding, as well as an accountant or qualified tax professional to see how your increased earnings could impact your personal tax situation. 2. Increase your retirement savings. If your employer offers a 401(k) plan and matches your contributions, you should consider contributing at least enough to get the full match amount. Granted that you were already doing so, or that your employer does not offer a match, increasing your retirement savings may still be a great option. And, for those who are comfortable with their lifestyle prior to receiving a raise and don’t plan to make any changes, you can supercharge your raise by increasing your savings rate at an equivalent rate to your bonus. Determining how much you need to save for retirement will depend on several factors. Betterment offers retirement planning tools that can provide guidance on not only how much you should save, but the optimal accounts for you to do so based on your situation. 3. Establish, or revisit, your emergency fund. Having an emergency fund is one of the most important financial savings goals, as it can help ensure a level of financial security for yourself and your family. An adequate emergency fund will allow you to cover truly large and unexpected expenses, and can also cover your costs if you end up losing your job. It can even provide financial freedom in the case that you want to try your hand at a new career. Typically, Betterment advises that your emergency fund should cover three to six months worth of expenses. If you didn’t have one prior to your raise, now would be a great time to start. If you already have an emergency fund, you may need to reevaluate the amount needed if your spending does increase. 4. Pay off debt. If you have any debt, especially high interest debt, you may choose to use this new capital to pay off some of your loans. Let’s assume that you are a single taxpayer, live in a state with no state income tax, and at the start of 2019 your pay went from $60,000 to $65,000. Assuming you don’t itemize, that would place you squarely in the 22% Federal tax bracket. If you get paid twice per month (24 times per year), your net paycheck would go from $1,950 to $2,112, an increase of $162. If you have student loans of $50,000 at 7% interest that were to be paid over 10 years, your minimum monthly payment would be about $580. Increasing your monthly payment by $162 would allow you to pay off your loans almost three years faster, and also help you save almost $6,000 in interest payments! 5. Invest in yourself. Okay, let’s say you’re already on track with your retirement goals, have an emergency fund, and paid off your debt. What do you do then? Investing in yourself can have immense value. And the best part is, it can be done in many ways. Whether that’s taking a vacation to reset your mind after months of diligent work, taking a class to enhance your skills or learn a new one, or even making a material purchase that you feel will better your quality of life, investing in yourself can be a great way to reap the benefits of your hard earned work. If you plan on spending this extra money, just make sure that it’s within your means—don’t fall victim to lifestyle creep. Inherently, you may be a saver by nature. While it’s important to set goals, you may not have a specific goal for these additional savings. By investing additional cash flow in a well-diversified portfolio, you can help to create an even larger raise for yourself at some point down the line. For example, using a taxable investment account will give you more flexibility as to how and when these savings can be used.
Should I Speak With A Financial Advisor?
As a robo-advisor, we give you automated advice that’s accessible through our website and ...Should I Speak With A Financial Advisor? As a robo-advisor, we give you automated advice that’s accessible through our website and mobile app. We also have a team of CERTIFIED FINANCIAL PLANNER® professionals who can help answer your burning financial questions. Betterment believes that every investor should have access to fiduciary advice that helps them achieve their financial goals. That’s why our investment accounts have no minimum balance requirements, the tools are easy to use, and our fee is only 0.25%/year. For many investors, our online tools are all they need. We love that. But we know that personal finance is complicated. For some investors, having the ability to speak with a professional financial advisor is important. An advisor could help you: Personalize your account setup and features—such as your portfolio settings, account types, and tax strategies. Obtain financial advice on topics we haven’t yet automated—such as Social Security, budgeting, and life insurance. Coordinate with your other financial professionals—such as your CPA, real estate agent, and attorney. That’s why—in addition to our online tools—we offer access to CERTIFIED FINANCIAL PLANNER™ professionals who can provide the reassurance, personalization, and fiduciary advice that you need. Our CFP® professionals are salaried employees who don’t make commissions, which means that the advice that they provide to you is meant to put you on the best path forward. How do you know if you should speak with one of our CFP® professionals? Below is a list of the most common questions our advisors can help with. If any of these questions apply to you, consider reaching out to our advisors. Common Questions Our Advisors Can Help With GETTING THE MOST OUT OF BETTERMENT Which accounts are right for me? Which tax strategies are appropriate? How do I personalize my investments? What is Betterment’s investment strategy? How do I factor in my outside accounts? GOALS AND CASH MANAGEMENT What should my budget look like? How much should I be saving? How do I prioritize my goals? How much cash should I hold? Should I dollar cost average or make a lump sum deposit? INVESTMENT ANALYSIS Are my investments appropriate? What risk level should I choose? How do I factor in my outside accounts? Am I properly diversified? What fees am I paying elsewhere? How do I customize my portfolio? CREDIT AND DEBT Should I pay off debt or invest? How can I improve my credit score? How can I optimize my credit cards? TAX OPTIMIZATION Which tax strategies are appropriate? Should I use tax loss harvesting? Is asset location right for me? Am I withholding the right amount of taxes? Which municipal bonds are best for me? How do I move my accounts tax-efficiently? Which accounts can help me control taxes? EQUITY-BASED COMPENSATION Should I exercise my stock options? What are the tax consequences of doing so? How much of my employer’s stock should I hold? RETIREMENT PLANNING Is a Roth or Traditional IRA better for me? Is an IRA or 401(k) better for me? Should I do a “backdoor” Roth IRA? Should I roll over my accounts? How much do I need to save for retirement? Which funds should I choose in my 401(k)? When should I claim Social Security? Is asset location right for me? EMERGENCY SAVINGS How much do I need? Where should I keep my emergency funds? Should I invest my emergency funds? COLLEGE PLANNING How much do I need to save for college? Does a 529 account make sense for me? Which 529 account should I choose? How should I invest for college? PURCHASING A HOME What home can I afford? Should I invest my down payment savings? Will buying a home help me save on taxes? Can you coordinate with my mortgage broker? GETTING MARRIED How do we combine our investments? Should we merge our bank accounts? Should we update our W-4s? Which accounts are we eligible for? How do we update our beneficiaries? Do we need an estate plan? How can I coordinate with my CPA? LIFE INSURANCE AND ESTATE PLANNING How much life insurance should I have? How do I “ladder” term policies? Can you coordinate with my estate planner? Ways To Get Help From An Advisor At Betterment Each investor is unique. That’s why we offer multiple ways for you to work with one of our advisors. You can choose the service that best matches your needs and price point. Compare services and sign up for what's right for you. 1. Betterment Advice Packages One-time access Costs $299 to $399 per call No minimum balance Our Advice Packages allow you to speak to a Betterment CFP® professional on a one-off basis. Simply pay a flat fee each time you call. This can be the best option if you only want one-time or infrequent access to a financial advisor. Choose your package and book your call. 2. Betterment Premium Plan Unlimited access Costs 0.40% per year $100,000 minimum This plan offers unlimited phone and email access to our team of CFP® professionals. The cost is only 0.40% per year. This can be the best option if you want an ongoing relationship with our team of advisors. Open an account, if you haven’t already done so. Then just click “Settings” to upgrade your account to the Premium Plan. We’ve Got You Covered We are known for our automated technology, which is informed by our investment experts. If you want the best of both worlds—technology and a CFP® professional to guide you—consider speaking with our financial planners.
How To Invest When You Have Family Members With Disabilities
Having family members with disabilities requires lifelong planning that might not be ...How To Invest When You Have Family Members With Disabilities Having family members with disabilities requires lifelong planning that might not be easily addressed by typical financial planning advice. Planning appropriately for their lives can ensure they are protected and secure. If you have children or other family members with disabilities, one of your most precious financial priorities may be providing security for your loved ones. As a caretaker, you may be able to provide attention and financial stability during your lifetime but there are a different set of challenges to overcome if you are to pass away. Special Needs Trusts are an extremely beneficial tool that can ensure that your family member will be taken care of and provide you with peace of mind. What Is A Trust Account? Generally speaking, a trust allows an individual - otherwise known as the grantor - to provide specific guidelines on how funds that are placed in a trust can be used. Essentially, a trust allows the grantor to have more control over what happens to their assets after they pass on, while also providing unique estate and tax planning benefits. Along with the grantor, there are two other major players involved with the creation of a trust: A trustee, who is an individual or group of individuals charged with the responsibility of adhering to the rules outlined in the trust documents by the grantor. A beneficiary, who is the person or person(s) that are entitled to the trust’s assets. In most circumstances, the grantor, trustee, and beneficiary are different people; in some cases one person can play multiple of these roles. There are two broad categories of trusts: revocable (able to be changed) or irrevocable (not able to be changed and considered to be a final gift). Special Needs Trusts Benefits Special Needs Trusts provide three specific advantages for a beneficiary with disabilities. First and foremost, the creation of the trust allows you to set aside funds in a specific vehicle that is intended to support your beneficiary with disabilities. Additionally, you have the luxury to hand-select the trustee who will manage finances accordingly when your beneficiary otherwise may not be fit to manage this on their own. Finally, by having assets placed in a Special Needs Trust, you can ensure that government benefits, such as healthcare coverage, Supplemental Security Income (SSI), rent subsidies, and job assistance, will still be available for your loved one. Many of these public programs have financial limitations that could prevent someone with disabilities from receiving benefits. For example, someone may be eligible for SSI, but if they have assets in their name of over just $2,000, SSI is not available. A Special Needs Trust can shield those assets and keep your beneficiary eligible to receive SSI. These types of government benefits can be extremely valuable for someone with a disability to help make sure they have an income stream and a place to live after you have passed. To be effective, a Special Needs Trust should be irrevocable, otherwise these benefits may be at risk. Types of Special Needs Trusts There are three types of Special Needs Trusts: First Party The assets in a first party Special Needs Trust rightfully belong to the person with disabilities. Commonly, this pertains to inherited assets, settlements, or windfalls - even their own personal savings. As long as these funds are held within the Special Needs Trust, the beneficiary can still qualify for government benefits. During the beneficiary’s lifetime, funds in the trust can be used to pay for the needs not covered by government program support. When the beneficiary passes away, any remaining funds must be paid back to the government, up to the amount of Medicaid care that the beneficiary had received during their lifetime. Third Party A third party Special Needs Trust can be established by any parent or family member of someone with disabilities. The grantor gifts their own assets into the trust, such as bank or investment accounts, that can be used during the beneficiary’s lifetime to cover their needs. Like the first party trust, the third-party trust doesn’t negatively impact the beneficiaries ability to receive government benefits. However, unused funds at the end of the beneficiaries lifetime do not have to be paid back to the government. This allows grantors to ensure that their beneficiary with disabilities is taken care of first, but then funds can be left to other family members after. Pooled In first and third party Special Needs Trusts, you must appoint a trustee(s). If you don’t know an individual that you are confident can act responsibly as a trustee, a pooled trust allows you to name a charity as manager. Funds for multiple beneficiaries are pooled together for investment purposes, but each beneficiary has their own respective account. At the end of the beneficiary’s life, there is a payback clause to the government for Medicaid benefits, and the charity will also receive payment for managing the trust. Managing A Special Needs Trust At Betterment Trustees have a long list of responsibilities, including a fiduciary responsibility to make sure the trust’s assets are in a sound investment plan with the right risk profile that meets the needs of the beneficiaries. Betterment trust accounts can be ideal for trustees who seek a professionally managed portfolio with a hands-off approach. Betterment will provide automated fiduciary advice that includes risk recommendations, a diversified investment portfolio, automated rebalancing, tax-efficiency, and low fees. As trustee, you can create multiple goals for an individual trust, allowing you to customize investment needs for each financial objective. For example, this means that you can invest funds for short-term and long-term needs at varying risk levels. Additionally, our platform allows you to manage multiple trusts at once, and you can access them all from one single login. While Betterment can help trustees invest trust assets appropriately, we are not able to help in the creation of a new trust. If you are considering establishing a Special Needs Trust, we recommend seeking the guidance of an estate attorney.