Our Blog

DWM is committed to learning for its team, clients and friends. In this changing world, it’s extremely important to stay current in all areas impacting your financial future.

We encourage all of team members to “drill down” on current topics important to you and contribute to our weekly blogs.  Questions from our clients and their families are often featured in our blogs.  

Financial literacy for clients and their families is very important to us.  We generally hold an annual wealth management seminar for all of our clients.  We encourage regular, at least semi-annual, meetings in person with our clients to review family updates, progress on financial goals, asset allocation and performance of investments.  We’re happy to assist younger members of the family as part of our total wealth management program.

Here’s our latest blog:

 

 

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Traditional vs Roth 401(k): Where Should I Be Putting my Money?

Written by Jake Rickord.

Traditional vs Roth

Recently, we have had quite a few conversations reviewing the age-old debate of whether Roth 401(k)s or Traditional 401(k)s are better. Well perhaps not age-old considering Roth 401(k)s came out in 2006, but still a common question with no quick answer. To start, let’s clarify exactly what a 401(k) is and how a Roth 401(k) compares and contrasts to a Traditional version.

Starting in 1980, the first 401(k) program was established through Johnson Companies. This retirement program provides employees the ability to shift their income straight from payroll into an investment account just for them. In a Traditional 401(k) plan, this shift comes in the form of deferred payment. Previously being reliant on company-set pension schedules, 401(k) plans transfers the legwork and adoptability of retirement savings away from company management and into the hands of workers themselves. Through this vehicle, employees can take a portion of their pay on a regular schedule that would normally be included in their check and instead deposit it into a corporate-structured, employee-managed investment account. These plans quickly became a company favorite, with over 50% of current companies either already providing these plans or considering it today.

Additionally, 401(k)s provide employees with an additional benefit: Tax-deferral for contributions. While contribution amounts to this account are capped annually ($19,500 for 2020 without catch-up), all amounts transferred are considered tax-deferred, i.e., employees can directly reduce their taxable income in the year contributed by their total contribution amount for that year. For example, if you were paid $100,000 in 2020 and deferred $19,000 into your 401(k), your total taxable income for 2020 would be $81,000.

For years, Traditional 401(k)s (and by proxy extremely similar accounts such as 403bs or 457s), dominated the market of employer retirement plans as they were one of the only real players in the game. However, in 2006, Roth 401(k)s (which are modeled after Roth IRAs created in 1997) shook all of that up. Why? Because these Roth plans offer up no current year tax deduction, but once contributed, the principal is never taxed again and the earnings are never taxed.  Not to mention that since the contributions are already taxed, if rolled into a Roth IRA upon retirement, there are no required minimum distributions (“RMD”s) during the account owners lifetime, and beneficiaries are not taxed as well which provides some extra incentive for individuals who look to provide significant inheritances to their loved ones.

The addition of this designation to retirement plans opened up a lot of questions that we’ve seen over the past few years as more and more employers begin to offer the option. The most prevalent one being the titular “How much should I be investing in my Roth 401(k) vs my Traditional 401(k)?”. And the answer may not be as simple as it seems at first glance.

The taxability of the contributions to each is the driving factor behind deciding which form of retirement plan works the best for each client. The long term understanding of tax rates can help clear up this picture. Take the situation below for example:

roth trad comparison with same rates

Chart 1: Value of Roth vs. Traditional 401(k)

As stated in the blurb above the figures given in Chart 1, the calculations hinge based on tax rates over time. In theory, both accounts end up holding the same net value. However, the idea that tax rates over time will remain the same is highly unlikely. The 2017 Tax Act cut rates initially but they gradually ascend back to the former, higher rates. Further, with trillions of dollars of U.S. debt hanging over our heads, tax rates look to go up in the coming years.  The result of this expected increase in tax rate indicates that the tax on the Traditional (also known as “regular”) 401(k) column shown in Chart 1 should be bumped up to something like 32% or higher, resulting in 4% less overall value of Traditional 401(k) assets than that of the Roth 401(k). While that may be only $1,200 dollars less in the example above, the larger the 401(k) value at retirement age the more significant this difference will be. Then again, this example assumes you stay at the same income now and in the future which may not be realistic. For many retirement will likely drop them into a lower tax bracket. As such, the Traditional 401(k) may make more sense. For a fun analysis to play around with this idea, try using this calculator.

One additional consideration not shown in the above chart is that additional taxable income in retirement years can also cause Traditional 401(k)s to have less appeal than Roth 401(k)s. If you expect to get a sizeable pension, annuity payout, or other income stream during retirement, the tax-deferral of the Traditional 401(k) contributions works less in your favor as you’ll likely be taxed at a similar or (in rare circumstances) higher rate than that of when you were working.

Further, the younger an individual is, the more likely that they will be in a lower tax bracket than when they look to retire. For this reason, we generally hope to see young individuals contributing at least 50% of their 401(k) contributions towards their Roth 401(k).

Here’s a different situation in which Traditional 401(k)s may be a better option. For example, if your current year income totals slightly above the current year tax bracket, it would likely be more beneficial to contribute more to a Traditional 401(k) in order to drop down a bracket and have all your income taxed at a lower current year rate.

At the end of the day, there are many variables to consider when choosing between a Traditional or Roth 401(k). One needs to make assumptions about one’s current and future financial situation. Frankly, those can be tough assumptions to make, but fortunately the argument over Roth vs Traditional is not an exclusive debate! In actuality, a significant number of workers will find that a mix of these savings, for example 50% of 401(k) contributions being allocated to Traditional and 50% to a Roth 401(k) can work out to receive the benefits of both sides, slightly lower taxes now as well as slightly lower taxes in the future!

Here at DWM we work with our clients to ensure that proper analysis through financial planning and tax planning provides us insight into the benefits that each type of 401(k) plan can offer on a case-by-case basis. If you would like to review this information and how it may apply to you in more detail, please feel free to reach out! 

 

https://dwmgmt.com/

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Are Offices Becoming Extinct?

Written by Les Detterbeck.

death of the office

Berkshire Hathaway held their annual meeting on Saturday- via live stream from an empty arena. For the event, Warren Buffet put on a tie for the first time in seven weeks. During the four hours of the presentation, Mr. Buffet questioned the need for office space and predicted a significant change in the supply and demand.

This week, the Economist’s Catherine Nixey put it more bluntly in her article titled “Death of the Office.” Even before the coronavirus hit, office space use was changing. A combination of the digital revolution, increasing rents and increased demand for more flexibility had resulted in over half of the U.S. workforce working remotely, at least some of the time. Across the globe, working from home (“WFH”) has been increasing as well. Now, COVID-19 has dramatically accelerated the trend.

Ms. Nixey believes the first large push into offices was started by the East India Company (founded in 1600 and dissolved in 1874). Their offices, inside of buildings featuring Palladian pillars and marble steps, were not simply to get work done, but also to demonstrate East India’s profitability, strength and efficiency.  Large organizations, like East India and governments, required a lot of “paper to be pushed” and managing proved easiest when all the workers were in one spot. The Industrial Revolution (1760-1830) produced an explosion in business and a huge increase in demand for office workers.  New steam team trains brought needed office workers into the city to sit behind desks to fill the growing needs of the developing professions of finance, law and retail. 

Mary Beard, professor classics at Cambridge, believes that the amount of time our generations have spent in offices would have been unheard of in earlier societies. Today, most of us spend more time working than at leisure.  For the Romans, it was the opposite- primarily leisure and only sometimes business. Romans didn’t need to go to an office. Their tablets and styluses were very portable and the Romans were able to spend much of their time outside and never behind a desk.

Fred Taylor, who pioneered time-and-motion studies in the 1890s, determined that workers performed best when seated at lines of desks with flat tops.  He is considered the father of the “open-plan office.” Fast forward 130 years, and current time-and-motion studies have found that office work not only takes up the bulk of our time, but the best part of it; when we are most alert.  Furthermore, most managers have been spending at least 20 hours per week in meetings.

It’s no surprise that writers including Balzac, Dickens, Flaubert, Melville and Kafka have satirized the office and office workers. T. S. Eliot, who once worked in a bank, saw of the crowds of commuters crossing London Bridge similar to Dante’s vision of hell: “I had not thought death had undone so many.” Walt Whitman sneered of clerks as men “of minute leg, chalky face and hollow chest.” 

In the last few decades, to make the experience of an office worker more palatable, changes have been made. There are many different new designs-office buildings shaped like beehives, baskets, rocket ships, and fish.  Inside there may be ping pong tables and other amenities; many of them brightly colored.  Some companies provide free food.  Designer Thomas Heatherwick suggests that the office building needs to be an inspiring “temple in which to toil, places of beauty that we can admire, even love.”

Love may be going a little far, but there are some key advantages of going to the office.

Lucy Kellaway, who wrote a newspaper column about the “absurdities” of office life, has written about the “great artificiality” we embrace when we step into an office.  We become professionals.  That’s not exactly how it feels at home; particularly if the children are there, you are unshaven in sweat clothes and living in chaos. Ms. Kellaway says that “putting on our business clothes and going to the office allows us to become a different person.”

The escape to the office has been out of reach for many for almost two months. Online encounters are fine and save driving time. But, it’s not the same as being together in the office. The relationships and collaborations we have in person, whether with family, team members and clients, are different than those by phone or online. Yes, humans need offices. Certainly, there will be changes in how companies use offices, but working from home, for many, is not feeling quite as great as they thought it might be.

The situation reminds us of Mark Twain. When asked by a reporter about his obituary which was mistakenly reported in a newspaper, Mr. Twain quipped: “The reports of my death are greatly exaggerated.” No one can predict the future, yet it seems that while office space and use will continue to change, offices will not become extinct any time soon.

https://dwmgmt.com/

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The Health IRA

Written by Grant Maddox.

hsa-desk-shot-sapling-wealth-1500x1000

Health savings accounts (HSAs) are tax-deductible savings plans that allow you to put aside savings for future health care expenses. HSAs were introduced in 2004 as part of the Medicare Prescription Drug, Improvement, and Modernization Act, which was signed into law by President George W. Bush. Since their creation, advancements in technology and popularity have allowed investors to not only access their HSAs more efficiently but also grow their accounts considerably.

While HSAs are primarily known as a tax-advantage plan for paying medical expenses, they can also help you save for retirement. Although it has become common practice that we income earners should contribute to our respective company-sponsored retirement plans or similar workplace defined contribution plans and other IRAs as the best way to save or invest our way towards retirement, recent developments in HSAs have created new strategies to help work towards financial independence and retirement expenses. 

Before getting into potential strategies for Health Savings Accounts, let's first look at who is eligible to open a Health Savings Account:

  • Must be 18 years of age or older
  • Must be covered under a qualified high-deductible health plan (HDHP). For 2020, the IRS defines an HDHP as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family.
  • May not be covered under any health plan that is not a qualified HDHP
  • May not be claimed as a dependent on another individual's tax return
  • Cannot be over the age of 65

 

Now, if you meet the criteria listed above, you are eligible to set up a Health Savings Account. Here is where the fun begins. HSA holders in 2020 can choose to contribute up to $3,500 for an individual and $7,000 for a family (HSA holders 55 and older get to save an extra $1,000). HSAs are considered 'triple tax-free' assets. 1) All contributions to your HSA account are tax-deductible. 2) All funds in your account grow tax-free. 3) Withdrawals to pay for qualified medical expenses are tax-free. Unlike a 401(k) or IRA, an HSA does not require the account-holder to begin withdrawing funds at a certain age. However, funds taken out for non-qualified expenses are both taxed and incur a 20% penalty if made before age 65. After age 65, non-qualified withdrawals are still taxed but have no penalty.

 As the popularity of these accounts has increased over the years, we have seen more and more HSA providers include investment options as an added benefit to their services, which gives investors all the more reason to take advantage of the benefits of HSAs. What we suggest as a long-term strategy to turn your HSA from a healthcare plan to a retirement strategy is:

  1. To max out your contribution every year.
  2. Don't spend it! This may sound counterintuitive, but we're looking at an HSA primarily as an investment tool and tax-exempt future bucket of money. Let it grow!
  3. Keep all of your medical receipts. That $900 invoice for physical therapy in 2019 can be used anytime in the future; for example, you can pull that $900 out in 2059 tax-free!
  4. The key to maximizing your unspent contributions, of course, is to invest them wisely. Don't leave your HSA account in cash!
  5. It may be wise to set up a separate savings account for unplanned future medical expenses so that you aren’t scrambling to find funds to pay for these expenses out of pocket.

 

In golf, we are all familiar with the main clubs in our bag. Our woods, irons, and (eventually) the putter. However, every once in a while we need a little extra help getting our ball to the green. That's where the rescue club comes into play. If your woods and irons are your 401(k) and IRAs, then the HSA is kind of like your rescue club to give you that extra push towards the green. The HSA can be a great addition to your long-term planning.

Do you still have questions about HSAs and how they fit into your overall plan? Please do not hesitate to reach out to your dedicated DWM team members to learn about new developments in this area, and how an HSA may fit into your overall planning. 

https://dwmgmt.com/

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