Author: Susan Ikola

SECURE Act 2.0: What it means for 401(k) Plans

Susan Ikola Economics
SECURE Act 2.0: What it means for 401(k) Plans

On May 5th, the House Ways and Means Committee unanimously passed the Securing a Strong Retirement Act of 2021. The bill is expected to be voted on later this summer by the full House, where it’s already seeing strong support.

The new bill, nicknamed SECURE Act 2.0, builds on the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, which expanded retirement coverage to more Americans. In addition, the new bill includes several provisions designed to ease retirement plan administration which should encourage more employers to adopt 401(k) plans.

Key provisions of SECURE Act 2.0 related to 401(k) plans include:

Expansion of automatic enrollment. Requires new 401(k) plans to automatically enroll employees at a default rate between 3% and 10% and automatically escalate contributions at 1% per year to at least 10% (but no more than 15%). Of course, employees can always change their contribution rate or opt out of the plan at any time. Existing plans are grandfathered, and new businesses as well as those with 10 or fewer employees are exempt.Enhanced tax credits for small employer plans. The SECURE Act provides businesses with fewer than 100 employees a three-year tax credit for up to 50% of plan start-up costs. The new bill increases the credit to up to 100% of the costs for employers with up to 50 employees. In addition, SECURE Act 2.0 offers a new tax credit to employers with 50 or fewer employees, encouraging direct contributions to employees. This new tax credit would be as much as $1,000 per participating employee.Increased age for required minimum distributions (RMDs) to 75. The SECURE Act increased the RMD age to 72 (from 70.5).  The new bill increases the RMD age even further: to 73 in 2022; 74 in 2029 and ultimately 75 in 2032.Higher catch-up limits. Catch-up contributions mean older Americans can make increased contributions to their retirement accounts. Under current law, participants who are 50 or older can contribute an additional $6,500 to their 401(k) plans in 2021. The new bill increases these limits to $10,000 for 401(k) participants at ages 62, 63, and 64.Ability to match on student loans. Heavy student debt burdens prevent many employees from saving for retirement, often preventing them from earning valuable matching contributions. Under this provision of the bill, student loan repayments could count as elective deferrals, and qualify for 401(k) matching contributions from their employer. The bill would also permit a plan to test these employees separately for compliance purposes.One-year reduction in period of service requirements for long-term part time workers. The 2019 SECURE Act requires employers to allow long-term part-time workers to participate in the 401(k) plan if they work 500-999 hours consecutively for 3 years. The new bill reduces the requirement to two years. Keep in mind that plans with the normal 1000 hours in 12 months eligibility requirement for part-time employees must allow participants who meet that requirement to enter the plan.Retroactive first year elective deferrals for sole proprietors. Thanks to the SECURE Act,  employers can retroactively establish a profit sharing plan for the previous year up until their business tax deadline. This allows the owner to receive profit sharing for the previous year without having to make any employee deferrals. SECURE Act 2.0 extends the retroactive rule to sole proprietors or single member LLCs, where only one owner is employed. For example, a sole proprietor owner would have until April 15, 2022 to allocate profit sharing and elective deferrals for the 2021 plan year.Penalty-free withdrawals in case of domestic abuse. The new bill allows domestic abuse survivors to withdraw the lesser of $10,000 or 50% of their 401(k) account, without being subject to the 10% early withdrawal penalty. In addition, they would have the ability to pay the money back over 3 years.Expansion of Employee Plans Compliance Resolution System (EPCRs). To ease the burdens associated with retirement plan administration, this new legislation would expand the current corrections system to allow for more self-corrected errors and exemptions from plan disqualification.Separate application of top heavy rules covering excludable employees. SECURE 2.0 should make annual nondiscrimination testing a bit easier by allowing plans to separate out certain groups of employees from top heavy testing. Separating out groups of employees is already allowed on ADP, ACP, and coverage testing.Eliminating unnecessary plan requirements related to unenrolled participants. Currently, plans are required to send numerous notices to all eligible plan participants. The new legislation eliminates certain notice requirements.Retirement savings lost and found – SECURE Act 2.0 would create a national, online lost and found database. So-called “missing participants” are often either unresponsive or unaware of 401(k) plan funds that are rightfully theirs.Want a better 401(k)?
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A Guide to Safe Harbor 401(k) Plans

Susan Ikola Investment
A Guide to Safe Harbor 401(k) Plans

 

“Your 401(k) plan failed.” Those words can strike fear in the hearts of even the most seasoned business owners. However, there’s a way to avoid the stress of your plan’s annual nondiscrimination testing. By setting up a safe harbor 401(k), you can bypass some of the tests, such as the ADP and ACP tests, and focus on helping your employees save for their financial futures. But is a safe harbor 401(k) right for your company? Read on for answers to frequently asked questions about safe harbor 401(k) plans.

What is nondiscrimination testing?

Before we explore safe harbor plans, let’s talk about nondiscrimination tests. Mandated by ERISA, these annual tests help ensure that 401(k) plans benefit all employees—not just business owners or highly compensated employees (HCEs). Because the government provides significant tax benefits through 401(k) plans, it wants to ensure that these perks don’t disproportionately favor high earners.

The three main nondiscrimination tests are:

Actual deferral percentage (ADP) test—Compares the average salary deferrals of HCEs to those of non-highly compensated employees (NHCEs).Actual contribution percentage (ADC) test—Compares the average employer contributions received by HCEs and NHCEs.Top-heavy test—Evaluates whether a plan is top-heavy, that is, if the total value of the plan accounts of “key employees” is more than 60% of the value of all plan assets. (IRS defines a key employee as an officer making more than $185,000, an owner of more than 5% of the business, or an owner of more than 1% of the business who made more than $150,000 during the plan year.]

Why is it hard for 401(k) plans to pass nondiscrimination testing?

It’s actually easier for large companies to pass the tests because they have many employees at varying income levels contributing to the plan. However, small and mid-size businesses may struggle to pass if they have a relatively high number of HCEs. If HCEs contribute a lot to the plan, but NHCEs don’t, there’s a chance that the 401(k) plan will not pass nondiscrimination testing.

So, you may be wondering: “What happens if my plan fails?” Well, you’ll need to fix the imbalance by returning 401(k) plan contributions to your HCEs or by increasing contributions to your NHCEs. If you have to refund contributions, affected employees may fall behind on their retirement savings—and that money may be subject to state and federal taxes! If you don’t correct the issue in a timely manner, there could also be a 10% penalty fee and other serious ramifications.

If you offer employees a safe harbor 401(k) plan, you can avoid these time-consuming, headache-inducing compliance tests.

What is a safe harbor 401(k) plan?

So, let’s back up for a minute. What exactly is a safe harbor 401(k) plan? Put simply, it’s a defined contribution retirement plan that’s exempt from nondiscrimination testing. It’s like a typical 401(k) plan except it requires you to contribute to the plan on your employees’ behalf, sometimes as an incentive for them to save in the plan. This mandatory employer contribution must vest immediately—rather than on a graded or cliff vesting schedule. This means your employees can take these contributions with them when they leave, no matter how long they’ve worked for the company.

To fulfill safe harbor requirements, you can elect one of the following general contribution formulas:

Basic safe harbor match—Employer matches 100% of employee contributions, up to 3% of their compensation, plus 50% of the next 2% of their compensation.Enhanced safe harbor match—Employer matches 100% of employee contributions, up to 4% of their compensation.Non-elective contribution—Employer contributes 3% of each employee’s compensation, regardless of whether they make their own contributions.

These are only the minimum contributions. You can always increase non-elective or matching contributions to help your employees on the road to retirement.

What are the benefits of a safe harbor 401(k) plan?

At the end of the day, you want your employees to achieve the retirement they envision—and a safe harbor 401(k) plan can help them pursue it (while saving you time and effort). Consider these top five reasons to elect a safe harbor 401(k) plan:

1. Attract and retain top talent—Offering your employees a matching or non-elective contribution is a powerful recruitment tool. In fact, a Betterment for Business study found that nearly half of respondents said a company match was a factor in whether or not they accepted a new job. Plus, an employer contribution is a great way to reward your current employees (and incentivize them to save for their future).

2. Improve financial wellness—Studies show that financial stress impacts employees’ ability to focus on work. By helping your employees save for retirement, you help ease that burden and potentially improve your company’s productivity and profitability.

3. Save time and stress—Administering your 401(k) plan takes time—and it can become even more time-consuming and stressful if you’re worried that your plan may not pass nondiscrimination testing. Skip the tests altogether by electing a safe harbor 401(k).

4. Reward your top earners—With a safe harbor 401(k) plan, you can ensure that you and your HCEs will be able to max out your retirement contributions (without the fear that contributions will be returned if the plan fails nondiscrimination testing).

5. Reduce your taxable income—Like any employer contribution, safe harbor contributions are tax deductible! Plus, you can receive valuable tax credits to help offset the costs of your 401(k) plan.

n ideal solution for small businesses

If you’ve failed nondiscrimination testing in the past—or are concerned that your lower earning employees won’t participate in a 401(k) plan—a safe harbor plan may be the best solution for your small business.

Get a safe harbor 401(k) plan that works for you and your employees. Start now.

What are the key cost considerations of offering a safe harbor 401(k) plan?

The main consideration is that safe harbor contributions could increase your overall payroll by 3% or more depending upon your participation rates and contribution formula. Therefore, it’s important to think about whether your company has the financial capacity to make employer contributions on an annual basis.

The good news is that 401(k) plans—including those with safe harbor provisions—are more affordable than they have been in the past. In fact, providers like Betterment now offer comprehensive plan solutions at low costs. Learn more now.

How do I set up a safe harbor 401(k) plan?

If you’re thinking about setting up a safe harbor plan or adding a safe harbor match to your existing plan, here are a few safe harbor 401(k) rules you need to know:

Starting a new plan—For calendar year plans, October 1 is the final deadline for starting a new safe harbor 401(k) plan. But don’t cut it too close—you’re required to notify your employees 30 days before the plan starts. So, if you’re mulling over a safe harbor plan, be sure to talk to your plan provider well in advance.Adding a safe harbor match to an existing plan—If you want to add a safe harbor match provision to your current plan, you can include a plan amendment that goes into effect January 1. However, employees are required to receive a notice at least 30 days prior.Adding a safe harbor nonelective contribution to an existing plan—Thanks to the SECURE Act, plans that want to become a nonelective safe harbor plan have newfound flexibility. An existing plan can implement a 3% nonelective safe harbor provision for the current plan year if amended 30 days before the close of the plan year. Plans that decide to implement a nonelective safe harbor contribution of 4% or more have until the end of the following year in which the plan will become a safe harbor. Importantly, the SECURE Act eliminated the usual employee notice requirement for nonelective safe harbor plans.Communicating with employees—Every year, eligible employees need to be notified about their rights and obligations under your safe harbor plan (except for those with nonelective contributions, as noted in the previous bullet). Notice must be given at least 30 days, but no more than 90 days, before the beginning of the plan year. Want to learn more about notices? Visit the IRS website.A plan provider like Betterment will be able to assist you with everything you need to create the safe harbor 401(k) plan that’s right for your company.

How do I select a safe harbor 401(k) plan provider?

When it comes to choosing the right provider, it’s all about asking the right questions. Here’s how Betterment would answer them:

Do you have experience setting up safe harbor 401(k) plans?

Our team has significant experience working with safe harbor 401(k) plans. We help you understand each step of the onboarding process so you can start your plan quickly and easily. Plus, we have the expertise you need to handle every detail—from safe harbor 401(k) eligibility rules to investment options.How much does your service cost?
Our fees are a fraction of the cost of most providers. Plus, we’re always fully transparent about fees so there are no surprises for you or your employees.How easy will it be for me to administer our plan on an ongoing basis?
Our intuitive platform works to reduce your administrative burden. That means you’ll stay informed of what you need to do and when you need to do it—simplifying plan administration.Do you offer financial wellness support for employees?
Our high-tech solution enables us to give employees holistic, personalized advice on everything from contribution rates to investments. Plus, we can link employees’ outside investments, savings accounts, IRAs, and spousal/partner assets, so they can get a big picture view of their long- and short-term financial goals.

What is the deadline to adopt a safe harbor 401(k) plan for the 2021 plan year?

If you are looking to implement a safe harbor plan for the 2021 plan year, it must be live by October 1, 2021. Sign up with Betterment by August 2, 2021 to start reaping the benefits of a safe harbor plan this plan year!

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Betterment is not a tax advisor. Please consult a qualified tax professional.

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Financial Advice From Betterment’s LGBTQ+ Community

Susan Ikola Investment
Financial Advice From Betterment’s LGBTQ+ Community

 

While not everybody feels that their identity affects their finances, queer people face disproportionate levels of homelessnness, carry more debt, and have more healthcare hurdles than their straight, cis-gendered peers.

This Pride month, we’re highlighting stories from members of Betterment’s queer community and sharing the creative ways that they approach money in their everyday life.

Get to know our employees with a fun fact.

Troy Healey, 401(k) Client Success Manager (he/him): I lived in South Africa for a year.

Crys Moore, Product Design Manager (they/them): I’m an avid rock climber. I’ve climbed all over the U.S, as well as Mexico and Cuba.

Sumaya Mulla-Carrillo, Social Media Coordinator (she/her): In addition to my full time job, I’m also a professional dancer.

Ricky Whitcomb, Customer Support (he/him): I love cooking and run a food/cooking Instagram account.

Woot Hammink, Banking Operations Manager (he/him): My family has farms on three continents!

Maria Howe, Sales Development Representative (she/they): I almost never wear matching socks—must be my Aries energy.

The path to financial freedom looks different for everybody. Here are some of the goals we’re working towards.

Woot Hammink, Banking Operations Manager (he/him): My partner and I have been mulling over buying a home! It’s a big, scary investment in a place like New York City.

Crys Moore, Product Design Manager (they/them): Saving for a house.

Sumaya Mulla-Carrillo, Social Media Coordinator (she/her): Saving for a trip to Italy, and also working towards 1.5 million in retirement.

Maria Howe, Sales Development Representative (she/they): Now that I’m on top of my student loans, my partner and I are starting to save for a home.

Ricky Whitcomb, Customer Support (he/him): Saving for my wedding.

Troy Healey, 401(k) Client Success Manager (he/him): Saving for a cruise ship trip for post COVID-19 travel!

Healthy habits make all the difference in doing what’s best for you and your money. Here are some ways our employees are reaching their goals.

Sumaya Mulla-Carrillo, Social Media Coordinator (she/her): I use auto-deposit for pretty much every account, and I also save any windfalls or extra money from dancing professionally towards my financial goals.

Troy Healey, 401(k) Client Success Manager (he/him): Automation! I deposit $100 every Tuesday into my cruise savings!

Ricky Whitcomb, Customer Support (he/him): Prepping my lunches as opposed to ordering out, and saving a percentage of my paycheck.

Woot Hammink, Banking Operations Manager (he/him):

First: Recurring deposits to a Home Ownership goal. We’ve got to start from somewhere.Second: We check in with each other frequently, and talk about what we’re open to and comfortable with. Since we’re not married, ownership gets even more complicated.

Maria Howe, Sales Development Representative (she/they): This may be counterintuitive, but after a lot of time spent in grad school and having a tight budget, little indulgences (like dinner out with my partner) are key to making sure I don’t go wild and break my budget.

Crys Moore, Product Design Manager (they/them): I auto-deposit into my house goal. Otherwise, I’d spend that money on something else.

Our approach to money can change drastically over time, and as we age, perspectives on money shift. Members of the BetterPride community shared advice to their younger self.

Ricky Whitcomb, Customer Support (he/him): Open a savings account and don’t touch it.

Crys Moore, Product Design Manager (they/them): Money is real and has real consequences. It’s not monopoly money. That student loan debt comes back around. Choose wisely young Crys!

Maria Howe, Sales Development Representative (she/they): I’d tell myself to go look up IRAs! I knew so little about tax advantaged accounts until working at Betterment. My money could have worked harder for me if I had known more.

Woot Hammink, Banking Operations Manager (he/him):  I’d first agree with my younger self that money should be more colorful than our green USD. I’d also take saving earlier more seriously, and spend less money at Dairy Queen.

Troy Healey, 401(k) Client Success Manager (he/him): Just make sure if you are going to spend it, you got it in the bank!

Sumaya Mulla-Carrillo, Social Media Coordinator (she/her): Take it slow and steady. I always want to achieve my goals as fast as possible, but in reality I have to slow down and stay the course for a while before seeing results.

Has your identity influenced your relationship with money in any way? Why or why not?

Maria Howe, Sales Development Representative (she/they):  As a queer person who was socialized as a woman, I subconsciously didn’t think of myself as a future breadwinner during formative years. Now that my partner and I are at the point in our lives where we are saving for goals like a house and family, I’m more aware of living in a society where a gender wage gap exists and I’m working hard to catch up!

Crys Moore, Product Design Manager (they/them): Even though I have a ton of skin privilege because I’m white, being visibly queer sets me back compared to my cisgender heterosexual peers. Society works for them in ways it doesn’t work for me. Most things are a bit harder.

Sumaya Mulla-Carrillo, Social Media Coordinator (she/her): Yes and no—I don’t think it influences my spending or saving habits, but I do know that I’ll eventually have more expenses around having a child, or any legal fees that come with adoption. I’m always mentally preparing myself for that major life expense.

Ricky Whitcomb, Customer Support (he/him): When I was younger I definitely felt the need to have the nicest brands and newest styles and now I’m a very happy boring dresser who doesn’t spend his paychecks on jeans.

Troy Healey, 401(k) Client Success Manager (he/him): No! I am a frugal spender… frugality applies to gay or straight!

Woot Hammink, Banking Operations Manager (he/him): Definitely! Being in a “nontraditional” relationship blurs a lot of lines when it comes to long term planning and saving. I’ve never felt like I have a traditional “Game of Life” style plan, where a simple path can lead me to success.

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What Employers Should Know About Timing of 401(k) Contributions

Susan Ikola Investment
What Employers Should Know About Timing of 401(k) Contributions

Timing of employee 401(k) contributions (including loan repayments)

When must employee contributions and loan repayments be withheld from payroll?

This is a top audit issue for 401(k) plans, and requires a consistent approach by all team members handling payroll submission. If a plan is considered a ‘small plan filer’ (typically under 100 eligible employees), the Department of Labor is more lenient and provides a 7-business day ‘safe harbor’ allowing employee contributions and loan repayments to be submitted within 7 business days of the pay date for which they were deducted.

If a plan is larger (>100 eligible employees), the safe harbor does not apply, and the timeliness is based on the earliest date a plan sponsor can reasonably segregate employee contributions from company assets. Historically, plans leaned on the outer bounds of the requirement (by the 15th business day of the month following the date of the deduction effective date), but today with online submissions and funding via ACH, a company would generally be hard-pressed to show that any deposit beyond a few days is considered reasonable.

To ensure timely deposits, it’s imperative for plan sponsors to review their internal processes regularly. All relevant team members — including those who may have to handle the process infrequently due to vacations or otherwise — understand the 401(k) deposit process completely and have the necessary access.

I am a self-employed business owner with income determined after year-end. When must my 401(k) contributions be submitted to be considered timely?

If an owner or partner of a company does not receive a W-2 from the business, and determines their self-employment income after year-end, their 401(k) contribution should be made as soon as possible after their net income is determined, but certainly no later than the individual tax filing deadline. Their 401(k) election should be made (electronically or in writing) by the end of the year reflecting a percentage of their net income from self employment. Note that if they elect to make a flat dollar 401(k) contribution, and their net income is expected to exceed that amount, the deposit is due no later than the end of the year.

Timing of employer 401(k) contributions

We calculate and fund our match / safe harbor contributions every pay period. How quickly must those be deposited?

Generally, there’s no timing requirement throughout the year for employer matching or safe harbor contributions. The employer may choose to pre-fund these amounts every pay period, enabling employees to see the value provided throughout the year and to benefit from dollar cost averaging.

Note that plans that opt to allocate safe harbor matching contributions every pay period are required to fund this at least quarterly.

When do we have to deposit employer contributions for year-end (e.g., true-up match or safe harbor deposits, employer profit sharing)?

Employer contributions for the year are due in full by the company tax filing deadline, including any applicable extension. Safe harbor contributions have a mandatory funding deadline of 12 months after the end of the plan year for which they are due; but typically for deductibility purposes, they are deposited even sooner.

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4 Ways Betterment Can Help Limit the Tax Impact Of Your Investments

Susan Ikola Economics
4 Ways Betterment Can Help Limit the Tax Impact Of Your Investments

In the US, approximately 33% of households have a taxable investment account—often referred to as a brokerage account—and approximately 50% of households also have at least one retirement account, like an IRA or an employer-sponsored retirement account.

We know that the medley of account types can make it challenging for you to decide which account to contribute to or withdraw from at any given time.

Let’s dive right in to get a further understanding of:

What accounts are available and why you might choose them.The benefits of receiving dividends.Betterment’s powerful tax-sensitive features.

How Are Different Investment Accounts Taxed?

Taxable Accounts

Taxable investment accounts are typically the easiest to set up and have the least amount of restrictions.

Although you can easily contribute and withdraw at any time from the account, there are trade-offs. A taxable account is funded with after-tax dollars, and any capital gains you incur by selling assets, as well as any dividends you receive, are taxable on an annual basis.

While there is no deferral of income like in a retirement plan, there are special tax benefits only available in taxable accounts such as reduced rates on long-term gains, qualified dividends, and municipal bond income.

Key Considerations

You would like the option to withdraw at any time with no IRS penalties.You already contributed the maximum amount to all tax-advantaged retirement accounts.

Traditional Accounts

Traditional accounts include Traditional IRAs, Traditional 401(k)s, Traditional 403(b)s, Traditional 457 Governmental Plans, and Traditional Thrift Savings Plans (TSPs).

Traditional investment accounts for retirement are generally funded with pre-tax dollars. The investment income received is deferred until the time of distribution from the plan. Assuming all the contributions are funded with pre-tax dollars, the distributions are fully taxable as ordinary income. For investors under age 59.5, there may be an additional 10% early withdrawal penalty unless an exemption applies.

Key Considerations

You expect your tax rate to be lower in retirement than it is now.You recognize and accept the possibility of an early withdrawal penalty.

Roth Accounts

Includes Roth IRAs, Roth 401(k)s, Roth 403(b)s, Roth 457 Governmental Plans, and Roth Thrift Saving Plans (TSPs)

Roth type investment accounts for retirement are always funded with after-tax dollars. Qualified distributions are tax-free. For investors under age 59.5, there may be ordinary income taxes on earnings and an additional 10% early withdrawal penalty on the earnings unless an exemption applies.

Key Considerations

You expect your tax rate to be higher in retirement than it is right now.You expect your modified adjusted gross income (AGI) to be below $140k (or $208k filing jointly).You desire the option to withdraw contributions without being taxed.You recognize the possibility of a penalty on earnings withdrawn early.

Beyond account type decisions, we also use your dividends to keep your tax impact as small as possible.

Four Strategies Betterment Uses To Help You Limit Your Tax Impact

1. We use any additional cash to rebalance your portfolio.

When your account receives any cash—whether through a dividend or deposit—we automatically identify how to use the money to help you get back to your target weighting for each asset class.

Dividends are your portion of a company’s earnings. Not all companies pay dividends, but as a Betterment investor, you almost always receive some because your money is invested across thousands of companies in the world.

Your dividends are an essential ingredient in our tax-efficient rebalancing process. When you receive a dividend into your Betterment account, you are not only making money as an investor—your portfolio is also getting a quick micro-rebalance that helps keep your tax bill down at the end of the year.

And, when market movements cause your portfolio’s actual allocation to drift away from your target allocation, we automatically use any incoming dividends or deposits to buy more shares of the lagging part of your portfolio.

This helps to get the portfolio back to its target asset allocation without having to sell off shares. This is a sophisticated financial planning technique that traditionally has only been available to larger accounts, but our automation makes it possible to do it with any size account.

Beyond dividends, Betterment also has a number of features to help you optimize for taxes. Let’s demystify these three powerful strategies.

Performance of S&P 500 With Dividends Reinvested

Source: Bloomberg. Performance is provided for illustrative purposes to represent broad market returns for the U.S. Stock Market. The performance is not attributable to any actual Betterment portfolio nor does it reflect any specific Betterment performance. As such, it is not net of any management fees. The performance of specific U.S. Stock Market funds in the Betterment portfolio will differ from the performance of the broad market returns reflected here.

2. Tax loss harvesting.

Tax loss harvesting can lower your tax bill by “harvesting” investment losses for tax reporting purposes while keeping you fully invested.

When selling an investment that has increased in value, you will owe taxes on the gains, known as capital gains tax. Fortunately, the tax code considers your gains and losses across all your investments together when assessing capital gains tax, which means that any losses (even in other investments) will reduce your gains and your tax bill.

In fact, if losses outpace gains in a tax year you can eliminate your capital gains bill entirely. Any losses leftover can be used to reduce your taxable income by up to $3,000. Finally, any losses not used in the current tax year can be carried over indefinitely to reduce capital gains and taxable income in subsequent years.

How do I do it?

When an investment drops below its initial value—something that is very likely to happen to even the best investment at some point during your investment horizon—you sell that investment to realize a loss for tax purposes and buy a related investment to maintain your market exposure.

Ideally, you would buy back the same investment you just sold. After all, you still think it’s a good investment. However, IRS rules prevent you from recognizing the tax loss if you buy back the same investment within 30 days of the sale. So, in order to keep your overall investment exposure, you buy a related but different investment. Think of selling Coke stock and then buying Pepsi stock.

Overall, tax loss harvesting can help lower your tax bill by recognizing losses while keeping your overall market exposure. At Betterment, all you have to do is turn on Tax Loss Harvesting+ in your account.

3. Asset location.

Asset location is a strategy where you put your most tax-inefficient investments (usually bonds) into a tax-efficient account (IRA or 401k) while maintaining your overall portfolio mix.

For example, an investor may be saving for retirement in both an IRA and taxable account and has an overall portfolio mix of 60% stocks and 40% bonds. Instead of holding a 60/40 mix in both accounts, an investor using an asset location strategy would put tax-inefficient bonds in the IRA and put more tax-efficient stocks in the taxable account.

In doing so, interest income from bonds—which is normally treated as ordinary income and subject to a higher tax rate—is shielded from taxes in the IRA. Meanwhile, qualified dividends from stocks in the taxable account are taxed at a lower rate, capital gains tax rates instead of ordinary income tax rates. The entire portfolio still maintains the 60/40 mix, but the underlying accounts have moved assets between each other to lower the portfolio’s tax burden.

Here’s what asset location looks like in action:

4. We use ETFs instead of mutual funds.

Have you ever paid capital gain taxes on a mutual fund that was down over the year? This frustrating situation happens when the fund sells investments inside the fund for a gain, even if the overall fund lost value. IRS rules mandate that the tax on these gains is passed through to the end investor, you.

While the same rule applies to exchange traded funds (ETFs), the ETF fund structure makes such tax bills much less likely. In fact, most of the largest stock ETFs have not passed through any capital gains in over 10 years. In most cases, you can find ETFs with investment strategies that are similar or identical to a mutual fund, often with lower fees.

We go the extra mile for your money.

Following these four strategies can help eliminate or reduce your tax bill, depending on your situation.

At Betterment, we’ve automated these and other tax strategies, which means tax loss harvesting and asset location are as easy as clicking a button to enable it. We do the work, and your wallet can stay a little fuller.

Learn more about how Betterment helps you maximize your after-tax returns.

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Important 401(k) Compliance Dates and Deadlines

Susan Ikola Economics
Important 401(k) Compliance Dates and Deadlines

Key 401(k) Compliance Dates

While many of these responsibilities are handled by Betterment, as a 401(k) plan sponsor it’s important that you are aware of important dates and deadlines associated with administering your plan.

DateResponsibilityPrevious Plan YearCurrent Plan YearJan 31BettermentIRS Forms 1099-R available to participants.Feb 10BettermentAnnual Return of Withheld Federal Income Tax (Form 945) due.Mar 1ParticipantDeadline for employees who participated in multiple plans to notify sponsors of excess deferrals (402(g) excess).Mar 15BettermentDeadline for refunds to participants for failed ADP/ACP tests(s). Failure to meet this deadline could result in a 10% tax penalty for plan sponsors.Mar 15Plan SponsorEmployer contributions (e.g., profit sharing, match, safe harbor) due for deductibility for incorporated entities.¹ Failure to meet this deadline could preclude plan sponsor from tax deductibility.Deadline to establish plan for the prior tax yearApr 1Plan SponsorDeadline to confirm that Initial Required Minimum Distributions (RMDs) were taken by participants who: turned 72 ² before previous year-end; are retired/terminated; and have a balanceApr 15 ³Plan SponsorEmployer contributions (e.g., profit sharing, match, safe harbor) due for deductibility for LLCs, LLPs, sole proprietorships (unincorporated entities).¹ Failure to meet this deadline could preclude plan sponsors from tax deductibility.Apr 15BettermentDeadline to complete corrective distributions for 402(g) excess deferrals.Jul 29 ⁴Plan SponsorDeadline to distribute Summary of Material Modifications (SMM) to participants (only if plan was amended).Jul 31 ³Betterment ⁴Deadline to electronically submit Form 5500 (and third-party audit if applicable) OR request an extension (Form 5558).Sep 30Plan SponsorDeadline to distribute Summary Annual Report (SAR) to participants and beneficiaries (unless Form 5500 extension filed; deadline to distribute will be December 15).Oct 1Plan SponsorDeadline to establish a new safe harbor match 401(k) plan.Oct 15 ³Plan SponsorDeadline to electronically submit Form 5500 and third-party audit, if applicable, if granted a Form 5558 extension.Dec 1Plan Sponsor (Notices prepared by Betterment)Deadline to distribute supplemental safe harbor notice to participants for safe harbor (“maybe”) plans. ⁵Dec 1Plan Sponsor (Notices prepared by Betterment)If applicable, distribute to participants for next plan year: Safe harbor notice, Qualified default investment alternative (QDIA) notice, Automatic enrollment noticeDec 1Plan Sponsor (Amendment drafted by Betterment)Deadline to execute amendment to make a traditional plan any type of safe harbor plan (match or nonelective).Deadline to execute amendment to make a traditional plan a safe harbor match plan for following plan yearDec 15Plan Sponsor (SAR prepared by Betterment)Deadline to distribute Summary Annual Report (SAR) to participants, if granted a Form 5558 extension.Dec 31Plan SponsorDeadline to make safe harbor and other fixed employer contributions.Deadline for Annual Required Minimum Distributions (RMDs). ArtDec 31Plan SponsorDeadline to execute amendment to make traditional plan a 3% safe harbor nonelective plan for the current plan year

 

¹ Assumes calendar tax year. Additionally, if your company files a tax extension, you have until the extension deadline to fund the contributions.

² This was increased from 70½ in 2019 and earlier years.

³ Or first business day thereafter.

⁴ 210 days after the year end of the effective amended date, which is July 28 in leap years.

⁵ Safe harbor “maybe” Plans (specified in the plan document) are able to adopt a safe harbor nonelective plan 30 days before the end of the plan year. Please review your plan document to confirm if the plan has adopted such a provision.

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What are New Comparability Profit Sharing Plans?

Susan Ikola Investment
What are New Comparability Profit Sharing Plans?

To retain their tax-qualified status, 401(k) plans are prohibited from discriminating in favor of key owners, officers, and highly compensated employees. Some small businesses that want to help their employees save for retirement may put off offering profit sharing contributions due to the financial burden of a “pro-rata” allocation compared to what the owners might get.

For these types of small businesses, a specific profit sharing plan design may provide the solution. Called new comparability, it allows businesses to remain in compliance while making larger contributions to its older participants, typically owners and highly compensated employees.

Different Testing Approach

Most profit sharing plans (i.e., pro rata, integrated plans), are deemed to pass nondiscrimination automatically using the safe harbor approach, while new comparability plans are required to pass the general test to prove its not discriminating against non-highly compensated employees.

New comparability allows employees to be segmented into more groups so that owners can be considered separately from, say, non-owner HCEs.  In addition, testing is based on projected benefits at retirement that are derived from contributions, rather than on the contributions themselves. This “cross-testing” is a bit of a hybrid approach whereby the 401(k) (a defined contribution plan) is tested as if it were a traditional pension (i.e., defined benefit) plan.

Plans using this method are able to pass testing and be compliant because younger NHCEs have more time until retirement, and so their projected benefit based on lower contributions falls within an acceptable range of the projected benefit of older HCEs receiving a larger contribution.

Using the new comparability plan design, a plan could, for instance, make 401(k) contributions of 10% to owners and 6% to NHCEs. Or contribute 10% to one owner, 8% to another owner, and 5% to NHCEs.

Minimum “gateway requirement”

To take advantage of the new comparability profit sharing plan design, the contribution to all NHCEs must be a minimum of:

One-third of the highest contribution rate given to any HCE; or5% of the participants gross compensation

Firms Well-Suited to New Comparability

The new comparability profit sharing plan design is a good solution for companies with fewer than 50 employees that have a group of older owners and/or HCEs that are important to the success of their organization.

Companies that tend to implement this design feature include:

Law FirmsMedical PracticesAccounting FirmsService Companies

Plan sponsors interested in this feature can include the profit sharing contribution in their plan documents as discretionary, meaning they are never obligated to make a contribution in any given year.  This is helpful, too, since your employee demographics will likely change from year to year and so may your profit sharing allocation decisions.

In addition to the benefits that a retirement plan provides to employees, profit sharing plans provide real benefits to small business owners. Profit sharing contributions are tax deductible and not subject to payroll taxes (e.g. FICA).

The new comparability profit plan design gives small business owners significant flexibility to offer a 401(k) that meets the needs of their organization.

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How to Close an Investor Leads Program

Susan Ikola Investment , , , ,
How to Close an Investor Leads Program

Using an Accredited Investor Lead Program is a great way to build your investment business quickly and efficiently. Accredited investor leads are highly qualified, experienced investors who have completed thousands of private transactions and earned top ratings in the investment industry. These highly skilled professionals are ideally suited to give you the insight, education, and contacts necessary to grow your online business. They also offer a host of services that can assist you in managing the day-to-day operations of your lead generation system.

 

The Accredited Investor Lead program connects investors with qualified entrepreneurs looking for private equity and venture capital investments. Providing investment capital to companies registered with the National Association of Securities Dealers (NASD) and the Financial Industry Regulatory Authority ( FINRA) investors help you achieve your revenue goals quickly and easily. In addition, through the investor leads, you will have access to companies that are ready to launch their online businesses and are eager to invest in your company.

In the past, investors acted as sole proprietors, acting as the sole funding source and taking all responsibility for capital raising and business operations. Since the advent of the internet and online capital raising opportunities, it has become increasingly difficult for an individual investor to raise capital. It has also become more difficult for a company to explore the online market to raise the money it needs. The result has been less capital raising and more limited opportunities for business growth. The goal of the Accredited Investor Lead Program is to bridge the gap between entrepreneurs and businesses by providing entrepreneurs access to the capital they need through an Accredited Investor.

Through the Accredited Investor Lead Program, investors have access to thousands of companies ready to start their online businesses. They can act as a middle-man for these companies in brokering deals, getting involved in negotiations with brokers, funding, and providing general knowledge of operations. In addition, through the accredited investor program, investors have access to companies that are willing to bid on specific pre-con condos or other real estate investment properties. 

The first step is to contact some local real estate investors to see what they are interested in. For example, you can go to investor clubs or investment groups and talk with other investors about investing in pre-con condos. Alternatively, you can visit the websites of some large publicly traded real estate investment companies. Usually, these companies will list information about their investments, properties they are selling, contact information for their sales representatives, and sometimes details about their overall performance. Many of these websites also offer directories of independent real estate investors. For example, some of these directories include realtor databases from local markets.

When you contact investors about investing in pre-con condos through an investor leads program, you should provide them with detailed business plans for each project, financial projections, and information about your team. If you are serious about making a profit, you need to know the number of units you expect to sell over the project’s life. In addition, you should provide investors with copies of your credit reports or your business plan if you are self-financed.

Once you have identified potential investors, you should arrange a meeting with them. At this meeting, you can present the opportunity for investors to invest in pre-con units and discuss the details of the investment opportunities. It would be best to talk about your team and the business plan for the projects you are targeting. If you can, take the time to answer any questions the potential investors may have before you enter into negotiations for investing in pre-con units through an accredited investor leads program.

There are some final steps you will want to take to close a deal. If you have identified at least four investors, you will want to have a definitive “step-by-step” closing before selling the pre-con units. Your sales pitch should end with a formal thank-you note. This will ensure that you don’t forget any of the vital information you shared with the potential investors, and it gives the investors a chance to take their time before committing to your offer.

Helping Latinx Employees With Their Unique Retirement Needs

Susan Ikola Investment
Helping Latinx Employees With Their Unique Retirement Needs

National Hispanic American Heritage Month spans from September 15 through October 15 and, as a part of this month of recognition, we asked ourselves at Betterment for Business: What are the unique challenges facing Latinx-American employees today? How can we learn about these challenges and address them as a part of our ongoing effort to promote Diversity, Equity and Inclusion at Betterment?

It turns out that not only do Latinx-Americans—the largest ethnic group in the U.S.—have disproportionately low retirement savings, but they also have disproportionately low access to savings. Plus gender and age also play a factor.

For employers committed to building out a financial wellness program that helps all employees, understanding the intersectional issues and how Latinx employees have unique needs and challenges is key. In this article, we’ll cover three important learnings that can help inform your wellness programs, and build support for Latinx employees during this National Hispanic American Heritage Month and beyond.

Latinx Employee Savings Lag Behind White Employees

According to a 2018 report by Unidos US and the National Institute of Retirement Security, “four out of five Latino households have less than $10,000 in retirement savings, compared to one out of two White households.”

And when comparing otherwise similar White and Latino households, researchers also found that “69% of working Latinos do not own any assets in a retirement account, compared to 37% of White households.”

When Latino families are saving for retirement, they are saving significantly less money than their White counterparts. That said, younger Latinxs are eager to save. For example, they are 25% more likely to own an investment property than non-Hispanic White households, according to the Hispanic Wealth Project.

Encourage Latinx employees to continue to diversify their investments and to set aside retirement savings in addition to their other assets—especially if you offer an employer-sponsored match that can help them reach their goals even faster.

ccess to Employer-Sponsored Retirement Plans is Also an Issue

For Latinx-Americans, access to retirement-sponsored retirement plans is “significantly” lower than it is for White workers. Overall, about 31% of Latinx workers participate in a retirement plan, compared to 53% of White workers.

But, to put this into further context, when Latinxs have access and are eligible to participate in a plan, “they show slightly higher take-up rates when compared to other races and ethnicities.”

In other words, when a retirement plan is offered, Latinxs are more likely to take advantage, but they are significantly less likely to have that access in the first place.

As such, Latinx-Americans, particularly younger populations, feel the pressure of providing a social safety net to their families and loved ones. They are 77% more likely to live in multi-generational households than non-Hispanic White households and, when surveyed, one half agreed that it was more important to help friends and family members now than to save for their own retirement.

It is important to offer a full-picture financial wellness solution that helps to address the unique needs of Latinx workers, which can include planning for the retirement of their loved ones or investing in additional real estate for their growing families.

Older Women are Disproportionately Affected

More than one in five Latinx women over the age of 65 live in poverty. And without the income from work, this population would not be able to meet the cost of basic living expenses.

Separately, Black and Latinx women make up a disproportionate share of domestic workers, with Latinx women making up over 29% of domestic workers as compared to only 17% of all other workers. Only 19% of domestic workers have access to health or retirement benefits, compared to 49% of other workers.

COVID-19 exacerbated this disparity. According to the UN, domestic workers were particularly vulnerable to the economic effects of COVID-19 globally, causing 46% of Latinx survey respondents (compared to 42% of non-Hispanic Whites) to draw from their savings to cover expenses since the beginning of the pandemic.

Consider your employee population and how factors like the pandemic may have affected them and the members of their household. Offer financial planning services and remind them that it’s never too late to get started with their savings, debt repayment, or other financial goals.

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Why More Hispanic Americans Should Be Investing In The Stock Market

Susan Ikola Financial
Why More Hispanic Americans Should Be Investing In The Stock Market

For the Hispanic American community, home ownership is commonly seen as one of the few ways to build wealth.

One reason may be the tangible nature of home ownership; a home is an asset you can both see and touch. Another reason may be the perception that owning a home ensures the wellbeing of your family. Yet, even with this focus on real estate assets, the Hispanic home ownership rate—at 50%—is still far from that of white Americans.

As of 2019, the wealth gap between Hispanic and white families stood at $0.21 per $1 of white American wealth. In this article, I’ll cover some reasons why Hispanic individuals may want to consider investing in the stock market alongside real estate as a path to building sustainable generational wealth.

Two reasons why investing in the stock market can help the Hispanic community.

I can relate to the instinct that home ownership should be “Item No. 1” on the financial checklist. I was 21 years old when my mother and I bought our first home. We needed at least $5,000 for a down payment, which might as well have been $50,000. After making some sacrifices, we finally saved enough to buy our first house for just under $150,000. It was all the money we had.

Reflecting back today as a financial planner with over 20 years of experience, I realize how risky our investment was. We achieved our goal of home ownership, but had no equity or savings with which to cover unexpected expenses.

Be prepared for emergencies.

What would have happened if one of us had gotten sick or injured? The expenses could have bankrupted us and cost us the house we had worked so hard to buy.

One of the most common tenets of financial stability is building an emergency fund. An emergency fund consists of your fixed expenses—like rent, food, childcare, etc.—saved in an account that you keep separate from your checking or savings account.

Typically, a robust emergency fund is three to six months of expenses, but starting off with a smaller goal that’s more motivating to you may help you reach it faster. You should also consider saving for your emergency fund in a low-risk investment account, since this will help your money’s value keep up with, or even surpass, inflation.

Build generational wealth.

Access to investments has changed dramatically over the past 20 years. Companies like Betterment now offer low cost investment options with low minimums and fees, offering young families the ability to use the money they already have to build wealth—all while mitigating the kind of financial risk that my mother and I took by putting every penny we had into buying a house.

Investing even a small amount and adding to your investments over time can be a great way to build wealth. If and when you finally decide to purchase a home, a portfolio of diversified investments alongside real estate is an ideal foundation from which to build solid, sustainable wealth for future generations.

Don’t be afraid to get started.

Today, there are few houses available for under $150,000. Young Hispanic Americans are earning more on average than previous years, but they face new barriers to home ownership. Many are burdened by student loans, lack of affordable housing, and limited inventory, among other factors. This does not mean that young Hispanic people will never purchase a home or build wealth. It just means that we have to be open to planning, saving what we can consistently, and investing in the stock market.

Betterment strives to help its customers build wealth more sustainably, so that families can achieve their financial goals—including home ownership—while helping to account for financial risks.

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