April 2022 - Page 2 of 2 - Hobbs Group Advisors

What Is a Roth 401(k)?

Posted on April 8, 2022January 22, 2024 by splashme@splashomnimedia.com

While many people are familiar with the benefits of traditional 401(k) plans, others are not as acquainted with Roth 401(k)s.

Since January 1, 2006, employers have been allowed to offer workers access to Roth 401(k) plans. And starting in 2023, retirement rules were updated to allow more retirement plans the ability to offer Roth contributions.^1,2

As the name implies, Roth 401(k) plans combine features of 401(k) plans with those of a Roth IRA.^3,4

With a Roth 401(k), contributions are made with after-tax dollars – there is no tax deduction on the front end – but qualifying withdrawals are not subject to income taxes. Any capital appreciation in the Roth 401(k) also is not subject to income taxes.

What to Choose?

For some, the choice between a Roth 401(k) and a traditional 401(k) comes down to determining whether the upfront tax break on the traditional 401(k) is likely to outweigh the back-end benefit of tax-free withdrawals from the Roth 401(k).

Please remember, this article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax professional before adjusting your retirement strategy to include a Roth 401(k).

Often, this isn’t an “all-or-nothing” decision. Many employers allow contributions to be divided between a traditional 401(k) plan and a Roth 401(k) plan – up to overall contribution limits.

Considerations

One subtle but key consideration is that Roth 401(k) plans aren’t subject to income restrictions like Roth IRAs are. This can offer advantages to high-income individuals whose Roth IRA has been limited by these restrictions. (See accompanying table.)

	Traditional 401(k)	Roth 401(k)	Roth IRA
Contributions	Contributions are made with pretax dollars	Contributions are made with after-tax dollars	Contributions are made with after-tax dollars
Income Limits	No income limits to participate	No income limits to participate	For 2023, contribution limit is phased out between $218,000 and $228,000 (married, filing jointly), and between $138,000 and $153,000 (single filers)
Maximum Elective Contribution*	Contributions are limited to $22,500 in 2023, ($30,000 for those over age 50)*	Contributions are limited to $22,500 in 2023, ($30,000 for those over age 50)*	Contributions are limited to $6,500 for 2023, ($7,500 for those over age 50)
Taxation of Withdrawals	Qualifying withdrawals of contributions and earnings are subject to income taxes	Qualifying withdrawals of contributions and earnings are not subject to income taxes	Qualifying withdrawals of contributions and earnings are not subject to income taxes
Required Distributions	In most cases, distributions must begin no later than age 73	In most cases, distributions must begin no later than age 73	There is no requirement to begin taking distributions while owner is alive
* This is an aggregate limit by individual rather than by plan. The total of an individual’s aggregate contributions to his or her traditional and Roth 401(k) plans cannot exceed the deferral limit – $22,500 in 2023 ($30,000 for those over age 50).

Source: IRS.gov, 2023

Roth 401(k) plans are subject to the same annual contribution limits as regular 401(k) plans – $22,500 for 2023; $30,000 for those over age 50. These are cumulative limits that apply to all accounts with a single employer; for example, an individual couldn’t save $22,500 in a traditional 401(k) and another $22,500 in a Roth 401(k).⁵

Another factor to consider is that employer matches are made with pretax dollars, just as they are with a traditional 401(k) plan. In a Roth 401(k), however, these matching funds accumulate in a separate account, which will be taxed as ordinary income at withdrawal.

Setting money aside for retirement can be part of a sound personal financial strategy. Deciding whether to use a traditional 401(k) or a Roth 401(k) often involves reviewing a wide range of factors. If you are uncertain about what is the best choice for your situation, you should consider working with a qualified tax or financial professional.

1. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth 401(k) distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals also can be taken under certain other circumstances, such as a result of the owner’s death or disability. Employer matches are pretax and not distributed tax-free during retirement. Once you reach age 73, you must begin taking required minimum distributions.
2. Forbes.com, January 5, 2023
3. In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
4. Roth IRA contributions cannot be made by taxpayers with high incomes. In 2023, the income phaseout limit is $153,000 for single filers, $228,000 for married filing jointly. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals also can be taken under certain other circumstances, such as a result of the owner’s death or disability. The original Roth IRA owner is not required to take minimum annual withdrawals.
5. IRS.gov 2023

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2024 FMG Suite.

Putting a Price Tag On Your Health

Posted on April 5, 2022January 23, 2024 by splashme@splashomnimedia.com

We hear over and over again how important it is to maintain a healthy lifestyle. But being healthy for its own sake isn’t easy—especially when you’re facing down temptation or battling procrastination. For some, the monetary benefits of a healthy lifestyle may offer helpful incentives.

Being healthy not only makes you feel good, but it may also help you financially. For example, one study found a steep increase in annual medical expenditures for individuals whose Body Mass Index was above 30.¹

If you’re wondering how your health habits might be affecting your bottom line, consider the following:

Regular preventative care can help reduce potential healthcare costs. Even minor illnesses can lead to missed work, missed opportunities, and potentially lost wages. Serious illnesses often involve major costs like hospital stays, medical equipment, and doctor’s fees.
Individuals can lower dental costs by receiving regular checkups and performing basic preventative care.²
When poor health persists over time, lost earnings may make it harder to save for retirement.
Some habits that lead to poor health can be expensive in themselves. Smoking is a classic example. Smokers also pay higher premiums for health care and life insurance, and their houses, cars, and other possessions tend to devalue at a quicker rate because of damage from smoking. The total economic cost of smoking is more than $600 billion a year, including nearly $240 billion in direct medical care for adults.³
Obesity is another expensive condition that affects many Americans. In fact, obese adults spend $1,861 more per year on direct healthcare costs than adults with a healthy weight.⁴

By focusing on your health, eliminating harmful habits, and employing preventative care, you may be able to improve your self-confidence and quality of life. You may also be able to reduce expenses, enjoy more of your money, and boost your overall financial health.

1. Journals.org, 2023. “Association of body mass index with health care expenditures,” landmark study first published in 2021
2. NIH. gov, 2023. “The impact of underutilization of preventive dental care by adult Medicaid participants,” landmark study first published in 2022
3. CDC.gov, 2023
4. CDC.gov, 2023

Countdown to College

Posted on April 3, 2022January 23, 2024 by splashme@splashomnimedia.com

As a parent, you of course want to give your child the best opportunity for success, and for many, attending the “right” university or college is that opportunity. Unfortunately, being accepted to the college of one’s choice may not be as easy as it once was. Additionally, the earlier you consider how you expect to pay for college costs, the better. Today, the average college graduate owes $28,950 in debt, while the average salary for a recent graduate is $55,360.^1,2

Preparing for college means setting goals, staying focused, and tackling a few key milestones along the way—starting in the first year of high school.

Freshman Year
Before the school year begins, you and your child should have at least a handful of colleges picked out. A lot can change during high school, so remaining flexible but focused on your shared goals is crucial. It may be helpful to meet with your child’s guidance counselor or homeroom teacher for any advice they may have. You may want to encourage your child to choose challenging classes as they navigate high school. Many universities look for students who push themselves when it comes to learning. However, a balance between difficult coursework and excellent grades is important. Keeping an eye on grades should be a priority for you and your child as well.

Sophomore Year
During their sophomore year, some students may have the opportunity to take a practice SAT. Even though they won’t be required to take the actual SAT for roughly a year, a practice exam is a good way to get a feel for what the test entails.

Sophomore year is also a good time to explore extracurricular activities. Colleges are looking for the well-rounded student, so encouraging your child to explore their passions now may help their application later. Summer may also be a good time for sophomores to get a part-time job, secure an internship, or travel abroad to help bolster their experiences.

Junior Year
Your child’s junior year is all about standardized testing. Every October, third-year high-school students are able to take the Preliminary SAT (PSAT), also known as the National Merit Scholarship Qualifying Test (NMSQT). Even if they won’t need to take the SAT for college, taking the PSAT/NMSQT is required for many scholarships, such as the National Merit Scholarship.³

Top colleges look for applicants who are future leaders. Encourage your child to take a leadership role in an extracurricular activity. This doesn’t mean they have to be a drum major or captain of the football team. Leading may involve helping an organization with fundraising, marketing, or community outreach.

In the spring of their junior year, your child will want to take the SAT or ACT. An early test date may allow time for repeating tests during their senior year, if necessary. No matter how many times your child takes the test, most colleges will only look at the best score.

Senior Year
For many students, senior year is the most exciting time of high school. Seniors will finally begin to reap the benefits of their efforts during the last three years. Once you and your child have firmly decided on which schools to apply to, make sure you keep on top of deadlines. Applying early can increase your student’s chance of acceptance.

Now is also the time to apply for scholarships. Consulting your child’s guidance counselor can help you continue to identify scholarships within reach. Billions in free federal grant money go unclaimed each year, simply because students fail to fill out the free application. Make sure your child has submitted their FAFSA (Free Application for Federal Student Aid) to avoid missing out on any financial assistance available.⁴

Finally, talk to your child about living away from home. Help make sure they know how to manage money wisely and pay bills on time. You may also want to talk to them about the social pressures some college freshmen face for the first time when they move away from home.

For many people, college sets the stage for life. Making sure your children have options when it comes to choosing a university can help shape their future. Work with them today to make goals and develop habits that will help ensure their success.

1. Forbes.com, February 22, 2023
2. TheBalance.com, June 28, 2022
3. PrincetonReview.com, 2023
4. Forbes.com, February 5, 2023