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401(k) Loans 03.31.01

401(k) Loans | You’ve recently made some money in the stock market and interest rates are still low, so you decide it is the perfect time to buy a home. But there is a dilemma – which assets should be used, and which accounts should be drawn from to fund the down payment? Should you liquidate investments held in your “regular” non-retirement account, or should you borrow from your 401(k)?

Many people don’t like the idea of funding a down payment by selling investments in a “regular” non-retirement account because of the possible income tax consequences. Instead, they sometimes choose to borrow from their 401(k), saying to themselves: I can save money NOW by borrowing from myself, AND I am paying myself interest on the loan! Sounds harmless, right? Not so fast!

Watch this video from our Sacramento Wealth Advisor and CPA, Matt Regan, to learn why treating your 401(k) like a piggy bank could have a material impact to your retirement plan and longer-term economic health.

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Is Your 401(k) in Disarray 03.29.2021

As a small business owner, we know that you are an “around the clock” grinder, with a myriad of responsibilities that often supersede the core responsibilities you have to the growth of your business. And understanding that a regular review of your business’s retirement plan may not be a top priority of yours, at Towerpoint Wealth we have created this 401(k) “healthcheck” for your benefit. We regularly come across 401(k) and other company-sponsored retirement plans that, as currently structured, are in serious need of attention and improvement, and we are experienced in helping you, as a trustee and fiduciary to your company’s retirement plan, minimize the hassle of giving your plan the attention it needs.

Is your 401(k) plan structured and optimized properly to help you and your employees maximize the myriad of economic, investment, and tax benefits? Are you properly managing your fiduciary responsibility? Ask yourself the questions found below to quickly gauge whether your 401(k) needs adjusting or improving.

 Does my plan have a safe harbor structure?

You want to ensure that your 401K) retirement plan passes the annual non-discrimination testing conducted by the IRS. In its simplest sense, non-discrimination testing ensures that an employer is making contributions to each employee’s retirement account that equals the same percentage of salary for everyone. Importantly, if a plan fails a non-discrimination test, the 401(k) may lose its tax-qualified status.1

Retirement Plan 401(k) Disarray Towerpoint Wealth White paper 2021

[1]The most common reason a 401(k) plan fails this non-discrimination testing is when one or more of the business owners make much greater 401(k) contributions compared to their employees.

A safe harbor 401(k) plan structure ensures that you meet the non-discrimination regulatory requirements by following strict guidelines specific-to employer plan contributions, participant disclosures, and much more. 

Does my plan have a profit-sharing component and if so, am I optimizing its structure?

For a business owner to maximize the personal net worth building benefits associated with sponsoring a company retirement plan and receive the maximum 401(k) annual contribution amount of $58,000 in 2021[1] (employee deferrals + employer contributions), pairing a profitsharing component in the plan’s design is essential.

All profit sharing plan structures – same dollar amount, comptocomp, new comparability, etc.[2] – are not created equal. In particular, the new comparability strategy is becoming increasingly more common in modern 401(k) plans as this type of profit-sharing plan allows for unique flexibility in allocating the profits among the business owner(s) and employees.

Is my investment fund lineup optimized?

401(k) investment fund lineups vary from basic to advanced and passive to active. And with employees having better and more diverse investment options outside of 401(k) plans, annually reviewing your company’s fund lineup for improvements is critical to ensure that employees do not look to invest their hard-earned dollars elsewhere, and also to meet your fiduciary responsibility as plan trustee.

It is also a requirement that a business owner (usually with help from an investment professional) formulate, and review at least annually, an investment policy statement (IPS) for their 401(k).

Is my ERISA fidelity bond fund amount appropriate?  

The Employee Retirement Income Security Act (ERISA) requires 401(k) plans to hold a fidelity bond, which protects the plan from losses resulting from improper handling of the funds.

While fidelity bonds are generally inexpensive for the coverage offered, we often see the amount protected as either 1.) inadequate or 2.) overkill.  

[1] Increased to $64,500 for business owners 50 years of age or older.

[2] There are often several different terms that refer to the exact same type of profit-sharing structure.

Does my plan currently allow for after-tax Roth contributions?

While changing for the better, many 401(k) plans still do not allow after-tax Roth contributions. 

For business owners and employees that are in a temporarily low income tax bracket –  a business owner “winding down” and closing in on retirement or a younger employee at the beginning of their career and earning curve – offering an after-tax Roth contribution option, particularly given it typically costs nothing to do so, is a valuable and often overlooked plan benefit.

Is my vesting schedule appropriate?

Retirement Plan 401(k) Disarray Towerpoint Wealth White paper 2021

In order to incentivize employees to stay with your company, having a vesting schedule for any  employer-matching profit sharing contributions that is not overly generous is important. For a number of Towerpoint Wealth’s clients who are business owners, a vesting schedule of six years (with 0% vesting in the first year of participation) is appropriate, but each business and retirement plan is unique.

Have I considered automatically distributing an employee’s 401(k) balance when they leave the company?

Many 401(k) plan administrators charge their fees based on the number of employees that the plan has. 

In order to keep fees to a minimum, it is advisable to consider automatically distributing account balances below a certain threshold when an employee separates from service.

Am I managing my fiduciary responsibility and minimizing my fiduciary liability?

All business owners who offer a 401(k) for themselves and their employees have a fiduciary responsibility to ensure that they are acting in the employees’ best interests, being prudent, diversifying plan investment assets, and adhering to all provisions of the retirement plan documents.

There are concrete steps that a business owner can take to uphold their fiduciary duty and at the same time, minimize their fiduciary liability.

Retirement Plan 401(k) Disarray Towerpoint Wealth White paper 2021

Wealth management firms that specialize in helping business owners optimize their retirement plans, such as Towerpoint Wealth, are able to help guide you through these murky waters.

Am I doing everything I can to maximize my own personal net worth within my company’s retirement plan?

Even if a small business owner has a well-structured plan that meets everyone’s needs, is it important to remember that 401(k)s, and other types of company-sponsored retirement plans, are uniquely customizable. And often, there are overlooked plan features that may help the business owner maximize their ability to accumulate wealth within the plan. 

One of these particularly powerful features is allowing for after-tax deferrals (not the same as after-tax Roth deferrals), which then affords the business owner to take advantage of the “Mega Backdoor” Roth IRA strategy.

Some other questions that are worth your thoughtful attention: Do I allow for hardship distributions and if not, should I? What about allowing rollovers from other retirement plans? Is it risky to offer loans to employees? Are my plan’s expenses and fees reasonable?

How Can We Help?

Steve Pitchford, CPA, CFP®
Director of Tax and Financial Planning

At Towerpoint Wealth, we are a legal fiduciary to you, and specialize in optimizing retirement plan structures for business owners.. If you would like to speak with us regarding any other tax questions you may have, we encourage you to call (916-405-9166) or email (spitchford@towerpointwealth.com) to open an objective dialogue.

Towerpoint Wealth, LLC is a Registered Investment Adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Towerpoint Wealth, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Towerpoint Wealth, LLC unless a client service agreement is in place.


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Choosing Who Will Inherit Your Retirement Accounts

You are working on your estate plan, and trying to figure out who you should name as the beneficiary of your 401k account and IRAs. Simple – the kids, right? Not so fast.

Click to watch the video below from our Wealth Advisor, Matt Regan, to learn the non-spouse beneficiary distribution rules for inherited and pre-tax IRAs and “regular” pre-tax 401ks, and why understanding these rules are so important for income tax and estate planning purposes.

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Retirement Account Rollovers | One Minute Tax Tips

This week’s One Minute Tax Tip – old 401(k) and retirement account rollovers! Many people have a retirement account held with a previous employer, but oftentimes don’t know what to do with these assets. Watch this quick video to learn more about the four options available to you.

Feel free to email us at info@towerpointwealth.com to discuss your circumstances further.

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Will Who We Elect Make the Market Correct

It’s right around the corner, and it isn’t going to be pretty, so let’s discuss the election’s impact on the stock market now and get it out of the way.

For a good part of this calendar year, we have counseled you that it is prudent to give advance thought to the range of potential economic, regulatory, taxation, spending, budget deficit, societal, and financial market implications of the national election results, depending on whether Republicans or Democrats win one or more of the White House, the House of Representatives, and the Senate

After Labor Day, the campaign is likely to reflect increased amounts of political vociferousness, perhaps some degree of vehemence, and even apportionments of vitriol (we hope and pray not too much), with the potential to cause meaningful shorter-term shifts in financial asset prices. That is precisely why we recommend forming beforehand, and sticking to, a well-reasoned and disciplined asset allocation plan and investment strategy tailored to your personal and financial circumstances, time horizon, objectives, and temperament.

November 2020: The 59th Quadrennial Presidential Election

September, October, and then, the Election: With the VIX volatility index (see the Graph of the Week below) having risen an average of four points ahead of each of the last seven presidential elections since this measure was created, important issues to consider in the upcoming weeks ahead include:

  • How clearly (and energetically) each political party’s convention message was received, perceived by, and responded to by their respective loyal voter bases;
  • The nation’s reactions to the anticipated three presidential debates and one vice presidential debate;
  • Assessments of the strength of party identification among various segments of the voting population, as well as in the composition of the overall electorate; at the same time, taking into account the ability of each ticket to generate serious backing from less-supportive voter populations; 
  • Which candidate voters (considering demographic attributes, where they live, how they classify themselves on the political spectrum, and other characteristics) think can better confront America’s broad challenges, including the coronavirus pandemic, the economy, social issues, and pressing global concerns;  
  • The effectiveness of voting procedures, trust in mail-in balloting, the degree of putative social media and foreign-based election interference, actual voter participation, and the perceived veracity and legitimacy of the results; and 
  • The potential consequences of prolonged uncertainty associated with a contested election (should it occur) for social order and the financial markets.

Some Implications of Potential Scenarios

Roughly one in five workers are currently receiving jobless benefits, and early expectations of a V-shaped recovery have been hindered by renewed coronavirus outbreaks. Regardless of who wins the 2020 election and in what manner, financial asset valuations appear to be reflecting expectations that whenever the coronavirus pandemic ends, some degree of economic acceleration is likely to take place in the U.S.

As we have counseled for some time, it is important to devote thought and attention to the taxation, regulatory, economic, asset allocation, and investment strategy implications of the three leading potential electoral outcomes outlined below (while noting that both political parties have expressed interest in promoting the development of generic drugs, lowering drug prices, and containing healthcare costs; and the two parties have also been focusing on antitrust, platform liability, and privacy issues relating to many of America’s biggest technology enterprises):

  1. If President Trump is re-elected and wins the White House, Democrats keep control of the House of Representatives, and Republicans keep control of the Senate, such an outcome would likely favor securities in the following sectors: technology, defense, finance, healthcare, and energy, while potentially putting pressure on sectors and companies that could be harmed by further deterioration in  U.S-China relations;
  2. If Vice President Biden wins the White House, Democrats keep control of the House of Representatives, and Republicans keep control of the Senate, such an outcome would likely favor companies and sectors that would be deemed to have thereby avoided increased taxes and a heavier regulatory burden;
  3. If Vice President Biden wins the White House, Democrats keep control of the House of Representatives, and Democrats take control of the Senate(sometimes referred to in the media as a “blue wave”), such results would substantially raise the odds of higher taxes. Offsets to the latter outcome could come in the form of substantial additional spending on infrastructure, education, and healthcare. Securities in the following sectors, among others, are perceived to be disadvantaged by a “blue wave” Democratic sweep: defense, healthcare, financials (via increased regulation) and energy (with expectations of restricting fracking and limiting drilling on federal lands in Texas/New Mexico’s Delaware Basin and Southeast Montana/Northeast Wyoming’s Powder River Basin), while giving a lift to sectors and companies that could be helped by improving U.S-China relations.

The Pre- and Post-Election Tax and Spending Outlook

As shown in the panel below, the current taxation and spending policy positions of Vice President Biden contain numerous base-broadening elements that increase taxes by approximately $4 trillion, while increasing spending to the tune of approximately $6 trillion in areas including healthcare, infrastructure, education, energy research, and other initiatives.

Released on Wednesday, July 9, the 110-page report of the Unity Task Forces (created and staffed by individuals designated by Vice President Joe Biden and Senator Bernie Sanders) contains a detailed set of policy recommendations in six domestic policy areas: 

  1. Health care (while not supporting Medicare for All, the report proposes a public option, a government-administered plan “like Medicare” that would be available to all Americans; on drug pricing, the report recommends appointing a government board to set prices that Medicare would pay for new drugs);
  2. The economy (with $400 billion pledged for procurement of domestically made goods and $300 billion to support high-tech research);
  3. Climate change (here, a total of $2.0 trillion over four years is earmarked to shift millions of jobs into clean energy, with the goal of cutting emissions from power generation to zero by 2030, having net zero emissions by 2050, and introducing new fuel-economy standards);
  4. Criminal justice (proposing reforms to law enforcement and policing practices);
  5. Education (including universal preschool for three- and four-year-olds, at a cost of $775 billion over a decade), and 
  6. Immigration (proposing to end travel restrictions against 13 countries, and to maintain protections from deportation for approximately 700,000 young immigrants known as “Dreamers”).

Should Vice President Biden win the White House, financial asset prices in general, as well as specific industries and companies, are likely to be affected by the speed and degree to which the new Administration and Congress (whose degree of support depends on which party controls the House of Representatives and which party controls the Senate) might be able to implement priorities in these and other areas.

For further granularity, the following panel sets forth eight elements of personal taxes and four elements of corporate taxes: (i) under the current U.S. tax regime, which would not currently be expected to change much under President Trump (although the President has endorsed the idea of payroll tax reductions; tweeted about a potential capital gains cut; and vowed to extend the Tax Cuts and Jobs Act of 2017, which capped the so-called SALT (State and Local Tax) deduction at $10,000); and (ii) as currently outlined as taxation policy under a Biden administration.

Given that the process of turning taxation proposals into law takes time, it is likely to be at least June 2021 for new tax legislation to be enacted. On several aspects of tax planning (including the timing and forms of income and expenditures; tax gain-loss harvesting; and retirement, estate, and gifting strategies), it may be sensible to postpone any major moves until a judicious assessment can be made of the makeup of the post-election government and its specifically-expressed legislative agenda.

Regardless of the fireworks, and ultimate outcome, of the election, we will always believe that good, well-run, profitable companies will remain good, well-run, profitable companies, independent of a Trump or Biden win.

What’s Happening at TPW?

Happy to have him aboard, contributing, and part of the Towerpoint Wealth family, the TPW team has been indoctrinating Matt Regan, a.k.a. “the new guy,” over the past two weeks:

Our new Wealth Advisor, Matt Regan, connected with our President, Joseph Eschleman, and our Partner, Wealth Advisor, Jonathan LaTurner, for an enjoyable business lunch at the historic Sutter Club in downtown Sacramento earlier this week.

Our President, Joseph Eschleman, and his wife, Megan Eschleman, hosted Matt and his lovely wife Alyssa for an enjoyable evening of tri-tip, corn on the cob, chicken skewers, and Frank Familycabernet.

TPW Service Highlight – Social Security Optimization

Many investors are not prepared for retirement, and have not properly planned for how to structure their post-retirement income. With the popularity and availability of pension plans quickly waning, and rock bottom interest rates making it difficult to derive enough interest income from bonds, the importance of Social Security has never been greater.

Through careful planning and the development and utilization of a custom Social Security optimization analysis, our aim at Towerpoint Wealth is to help our clients structure a plan to ensure that they are not leaving any money on table when it comes to their Social Security benefits. According to the Annual Statistical Supplement to the Social Security Bulletin, 70% (!) of all retired workers started taking benefits before their normal retirement age. For some this may make sense, but for many, this will result in the forfeiture of tens, if not hundreds of thousands of dollars over their lifetime.

Let us help you scientifically analyze the myriad of Social Security claiming strategies available to you, and develop a customized plan to ensure you have properly maximized this hugely important retirement income benefit.

Graph of the Week

The market anticipates some pretty incredible fireworks (as we probably all do) leading up to November’s elections. With Joe Biden’s lead over President Trump drifting lower since the late summer, there is now even more expected volatility around Election Day, and things almost assuredly will only heat up further as we get closer to November.

The graph below reflects the historical activity and pricing of the VIX, a popular index that measures future stock market volatility, used by investors to hedge against it. Currently, November’s election is the most expensive event risk on record. With many more absentee and mail-in ballots expected to be cast in this election, the possibility certainly exists that we do not know who the winner is on Wednesday, November 4.

Quoting Cameron Crise, Bloomberg macro strategist, “In the history of VIX futures contracts, we’ve never had an event risk command this sort of premium… That obviously suggests that markets anticipate some pretty incredible fireworks.”

Don’t say you haven’t been warned, keep your seatbelt firmly buckled, and most importantly, don’t be surprised nor overreact to the upcoming craziness!

As always, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us at any time (916-405-9140, info@towerpointwealth.com) with any questions, concerns, or needs you may have. The world continues to be an extremely complicated place, and we are here to help you properly plan for and make sense of it.

– Nathan, Raquel, Steve, Joseph, Lori, Jonathan, and Matt

Towerpoint Wealth Team : Sacramento Financial Advisor
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President Joseph Eschleman Cited As Expert

Our President, Joseph Eschleman, recently penned a white paper for Towerpoint Wealth that discussed 14 different strategies to consider during the coronavirus crisis. Joseph was cited as an expert by MutualFunds.com for his work and content on the subject, who published his commentary on their website on June 11.