401(k) in Focus
In this issue
A Taxing Decision:The Difference Between Roth and Traditional 401(k)s
Quarterly Market Update from Fisher’s Investment Policy Committee
FAQ Check—What Happens to Your 401(k) if You Leave Your Job?
August 2016
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401(k) SOLUTIONS
2 AUGUST 2016
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401(k) SOLUTIONS
A Taxing Decision: The Difference Between Roth and Traditional 401(k)s
In 2006, changing IRS rules allowed employers to offer a
new 401(k) option. Now employees could decide to stay
on the well-worn traditional 401(k) path, or forage into
largely uncharted territory and place their contributions
into a Roth 401(k) account.
Fast forward to 10 years later and the path still isn’t
clear—many employees don’t understand the difference
between a traditional 401(k) and a Roth 401(k) account
and are confused about which they should choose. If
your plan offers a Roth option for your personal 401(k)
contributions—and not all of them do—grab a compass
and put on your explorer hat. We’re going to look a little
deeper.1
How 401(k)s are taxed may help you choose your path
Roth and traditional 401(k)s are great retirement savings
options. The key difference between a Roth and a traditional
401(k) account is the way each is taxed. If you contribute to
one, you’ll pay taxes up front. Send your contributions to
the other, and you’ll pay when you withdraw your money.
The trick is to figure out which path will benefit you more.
With a traditional 401(k) you:
Save tax-free now…When you initially decided to participate in your 401(k)
plan, you may have been drawn by the idea of paying less
in income taxes. In a traditional 401(k) account, the money
you contribute is deducted from your paycheck before
federal and state taxes are applied and does not count
as taxable income. At the end of the year, your W-2 will
show a lower Adjusted Gross Income (AGI), or less taxable
income, than it would have if you had not saved in your
401(k) account.
And pay your taxes laterHowever, when the time comes to withdraw money
from your traditional 401(k) account, the withdrawals
will be considered taxable income. You will have to pay
federal and state (if applicable) income taxes on your
withdrawals because you weren’t taxed when you made
your original contributions. All investment earnings from
your contributions will be taxed upon withdrawal as well
because they grew in your account tax-free.
1As is true with most legal and governmental issues, there are exceptions to the rules. You should discuss your specific situation with a tax advisor before making your own decision.
3AUGUST 2016
With a Roth 401(k) you:
Pay taxes now…On the other hand, in a Roth 401(k) account, your wages
are taxed before your contribution goes into your 401(k)
account, meaning your contributions are made post-tax.
At year’s end, your W-2 will reflect the entire amount you
earned for the year—not including any other deductions—
leaving your AGI unaffected by your 401(k) contributions.
And withdraw your money tax-free laterWhen you retire and withdraw money from a Roth 401(k)
account, your withdrawals will not be taxed or count as
taxable income because you paid taxes back when you
made your original contributions. And because you already
paid taxes, any investment earnings from a Roth 401(k)
account will not be taxed when you withdraw your money.
So which is better?
Making important decisions is seldom simple, and this is
no exception. You can start figuring out which path is right
for you by considering these three questions:
1. What do you expect overall income tax rates to be
when you retire and start taking withdrawals?
If income tax brackets are lower today than when
you retire, then the taxes you pay now on your
contributions will be less. That means you could
end up paying a smaller tax bill overall by choosing
to save in a Roth account. However, if tax brackets
are lower in the future, you could lose investment
earnings because your original investment amount
will be less. And less money invested could lower
your long-term earnings because less money is
gathering compounding interest.
2. Do you expect your personal income tax bracket
at retirement to be higher, lower, or the same as it
is now?
If your retirement income tax bracket will be lower
than your current tax bracket, you may be better
off saving in a traditional 401(k) account. But if
you expect to earn more in retirement than you
do today, you may also be required to pay more in
income taxes. In this instance, a Roth 401(k) account
may be a better choice, because your overall tax bill
could be less.
3. How old are you, and how long do you plan to be
invested in the market?
Younger employees who expect to be in the market
for a long time will likely see their wages and tax
bracket go up over the long run. Paying taxes early
with a Roth 401(k) at a lower rate may benefit these
folks. Older employees who make more and like
additional tax deductions may prefer a traditional
401(k). Call the Fisher 401(k) Help Desk to discuss
how time can affect your 401(k) choice.
There are many things to consider when choosing
between a Roth and traditional 401(k), like your age,
when you begin saving, federal and state income taxes,
your other investments, and changing life circumstances,
just to name a few. We urge you to explore this topic
further and discuss your situation with your tax advisor
today. Keep in mind that your decision doesn’t have to
be all or nothing—you can also choose to save in both
kinds of accounts, potentially reaping the benefits of each
strategy.
Which path will you take? The choice is yours.
4 AUGUST 2016
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401(k) SOLUTIONS
Quarterly Market Update from Fisher’s Investment Policy Committee Q2’s finale didn’t lack drama, yet for all the wildness, global
markets rose 1.0% in the quarter.1 While there may be
volatility—both up and down—along the way, we expect
stocks to reward patient investors in 2016’s second half.
Many pundits bemoan “flat” market returns since mid-
2015, suggesting the seven-year-old bull market is running
out of steam. However, no bull market in history has died
of old age or because it lacked momentum. This line of
thinking is dangerous for investors—past returns and
market direction are never predictive—flat market returns
recently don’t foretell future flatness. Besides, the flatness
pundits bemoan is actually just the impact of 2015 and
early 2016’s correction, a not-uncommon occurrence
historically. Since 1930, the S&P 500 has had nine flat
periods exceeding 300 days during bull markets (including
the present).2 Eight of them included corrections.
Sudden, unforeseeable dips and corrections (short, sharp,
sentiment-driven dips exceeding -10%) are routine in bull
markets. Several have come and gone in this expansion,
rewarding those who stayed cool or bought while stocks
wobbled. Early 2016’s downdraft illustrates this perfectly.
While volatility can always come, we do not see a bear
market—a fundamentally driven, lasting decline of more
than 20%—drawing near. In the absence of a bear market,
we believe those needing equity-like returns on some or
all of their portfolios to reach their long-term goals should
maintain equity exposure. This, not timing myopic market
jumps and falls, is the best way to capitalize on stocks’
superior long-term returns.
Many remain stunned by Britain’s June 23 vote to leave the
European Union. Yet the media glare exaggerates Brexit’s
fallout. While markets gyrated immediately after the vote,
by day three they were recovering. At quarter end, global
stocks were down just -0.8% from their pre-Brexit level,
and US stocks -0.7%.3 UK stocks were up 2.8% in sterling.4
This wasn’t a crash, and we don’t believe Brexit will end
the global bull market.
Brexit’s primary near-term impact is political, not economic.
Headlines dwell on Prime Minister David Cameron’s
resignation, the wild race to replace him, and the chaos in
the opposition Labour Party. The tumult has many investors
on edge, but keeping a cool head is key. Stocks care about
policy and economics, not personalities. Most importantly,
Britain stays in the EU throughout exit negotiations, a
multi-year process that hasn’t begun, so little has changed
economically. The politicians who begin talks may not
even be those that finish them. The final agreement may
be great, or it may contain unintended consequences—it
is unknowable now. Importantly, though, talks will proceed
slowly and publicly, mitigating shocks.
5AUGUST 2016
Gradually falling uncertainty should lift stocks this year.
Brexit was a setback, but a temporary one—its impact
seemingly waning already. The near-term political
uncertainty it caused should fade with time.
Uncertainty over America’s election
has already fallen, as the field has
narrowed to two—Hillary Clinton
and Donald Trump. The Republican
and Democratic conventions mark
the official beginning the general
election—a stretch where stocks
typically do well, with America
outperforming non-US stocks.
As a reminder, our election analysis
is solely focused on the investment
implications over the next 12 to 18 months.
We have no favorite candidate or party and can paint
a scenario for either candidate winning. Historically,
election years have been better when Republicans win
and inaugural years have been better under Democrats,
but this year any resolution to the political circus may
reduce uncertainty and investor angst. Crucially, always
remember: Love or hate either candidate, they can’t do
much to impact markets unilaterally. Presidential power is
more limited than many think, and gridlock likely persists.
Also, candidates often promise big, only to backtrack
post-election. Watch what they do, not what they say.
Economically, most data points to reaccelerating US
growth, underpinned by healthy consumption, a strong
services industry, and improving manufacturing data. US
earnings fell less than expected in Q1, and the Energy
sector accounted for most of the decline. Energy’s drag
should wane as early-2015’s higher profits fall out of
the year-over-year comparisons. Looking ahead, The
Conference Board Leading Economic Index (LEI) is in a
long uptrend, suggesting growth should continue. Since its
1959 inception, no recession has begun when LEI is rising.
Most major foreign economies are growing.
Despite Brexit fears, UK economic data
were mostly expansionary throughout
Q2. After eurozone GDP accelerated
in Q1, newer data suggest growth
continues, countering lingering
debt fears and bank jitters. The
disconnect between Europe’s positive
fundamentals and negative sentiment
is bullishly wide. Commodity-heavy
nations aside, most Emerging Markets
are growing nicely, boosting global growth.
The lifting uncertainty fog should reveal a much
more positive world than investors appreciate. Negatives
exist, as always, but are too small or widely discussed to
end this bull market.
We know that election year jitters are common. If you
would like to learn more about the stock market, have
any questions, or need assistance with your 401(k), we
encourage you to contact your company’s Fisher Retirement
Counselor or call the Fisher 401(k) Solutions Help Desk at
888-322-7586.
-The Investment Policy Committee
While volatility can
always come, we do not see a bear market drawing
near.
1FactSet, as of 06/30/2016. MSCI World Index returns with net dividends, 03/31/2016 – 06/30/2016.2Global Financial Data, Inc., as of 04/28/2016. S&P 500 price returns, 01/02/1930 – 04/27/2016.3Ibid. MSCI World Index with net dividends, S&P 500 total return, 06/23/2016 – 06/30/2016.4Ibid. MSCI UK total return (in sterling), 06/23/2016 – 06/30/2016.
6 AUGUST 2016
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401(k) SOLUTIONS
FAQ Check—Ask a Retirement Counselor What happens to your 401(k) if you leave your job?
One of the many decisions people face when leaving a
job is what to do with their retirement savings account or
401(k) account. Here are four options to consider:
Leave your balance in your current accountDepending on your plan requirements, you may be able to
leave your money in your 401(k) account after terminating
employment. If your previous company’s plan has good
investment options, you may choose to leave your money
where it is. However, most 401(k) plans have minimum
required balances—if you don’t meet the minimum, you
may be forced to withdraw your funds. Contact your
company’s 401(k) plan representative to learn more about
your options.
Rollover your balance to your new company’s retirement accountTo determine if this is a good option for you, examine
your new company’s 401(k) to ensure that it offers
diversified investment options, preferably at a lower cost
than your current plan. Rolling your balance(s) into your
new employer’s plan will also mean you only have one
investment strategy to monitor.
Rollover your balance to an Individual Retirement Account (IRA)IRAs occasionally offer more investment options than an
employer-sponsored plan. However, this flexibility may
come at a cost. IRAs often cost more per year, typically
charging maintenance and trade fees not usually associated
with employer-sponsored plans.
Withdraw your balanceDue to taxes and penalties, this is the least favorable
option. For starters, your withdrawal will be taxed at the
ordinary income tax rate and considered part of your yearly
income, potentially raising your taxes. Also, distributions
taken by employees under 59½ are subject to a 10 percent
early withdrawal penalty from the IRS. Because of the costs,
withdrawing your balance should only be considered as a
last resort.
There are many things to consider when deciding what
to do with your 401(k) balance when you terminate
employment. If you’re contemplating which option is best
for you, contact your Fisher Retirement Counselor. We’re
here to provide you with the education and support you
need to make an informed decision.
About Tim KroonTim Kroon joined Fisher 401(k) Solutions in 2016. He is dedicated to providing quality investment education and has spent more than 14 years helping clients and employees prepare for their financial and retirement goals.
Tim earned his B.S. in Business Administration with dual concentrations in Finance and Accounting from the Charles H. Lundquist School of Business at the University of Oregon.
7AUGUST 2016
Back to School Saving Basics
Heading back to school can be expensive. In 2014, U.S. families spent an average of about $669 on school supplies, clothing, and technology.* How can you cut your back to school spending and reclaim money for your retirement savings? Here are some handy tips:
1. Review what you have. Start off on the right foot—sort and identify what your kids have, what still fits, and what they need. Then get ready to…
2. Make some money! Have a tag sale, consign, or donate unwanted items to a charity. Your donations could also mean a write-off on your year end taxes.
3. Make a list. Avoid pointless purchases and save money at the register by knowing what your kids really need.
4. Set a budget and stick to it. Just like your regular monthly budget has helped you save more in your 401(k), shopping with a back to school budget can equal big savings too.
5. Leave the kids at home. Kids love flashy, trendy items. When selecting school supplies and basics like socks and jeans, know what they like and just go alone.
6. Buy online. Shopping online allows you to comparison shop without stress and saves you the time searching empty store shelves. And some of your best tech deals can be found online!
7. Timing is everything. Avoid seasonal markups and missing items—shopping off-season can help you get the best deals and avoid long lines.
Check It Out
*Grannis Allen, Kathy. “After Splurging in 2014, Families Trim Back-To-School Spending for 2015.” National Retail Federation, 15 July 2015.
CONTACT US
If you have a 401(k) account serviced by Fisher Investments 401(k) Solutions and need help or have
any questions, please contact us at 888-322-7586. We can help you with your 401(k) account, including
assistance with technical issues, as well as other service needs. We can also help answer questions about
the latest news developments and what it may mean in terms of investments and retirement planning.
ABOUT FISHER
Fisher Investments 401(k) Solutions is dedicated to helping business owners and their employees successfully
reach their retirement goals. We help people better optimize their retirement savings opportunities and
understand their retirement plan options through in-person enrollments, ongoing education and our live-
person Help Desk.
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K02163V August 2016©2016 Fisher Investments.
Investing in stock markets involves the risk of loss. Past performance is never a guarantee of future returns. This newsletter is intended for educational purposes only. It constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of investment performance. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts may be, as accurate as any contained herein.