Advertiser Disclosure

Investing

What is a Roth 401(k)?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

You’ve probably heard of a Roth Individual Retirement Account (IRA) and are at least somewhat familiar with 401(k) plans, but what about a Roth 401(k)? Here’s what you need to know about this increasingly popular hybrid option some employers offer to help their employees save money for retirement.

What is a Roth 401(k)?

Roth 401(k)s get their name from former U.S. Rep. William Roth of Delaware, who’s credited with establishing Roth IRAs as part of the Taxpayer Relief Act of 1997. In 2006, as an extension of that legislation, employers were able to begin offering Roth 401(k)s, which follow the same tax principals as Roth IRAs — you pay taxes on contributions up front so you have access to tax-free funds during retirement.

Roth 401(k)s operate much like traditional 401(k)s. The difference lies in when you pay taxes on the contributed funds. With a traditional 401(k), the money you put away is taken out of your paycheck before you pay taxes on it. Of course, taxes are unavoidable and you’ll have to pay taxes on the withdrawals you make later in life when you’re retired.

On the other hand, if you contribute to a Roth 401(k), you pay taxes on the funds during the same year in which you contributed. That means when you eventually withdraw money from the account during retirement, you’ve already ripped off the financial Band-Aid so to speak, and you have access to tax-free funds.

Roth 401(k) eligibility

Employers aren’t required to offer any 401(k) plan. They’re an optional benefit businesses of any size can choose to provide, but there are no laws requiring employers to participate. If an employer does offer a Roth 401(k) option, they must also offer a traditional 401(k) plan. If both are offered, employees may split their contributions between the two options.

According to a retirement study by the Transamerica Center for Retirement Studies, 65% of U.S. workers have access to a 401(k) plan through their employer, with large companies (92%) being more likely to offer them than small businesses (59%). Of those companies offering a 401(k) plan, 45% offer the Roth 401(k) option. When offered the option of a Roth 401(k), approximately 28% of employees choose that option, with millennials choosing a Roth 401(k) option 63% of the time.

If your employer offers a 401(k) plan, it doesn’t automatically mean you’re eligible to participate. It’s up to each employer to determine which employees are eligible based on varying criteria. For example, only 41% of employers who offer a 401(k) plan offer it to their part-time workers. Other companies may require certain employment thresholds to be met before they can enroll (like being employed for a year).

Roth 401(k) deductions

Once enrolled in a Roth 401(k), a portion of your salary (usually a set percentage) is deducted automatically from each of your paychecks. For example, if you make $4,000 a month and decide to contribute 10% to your 401(k), then $400 will be deducted from each of your monthly paychecks.

Determining how that money is invested is up to each individual employee. Beyond the Roth option, in some cases, you will be presented with a variety of investment options including managed accounts and asset allocation suites. There may be a fee associated with some of them, which must be disclosed to employees by the plan’s administrator.

How much can you contribute?

There are no income limitations for participation in a Roth or traditional 401(k). However, there is a limit as to how much you can contribute, which is adjusted yearly. For example, in 2020, the limit is $19,500, while the limit for 2019 was $19,000. If you’re over the age of 50, you can contribute an extra $6,500 per year as a “catch-up” contribution. You don’t have to contribute the entire amount, but you can select to have any amount up to that limit deducted.

As much as 85% of companies who offer 401(k) plans also provide matching funds up to a certain amount (yay, free money!), while others may contribute to your 401(k) regardless of whether you do or not. It’s important to note that any funds your employer contributes won’t be put in your Roth 401(k), and instead placed in a traditional 401(k). You will be responsible for paying taxes on the amount they contribute.

In some cases, employer contributions vest immediately, which means they belong to you right away, protecting your retirement in the event you quit or leave the company. In other cases, employer contributions are vested over time. That means if you quit before a certain amount of time, you only get to take a portion of the employer-contributed funds with you. The amount you get to keep typically increases each year, according to the employer’s vesting schedule, until you’re fully vested and get to keep the entire amount.

Roth 401(k) withdrawal rules

You’ve made the wise financial choice to invest in your future — so when do you get to use some of that money?

The money you’ve contributed, along with any vested employer contributions, technically belongs to you and you can withdraw it at any time. The catch is that unless you meet certain requirements, you’ll have to pay a penalty. To withdraw funds penalty-free, 59 and a half is the magic age. Once you’ve contributed to a plan for five taxable years and you hit your half birthday in your 59th year, you can withdraw from your fund without penalty.

If you do choose to withdraw funds from your 401(k) early, you’ll face a 10 percent early withdrawal fee on the amount, plus taxes. With a Roth 401(k) it’s a little bit different. Since you’ve already paid taxes on your contributions, you’re only responsible for paying the penalty tax based on the increase in the value of your funds since you opened the account. There are also exceptions for death or disability.

Some plans allow you to take out a loan from your Roth 401(k), but there are tax repercussions for doing so. You’ll pay interest on that amount and if you don’t repay the loan, the funds may be considered a non-qualified distribution, requiring you to pay taxes on that, too. In some cases, if you leave your job, you’ll be responsible for paying the loan in full at that time.

It’s important to note that you can’t leave the funds in a Roth 401(k) forever. The IRS requires that you take distributions from your plan no later than age 70 and a half, unless you’re still working.

Roth 401(k) vs. traditional 401(k)

In general, experts say the two most important factors to consider when deciding between a Roth and a traditional 401(k) is your age and the tax income brackets you’re currently in (and expect to be in later on). The more years between you and retirement, the more likely your Roth will pay off. That money has years to grow tax-free, and you won’t pay taxes on it no matter how much that money grows.

On the other hand, people who anticipate their tax rate will be lower in retirement may prefer to keep the extra income now and pay taxes in retirement. It’s not a cut-and-dry decision, and you must take into account your effective tax rates, expected earnings and various other factors that are unique to your situation.

If you can’t decide between the two, you can always split your contributions between both options to diversify your savings.

 Taxes2020 Contribution LimitsPenalty-free Withdrawal

Traditional 401(k)

Paid on funds when they’re withdrawn in retirement

$19,500 per year ($26,000 if you’re over 50)

After 5 years and at age 59 and a half or older (exceptions made for death and disability)

Roth 401(k)

Paid in the year funds are contributed to the plan

$19,500 per year ($26,000 if you’re over 50)

After 5 years and at age 59 and a half or older (exceptions made for death and disability)

Roth 401(k) rollover

As the saying goes, all good things must come to an end, and when you’re ready to move on from your job, you have some options when it comes to the funds you’ve been socking away.

One option is to leave it be and start a new 401(k) plan with your next employer. Many people, however, choose to transfer or “roll over” those funds into another account. While you can roll over your Roth 401(k) into a Roth IRA, you can’t roll it in into a traditional 401(k). On the flip side, you can roll over a traditional 401(k) into a Roth 401(k) or IRA, but you will owe taxes when doing so.

So, if you’re fortunate enough to work for an employer that offers a 401(k) plan, take a close look at your options. If Roth is one them, it’s worth considering to help secure your financial future.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Advertiser Disclosure

Investing

SIMPLE IRA Contribution Limits 2020

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

SIMPLE IRAs are tax-advantaged retirement savings accounts that benefit small business owners and the people who work for them. In addition, you can use the SIMPLE IRA to save for retirement if you are self-employed. Like many other retirement savings vehicles, SIMPLE IRAs are subject to annual contribution limits.

SIMPLE IRA contribution limits

The annual SIMPLE IRA contribution limits for employees and employers in 2020 are as follows:

Annual SIMPLE IRA Contribution Limits

Employees under the age of 50

$13,500

Employees 50 years and older

$13,500, plus $3,000 in catch-up contributions

Employer matching contributions

Up to 3% of employee’s salary

Employer non-elective contributions

2% of the employee’s salary

SIMPLE IRA contribution limits 2020 for employees

For 2020, the amount employees may contribute to a SIMPLE IRA plan is capped at $13,500 per year. That’s an increase from 2019’s limit of $13,000, and an even bigger leap from the $12,500 limit imposed from 2015 to 2018.

It’s worth noting that for employees who are also participating in other employer-sponsored retirement plans, such as 401(k) or 403(b) plans, aggregate annual contributions to all plans cannot exceed $19,500 in 2020. For those 50 and older, the overall annual limit for catch-up contributions is $6,500 for 2020, for a total ceiling of $26,000.

SIMPLE IRA contribution limits 2020 for employers

If a small business owner chooses to offer a SIMPLE IRA plan, they are required to make contributions to their employees’ accounts. They may choose to either match their employees’ contributions, up to a certain limit, or make non-elective contributions.

If an employer chooses matching contributions, their match is capped at 3% of an employee’s annual compensation. While an employer can make matching contributions of less than 3%, the match cannot be less than 1% of the employee’s annual compensation — and it cannot be less than 3% for more than two out of five consecutive years.

If an employer chooses non-elective contributions, they are required to put money into their employees’ SIMPLE IRAs regardless of whether the employees themselves make contributions. With non-elective contributions, the employer must make fixed contributions of 2% of their employees’ compensation. For 2020, the maximum amount of an employee’s total compensation that can be considered for calculating a non-elective contribution is capped at $285,000, up from 2019’s cap of $280,000.

What are the contribution deadlines for a SIMPLE IRA?

Employers are required to deposit their employees’ SIMPLE IRA contributions within 30 days after the end of the month in which those contributions were withheld. Employers are required to make their matching or non-elective SIMPLE IRA contributions by their tax return filing deadline, including extensions.

For people who are self-employed, the deadline for depositing SIMPLE IRA contributions for a calendar year is 30 days after the end of year, or Jan. 30.

SIMPLE IRA contribution limits vs. Roth contribution limits

While SIMPLE IRA contributions are capped at an annual limit of $13,500, annual Roth IRA contribution limits are much lower. For 2020, Roth IRA contributions are capped at $6,000, with an additional $1,000 allowed for catch-up contributions for those 50 and older.

Another differentiating factor of Roth IRAs is that they have income phaseout limits. Depending on how much you make, you may be limited to how much you can contribute or whether you can contribute at all. For 2020, single filers cannot contribute to a Roth IRA if they make more than $139,000, and if married and filing jointly, you’re only able to contribute if you earn less than $206,000.

Can you contribute to both a SIMPLE IRA and a Roth IRA?

You can contribute the maximum allowed amounts to both a SIMPLE IRA and a Roth IRA, as their contribution limits are not cumulative. In fact, most financial advisors recommend you max out both your SIMPLE IRA and Roth IRA if you can afford to do so, as they offer different tax benefits.

While SIMPLE IRA contributions are made pre-tax, and therefore lower your taxable income, your Roth IRA contributions are made with after-tax dollars, so qualified distributions are tax-free.

“Advisors talk about diversification all the time, and usually they are talking about stocks and bonds,” said Gregory Kurinec, a certified financial planner with Bentron Financial Group in Downers Grove, Ill. “But investors will want to diversify their accounts into different tax categories as well. By having a combination of pre-tax (SIMPLE IRA), after-tax advantage (Roth IRA) and non-qualified, this will allow the investor to pick and choose which account to take funds from to best impact their tax situation.”

What is a SIMPLE IRA?

A SIMPLE IRA is an effective retirement savings match plan, especially for small business owners. SIMPLE IRAs are available to small businesses with 100 employees or fewer.

SIMPLE IRAs require employers to make contributions on behalf of their employees, either up to 3% of their employee’s compensation as an employer match or a flat 2% of the employee’s compensation.

As with most financial products, when it comes to saving for your golden years, a SIMPLE IRA is just one of the many options available to you. Explore all of the options at your disposal when deciding how to build your nest egg.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Advertiser Disclosure

Investing

Review of Altfest Personal Wealth Management

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Altfest Personal Wealth Management is an investment management firm based in New York City. The firm typically only accepts clients with a minimum investment of $1 million. For these high net worth clients, Altfest Personal Wealth Management provides customized investment portfolios with comprehensive financial planning services. The firm has 16 employees who provide investment advisory services, and currently oversees $1.21 billion in assets under management (AUM).

All information included in this profile is accurate as of February 10th, 2020. For more information, please consult Altfest Personal Wealth Management’s website.

Assets under management: $1,210,000,000
Minimum investment: $1 million (waivable at the firm’s discretion for young professionals)
Fee structure: A percentage of AUM, ranging from 0.50% to 1.40%, depending on account size; hourly fees; fixed fees
Headquarters: 445 Park Avenue
Sixth Floor
New York, NY 10022
www.altfest.com
212-406-0850

Overview of Altfest Personal Wealth Management

Dr. Lewis Altfest launched Altfest Personal Wealth Management in 1983. He is still the majority owner of the firm and acts as CEO. He runs the organization along with his wife, Dr. Karen Altfest, the firm’s executive vice president, and their son, Andrew Altfest, the firm’s president. Both Lewis and Karen hold Ph.Ds; Lewis is an associate professor of finance at Pace University.

Including the Altfests, the firm has 37 total employees, 16 of whom provide investment advisory services. Altfest Personal Wealth Management specializes in creating customized, actively managed investment portfolios for high net worth clients. The firm and the Altfest family have won numerous awards for their performance, and both Lewis and Karen are regular contributors to financial news programs and publications.

What types of clients does Altfest Personal Wealth Management serve?

Altfest Personal Wealth Management primarily works with individual investors. A client usually needs a portfolio of at least $1 million to open an account with the firm — however, Altfest does make exceptions to this account minimum for “young professionals” who they believe will become high net worth clients in the future. The firm’s individual client base is currently split 40/60 between individuals and high net worth individuals, with the SEC defining high net worth individuals as those with at least $750,000 under management or a net worth of at least $1.5 million.

While the firm works with a diverse range of clients, it specializes in advising women, executives and healthcare professionals. In addition to individual investors, Altfest Personal Wealth Management also works with pension plans, profit-sharing plans, trusts, estates, corporations and other business entities.

Services offered by Altfest Personal Wealth Management

Altfest Personal Wealth Management specializes in investment management and financial planning. However, the firm’s investment management services are available to individuals and small businesses only; these services are not offered to investment companies, pooled investment vehicles, large businesses and institutional clients.

Most of the firm’s investment accounts are run on a discretionary basis, meaning that Altfest Personal Wealth Management advisors can make trades on behalf of the client. The firm does have a few nondiscretionary accounts, where the client must approve all trades themselves.

If a client only wants a few investment recommendations, rather than the management of their entire portfolio, the firm can provide this service as well.

Altfest Personal Wealth Management also offers comprehensive financial planning, as many of its advisors hold the certified financial planner (CFP) designation, a professional certification for financial planners. The firm’s financial planning services include the creation of a detailed financial plan outlining the necessary steps to achieve their goals and objectives. The plan can address specific areas, such as college savings, estate planning and debt management.

More specifically, Altfest’s services include:

  • Investment advisory services and portfolio management (mainly discretionary but some non-discretionary)
  • Financial planning
    • Retirement planning
    • Trust and estate planning
    • Charitable planning
    • Education planning
    • Tax planning
    • Cash flow forecasting
    • Budgeting and strategic planning
    • Long-term care planning
    • Debt management
    • Divorce planning
  • Insurance and risk management
  • Workshops and seminars
  • Newsletters and publications

How Altfest Personal Wealth Management invests your money

Altfest Personal Wealth Management builds unique, customized portfolios for each client based on their time horizon, risk tolerance, income level and long-term goals.

As part of this analysis, the firm follows a system called Total Portfolio Management. Rather than only looking at a client’s investment history, the firm also gets to know their entire financial plan, including income, debts, spending requirements and future earnings potential. The firm uses this information to finetune a portfolio comprised of stocks, bonds, mutual funds, ETFs and private funds.

Altfest Personal Wealth Management follows an active investment approach: this means the firm is regularly trading in an attempt to earn above-average portfolio returns.

Fees Altfest Personal Wealth Management charges for its services

For portfolio management services, Altfest Personal Wealth Management charges a fee based on a percentage of assets under management, with the rate ranging from 0.50% to 1.00%, depending on the size of the client’s portfolio. Altfest does not charge trading commissions or performance-based fees.

Portfolio Size Annual Asset-Based Fee
First $3 million* 1.00%
Between $3,000,001 and $6,000,000 0.75%
Over $6,000,000 0.50%
*If a portfolio falls below $2 million in value at the end of the quarter, the firm will assess an additional 0.10% fee on top of the asset-based fee listed above.

For “young professional” clients who don’t meet the firm’s portfolio minimums, Altfest charges the following fee schedule:

  • In the first year, the firm charges an annual fee of either 1.10% of assets under management or $2,500 whichever is greater.
  • After the first year, the firm charges 1.10% of the portfolio value or $1,500 per year whichever is greater.

This rate includes cash flow analysis, investment analysis, investment management and 401(k) recommendations. Clients who want additional financial planning services will be billed at a rate of $250 per hour.

If a client only wants standalone investment recommendations, Altfest Personal Wealth Management charges either an hourly fee ranging from $500 to $800 an hour, or a fixed fee of at least $3,500 for specific investment recommendation requests.

Finally, some of the investments included in Altfest’s portfolio recommendations may carry additional fees. Clients are responsible for covering these costs, though the money won’t go to Altfest Personal Wealth Management.

Altfest Personal Wealth Management’s highlights

  • Wide range of awards: Over the past few years, Altfest Personal Wealth Management has been recognized as a top investment advisor by publications including Barron’s, Forbes, Financial Times and Financial Advisor magazine.
  • Highly educated management team: The heads of the firm, Dr. Lewis Altfest and Dr. Karen Altfest, both hold Ph.Ds; Lewis is also an associate professor of finance at Pace University. In addition, many of the financial advisors at the firm hold the CFP designation.
  • Customized investment approach: Altfest Personal Wealth Management designs a customized portfolio for every client, tailored to their specific needs, and don’t lump people into one-size-fits-all funds as some firms may do.
  • Extensive financial planning in addition investing: Altfest Personal Wealth Management also specializes in financial planning. When the firm creates a portfolio recommendation, it goes over a client’s entire financial situation before designing the portfolio, not just their existing investments.
  • Specialty in advising women, executive and healthcare clients: The firm specializes in advising women, executives and professionals in healthcare. Additionally, Forbes named Dr. Karen Altfest one of the top women advisors in the country in 2017, 2018 and 2019.

Altfest Personal Wealth Management’s downsides

  • Above-average investment fees: Altfest Personal Wealth Management charges an annual 1.00% asset-based fee on the first $3 million in a client’s account (plus an additional 0.10% per quarter if their portfolio value falls below $2 million). In comparison, the median investment management fee charged by firms for accounts over $2 million is 0.75%, according to Kitces.
  • High minimum to open an account: It takes at least $1 million to open an account with Altfest Personal Wealth Management. While the firm does waive the minimum at its discretion for “young professionals,” the typical investor would need to be quite wealthy to make use of the firm’s services.
  • Only has one location in New York City: The only way to visit the Altfest Personal Wealth Management office in person is in New York City, the firm’s only location.

Altfest Personal Wealth Management disciplinary disclosures

Whenever an SEC-registered firm or its employees or affiliates face disciplinary action, including a criminal charge, a regulatory infraction or a civil lawsuit, the firm is required to report that incident in its Form ADV, paperwork filed with the SEC. Altfest Personal Wealth Management reports in its Form ADV that it has faced no such incidents over the past 10 years, indicating a clean disciplinary record.

Altfest Personal Wealth Management onboarding process

To start the onboarding process with Altfest Personal Wealth Management, you can request a free consultation with one of its advisors. You can contact the firm either by phone at 212-406-0850, by email at [email protected] or by filling out a form on the firm’s website. As part of the onboarding form, the firm asks you to share your story, which helps the firm start determining whether you are a good fit based on your income and profession.

If it seems like a good match, the firm’s advisors will then get to work designing your customized investment portfolio based on your goals, risk tolerance and overall financial situation. When you’re ready to launch, the firm’s advisors would then take care of opening your new accounts, transferring over your existing accounts, making the necessary investments and keeping up with the records for your portfolio.

The bottom line: Is Altfest Personal Wealth Management right for you?

If you’re a high net worth individual or a young professional who wants personalized investment recommendations combined with financial planning, Altfest Personal Wealth Management could be a good choice. This may be especially true if you are in one of the firm’s specialty client categories: women, executives and healthcare professionals. Since Altfest Personal Wealth Management only has one location in New York City, however, the firm might be a better choice if you live in the Northeast rather than other parts of the country.

On the other hand, Altfest Personal Wealth Management’s comprehensive services do not come cheap. The firm’s fees are higher than average, and you’d need at least $1 million to open an account (unless Altfest waives the minimum because you’re a young professional). If you want a simpler investment strategy or prefer to manage your portfolio more on your own, you could find less expensive advisors than Altfest Personal Wealth Management.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.