Carolyn Taylor

Your savings will be spread among a number of assets because a Target Date Fund (TDF) invests in a variety of underlying funds, however diversification is not quite that simple. The question is the overall asset allocation and how it will change over time. Most of these funds will begin with an aggressive allocation, a higher percentage to equity, and become more conservative as you reach retirement, transitioning from equity to fixed income. The appeal of a TDF is the set it and forget it approach. However, consider the process of a financial professional, they work extensively with clients to determine a number of individual factors to achieve your financial goals. They examine your entire financial picture, assessing risk tolerance, liquidity needs, expected retirement/time horizon, tax situation, unique circumstances etc. This illustrates that asset allocation is not a one size fits all approach; you may be diversified in terms of number of investments but not effectively spread across asset classes. The asset allocation provided by the fund may not be appropriate for your specific financial situation. TDFs do not generally offer alternative investments like commodities or real estate, which may be valuable from a diversification standpoint. Even further, within each asset class you want to ensure that you are diversified; for example, if the fund offers an overall asset allocation of 60% equity and 40% fixed income, but 70% of the equity is invested in US Large Cap Energy Stocks that would not be well diversified. Fees associated with TDF’s can be rather high, eroding returns, it is important to consider the after tax and after fee returns compared to other available investment options. Lastly, changes in your financial circumstances may require a change of target date fund, remember to periodically reevaluate your options keeping your long term financial goals in mind. It is crucial that you know what is actually held in the fund and determine the overall asset allocation currently and how it will change over time. You want to be aware of how often the TDF is rebalanced, ask yourself if the broad asset allocation is appropriate as well as the breakdown within each general asset classes. Due diligence for these funds is a must.

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.

A mutual fund is an investment vehicle comprised of pooled funds from multiple investors, collected for the purpose of investing in stocks, bonds, and other securities. The funds are professionally managed by the fund manager according to a defined investment objective. Mutual funds allow investors to build a diversified portfolio with minimal initial investment and high quality professional management. They provide diversification to investors in a cost effective manner as investors do not need to individually purchase the securities, but rather, obtain exposure to the collection of securities held in the fund. Mutual funds allow the average investor to participate in opportunities previously only available to large investors.

Besides the advantage of portfolio diversification, which decreases investment risk, mutual funds have several other attractive features. They offer daily liquidity, regardless of whether the individual securities can be bought and sold daily. A mutual fund eliminates the need for the individual to manage their investments on their own, as this becomes the fund manager’s responsibility. Expert management can be an attractive and convenient option for many investors, although it does eliminate much of the individual investor’s control. Mutual funds are also subject to an annual fee, which represents the cost of the manager’s expertise, as well as the transaction fees of buying and selling securities. These fees should be closely examined before a purchase decision is made.

There are three basic types of mutual funds: equity funds, fixed-income funds, and money market funds, however the fund objective can vary greatly with complex investment strategies. Hybrid, balanced, or lifestyle funds can be a combination of asset classes or sectors, comprised of a fixed or variable asset allocation maintained by the fund manager.

The Investment Company Act of 1940 created more stringent regulation of fund companies and greater disclosure requirements. A prospectus is required to be delivered to all investors, providing detailed information regarding the objective, strategy, asset allocation, fees, and much more. Mutual funds can be either actively or passively managed. A passively managed fund, or an index fund, mirrors the return of a market index, while an actively managed fund attempts to outperform based on the manager’s skills. Exchange traded funds, an index product; now provide a competitive alternative for mutual fund investors. Mutual funds can be a beneficial tool for investors, be sure to examine the details of the fund and other investment options before making a purchase decision.

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above

Roth 401(k) plans combine features of traditional 401(k) plans with those of Roth IRAs. Participants can choose to contribute to a Roth 401(k) with after-tax dollars (in the same way one would contribute to a Roth IRA) or with pre-tax dollars (often called an elective deferral option, as the payment of income tax is deferred). Regardless of how the participant chooses to contribute, any employer-matched contributions are done with pre-tax dollars and both contributions and earnings are added to gross income at withdrawal. Employer-matched contributions are allocated to a pre-tax account and kept separate from any participant Roth contributions.

To withdraw from a Roth 401(k) without incurring any additional income tax, two criteria must be satisfied: the funds must remain in the account for at least 5 years starting the year of the first contribution, and the participant must be 59 ½. Distributions from the Roth portion of the plan meeting these criteria are considered qualified, and are not included in gross income. Distributions from the employer-match separate account are included in gross income as they were funded using pre-tax dollars.

An exception applies for participants who elect to have distributions made as part of a series of substantially equal periodic payments (SEPP) over his or her life expectancy (known as the exception to IRS Rule 72). The payments are calculated annually based on the December 31 account value of the prior year, and are determined by the required distribution method, the amortization method or the annuitization method. For qualified plans, like a Roth 401(k), the participant must separate from service with the employer maintaining the plan before distributions begin in order to be eligible for the exception.

In the scenario described above, only one of the criteria (age) is met. Distributions from the Roth portion of the plan would be considered non-qualified, and a portion of the distribution would be subject to income tax. The portion of the distribution allocable to the participant’s after-tax contribution would not be included in gross income; however, the portion allocable to earnings would be included. The portion allocable to the participant’s contribution would be determined by multiplying the amount of the non-qualified distribution by the ratio of designated Roth contributions to the total designated Roth account balance. For example, if the current account balance is $10,000 and the participant contributed $8,000, 20% (the percentage of the account balance from earnings) would be included in gross income. If the participant is no longer employed with the employer sponsoring the plan, he or she could elect to have distributions made as part of a SEPP plan to avoid early withdrawal tax penalties.

As with any retirement plan, always consult the plan administrator or a financial professional to determine the tax implications of distributions based on individual circumstance.

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.