IRA Contributions After 70.5…Can You? Should You?

Recently I had a client in his mid-60s ask me how much longer he’d be allowed to contribute to his IRA. My client was approaching retirement, but wasn’t planning on drawing from the account until he absolutely needed to.

Since he had other financial resources to draw income from his plan was to let the account grow for as long as possible, thereby delaying tax on the gains. This meant contributing the maximum amount to his account each year, and only withdrawing funds when forced to by required minimum distributions.

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5 Times a Roth 401k Conversion is a Good Idea

Roth IRAs have become one of the most popular ways to build retirement savings over the years. In fact, they’re so popular that thousands of people clamor every tax season to convert their traditional IRAs to Roth IRAs.

This conversion is one of the most popular financial planning moves, since it can reduce your tax burden and eliminates required minimum distributions (RMDs).

More recently, a new form of Roth account has emerged: Roth 401k plans. Roth 401k plans are essentially the same alternative to traditional 401k plans that Roth IRAs are to traditional IRAs. Contributions are made after tax, and gains and withdrawals are tax free.

And with Roth 401k plans on the scene, many sponsors are starting to allow their participants to convert their traditional, pretax 401k balances into Roth, after tax balances. This transition is known as a Roth 401k conversion.

Roth 401k conversions are not unlike Roth IRA conversions. The transition will create taxable income, but your assets will never leave your employer’s 401k plan.

Here’s how one might work:

Johnny has a $100,000 saved up in his employer’s 401k plan. He didn’t pay any income tax on his contributions, and they will continue to grow tax free until he starts taking withdrawals.
When he starts taking withdrawals after age 59 1/2, he’ll owe income tax on every dollar he takes out of his account.
If Johnny were to convert his 401k contribution to Roth contributions, he would owe income tax on the entire $100,000 this year. His account would continue to grow tax free as it would have otherwise.
But, when he begins taking withdrawals down the road, they won’t be taxable income to Johnny. Essentially, he would be paying his tax burden now instead of later.

Conversions can be appealing. You pay taxes on the account now, rather than in the future when you might be in a higher bracket. But the decision is not always so cut and dry. And since this is a question I get in my practice from time to time, I thought it’d help to share 5 circumstances where a Roth 401k conversion is a good idea.

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The Ultimate 7 Step Checklist For Hiring a Financial Advisor

A few years back, I had a friend approach me at a BBQ. He had some questions about how his financial advisor was managing his accounts.

Friend: “Yeah, I just don’t know if this guy is doing the right thing for me. We talk every now and then, he seems like a nice guy, but my portfolio hasn’t really gone anywhere.

Plus, every time we chat he has some brand new investment idea he tries to sell me on. And every single time, he talks up his new idea like it’s the Michael Jordan of portfolio management. (My friend is a big NBA fan). His ideas sound good….I’m just not sure I’m in the right situation. I feel like there’s more going on behind the scenes that I don’t see, but I don’t know what questions to ask.”

Me: “Well how did you find him?”

Friend: “A coworker recommended him. Said the guy made him a ton of money a few years ago.”

Me: “How are you paying him?”

Friend: “Well, I’m not really sure. Everything gets wrapped through the account somehow.”

Me: “OK. Let’s take a step back. Maybe it’d help to identify what you’re looking for in an advisor. If you were starting fresh, what would you like an advisor to help you with?”

Friend: “Hmmm. I guess manage my money and help it grow, make sure I’m on track for retirement, and make sure I don’t run out of money after I stop working.”

Me: “So if you were starting from scratch, what qualities would you look for in an advisor? What criteria would you use?”

Friend: “I really have no idea. I’ve never thought of it that way. Plus there’s about a million financial advisors around here, I get information overload. I guess I’d go with someone I know and like, and seems to have a good reputation. What should I be looking for?”

I had to think about my friend’s question for 10 seconds or so. At the time, I was working at Charles Schwab, but strongly considering starting my own firm.

Me: “I think if I were looking for an advisor, I’d try to find someone who’s competent, trustworthy, unbiased, enjoyable, and looks after for my finances for a fair and transparent price.”

Friend: “Whoa whoa whoa. Slow down with the laundry list. That’s a whole lot of stuff I don’t understand. It sounds GOOD though. I need to tend the grill, but let’s reconvene in a few minutes.”

Coincidentally, this was one of the very reasons I was considering starting my own firm. There are about 300,000 professionals in the U.S. today who call themselves “financial advisors” or “financial planners.” But in my opinion, only a small portion of them have the qualities and service model I’d look for in an advisor.

I’ve had this question come up many times in the years since, and my friend isn’t the only one who’s not sure how to evaluate a potential advisor. And without knowing what questions to ask, how can you be sure you’re finding someone trustworthy and competent?

Because of this, I thought it’d be helpful to build a checklist you can use to evaluate financial advisors & planners. If I were looking to hire someone for help with my finances, these are the exact qualities I’d look for and the exact criteria I’d use. And at the very least, hopefully you’ll be armed with a few good questions to ask.

Click here to download the Ultimate 7 Step Checklist for Hiring a Financial Advisor

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How to Analyze a Variable Annuity

Ever had a variable annuity pitched to you? Maybe you own one. They’re a popular way for many people to mix guaranteed retirement income with the growth potential of equities.

But I’m guessing even if you hold a variable annuity, you’re not 100% sure how it works.

“What are the annual fees again?”

“How does that bonus period work?”

These were a few of the questions a client asked me recently when he was considering a variable annuity.

**Full disclosure – I do not sell variable annuities**

This client just wanted a second opinion. He’d recently met with an advisor who pitched him a variable annuity, and wanted input from an objective source.

My client was in a tough position. He’d just lost his father, and was about to receive a sizable inheritance. He wanted to use this inheritance to produce income throughout retirement, since he was about to turn 60.

He was skeptical about investing in the markets, fearing that another financial crisis would destroy his nest egg. At the same time, he struggled with the idea of buying an annuity. He was attached emotionally to the money since it was coming from his father’s estate, and he didn’t want to fork it over to an insurance company. On top of that, the annuity he was considering was complicated and confusing, and he was feeling a little lost.

After walking through everything together, my client decided to use some of his inheritance to purchase an annuity – but not the one he was being pitched. He opted for a fixed rather than a variable annuity, which he bought with a small portion of the money from his father. He decided to invest the majority of the money in a diversified portfolio geared to produce income.

My client isn’t alone, and I get a lot of questions about variable annuities. Since they have so many moving parts, I wanted to share exactly how I analyze variable annuities using my client’s contract as an example.

There’s a lot of nonsense floating around the internet when it comes to annuities. Hopefully this framework is useful to you if you’re considering buying one.

American Legacy Annuity Analysis

In this video, I’ll analyze the American Legacy variable annuity offered by Lincoln Financial Group, which my client was considering. This specific contract is the American Legacy Shareholder’s Advantage annuity, with the i4LIFE Advantage Guaranteed Income Benefit. I’ll also assume that the Enhanced Guaranteed Minimum Death Benefit (EGMDB) is chosen.

Framework: How a Variable Annuity Works

Before we discuss how to analyze a variable annuity, let’s take a step back and review how they work & where they came from.

Variable annuities have become very popular in the retirement planning industry over the last 25 years. Essentially, they’re a contract between you and an insurance company that guarantee you a series of payments at some point in the future.

There are two phases in a variable annuity: the accumulation phase and the payout phase. What’s unique about a variable annuity is that you invest your contributions during accumulation phase – hence the term “variable.” These investments are known as sub accounts and behave a lot like mutual funds. They are professionally managed and will follow a specific investment strategy described in a prospectus.

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Small Business and Tax Policy

For small businesses, two topics are consistently near and dear to our hearts in presidential elections: taxes and health care costs.

There’s been heated debate on the issues during this election (and most for that matter). And while I’m no political expert, I’m confident our new president will push for changes that affect the small business community – both good and bad.

To help sort through negative ads, debate & media circuses, and smear campaigns, I’ve compiled the remaining candidates’ positions on taxes and health care.

The Candidates

I’ve sorted them by where each falls on the political spectrum with regard to their tax policies. We’ll start with most conservative, and work our way toward the most liberal.

Ted Cruz

ted-cruz-poster_1

Personal Taxes

Ted Cruz has notably emerged as a proponent for a flat tax. Cruz wants to tax all personal income and wages at 10%, and eliminate the estate tax and alternative minimum tax entirely.

Corporate Taxes

On the theme of a flat tax, Cruz wants to replace the payroll and corporate income taxes with a 16% flat business tax. He also wants to eliminate tax on business profits earned abroad.

Cruz’s position is the most radical of the republican candidates, but the camp still claims that social security and medicare would remain fully funded after implementing his measures.

Interestingly the Tax Foundation, which is a group that supports lower tax rates, claims that Cruz’s plan would increase the federal deficit by up to $3.6 trillion over the next 10 years. With potential economic growth, that number decreases to $768 billion.

Cruz has also been outspoken against the IRS, and wants to relegate tax collection and enforcement to another arm of the treasury. He’s been critical of the IRS since their targeting scandal, and believes they should be made irrelevant through his tax plan.

Healthcare

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