Planning to Roll Your 401(k) to Your Own IRA?

Jim Lorenzen, CFP®, AIF®

Getting ready to retire?  Planning to roll your 401(k) into your own IRA?  It will pay to do your homework first.

To help you get started, you might find our 401(k) Rollover Review helpful.  It contains information on changing jobs, retiring, methods, rollover taxation issues, and more.

i303a_ira-rollover-review_overview-report_vsa_001Click Here for your 401(k) Rollover Review!

 

Happy Thanksgiving: Should you be thankful for the electoral college?

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Jim Lorenzen, CFP®, AIF®

You’re probably wondering, “What does the electoral college debate have to do with Thanksgiving?  Nothing.

It maybe has more to do with being thankful for our founding fathers’ wisdom.  And, I’m not talking about this past election, but the reasons why the electoral college was created for all elections we’ve had and will have in the future.  Those who say it’s `outdated’ probably don’t understand why it was created – and why eliminating it will likely never happen.

As an amateur historian – an un-ranked/low-rank/no-rank amateur, at that – I’ve found that learning about these things can be quite interesting, which shows you how much excitement I have in my life.

I won’t get into the weeds on this, lest your eyes begin to glaze over; however, I will give you the names of a couple books, should you find you’d like to learn more.

Even as far back as the Constitution Convention in 1787, race and class warfare was alive and well in America; indeed, the Constitution itself can be, and has been, viewed by some as a racist document, but that’s another story.  Slavery was the elephant in the room no one wanted to talk about since, at that time, the object was to keep the southern states on-board as the northern states were striving for unity in the separation from English rule.

The divisions were complicated:  Northern mercantile vs southern agriculture economies – large states vs. small states, etc.  So, regional and cultural differences not only divided many, but also made them in many ways interdependent.  As was also true then, the population centers, such as they were in those days, tended to be clustered around Boston, Philadelphia, and New York.  The rest of the population was spread-out throughout the colonies in rural areas, including the agricultural south.

In the convention, small states didn’t want to be dictated to by the large; and were concerned that regional influences could dominate national interest, so a system of ‘electors’ was created to ensure that smaller states could still have a voice in the democracy.
The system was based on state representation.   Each state would receive one elector for each senator (2 from each state), and one elector for each member of the House.  Each house member would come from a congressional district, the number of districts being determined by the state’s population.   No state would have less than 3 electors (Rhode Island’s 1 district + 2 senators), but only population growth would limit the larger states, albeit there was a moderation factor:  the limit of 1 elector for each of the two senators.

As I said, this is a short version.

6a00d83451c82369e201b8d0769f84970c-600wiStill, even today, no one regional area can dominate national election results; and, this latest election is just the most recent example (there have been others throughout our history) that demonstrates exactly what the founders had in mind.

Below is  a county-by-county map of the recent Presidential election results.  While it doesn’t reflect the degree of victory for each county (landslide vs. squeeker), it does provide a broad picture of the larger regional support patterns.

As you can see, Democrats did well in densely populated regions like the California coast, the Miami-Dade area in Florida, and New England.  Hence, Mrs. Clinton won more popular votes than did Mr. Trump  because of the high concentration population centers placed in only a few regions – the exact issue the founders in the Philadelphia State House that summer were trying to moderate.

If there had been no electoral college to moderate regional influence in this past election, the people in Ohio, Indiana, Michigan, Wisconsin, Oklahoma, Iowa, Kansas, Missouri, Nebraska, and many other states would have had – and maybe would never have – a voice in the electoral process.

Indeed, the electoral college was the reason both presidential candidates spent time in Nevada.  Without the electoral system, they would have ignored the state completely.  Bottom line:  Every region should have an impact on a national election that decides a national leadership.  A few areas should not decide the government for the whole simply because they have high population clusters.
Source_ The Washington Post

While James Wilson of Pennsylvania proposed the elector system, it was James Madison, known as the father of the Constitution, who noted that a system mediated through electors, rather than direct voting, would balance regional interests better as population grew and became more centralized.  Indeed, James Mason argued that the people could not be trusted!   With the electoral college the smaller states, particularly those in the South who wanted to protect slavery, were glad to see that New York and Philadelphia wouldn’t dominate national politics to the exclusion of the interests of the minority.  They didn’t talk about slavery much though.  As I said, it was the elephant in the room no one really wanted to address – the result being a violent split that took another seventy-three years to ignite.

The founding fathers argued all summer in 1787 and the result was a Constitution that today, 229 years later, is the oldest, still-functioning Constitution in the world!  Not France, not Greece, not England, not Spain – no country in the world has a constitution in effect that’s older than ours.  Amazing, huh?

A few possible reasons:

  • It’s intentional ambiguity, which allows for interpretation as times change, although many strict constructionists may not consider that a good thing.  However, when Secretary of the Treasury Alexander Hamilton wanted to create the first national bank in the Washington Administration, it was Thomas Jefferson (later the first Democrat) who opposed it because that power wasn’t granted to the president in the Constitution.
  • The amendment process, which allows for changes in the Constitution, even with the high hurdles, that can originate from the people through their elected representatives.
  • The willingness of our elected officials to recognize the Constitution as the supreme law.  Many world leaders have chosen to ignore theirs in the past.  Here, we’ve seen one President resign and, even in this most recent rancorous election, we’re seeing a smooth transition – maybe except in the media (they have to fill a lot of time) and in the streets, where many who demonstrate know little about the process they hate so much.

If you’re interested in learning more about the Constitution, here are a couple of good books you might enjoy:

The Summer of 1787, David O. Stewart

America’s Constitution, Akhil Reed Amar

If you’re an American history lover like me, you’ll find both of these enjoyable holiday reading.
Maybe I should have saved this post for the 4th of July!

Enjoy!

Jim

 

Jim Lorenzen, CFP®, AIF®
The Independent Financial Group
A Registered Investment Advisor
805-265-5416
If you’d like to Get Started with IFG, you can begin here!
 

Jim Lorenzen, CFP, AIF

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group.  He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Will Your Retirement Money last? Maybe – with the right ‘Late Life Income’ strategy.

iStock Images

iStock Images

Jim Lorenzen, CFP®, AIF®

This past Monday, I retweeted a Fox Business post, Why Your Retirement Savings May Be a Pipedream.

A number of my clients, deciding to help ensure their late-life income needs will be met, have  in the past elected to execute a “late life income” strategy – however, they wanted one that would not lock them in to the low rates and liquidity issues that come with annuities.

I created a hypothetical – translate fictitiousLate Life Income “case study” of what such a strategy might look like for the right candidate couple (this may not be right for everyone).  You can learn more by getting it here.

Enjoy,

Jim

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Resized CFP_Logo_GoldJim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an Accredited Investment Fiduciary® serving private clients providing retirement planning and wealth management services since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.6a017c332c5ecb970b01a51174cbb0970c-120wi

Looking for an Easy Bonus Plan for Your Key Employees?

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iStock Images

Jim Lorenzen, CFP®, AIF®

Executive Bonus plans are a little different from Non-Qualified Deferred Compensation Plans (NQDC), which we talked about in another short paper.   But, these types of plans are very popular!
The employee (or a third party, such as an irrevocable trust designated by the employee) purchases and owns the policy and even names the  beneficiary.

The employee-policy owner has all the rights in the policy.  The corporation never has any right to any part of the policy cash values, dividends, or death benefit.  In fact, the corporation never has any incident of ownership in the policy.

Basically, it involves the purchase of a life insurance policy on the life of one or more employees, chosen by the employer.  The employer pays the premium on the policy but charges the employee with a bonus with an amount equal to the payment.  Under other arrangements, the employee can pay the premium and the employer adds the amount of the premium to the employees paycheck.

iStock Images

iStock Images

Why does a corporation do this?  

  • Unlike the NQDC, the corporation, under IRS Section 162, can take an immediate tax deduction for the amount of the bonus.
  • It provides valuable life insurance for key employees at little or no-out-of-pocket costs. The corporation has a great deal of freedom in deciding just who will be covered and has considerable flexibility, depending on the product type, regarding how much premium to pay.  If cost is an issue, a permanent universal life product can provide essentially a term insurance equivalent.
  • It’s completely confidential. No one other than covered employees need know about the plan
  • It can be terminated by the employer at any time for any reason without justification to the IRS or the Department of Labor. There’s no termination penalty, as is the case with a qualified plan.
  • It may be the most inexpensive and easy plan to implement and maintain.
  • It’s appreciated because these plans provide real benefits for the chosen employees – and the benefits cannot be forfeited. Unlike a NQDC plan, assets in a Section 162 plan belong to the employee and cannot be reached by the employer’s creditors.
  • The policy is portable. Termination of employment has no impact on policy values.
  • Present or future management may discontinue premium payments, but the employee will not lose anything if the business is subsequently sold or there is a corporate takeover.
  • Premiums payments may self-complete if the selected employee becomes sick or suffers an accident, if there is a disability waiver of premium rider. Cash values will continue to grow.
  • Cash values, which accumulate income tax deferred, can be turned into tax-free supplemental retirement income, cash for an education, or any other need, in the form of policy loans.\
Fotilla Images

Fotilla Images

Disadvantages:

  • Once the premium is paid, the employer generally has no control over either the employee or the policy. This can be somewhat controlled using a “Controlled Executive Bonus arrangement”, however, the employer bonus is generally enough of an incentive for the employee.
  • Cash values are controlled by the employee; but then, it is a bonus plan and the employer did receive a tax-deduction for it.
  • None of the cost of the plan will ever be recovered by the employer, compared to a split-dollar plan, which allows recovery of employer costs. However, bonus payments are seldom recoverable anyway; and, as stated earlier, this is one of the easiest and least expensive plans to set-up and maintain.

Tax implications:

  • Bonus payments made, whether to the employee to pay the insurer or directly to the insurance company, are deductible by the employer.
  • The bonus (premium) is reportable as income by the employee
  • It’s likely that the payments will be considered a non-cash fringe benefit for withholding purposes, meaning that premium amounts should be added to regular cash wages and subject to appropriate withholding.
  • Since the employee has already paid tax on the full cost of the policy, the employee’s cost basis is equal to the sum of the all premiums paid by the employer. This basis can be used to offset income tax as amounts are withdrawn when the policy is surrendered.

If you’d like to see how it works, the click the button below and I’ll send you our concept sheet that shows how an Executive Bonus Plan looks “in action”.

Get Your Executive Bonus Roadmap!

6a017c332c5ecb970b01a51174caed970c-120wiTo learn more, talk with your advisor, or seek out an independent insurance professional.  Look for credentials such as CFP, ChFC, or CLU.  An independent will not only know the ins-and-outs of the ratings agencies (some highly-rated companies have failed during past melt-downs, remember?), as well as which companies stand-out in this part of the market.   The right advisor should be able to bring the right experts to the table for you.  Of course (shameless promotion), you can contact me!

Jim


6a017c332c5ecb970b01a51174cbb0970c-120wiJim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an Accredited Investment Fiduciary® serving private clients’ wealth management needs since 1991.   Jim is Founding Principal of The Independent Financial Group, a Registered Investment Advisor providing retirement planning and investment advisory services on a fee-only basis.   He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriately licensed professional.  All images used in this communication are in  public domain unless otherwise noted.