Getting Ready to Take a RMD? Here’s a 4-Point Checklist.

Jim Lorenzen, CFP®, AIF®

Remember the 1990s?  That was when every business channel had multiple programs with business gurus picking and ranking mutual funds.  It was a time when many mutual fund managers were becoming the ‘rock stars’ of financial meda.  Everyone wanted to know what Peter Lynch, Bill Gross, and others were buying, selling, and saying.

If you were one of those following all those shows back then, you were no doubt thinking about your financial future.  And, if you were born in the years following 1946, chances are you’re a ‘baby boomer’ – a term we’re all familiar with by now.

I read somewhere that there are 65,000 boomers turning age 65 every year!  And, those turning 70-1/2 have hit a big landmark:  It’s the year – actually it’s up until April 1st of the following year – Uncle Sam begins sticking his hand into your retirement account – after all, he is your partner; and, depending on your combined state and federal tax-bracket, his ownership share can be pretty significant, depending on the state you live in.  Yes, that’s when you must begin taking required minimum distributions (RMDs).

By the way, if you do wait until April 1st of the following year, you’ll have to take TWO distributions in that year – one for the year you turned 70-1/2 and one for the current year.  Naturally, taking two distributions could put you in a higher tax bracket; but, Uncle Sam won’t complain about that.

So, now that you’ve been advised of one trap that’s easy to fall into, what are some of the others?  You might want to give these concerns some thought – worth discussing with your tax advisor, as well as your financial advisor.

  1. Not all retirement accounts are alike.
    • IRA withdrawals, other than Roth IRAs, must be taken by December 31st of each year – and it doesn’t matter if you’re working or not (don’t forget, there is a first year exemption as noted earlier).
    • 401(k) and 403(b) withdrawals can be deferred past age 70-1/2 provided you’re still working, you don’t own more than 5% of the company, and your employer’s plan allows this.
    • As noted, Roth IRAs have no RMD requirements.  Important:  If you’re in a Roth 401(k), those accounts are treated the same as other non-Roth accounts.  The key here is to roll that balance into a Roth IRA where there will be no RMDs or taxation on withdrawals.
  2. Fotila Images

    Get the amount right!

    The amount of your total RMD is based on the total value of all of your IRA balances requiring an RMD as of December 31st of the prior year. You can take your RMD from one account or split it any or all of the others.  Important:  This doesn’t apply to 401(k)s or other defined contribution (DC) plans… they have to be calculated separately and the appropriate withdrawals taken separately.

  1. Remember: It’s not all yours!

You have a business partner in your 401(k), IRA, and/or any other tax-deferred plan:  Uncle Sam owns part of your withdrawal.  How much depends on your tax bracket – and he can change the rules without your consent any time he wants.  Some partner.   Chances are you will face either a full or partial tax, depending on how your IRA was funded – deductible or non-deductible contributions.  Important:  The onus is on you, not the IRS or your IRA custodian, to keep track of those numbers.  Chances are your plan at work was funded with pretax money, making the entire RMD taxable at whatever your current rate is; and, as mentioned earlier, it’s possible your RMDs could put you in a higher tax bracket.

It’s all about provisional income and what sources of income are counted.  The amount that’s above the threshold for your standard deduction and personal exemptions are counted.  By the way – here’s something few people think about:  While municipal bond interest may be tax-free, it IS counted as provisional income, which could raise your overall taxes, including how much tax you will pay on Social Security income.   Talk to your tax advisor.

  1. Watch the calendar.

    If you fail to take it by December 31st of each year – even if you make a miscalculation on the amount and withdraw too little – the IRS may hit you with an excise tax of up to 50% of the amount you should have withdrawn!  Oh, yes, you still have to take the distribution and pay tax on it, too!   There have been occasions when the IRS has waived this penalty – floods, pestilence, bad advice, etc.

Remember to talk with your tax advisor. I am not a CPA or an attorney (and I don’t play one on tv); but, of course, these are issues that come up in retirement planning and wealth management quite often.

Happy retirement!

Jim


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, 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.

Worried About the Markets? Maybe you should(n’t) try alternatives – part 2.

Jim Lorenzen, CFP®, AIF®

In my last post, a talked about how the financial planning profession has changed dramatically since I opened my first office in  1991; but, the financial services industry – not to be confused with the profession that operates alongside it – seems to have changed little, though it’s changed a lot.

I talked about how the financial product manufacturing, marketing, and sales channels represent an industry that exists alongside – not necessarily a part of – the financial planning profession.  It doesn’t help, of course, that anyone can call themselves a financial planner – but I digress.

Alternative investments (alts) represent one example, which I discussed in the last post.  Another alternative investment is deferred annuities.

People love guarantees.  Marketers know this and the use of the word virtually always gets investors’ attention – particularly those who’ve amassed significant assets and are contemplating retirement.

The media – always on the alert for something they can hype or bash for ratings and typically lazy – find it easy to highlight high costs and shady salespeople.   And, there’s some truth to that.  Guaranteed income or withdrawal riders and equity indexed annuities do tend to have high costs.  Often the guarantees that are less attractive than those presented.

The cost-benefit argument could, and probably will, go on forever.   I have other issues.  The first is, does an annuity make sense at all?  – Any annuity.   There’s no tax-deferral benefit if used inside an IRA and it limits your investment choices.  They also often have surrender charges that enter into future decision-making; but, even when there are no surrender charges, the withdrawals can harm performance or even undermine the guarantees that were the focus of the sale.

For me, here’s the big issue:  the annuity creates something most of my clients no longer want any more of – deferred income (who know what future tax rates will look like in 10-15 years as government deficits climb?  Deferred income comes out first and is taxed at ordinary income tax rates.

Deferred income in non-qualified annuities (outside IRAs, etc., funded with normally taxable money) is income in respect of a decedent (IRD) and does not get a step-up in cost basis at the death of the holder – someone will pay taxes on the earnings and they may be in a higher tax bracket or the IRD may put them there.

There may be other ways to invest using alternative strategies.  Options can work, but they also carry additional costs and risk.

Talk to your advisor –  maybe one with recognized credentials and willing to take fiduciary status might be a good idea – to see what your plan should be.


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, 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.

Worried About the Markets? Maybe you should(n’t) try alternatives.

Jim Lorenzen, CFP®, AIF®

The financial planning profession has changed dramatically since I opened my first office in 1991; but, the financial services industry – not to be confused with the profession that operates alongside it – seems to have changed little, though it’s changed a lot.  What?  I’ll explain.

The industry, comprised largely of product manufacturers and their sales arms (these days it seems anyone can say they’re a ‘financial advisor’), has a long track-record of constantly packaging new products to take advantage of a demand among investors that the product manufacturers create through their marketing.   New ‘issues’ (created by marketing) give rise to new products to be sold to fill a marketing-driven demand.  Changes in product innovation to generate new sales is the constant that never changes.

This doesn’t mean it’s all bad; it’s just that it can be difficult for spectators to recognize the game without a program.

Alternative investments get a lot of press these days – especially if there’s a perceived risk of a down or bear market… a perception that’s convenient to exploit at almost any point in time.  The media likes ratings, so profiling people that called a market top or decline – and made money – is always good for attracting an audience.  And, since there’s always someone on each side of a trade, finding someone on the right side isn’t difficult.

I’ve always felt that many fund managers operate like baseball free agents.  Being on the right side of a call gets them on tv, which in turn attracts new assets, which in turn leads to bigger year-end bonuses.  I could be wrong, or not.

Many captive “advisors” are putting their clients into “alts” these days because their employer firms (the distribution arm for the product manufacturer) are emphasizing them.

My sales pitch for alternatives:   With alternatives, you can have higher costs, greater dependency on a fund manager’s clairvoyance, less transparency, low tax-efficiency, and limited access to your money!  What do you think?

Don’t get me wrong.  It’s not a black and white decision.  They can have a place in a well-designed portfolio; and, while many endowment funds and the ultra-wealthy do tend to own alts, most of us aren’t among the ultra-wealthy and risk mitigation is important.

More about alternatives next time.


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, 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.

ROLLOVER MISTAKES CAN BE COSTLY

Jim Lorenzen, CFP®, AIF®

… and mistakes are more common than you might think.

IRA mistakes generally revolve around errors associated with required minimum distributions (RMDs), hardship distributions, and distributions involving pre-tax vs. after-tax funds; but rollover errors can create special headaches.  Ineligible rollovers are often taxable (unless they are after-tax funds) and could be subject to a 10% IRS penalty.  Not good.

According to retirement expert Ed Slott[i], the biggest three ineligible rollovers are:

>  Violations of the one-per-year IRA rollover rule

>  Missing the 60-day rollover deadline.

>  Distributions to non-spouse beneficiaries (a non-spouse beneficiary can never do a rollover.  The funds must be moved as direct transfers).

Those are only the top three; but there are many other lesser-known rollover tax-traps.   If you’re retiring and planning a rollover, you might consider getting professional help.  You can find a CERTIFIED FINANCIAL PLANNER® (CFP®) professional here.

Naturally, if I can help, you can get things started here.

Here’s an IRA Rollover Checklist you might find helpful, as well as a little insight about How To Get Value from an Advisor Relationship.

Jim

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[i] El Slott is a CPA based in Rockville Centre, New York, who has appeared on PBS and is the author of several books on IRAs.


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, 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.

Annuities Can Generate Guaranteed Income for Life! So, why do people hate them?

Jim Lorenzen, CFP®, AIF®

Many people who’ve enjoyed their employers’ guaranteed retirement pensions probably never gave much thought to the fact that some of their compensation was being diverted into an account that would fund the pension – and I’ll bet even fewer suspected that their pension was likely being funded with an annuity purchased by their employer.   They would have hated purchasing an annuity themselves; but, they love the pension.

But there is an anti-annuity bias existing among many, if not most, investors.  And this is despite the fact that there are certain realities we all face:

  • We don’t know how long we will live – we face longevity risk, the risk of running out of money.
  • When the ‘bad return years’ will occur (Murphy’s Law) – that’s called sequence of returns risk.
  • If and when unexpected financial disasters might occur – health issues, roof and air/heating go kaput at the same time (Murphy’s Law again).

The good news is the use of an immediate or deferred annuity can help solve many concerns, particularly the first two above – the income is for life and market returns won’t affect that income.   This is why many refer to their use as a ‘personal pension plan’.

But, there is no such thing as the perfect investment – at least I haven’t found it (and I’ve been looking on behalf of clients for more than 27 years).

Every investment on the planet has a set of characteristics.   It’s generally not a question of what’s ‘good’ or ‘bad’; it’s more of a question of whether (or not) the majority of those characteristics are appropriate and beneficial – or whether the majority are inconsistent with the client’s financial situation, as well as his/her goals and desires.

  • Sometimes, problems arise when people misconstrue the purpose of an annuity.  Instead of focusing on the true purpose (providing an income for life), they often focus on the risk of dying before they receive all their money back.  They hate the thought the insurance company might `win’.   Despite the fact they hope they’ll never have a house fire (which would allow them to ‘collect’), they forget they’re really insuring against a risk (longevity) in the same way they insure their homes and cars.
  • Some focus on ‘returns’, conflating an annuity purchase with a bond.  The truth is they’re not purchasing a stream of dividends or interest; they’re purchasing an income stream, i.e. cash flow for life – in effect, a return of principal and interest with one difference:  It’s for life; it never runs out.
  • Another obstacle appears to be investors’ tendency to misprice the value of a guaranteed income for life.  Few understand time-value of money and generally greatly underestimate the amount of money it takes to fund a monthly income for life.   No wonder lottery winners tend to take the lump-sum and most people elect to take Social Security at 62.

Almost everyone would like a pension; but, few are willing to fund it – despite the fact that those who do have pensions and Social Security income did indeed fund those annuity payments with about 6% from each paycheck.

When one considers it takes a 25% return to buy-back a 20% loss in the markets, guaranteed income for life can sound pretty good IF there’s a willingness to fund the income stream.

Fotila Images

Are fixed annuities right for everyone?  No.  Nothing is.  Some academic research seems to support their use as a portfolio component for those with between $400,000 and $2 million; but, that’s academic theory, which often doesn’t translate well into the real world.   Not everyone who fits this profile will have the same family situations, lifestyle requirements, health concerns, goals, yada, yada, yada.

It’s also worth remembering that annuities can be very complex products with a lot of moving parts – something that contributes to investor hesitancy.   However, if you decide you want an annuity as part of your portfolio – talk this over with your advisor and be sure you understand how it will fit with your current formal retirement plan (or if it’s even needed) – a few key points are worth remembering:

A retirement annuity is not an investment; it’s a risk-transfer tool.   You are purchasing a lifetime income stream and transferring longevity risk to the insurance company.  It’s an insurance policy.

A retirement annuity should not be your total retirement strategy – it’s a supplement to your other planning, as well as Social Security.

Do not automatically assume annuities are good.  Do not assume they are automatically bad.  Simply see if and how this planning component could fit (or not) with your formal plan.

Finally, I can hear someone asking, “Do you recommend annuities to your clients?”   My use of annuities in client portfolios can best be described as extremely rare.  It’s not that annuities are bad; it’s more that, for one reason or another, they either haven’t been needed or there were other overriding issues that were more important.   That doesn’t mean I wouldn’t recommend a particular annuity design if circumstances warranted – it’s just been a rare occurrence up to now.

Annuities can be confusing:  Variable annuities are NOTHING like fixed annuities.  An annuity linked to a market index is NOT a variable annuity – it’s actually a fixed annuity and it is NOT an investment in the stock market.

If you’re not sure, the best advice is to get professional help.    After all, how many of us would stand in front of a mirror with a pair of pliers when we have a toothache?

Jim


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, 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.

Financial Literacy College Courses May Become Mandatory

Jim Lorenzen, CFP®, AIF®

Guess what?

The government require Americans to take financial literacy courses in college.   The Financial Literacy and Education Commission, chaired by U.S. Treasury Secretary Steven Mnuchin, released a report earlier this year with the recommendation that financial literacy be emphasized in school, even suggesting “mandatory financial literacy courses.”   Considering how ill-prepared most people are for retirement, this may not be a bad idea!

The report also suggested providing those needing to improve their financial literacy with actionable financial information.   “A body of evidence indicates that financial education alone has had a small impact on financial behaviors, in part because financial knowledge decays within two years of the lesson,” the report noted. “Behaviorally based strategies,” for example providing Social Security benefit estimates to individuals near retirement age, instead of arbitrarily providing that information, tends to be more helpful for individuals.  So, relevant information – the kind they can actually use – may be just the ticket!

You can see the report here.

Jim


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, 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.

Do You REALLY Want to Invest Like Warren Buffett?

Jim Lorenzen, CFP®, AIF®

Picture this:   After a long talk with your financial advisor, s/he leans back and says, “I think you should put 90% of your money into stocks and 10% into short-term government bonds.”

Your jaw drops, “What?”

Who could blame you?  But, according to an excellent recent article by Craig L. Israelsen[1], those were Warren Buffet’s 2013 letter to Berkshire Hathaway shareholders disclosing his instructions to a trustee for the management of the final bequest to his wife.

Retire with all your money in only two asset classes?   I wonder how that would sound to the regulators if an advisor made that recommendation to clients?

Dr. Israelson decided to test this concept using a $1 million retirement portfolio with annual withdrawals determined by the required minimum distribution (RMD) over a 25-year period – and he tested four different portfolios:   (1) A seven-asset portfolio[2], (2) 60% large-cap US stocks and 40% aggregate bonds, (3) 90% large-cap US stocks and 10% short-term government bonds, and (4) 100% cash.   His time frame was the 49-year period from 1970 to 2018, which contained 25 rolling 25-year periods.

Guess what? Buffett’s portfolio won!  While all portfolios were solvent after 25 years, the Buffett model had the highest average ending balance after 25 years of withdrawals.  It also provided the highest average annual withdrawal and the highest average of total withdrawals over 25 years.

The operative word, however, is average.   The Buffett model also had the widest swings of all the other portfolios; but, when you have more than a billion dollars, who cares?

Most of us living in the real world of making our money last may love the destination; but, we may not like the ride.

Jim

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[1] Financial Planning, May 2019, p. 50.  Craig L. Israelsen, Ph.D. is an executive in residence in the personal financial planning program at the Woodbury School of Business at Utah Valley University and is also the developer of the 7Twelve portfolio.

[2] Equal portions of large-cap US stocks, small-cap US stocks, non-US stocks, real estate, commodities, US bonds, and cash.


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, 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.

RMDs Rules About to Change?

Jim Lorenzen, CFP®, AIF®

The government is facing huge deficits and a building national debt.  So, the latest bid to re-arrange deck chairs, the House recently passed The Setting Every Community Up for Retirement Enhancement Act of 2019.   They’re calling it The Secure Act.

According to Wealth Management, it’s not law – it’s just a bill that’s passed the House and the Senate will pass its own version at some point before it goes to committee for reconciliation.  Nevertheless, here’s what’s in the House bill:

  1. Retirement accounts would be forced to distribute all benefits within 10 years after the employee or owner dies.  This would apply whether or not the deceased had reached his/her required beginning date.   What this does, of course, is reduce the value of inheritances.  No special provision addresses trusts.
  2. Determination of a plan’s beneficiary being an eligible designated beneficiary happens on the date of the employee’s or owner’s death.
  3. Some charities will adapt to the 10-year rule by naming a charitable remainder unitrust (CRUT) as a beneficiary, permitting tax deferral over the tern of the CRUT and increasing the value realized by the non-charitable beneficiary. A present value analysis can help determine whether the benefit to the family exceeds the use of the 10-year rule.  Some may adapt by making lifetime qualified charitable distributions – direct transfers of up to $100K/year from an IRA to a qualifying charity after age 70-1/2.

It’s a long way from being law yet; but, it’s good to know what they’re up to.

Jim

Jim


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, 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.

Withdrawal Tax-Traps You Want to Avoid!

iStock Images

Jim Lorenzen, CFP®, AIF®

News Flash:  Baby boomers are getting older! (film at 11).   As if they didn’t have enough to worry about (i.e., parents coming home to live with them, children that can’t seem to leave home, wondering it their money will last through retirement, and an outlook that screams for increased health care costs and taxes), what if there’s an emergency that forces an early withdrawal from a retirement account?   What happens if it occurs before age 59-1/2 and the IRS levies a 10% tax penalty on top of the income tax?

Not a happy situation.  Someone in a 25% tax bracket who needs $10,000 will have to withdraw $13,333 plus money to cover the penalty…

… unless there’s an exception.

For example, an employee over age 50 who withdraw money from company plans after separating from service can withdraw money from his/her plan without paying the penalty – but, as highly-regarded retirement guru Ed Slott reminds us[1] it’s important to know that not every exception applies to every type of plan.  Some exceptions apply to company plans alright, but not all.  Some apply to IRAs, but not all.  Some apply to both.

Is your head spinning yet?  Mr. Slott says he sees the biggest errors with first-time home buyers and people in higher education – situations where the exceptions apply only to IRAs and never to company plans.  In one case a school teacher withdrew over $67,000 from her 403(b) for college education expenses only to find out (in tax court) she had to pay the 10% IRS penalty.

iStock Images

Here’s another from the Slott files:  A Big-10 accounting firm accountant lost in tax court when he found he had to pay the 10% penalty on top of the taxes for the $30,000+ distribution he took from his 401(k) to begin his Ph.D. studies.   Here’s a real shocker:  Even a person who has negative income for the year and is able to withdraw funds from an IRA tax-free even after the distribution income is factored-in, will still have to pay the 10% penalty – yes, even if there’s no income tax!  This one lost in tax court and again on appeal.  The 10% penalty is completely independent of the level of income for the year.

Medical expenses are another possible trap, according to Mr. Slott.  In one case, someone withdrew a little over $17,000 from her qualified play to pay for medical treatments that began in the same year.  Payment for the treatments, however, was made the following year.  The IRS assessed a 10% penalty, a little over $1,700.  She lost.  The expenses had to be paid in the same year the money was withdrawn.  It’s important to remember that the medical expenses must qualify as deductible, meaning it must exceed the income threshold for claiming the deduction, which increased to 10% of AGI (adjusted gross income) for 2019.  The exception is still available even if the taxpayer uses the standard deduction.

As you can see, there are a number of tax-traps when withdrawals from retirement plans (IRA or company plans) are used to meet emergencies.

Mr. Slott argues – and I have argued as well – this is why it’s important for advisors and their clients to set-up tax-free sources of income, such as non-IRA funds – money that’s already been taxed – so the money will be available for those emergencies when they arise.

It’s not something you can do at the last minute; but, it is something you can plan for IF you plan ahead.

Hope this helps,

Jim

[1] Financial Planning, June 2019.  Ed Slott is a practicing CPA and a nationally recognized 
retirement expert, often appearing on PBS conducting highly entertaining and informative 
educational sessions. 

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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, 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.

Alternative Investments (“alts”) and The Flight to Safety – Part II

Jim Lorenzen, CFP®, AIF®

In my last post, a talked about how the financial planning profession has changed dramatically since I opened my first office in  1991; but, the financial services industry – not to be confused with the profession that operates alongside it – seems to have changed little, though it’s changed a lot.

I talked about how the financial product manufacturing, marketing, and sales channels represent an industry that exists alongside – not necessarily a part of – the financial planning profession.  It doesn’t help, of course, that anyone can call themselves a financial planner – but I digress.

Alternative investments (alts) represent one example, which I discussed in the last post.  Another alternative investment is deferred annuities.

People love guarantees.  Marketers know this and the use of the word virtually always gets investors’ attention – particularly those who’ve amassed significant assets and are contemplating retirement.

The media – always on the alert for something they can hype or bash for ratings and typically lazy – find it easy to highlight high costs and shady salespeople.   And, there’s some truth to that.  Guaranteed income or withdrawal riders and  equity indexed annuities do tend to have high costs.  Often the guarantees that are less attractive than those presented.

The cost-benefit argument could, and probably will, go on forever.   I have other issues.  The first is, does an annuity make sense at all?  – Any annuity.   There’s no tax-deferral benefit if used inside an IRA and it limits your investment choices.  They also often have surrender charges that enter into future decision-making; but, even when there are no surrender charges, the withdrawals can harm performance or even undermine the guarantees that were the focus of the sale.

For me, here’s the big issue:  the annuity creates something most of my clients no longer want any more of – deferred income (who know what future tax rates will look like in 10-15 years as government deficits climb?  Deferred income comes out first and is taxed at ordinary income tax rates.

Deferred income in non-qualified annuities (outside IRAs, etc., funded with normally taxable money) is income in respect of a decedent (IRD) and does not get a step-up in cost basis at the death of the holder – someone will pay taxes on the earnings and they may be in a higher tax bracket or the IRD may put them there.

There may be other ways to invest using alternative strategies.  Options can work, but they also carry additional costs and risk.

Talk to your advisor –  a real one would be a good idea – to see what your plan should be.

Jim


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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, 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.