To Roll or Not to Roll

That’s the rollover question. Do you have the answer?

Jim Lorenzen, CFP®, AIF®

Getting rollover advice isn’t always straightforward.

There’s a difference between a “financial advisor” or “financial planner” who really uses “planning” as a vehicle to sell products – yes, Virginia, they do exist – and a true advisor/planner who provides independent and objective analysis as a part of his or her service to clients.

Wasn’t that commercial subtle?

Nevertheless, when deciding whether or not to roll over your company retirement plan to a self-directed IRA, there are considerations and analysis to be considered before making this irrevocable decision.

Here’s a brief – read that as ‘oversimplified’ and incomplete – hint of the types of issues you should consider:

Sample of 401(k) issues:

  • Maybe no required minimum distributions (RMDs) when you hit age 72 if you’re still working and not a 5% owner of the business you work for.   Maybe.  You need to check with your plan administrator – some plans still require RMDs even if still employed.

  • Expenses in the 401(k) plan may be less.  Maybe.  This is a murky area as some plans are sold to employers as being ‘free’.  It’s a myth, of course, as often costs may be hidden even from the company plan sponsor.  Often plans offer a large menu of options, but not all are ‘open architecture’; many are pre-packaged.  Your financial advisor should be able to provide a full independent comparison expense analysis of your plan holdings vs. the IRA holdings you’re considering.

  • ERISA protections (Employment Retirement Income Security Act) protect your 401(k) assets from creditors (except IRS levies).  Only qualified ERISA plans have this protection – 403(b) plans offered by state and local governments might not qualify for this protection.

Sample of IRA issues:

  • You can contribute as long as you’re working, regardless of age.

  • Unlimited menu of investment options.  Many do not allow self-directed brokerage

  • Not protected by ERISA but rollovers is protected under federal bankruptcy law.  Amounts not rolled over (money from other sources) are protected up to $1 million, indexed for inflation every three years.
  • Option to convert an IRA to a Roth IRA.  You’ll need to pay taxes on the conversion – and they should be paid from other assets to capture the full advantage – and the Roth IRA will need to be funded for at least five years with the owner reaching age 59-1/2 (or disabled) when distributions are made.   The current historically low income tax rates are set to expire in 2026 and could be replaced sooner.  Taxes appear to be ‘on sale’ now – so this is an attractive option for many taxpayers, particularly in light of the SECURE Act, but that’s another subject (see SECURE Act under Categories on the right side panel of this blog).

Remember to plan BEFORE you act.  Ready, fire, aim seldom works out well.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  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: We’re Baaaack!

The 2020 RMD waiver is coming to an end. They begin again in 2021!

Jim Lorenzen, CFP®, AIF®

 

The headline says it all.  But, this is a blog; so I guess I’d better elaborate a little.

RMDs do NOT apply to Roth IRA owners, unless it’s inherited.  

If you take more than the required minimum distribution, that’s not a problem; but, distributions of less than the required amount will result in a penalty:  50% of the RMD shortfall!  For example, if your RMD for 2021 is $25,000 and you take only $20,000, you’ll still have to take the $5,000 remainder and the IRS will take 50% of that shortfall amount: $2,500… money you could have used to buy more masks.   

There’s a new age for taking RMDs, brought on by The SECURE Act, which I’ve covered in a couple of previous posts.  See The Game Changer and this overview.  Those two posts should bring you up to speed for most issues.

By the way, if an IRA was inherited in 2020, including a Roth IRA, an RMD must be taken for 2021 if the beneficiary is an eligible designated beneficiary is taking distribution over his/her life expectancy.  There are rules and exceptions, so be sure to get professional guidance.  IRAs inherited in 2021 and forward come under the 10-year rule, covered in the above previous posts.

RMD penalties are high and requesting waivers can result in headaches.  It’s best to do it right instead of having to do it over.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  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.

The SECURE Act Is A Financial Planning “Game Changer”.

And, there are implications many have missed.

Jim Lorenzen, CFP®, AIF®

Why did congress pass The SECURE Act?

Simple.  This major change will bring in $15.7 billion in tax revenue by 2029, according to the joint committee on taxation in their report on the bill, H.R. 1994.   And, guess whose money they want?   Yes, yours.

The administration, of course, is looking for ways to address the debt by raising revenue without actually talking much about the debt.  They’re even kicking the can down the road on taxes, talking about making the current tax-cuts “permanent” – as if Washington had ever passed a permanent tax bill; it’s “Washington-speak”.  The current tax law is set to “sunset”, i.e., expire in 2026, taking us all back to the pre-2017 tax rates.   Permanency would be achieved by removing the sunset date.  So far, so good; but, if you’re one of those planning for the next two decades, you should be thinking about what the next ten congressional elections might bring. 

The Stretch IRA is all but eliminated.  Under the old law, an heir could inherit an IRA and stretch the RMDs over his/her life expectancy.   Okay, considering the inheritance will probably take place during their peak earning years.   So, a $17,000 RMD on a $500,000 IRA (purely hypothetical) won’t make much difference.   However, under The SECURE Act the inheritor must liquidate the IRA by the 10th year.   There’s NO RMD REQUIREMENT, so, the heir could let the IRA grow until the last year—but, then would be required to withdraw ALL funds in one year—talk about playing roulette with what the tax laws will be when the entire balance is added to that year’s income for calculating the tax bill.   Alternatively, the heir could take a 10% yearly distribution, for example.   But, in our example, that would add $50,000 each year to taxable income during what would likely be the heir’s peak earning years!

For the owner of a traditional IRA, remember that RMDs are considered in two other areas:  (1) how much of Social Security income will be subject to taxation, and (2) as income for determining your Medicare Part B premiums.  Oh, yes, high income in retirement means higher Part B premiums.

It’s a good time, especially for those with substantial incomes, to do some planning.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

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.