retirement planning

Four on the Floor

With many Americans routinely living 25 to 30 years into retirement—or more—it’s time to rethink planning horizons.


Key Takeaways:

·         Successful retirees know how much they need to maintain a reasonable lifestyle; how much they need to save to get there; and how much they can reasonably withdraw from investment accounts each year.

·         The long-standing 4-percent drawdown rule may no longer be a viable benchmark.

·         Retirees must manage three types of risk as they age: investment and portfolio risk, consumption and inflation risk, and, finally, mortality and longevity risk.

 

The American College launched a doctoral program in retirement planning to help academicians and practitioners look more closely at the coming retirement crisis and help identify possible solutions. Much has been written in the past few years regarding the new thinking that has emerged regarding safe withdrawal rates and floor income.

At the core of retirement planning are three key questions:

  • First, how much capital is needed at retirement in order to maintain a reasonable lifestyle until death?

  • Second, how much should be saved to reach this goal?

  • Third, how much can be reasonably withdrawn from an investment account to sustain this lifestyle without running the risk of depleting the investment portfolio?

 

Embedded in these questions are issues of significant importance. Without a keen understanding of the possible answers and their ramifications, you and your advisors could run the risk of making poor decisions that will not be discovered until it is potentially too late. Yet it’s easy for retirees to be lulled into a false sense of security and ambivalence from which they might never recover.

Is the 4-percent drawdown rule still viable?

 

At the core of this problem is the four percent rule first proposed in 1994 by William Bengen, CFP. His historical analysis of rolling returns concluded investors could withdraw an inflation-adjusted four percent annually from their portfolios with impunity. This soon became the benchmark for distribution planning for nearly two decades. It took the lost decade (2000 to 2009) for many people, including experienced financial advisors to realize that markets are potentially dangerous to a retiree’s wealth.

Dr. Moshe Milevsky, Dr. Wade Pfau and other researchers, using Monte Carlo simulations (that’s not gambling, but a sophisticated financial scenario planning tool), have questioned whether this conclusion is as bulletproof as Bengen suggested. Their research and modeling show a high probability of failure due to “sequence risk”—caused by an unfortunate cycle of down markets. If this happens during the first few years of your retirement, there is virtually no way to recover. You could find yourself in a downward spiral with no way to escape.

Don’t let this happen to you.

Three phases of retirement and risk factors

The investor life cycle has built on three phases:

1. Accumulation,

2. Transition and

3. Decumulation.


In each phase, you must be aware of how these risks will impact your investment and portfolio risk, your consumption and inflation risk, and finally, your mortality and longevity risk. Early models for retirement planning treated all three phases the same. Additionally, there was little thought given to whether the “go go” years of early retirement required the same amount of income as the “slow go” or “no go” years later in your retirement years. Is there an optimum “glide path” for distributions instead of a straight upward slope including inflation? Should you ask your advisor about growth strategies for your portfolio if you are in your 80s, retired and have no legacy intent?

Strategically, does it make sense to grow your portfolio as large as possible, with no eye toward a safe withdrawal rate. Or, should you instead have a floor of real income that cannot be outlived? Dr. Wade Pfau has invested hours of research and effort to show options and ways for retirees to evaluate an optimal divestiture strategy. With no bailout strategy or floor income, a retiree could be heading off the proverbial cliff without an escape route.

What is being termed the Fourth Generation of retirement planning has moved past this prehistoric thinking and is now more focused on a guaranteed income by utilizing a floor to prevent total devastation in the no-go years. Longevity planning is becoming more and more relevant as retirees routinely live 25 to 30 years past retirement.

New strategies include longevity insurance, building this floor with bond ladders and Treasury Inflation Protected Securities (TIPS) or annuities (using mortality credits). Other studies focus on lifestyle “glide paths” that allocate more income in the go-go years of retirement instead of using constantly inflating income assumptions with no practical consideration of age-based spending (not forgetting long-term-care risks). The amount allocated to the floor portion of the portfolio is based on the amount of wealth and income needed. Any surplus would be invested in the capital markets.

Factors that need analysis include risk tolerance, age and bequests considerations. In addition, wise retirees and their advisors will build a “sequence risk” buffer into their portfolio to protect against the dreaded market crash in a capital market portfolio, guarding against a crash during the first six years of retirement (the most vulnerable period). Asset allocation for retirement takes on a whole different meaning from how a portfolio is structured—large and small cap, domestic and international, value and growth.

Conclusion


Retirement planning has entered a new phase of analytics that will both retirees and those who advise them. Be on the lookout for new thinking and strategies to help you and your advisor build sustainable and personally rewarding income streams that will last a lifetime (and beyond).

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Should I set up a Traditional 401(k) for my Business?

There are several different 401(k) and IRA retirement plan options that allow for the same tax treatment as a 401(k), but each has different contribution limits and costs. The different options a business owner should consider include several different 401(k) types, the SIMPLE and SEP IRA, and defined benefit (pension) plans.

Does your business have employees?

If your business has employees, you will want to consider either a 401(k) plan or a SIMPLE IRA.  The type of 401(k) plan you choose will be determined by several factors, including cost and if you want to make employee contributions.  If you do not want to contribute towards a retirement plan for your employees, you should consider a traditional 401(k), which allows for discretionary employer contributions, subject to testing.  Businesses with more than 100 employees making over $5,000 should consider a SIMPLE 401(k) or SIMPLE IRA, because they are easier to set up than traditional 401(k)s.  Employers with less than 100 employees should consider a Safe Harbor 401(k).  If your business has no employees, move on.

Do you want to contribute more than $56,000 in a retirement account?

If you answered yes and you are an older business owner, you should consider a defined benefit pension plan, which would allow much higher contribution amounts than any 401(k).  If you plan on contributing less than $56,000 annually, move on.

Are you looking to contribute more than 25% of your net compensation?

If you are, you should consider a Solo 401(k).  This allows you to contribute up to 100% of compensation or $56,000 (plus catch-up contributions).  If you will be contributing less than 25% of your net compensation, a SEP IRA would allow the same benefits as a Solo 401(k) but with less administration costs.

To learn more about the best retirement plan options for your business, check out this flowchart.

If you would like to schedule a call see what retirement plan would be optimal for you as a business owner, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Why Couples Should Have a Financial Agenda Before Cohabitating

Make sure you have considered the financial, emotional and legal implications of "officially" moving in together before taking the plunge.


Key Takeaways:

  • The latest U.S. census data show there are now more nontraditional households in America than at any other time in our nation’s history.

  • Financial planning issues have never been more complicated for soon-to-be-joined couples—especially when one or both members of the couple are affluent.

  • Depending on how you and your spouse feel about your financial position, age and health, chances are estate plans, financial plans and other legal documents need updating.

Couples that are planning to move in together—whether young adults or seniors--should have a serious discussion with each other, as well as with their adult children, parents and financial advisors, who may be affected by their decision to cohabitate. They should also make sure they’re in sync with each other when it comes to personal, career, financial and family goals. Couples should also be very open about each other’s health status and any prior financial commitments they may have.

Here are eight key questions that soon-to-be-official couples should discuss before taking the next big step in their relationship:

1. What are each partner’s assets, liabilities and income? Make sure your partner can tell you ALL of the assets and debts they have in their name. They should be able to include everything if needed, along with a copy of the last two years’ income tax returns. Be honest about how much each other earns and about other sources of income (e.g., rental from a property or income from a trust fund).

Discuss debts in detail (how does each partner plan to pay them off?) and credit ratings. Bring up prior financial problems such as an inability to handle debt or a bankruptcy.

2. Does your partner want or need a cohabitation agreement? This may be a delicate topic, but you should address it head-on, especially if one partner has greater assets than the other.

3. How might wills, trusts and/or health care directives and powers of attorney be handled? Will each partner name the other as the primary beneficiary of their assets, life insurance policies and retirement plans? If there are children from a prior marriage, who will be the primary beneficiary? Who should be the one to take care of matters should something happen to either of them? If one partner has a larger estate, marriage may provide some estate-tax savings. Talk it out until you agree on what’s fair.

4. Does your partner have your same view about savings and retirement? Discuss attitudes regarding savings for the short term and the long term. Are they savers or spenders? If still working, when are you each planning to retire? What resources does your partner have for retirement, and how do they want to live those years?

5. How does your partner manage finances? Will he or she keep separate bank and investment accounts? Will you have only joint accounts, or have something in between?

If you use joint bank accounts or hold title to assets in each other’s names, then that can be used as evidence during a breakup that you had an “agreement” to divide all of your respective assets evenly. If your partner is certain that they want joint ownership of some assets, be sure an attorney drafts provisions in a written agreement specifying who owns what and what happens in the event of a breakup. The agreement should also provide guidance about handling money transfers to the other. Be sure the terms of a gift or loan are clearly stated to avoid misunderstandings later if there is a break up.

Who will pay the bills? How will expenses be divided? Will each partner do this equally or will those duties and obligations be based on income. Will one of you handle all of your financial responsibilities related to couple-hood? Will you and your partner invest together or separately?

Make sure to talk about your respective feelings toward debt. Is one you more comfortable than the other when it comes to taking on obligations? Does one of you view debt like the plague? If so, how will this be handled?

Be careful about having both of your names on a credit card. Will each of you be liable for what the other one charges. If so, your respective credit ratings can be at risk. Make sure your partner understands that if they decide to sign a joint credit card application, they should cross out the word “spouse” and substitute “co-applicant,” so you are not being presented to the world as a married couple.

6. What is your partner’s approach to financial risk? Is one of you a risk-taker and the other risk-averse? Can the two live together without driving each other crazy financially? Are you each willing and able to make changes as needed?

7. Does your partner have insurance? Find out how much and what kind of insurance each of you has. Are you both insurable? Can either of you qualify for any additional coverage through an employer?

With homeowner’s insurance, both of your will be on the policy if you co-own your residence. If only one of you is an owner, then the other needs to be named as an additional insured or must have renter’s insurance.

If each of you owns a car, the insurance company will want to issue two separate policies. That will cost you more because you won’t get a multiple car discount. If you decide to co-own each of your cars, determine the potential liability if one partner has a car accident. Find out how well you and your partner are covered if driving someone else’s car (including rental cars). Have an attorney cover the issue of ownership of the cars.

Each of you should have umbrella insurance to provide additional protection beyond the car and homeowner policies.

8. What names will each of you use on official financial and legal documents? Is either taking on the other’s last name? Be careful when one takes on the other’s name. Calling one’s partner a “husband” or “wife” or presenting oneself as a married couple can have serious consequences. Each of these actions may be used to support an argument for a division of assets and support payments if you break up.

Conclusion

An estimated 120 million Americans—including millions of unmarried couples that live together---do not have an up-to-date estate plan to protect themselves and their families. This makes estate planning one of the most overlooked areas of personal financial management. As there are many potential legal and financial traps with cohabitating, this may be an excellent opportunity for you and your partner to discuss your changing situation with a qualified financial advisor. The more you can keep your legal and financial house in order, the more you can enjoy the process of getting to know your partner better in a fulfilling and deeper way.

A number of organizations, including The Financial Awareness Foundation, have excellent resources about estate planning for non-traditional couples.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Eye On Money September/October 2019

We invite you to check out the new issue of Eye On Money! Inside are articles on:                                       

529 education savings plans. Do not miss this one if you want to help your child, grandchild, or other loved one save for college!

Starting a retirement plan for your business. There’s still time to set one up for 2019 if you act soon! Here’s a rundown of the types of retirement plans available to businesses and self-employed individuals.

Social Security retirement benefits. Check out this article for five things you should know about Social Security before you begin receiving retirement benefits.

What to do before and after a disaster strikes your home. These financial tips can help you prepare for a disaster and deal with its aftermath.  

Also in this issue, you can learn about exchange-traded fund (ETFs) and revocable living trusts, take an armchair tour of China’s Sichuan Province, find out about some special exhibitions and events planned for this fall, and test your knowledge of sports venues.

Please let us know if you have questions about anything in Eye On Money.

Eye on Money September/October 2019

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Can I Do a Net Unrealized Appreciation (NUA) Distribution?

Many companies offer company stock as a type of profit-sharing bonus in order to encourage company stock ownership for employees.  This is typically rewarded to employees within their 401(k) or other retirement account.  Unfortunately, as with all 401(k) distributions, withdrawals are taxed at ordinary income rates.  To combat this, the IRS allows for the capital appreciation of the stock to be taxed at long-term capital gains rates, as long as certain requirements are met.  Read on to see if you could qualify for a NUA.

Do you have employer issued stock in an employer retirement plan?

If you have no company stock, you won’t be eligible for an NUA distribution.  If you do have appreciated company stock in a retirement plan, read on.

Is it phantom stock or stock options?

Unfortunately phantom stock and stock options are not eligible for NUA treatment.  If you have other company stock, read on.

Do you have investments in the retirement account, other than employer issued stock (such as mutual funds)?

NUA distributions require the entirety of the account to be distributed, but non-qualified distributions from retirement funds could trigger taxes and penalties.  To avoid this, roll all non-employer stock to a Traditional IRA. 
Was part or all of the employer stock distributed in-kind to a taxable brokerage account?

To be eligible for the NUA distribution, the employer stock must be distributed directly to taxable account.  Additionally, the distribution must occur after one of the following events to be eligible: death, disability, separation from service, or reaching age 59.5.

If you meet all of the above requirements, you will be eligible for a NUA distribution.  Check out this flowchart to learn more.

NUA distributions can be complicated and difficult to coordinate with the retirement plan sponsor.  Numerous mistakes can be made in the long process that will disqualify you from receiving NUA treatment.  If you have questions regarding NUA distributions or retirement planning in general, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Retirement Choices - Eight Key Dilemmas That You and Your Advisor Should be Addressing

8 key dilemmas that you and your advisor should be addressing

By Robert Pyle

Key Takeaways

  • Even the affluent worry about running out of money in retirement and no one really knows how long they will live.

  • Some retirees have to increase spending in their golden years while others need to go on a budget.

  • Don’t wait too long to enjoy “bucket list” trips and other life changing experiences--or you may never get the chance.

 

If you worry about running out of money in retirement, you’re not alone. According to recent surveys conducted by the AICPA and Transamerica, about half of retirees cite “outliving their money” as their No.1 concern. That dovetails with the 2019 CPA/Wealth Adviser Confidence Survey™ which found that two-thirds of financial advisors believed their clients were “in danger of outliving their money” when they first came to see them. The survey of nearly 300 CPAs and wealth managers was conducted by CPA Trendlines, The Financial Awareness Foundation and HB Publishing & Marketing Company) this spring.

While these numbers are consistent with what I see in my practice, it’s important to understand that there’s no secret formula or magic algorithm to use when planning your retirement. It’s a complicated balancing act that is constantly changing as your life circumstances change.

As my practice has evolved over the years, I’ve seen eight common dilemmas surface time and time again for our clients. There are no quick and easy answers, but getting the issues out in the open, is a key step in devising solutions. How many of these sound like you?


Dilemma #1: Pay for all of your children’s’ education (or just part of it)
This dilemma really has two parts: First, is an out-of-state private college (say $60,000 per year) worth twice the financial hit as an in-state public school costing say, $30,000 per year? There are pros and cons to attending each type of college and no two students have the same needs and career expectations. Just keep in mind that if you go the out-of-state private college route, that’s an extra $120,000 over four years—and that’s before you factor in airfare, cabs and other travel-related expenses that aren’t deductible. Trust me, it adds up quickly. If your current spending is $10,000 per month, then that extra tuition hit is equivalent to 12 months of your normal spending. That means you’ll have to wait an extra year to retire for each child you send to an out of state private school.

The second part of this dilemma—regardless of which type of college your children attend—is paying the tuition 100 percent up-front or asking your children to shoulder some of the student loan burden after they graduate. Doing so will certainly make the young adults in your life financially responsible and may allow you to retire earlier—if you don’t have to help your recent grads with the student loan payments.

See. I told you it wasn’t easy.
That’s why we use MoneyGuide Pro, powerful financial planning software that helps us model a vast array of calculations and what-if scenarios for our clients.

 

Dilemma #2: Take trips now and work an extra year or so later 
When most people hear the word “retirement,” visions of leisurely travel to exotic locations fill their head. No more counting precious PTO days. No more checking in with the office every hour on a painfully slow Wi-Fi connection. No more red eye flights to get back to the grind on time. Sounds great right? But, if you wait until you and your spouse are 100-percent retired, you may not be healthy enough (mentally or physically) to travel extensively and fully enjoy the trip. That’s why many near-retirees start taking bucket-list trips about five years prior to their planned retirement date—and plan to remain employed an extra year or two--so they don’t spend their golden years muttering: “Shoulda Woulda Coulda!”


We recently modeled a retirement scenario for a couple who was about five years out from retirement.

They wanted to take a two-week overseas trip every year for the last five years of their working lives. They liked to take fairly high-end tours, so we budgeted $10,000 to $20,000 per trip per year. That’s $50,000 to $100,000 in after-tax dollars over five years. Since the couple’s normal living expenses were about $10,000 per month, we helped them see how staying in the workforce for a year longer than expected would provide the extra income they’d need to enjoy their yearly overseas trips without causing financial hardship.

Dilemma #3: Delay taking trips until after you retire
Here’s the opposite of Dilemma #2. If you save and save during the last years of your working life—and don’t go on any exotic trips--you’ll be able to retire a year or two earlier than the couple above, but one of you (or both) may not be healthy enough (mentally or physically) to start enjoying extended overseas travel.


Dilemma #4: What can go wrong?

Your health can deteriorate, a spouse can pass away unexpectedly, or one of you could suffer from dementia or Alzheimer’s disease. All of a sudden, your travel plans are out the door. All that money you diligently saved for travel during the final decade of your working years could easily go toward healthcare expenses instead of seeing the world.


Dilemma #5: Children may not be able to spend time with you later
When your kids are younger and still living at home, you may be swamped at work, but it may be the last chance you’ll have to go away together as a family for an extended period of time. Once your children are in college or in the workforce, they may have too many academic or career obligations (possibly young children of their own) to be able to go away with you on that trip to Europe, Africa or Australia that you always dreamed of.

Dilemma #6: When pinching pennies doesn’t make sense
I know this sounds counterintuitive, but sometimes we have to encourage clients to spend more in retirement, not less. For example, we work with one couple in their early 70s. They have no children or grandchildren; they’re in good health and they have about $1 million in investible assets which provides an annual income of about $120,000. They always talk to me about going to Europe, but they don’t want to spend the money. I bring up their Dream Trip every three months at their quarterly meeting, but they were brought up shortly after the Great Depression, and it’s psychologically very hard for them to splurge on non-essentials. Like many seniors, I also suspect they have lingering fears about running out of money if they may someday need say, $70,000 per year, for eldercare—for themselves or an elderly parent.

Sometimes we use our financial planning software to show clients how much they can spend every month for the next 20 years and still be okay. That can be just as much of an eye-opener as it is for clients who are spending too much. If they don’t use some of their hard-earned savings to enjoy life and I they have no one to pass it on to, then it’s all going to have to go to charity or back to the state when they pass on.

Dilemma #7: Cut back your spending
In financial planning there’s something called a “safe withdrawal rate,” typically 4 percent of their nest egg per year. If clients are spending 8 percent per year then they’re in danger or running out of money.

Over the years, we’ve had to sit down with clients occasionally and tell them to rein in their spending. This is not an easy conversation for an advisor. Clients could be spending on houses, new cars, trips or tuition for their children or grandchildren. For example, if a couple is in their mid-60s and spending $80,000 per year on a $1 million portfolio, this could easily outlive their retirement nest egg. It’s a big wakeup call for folks who’ve been affluent and successful their entire adult lives. By using MoneyGuide Pro, we can show them that if they keep spending money at their current rate, their money will only last them 10 to 15 years. Sometimes they have to see the illustration two or three times before it hits home that they could be out of money before they turn 80.

 

Dilemma #8: We don’t know how long we will live
It’s very important to be honest with your advisor and make sure they’re aware of all of your life goals and aspirations. You may want leave millions of dollars to your heirs and favorite causes when you pass on or you may want to enjoy your money while you still can and ideally pass away with an “empty financial tank.” No advisor, no matter how talented, can predict when clients are going to pass away. Most doctors can’t either.

Everyone knows a couple that retired and planned to take lots lot of trips before something came out of left field to derail their plans. One spouse could have dementia, or another could be diagnosed with cancer. As an advisor, I always feel terrible when this happens because in hindsight, I could have urged them to retire earlier and take more trips when they had the opportunity.


Conclusion

We live in a world of life hacks, rules of thumb and 24-hour door-to-door delivery. It’s temping to take the same quick-fix approach to our retirement dilemmas, but you’ll be sorry if you do. It’s on ongoing iterative process and it’s best to have an objective confidant by your side who can guide you through all the twists and turns along the way. Contact me any time if you or someone close to you is wrestling with life and money dilemmas like the ones discussed above.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

How Smart Business Owners Plan for their Golden Years

Know the power of retirement plans

Key Takeaways:

  • Most business owners are not going to retire solely on the proceeds from the sale of their business.

  • You need to get up to speed on different types of retirement plans.

  • Business owns are interested in how much money they can save--not what’s a fair plan.



Most business owners have a dream. It’s to build a successful business, sell it for a zillion dollars and ride off into the sunset. The sad fact is that for the vast majority of business owners, this is just a pipe dream. In most cases, business owners will get less than 50 percent of their retirement income from the proceeds of the sale of their business—if they’re fortunate enough to sell it.

Many business owners have spoken with various advisors about diversification. Too often I see advisors warn owners how unsafe it is for the owner to have all of his or her assets tied up in the business. This conversation has merit, of course.

But, the conversation that resonates more is when I help owners understand that they won’t be able to leave their business if they think the business will provide all of their retirement income. This conversation always gets traction. If your client owns a business and employs fewer than 25 people, it’s very easy to design a retirement program that is almost irresistible for the owner.

It’s all about what the owner can get

The first rule of retirement plan design is understanding that it’s all about what you, the owner, can put in your pocket. Most owners I know are also happy to include their employees when it makes economic sense to do so.

Let’s assume you are in a 38 percent marginal tax bracket, as are most successful small-business owners. If that’s true, your plan only needs to cost less than 38 percent for the employees before it’ll make economic sense for you.

For example, if you want to maximize a 401(k) and profit-sharing plan, you will be able to defer $56,000 per year (for 2019). If the employee cost is less than $40,320, then the employer comes out ahead. The reason? If your client wants to save $56,000 in a taxable account, the tax cost would be $43,320.

When I’ve asked business owners if they’d rather give the government $40,320 or give their employees $40,320 while saving $56,000, it’s an easy answer. One hundred percent of the time the business owners will say they would rather give the money to their employees than to the government.

The proper question to ask


Now that you’ve seen the power of a qualified retirement plan, you need to figure out how much you will save. The proper question here is, “Since you have no limits on how much you can save, how much do you want to put in your plan every year?”

As advisors, we too often decide for our clients how much they can or should save. This is actually a question that YOU should answer. If you are over 50 years old and have a company that employs fewer than 25 people, it’s easy to design a plan in which you can save $200,000 per year in your account—or more. I’ve rarely met a business owner who wants—or could afford—to save more than that in a qualified account.

Four power options for business owners

Here are four plans that I’ve discovered business owners find interesting:

1. Simplified Employee Pension (SEP) plan—This is the simplest of all plans. It requires an equal contribution for all employees based on their salary. For tax year 2019, the owner can defer a maximum of $56,000 in this plan. From a tax/employee deferral analysis, it’s hard to make a SEP work with more than ten employees.

A SEP requires that you put the same amount of money away for each employee as a percentage of their salary. This will often cause the amount put away for employees to be larger than the owner’s deferral amount. Once a company reaches ten employees we start to look at 401(k) plans and profit-sharing plans as being more cost-effective for owner retirement savings.

2. 401(k) plan—This plan is best for owners who want to save up to $25,000 per year in their account. You will want to provide a safe-harbor plan for this account. This allows the owner to defer the maximum contribution with no plan testing.

3. Cross-tested profit sharing/401(k) plan—This plan uses age and salary as a method for putting together contribution amounts. The owner can defer up to $56,000 per year. Using a combination of a maximum 401(k) deferral and profit-sharing plan, the cost for all employees is often less than the tax breakeven point.

4. Cash balance—profit-sharing/401(k) plan—Say your owner wants to defer more than $56,000 per year and can reliably do so for at least five years. You can now consider a hybrid plan that combines a cash balance defined benefit plan with a cross-tested profit-sharing plan. Most owners will be able to defer over $200,000 per year, with a significantly lower amount for the employees.  This plan is the secret sauce for an owner who has not saved enough for retirement and has excess cash flow while running their business with little prospects for a great sale when they’re ready to transition their business.

Don’t forget your spouse

In many cases, the spouse of the company’s owner might be on the company’s payroll, too. If your spouse is over 50 years old, he or she can defer up to $25,000 in the company’s 401(k) plan. This brings a simple deferral to $81,000 for the owner of the company and their spouse.

If the owner’s spouse is not on the payroll, it’s pretty easy to justify adding the spouse to the plan for the amount that would be needed for the 401(k) deferral.

Conclusion

A financial plan is a crucial part of the private business planning process. I often do a rough plan on a legal pad to illustrate the problem the business owner has. I call it the four boxes of financial independence. Once I’ve gotten the attention of the owner we will then move to a formal financial plan.

I want to make sure you are moving in a direction that will get you to financial independence. A simple plan will help both of us understand that we’re making a wise decision. Please don’t hesitate to contact me any time to discuss.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Will I Get a Step-Up in Basis for this Inherited Property?

Receiving inherited property often comes with a tax advantage: receiving a step-up in basis.  Whether you are receiving property from a spouse or family friend, you may be eligible to minimize future taxes by taking a step-up in basis. Read on to see if your inherited property qualifies:

Did you inherit property from your spouse?

If the inherited property is from your spouse and you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), then both halves of the property receive a step-up in basis as long as at least half is included in the decedent’s gross estate (full step-up in basis to FMV).  If you don’t live in a community property, skip to “Is the property an IRA, 401(k), pension, annuity, or irrevocable trust?” question.

Did you or your spouse gift the property to the decedent within one year before their death?

If you answered “yes,” then your original basis is carried over, and you will not receive a step-up.  If not, move on to the next question.

Is the property an IRA, 401(k), pension, annuity, or irrevocable trust?

If you answered “yes,” then you will not receive a step-up in basis.  If not, you will likely be eligible for either a half or full step-up in basis. 

Receiving a step-up in basis can potentially save you thousands of dollars in taxes. Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best tax strategies for your inherited property, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

6 Keys to Comprehensive Personal Wealth Planning, Part 1

Key Takeaways:

  1. Accumulating wealth for retirement needs.

  2. Doing appropriate income tax planning.

  3. Planning for the distribution of the estate.

  4. Avoiding guardianships.

  5. Preparing for long-term health care costs.

  6. Protecting assets.

 

This article is the first in a series designed to help you and your advisor implement appropriate financial, estate and asset protection planning, regardless of your age, assets or income.

Personal and Wealth Planning Needs: 6 Keys

Everyone, regardless of their age, health, marital status, assets and income, should understand the six key planning needs for protecting themselves against personal, legal, tax and financial issues.

1. Accumulating Wealth for Retirement Needs

We all retire at some point in time. Retirement is when wealth accumulation normally tapers off and we begin to consume our accumulated assets in order to fund our retirement needs. Never overlook the importance of retirement income planning because, if ignored, retirement, aging and income cash-flow needs can significantly erode your wealth. Life insurance statistics show that a 50-year-old now has at least an even chance of living to 110!

Assuming an average retirement age between age 60 and 65, many of you realistically face the prospect of living 30 to 40 years AFTER your working life (i.e. wealth accumulation phase) has ended. In estate planning, we often talk about preserving wealth and passing it on to the next generation. But given the demographics of aging, inflation, health care needs, etc., it is easy to have your wealth run out before you do.

2. Appropriate Tax Planning Should Always Be Considered

You face a multitude of state and federal taxes (along with income tax issues and wealth transfer tax issues), which must be addressed at each stage of life as well as at each stage of the planning process.

3. At Some Point We All Die

It is critical that you have appropriate estate planning documents in place, including wills, trusts, appropriate beneficiary designations, guardian designations and more.

4. Avoiding Guardianships

Unfortunately, because of age, accident or illness, we all face the prospect of being unable to take care of our own finances or to make our own health care decisions. Therefore, proper documents need to be put in place NOW to allow someone else to make appropriate decisions on our behalf.

5. Long-Term Health Care Costs

Because of health and aging, everyone faces the prospect of financing long-term health care needs, including the possibility of assisted living and full skilled-care living. These costs can be financially devastating if they are not planned for.

6. Asset Protection Planning

Everyone should be concerned about protecting their wealth from divorcing spouses, lawsuits, family problems, business problems, taxes, creditors and predators that can ruin your long-term financial health. Failure to address any of these needs can result in significant financial loss and the accompanying emotional, psychological and family issues that all too often accompany the onslaught of life’s problems.

We can’t fight the aging process. We can’t prevent the unexpected events that impact our quality of life. However, proper planning and documentation can go a long way toward creating peace of mind when we have put in place the appropriate planning for financial, legal, tax and healthcare issues that are bound to occur during your lifetime.

Getting started

Regardless of your age, health, assets and income, everyone needs a well-drafted “financial durable power of attorney” and an appropriate advanced medical directive. Advanced medical directives normally include healthcare powers of attorney, living wills and more. If you are unable to attend to your financial, personal care or health care matters because of age, accident or illness, no one can make these decisions for you unless the decision making has been specifically designated in writing. 

Financial durable powers of attorney cover assets, income and dealings with other financial matters and government agencies. Advanced medical directives deal with personal care and medical issues, including surgery, placement, medication, assisted living, full skilled-care decisions and end-of-life decisions.

If you do not have these documents in place, unfortunately these decisions will have to be made under a court-supervised process known as a “guardian of the person” (for personal care and medical issue decisions) or a “guardian of the estate” (for financial matters). Guardianships are expensive, personally intrusive and perhaps the worst way to manage any of the decision-making processes.

The proceedings can be very traumatic and expensive. Guardianships of an estate or the person are easy to avoid if the appropriate documents are put in place.

Conclusion

A final word of caution: Be careful about using simple, generic estate planning forms. Simple forms often ignore many of the issues that will have to be made throughout the course of your lifetime. Many of the decisions that may be critically important to your family need to be specifically designated in the documents. Take the time to get your affairs in order while you are still in your prime health and income producing years. You’ll be glad you did.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Am I Eligible for Medicare Part A & Part B?

The Medicare program can provide healthcare for elderly or disabled individuals at a greatly reduced cost.  Medicare Part A covers hospital insurance, and Part B covers medical insurance.  Read below to see if you are eligible for Medicare.

Are you a US citizen and age 65 or older?

If you are under 65 and are not disabled, then you are not eligible for Medicare Part A or Part B.  If you are under 65 and disabled you may be eligible for Medicare benefits.  If you are over 65 and not disabled, move on to the next question.

Are you entitled to Social Security benefits (you have 40 work credits; about 10 years of work history)?

If you answered “yes,” you will be eligible for Medicare Part A & Part B.  If not, then you may still be eligible, depending on your spouse’s eligibility for Medicare and several other factors.

If you’ve made it this far, there is a good chance you are eligible for Medicare Part A & Part B.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about planning strategies that incorporate Medicare, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Get a Home Equity Line of Credit Before You Really Need It

Get a Home Equity Line of Credit Before You Really Need It

It’s especially important to establish your line before you retire

By Robert J. Pyle, CFP®, CFA, AEP®

Key Takeaways

  • When used intelligently, home equity lines of credit (HELOCs) can be excellent cash flow management tools.

  • Contrary to what you might have heard, the interest on HELOCs remains tax deductible when used to pay for home improvements.

  • Don’t wait until you’ve left the workforce to establish a HELOC. Even high net worth individuals can have trouble qualifying when they no longer show employment income.

We’ve been trained most of our lives to treat debt as evil and interest rates as the devil’s work. But, sometimes well-managed debt can provide substantial flexibility and leverage as you pursue your financial and life goals. Demonstrating that you can handle debt responsibly can also boost your credit rating.

If you are a homeowner in good standing, a HELOC can be a very powerful tool for consolidating credit card debt, paying for home renovations, a wedding, a new car purchase, unexpected medical expenses, auto or home repair, even college tuition. Despite the Fed’s recent hikes in interest rates, the rate you are likely to pay on a HELOC will be far lower than what you’ll pay on credit cards, auto loans, student loans, etc.


The key is to finance your big-ticket expenses without depleting your rainy day funds or cashing out stocks or other assets and incurring capital gains taxes—and possibly pushing yourself into a higher tax bracket, especially if you’re retired. HELOCs check all the boxes.

Many folks hope to have all their debt paid off before retirement. But a HELOC can be a very effective tool for managing your cash flow and account withdrawals in retirement.


Just make sure you obtain a HELOC before retiring

Many retirees are shocked to learn they don’t have enough monthly income to meet their bank’s debt ratio (debt/income requirements) when applying for a HELOC or home equity loan. Also, underwriting criteria for these so-called second mortgages has tightened up considerably since the last recession. Most lenders don't look at your assets; they only look at income and credit scores. In addition to retirement benefits (e.g., social security), you may have to provide proof of other income -- enough to make the loan payments. 

 
Don’t believe me? We once had a self-employed client with a $4 million net worth and he and his wife still couldn’t qualify for a HELOC or other type of second mortgage.

Why shouldn’t I just get a home equity loan?

As mentioned earlier, HELOCs and home equity loans are types of “second mortgages” secured by the equity you have built up in your primary residence. Generally, the choice between the two types of credit depends on your intended use for the money and your time frame for repayment. For instance, if you have a set amount in mind for a specific expense such as a wedding, a new septic system or new roof--and you have no further foreseeable expenses--then a fixed rate home equity loan makes sense. However, if your needs are more open-ended—say, a major home renovation that will span a year or two, or to supplement a child's college tuition each year for the next four years--then the more flexible HELOC could be the better option.

Put in article.png

Unlike a convention loan with a fixed payment schedule, a HELOC allows you to pay down as much of the outstanding principal as you want when your cash flow is good, but only requires you to pay the minimum amount of interest when and no principal when cash is tight. Further, you can pay down the entire outstanding balance (draw) at any time during the duration of the loan term (typically 5-10 years)—and later tap into your line again as life circumstances change.

I’m sure those of you who are business owners understand this concept well.

Why should I pay “all that interest”?


That’s a refrain I often hear from clients and prospects. For example, say you have $300,000 in a taxable account, and you are debating whether to use $60,000 of this money for a major house remodel or get a HELOC. If you use the money from the taxable account, you could potentially have capital gains. If you get a HELOC, you could pay off that expense gradually and keep a lot more of your money fully invested—while deducting the HELOC interest from their taxable income if you can itemize. The typical answer for not choosing a HELOC is because most people don’t want to be paying “all that interest.”

We take a different approach when looking at interest. First, we look to see if you can write the interest off. Then we look at the average rate of return on your portfolio. If your portfolio has been averaging the same or more than the after-tax cost of the loan, then we recommend you go with the loan.

EXAMPLE: Let’s take a $60,000 loan at a 5 percent interest rate. If you can earn a 7-percent return on your portfolio, that 2-percent spread in your favor translates into $1,200 more in your pocket every year that you have the loan.

 

I know what you’re thinking: “I thought the interest on HELOCs isn’t deductible anymore (post Tax Reform).” Actually, it is as long as the funds are being used for home improvements.
(See Example 1 below).

put in article 4.JPG

Conclusion

If you or someone close to you has concerns about their cash flow and expense management needs, please don’t hesitate to contact me. I’d be happy to help.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail
info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Diversified Asset Management, Inc. – 2019 2nd Quarter Newsletter

This quarter’s newsletter is filled with lots of great information. Here is a list of topics included in this newsletter.

Soaring Stocks Raises Importance Of Diversifying

The concept of diversification is vital to investors: Don't put all your eggs in one basket so they won't all get smashed if you trip and fall. It's better to spread your wealth over a broad financial spectrum of investments, but avoiding pitfalls isn't as intuitive as it may seem. Diversification neither assures a profit nor guarantees against loss in a declining market. This is especially important to remember when stocks are soaring and portfolios can get overloaded with stocks and human nature is to get greedy and overly optimistic about a continuation of the current trend.

 

If Family Is Wealth, Then Planning Is Immortality

Planning makes you immortal. It ensures the next generation will be just fine. This is something you may not learn or even understand until your 60s or 70s. If you're lucky, you come to hold a baby with dreams for the best things that could happen in the future.

In that moment, when you are feeling so blessed and generous, plan to make the next generation better. Think about how you can imbue the values you hold dear in them.

 

Your Alma Mater Or Your Family?

The new tax law doubles what you can leave loved ones' tax free when you die and that's really bad for your alma mater. Tax breaks for donations to your alma mater may no longer make the grade with you. Here's why:

Estate Tax Exemption Rises. The Tax Cuts And Jobs Act (TCJA) doubles a married couple's estate's tax-exemption to $22 million. Alums now want to maximize their exemptions by leaving $22 million to their children, nieces, nephews and other loved ones before even thinking about a donation to favorite old schools.

 

What Are The 3 R’s Of Roth IRAs?

It's not reading, 'riting, and 'rithmatic, but when it comes to Roth IRAs, it pays to know the three R's: Roth conversions, rechacterizations, and reconversions. Understanding the rules for all of these could save you thousands of tax dollars.

Unlike with traditional IRAs, for which some of your contributions could be tax-deductible, money that goes into to a Roth IRA never is. However, after five years, the money coming out of a Roth is tax free. To qualify for that benefit, withdrawals must be made after age 59Y, because of death or disability, or to buy a first home (up to a lifetime limit of $10,000).

 

Seven Steps To Get Ready For Your Retirement

Are you among the millions of Baby Boomers counting down the days to retirement? Before you move into the next stage of life, it's important to get all of your financial ducks in line. To prepare yourself, consider these seven practical suggestions.

Rebuild the budget. You've probably been living on a monthly budget that takes into account your usual expenditures and income. But that's about to change in a big way. For example, once you stop working, your expenses for a business wardrobe and commuting will also end, but so will the regular paychecks you've been living on.

Come up with a new plan. Identify what you expect to have coming in and going out. Remember that you won't be able to rely on 401(k) deferrals to reduce your taxable income after retirement, but you should still keep saving.

 

Paying Off A Mortgage And The New Tax Code

Among the most prized tax deductions to get trimmed by the Tax Cut And Jobs Act was the monthly mortgage interest. Should you pay off your mortgage, if your mortgage interest deduction is gone? The answer more often now is "Yes," providing you can afford to retire the debt. If you can't afford that now, aim to do it as soon you can.

Due to a large increase in the standard deduction, fewer taxpayers qualify for the mortgage interest deduction. The standard deduction under the new tax law almost doubled to $12,000 for single filers and $24,000 for married couples. Only people with deductions of more than those amounts can itemize and deduct their mortgage interest.

To read the newsletter click on the link below:

Diversified Asset Management, Inc. – 2019 2nd Quarter Newsletter

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Will I Avoid the Social Security Windfall Elimination Provision?

The Windfall Elimination Provision (WEP) applies to Social Security recipients who have their own retirement savings as well as a pension from an employer who did not pay into Social Security.  The purpose of WEP is to disallow for the collection of full Social Security benefits when a retiree has retirement savings and a pension from employers who opted out of Social Security (commonly local government).  Read on to see if you could have your Social Security benefits reduced by the Windfall Elimination Provision.

Have you worked for an employer that did not withhold for Social Security (such as a govt. agency)?

If you have not, then the WEP does not apply to you and will be eligible for full Social Security benefits.  If “yes,” then move on to the next question.

Do you qualify for Social Security benefits from work you did in previous jobs?

If not, then you will not be subject to the WEP.  If you have, move on.

Are you a federal worker in the FERS retirement system and first hired after 12/31/1983?

If you are a federal worker who meets the conditions outlined above, you will not be subject to WEP.  If you are not a federal worker or are a federal worker and do not meet the above conditions, you may be subject to the Windfall Elimination Provision.

The Social Security Windfall Elimination Provision is complicated and has a large influence on your retirement situation should it affect you.  Check out this flowchart to learn more.

If you would like to schedule a call to talk the Social Security Windfall Elimination Provision to see if it affects you, please give us a call at 303-440-2906 or click here here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Will My Roth IRA Conversion be Penalty-Free?

There are several situations in which a Roth Conversion could benefit your future tax situation.  Whether you have lower income this year or want to take advantage of low tax rates, you will want to make sure you avoid any penalties.  Let’s take a look:

Are you converting a Traditional IRA?

If your answer is “yes”, move on to the next question.  If you are converting a SIMPLE IRA, the answer is a bit more complicated depending on how long you have had the Simple IRA.  Check out our chart to learn more.

Are you expecting to take a distribution within 5 years of your conversion?

If you are far from retirement, then your answer to this will likely be “no”, then you can convert any amount.  Remember that any conversion amount is taxed as ordinary income and could increase your Medicare Part B & D premiums.  If you plan to take distributions within 5 years and are under 59.5, you may be subject to a penalty. If you are taking Required Minimum Distributions then you will have to take your RMD before any conversion.

Advantages of a Roth IRA

Roth IRA’s are particularly advantageous if there are changes (increases) in tax rates. Here are ways you could be subject to higher taxes in the future.

1.      The Government raises tax rates.

2.      One spouse passes away and now you are subject to single rates instead of married rates. When a spouse passes away, your expenses are not cut in half but the brackets are cut in half.

3.      Your expenses dramatically increase because you are in an assisted living facility or a nursing home.

If you’ve made it this far, there is a good chance you can make a Roth IRA conversion penalty-free.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategy for converting a IRA to a Roth IRA, give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Can I Delay the RMD from the Traditional IRA I Inherited?

Traditional IRAs allow the owner several tax advantages: it allows for an upfront tax deduction as well as tax-deferred growth.  Upon withdrawal of funds, the account owner is taxed at ordinary income rates. Inherited IRAs require the new account owner to begin taking withdrawals over their lifetime regardless whether or not they need the funds.  Why?  Because Uncle Sam wants to collect his share.  Here are some potential strategies for delaying RMDs from Traditional IRAs as long as possible.

Are you the beneficiary of a Traditional IRA from someone other than your spouse?

If you inherited a Traditional IRA from a spouse, you are likely able to delay taking RMDs until you reach 70.5 years of age.  Check out our “Should I Inherit my Deceased Spouse’s IRA?” flowchartIf you inherited the IRA from a non-spouse, move on to the next question.

Did the person pass away before their Required Beginning Date (April 1st, the year after turning 70.5)?

They have reached their Required Beginning Date

This allows you two options: electing the “5 Year Distribution Rule” or taking RMDs based on your life expectancy using the IRS Single Life Expectancy Table.  The “5 Year Distribution Rule” means all assets must be out of the account at the end of 5 years.  You could withdraw all funds immediately, spread them out over the 5 years, or take them all out just before the end of 5 years.  Keep in mind you will need to pay ordinary income tax on the whole amount distributed. 

If you take RMDs based on your life expectancy it will spread out the tax burden.

They have not reached their Required Beginning Date

You will be required to open an Inherited IRA and take RMDs based on your life expectancy according to the IRS Single Life Expectancy Table.  Depending if the deceased had satisfied their RMD for the year of their death, you may be required to take one this year.

If you’ve made it this far, you may be able to delay the RMD from your inherited IRA.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategy for delaying RMDs from Inherited IRAs, give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

 

 Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

Time Is One of Your Most Valued Assets

Like any other asset you possess, you must be diligent about protecting it, managing it and sharing it

Key Takeaways:

  • Time management is a critical skill set required to achieve success whether you’re retired, in your peak earning years or aught in the Sandwich Generation.

  • Identify where you are spending your time each day that create the most success and happiness.

  • Identify and remove the time bandits that steal precious hours and minutes from the activities that create the most success and happiness.

  • Always heed the 4 D’s.

 

Overview


As many of you have just completed the annual rite of spring known as last-minute tax planning, procrastination and portfolio rebalancing, now might be a great time to hit the “pause” button for just a second.

Equity markets are at or near their all-time highs, interest rates are near their historical lows, inflation is in check and millions of Americans are expecting tax refunds. So why isn’t everyone racing out to purchase new yachts, cars and horses? Because they’re not all that secure, thanks to newfound uncertainty about trade wars, North Korea nukes the revolving door in the White House and interest rates poised to keep rising.

You probably don’t have time to go luxury good shopping anyway.

One of the most significant challenges we face in today’s fast-paced society is controlling our limited time. If you can develop better time management skills, you will have a leg up on your career, family relationships and/or retirement lifestyle. In addition to life coaches and time management experts, many wealth advisors can help you with time management as well—but it all starts with you.

Getting started on the right time management path

Good time management is a two-step process. First, you must clearly identify activities that only you can do and that add significant value to your day. Second, you must identify the time bandits that steal your limited time from the activities that really matter.

Top 8 time bandits


Here are some of the most common time bandits and remedies we see in our work among successful individuals and retirees.

1. Losing time due to lack of organization (specifically, prospect lists, meetings and personal calendars)
Plan and prepare for meetings, medical appointments media, even consultations with your tax and financial advisors with agendas, on-topic communication and hard stops for every meeting to respect everyone’s time.

2. Discussing market forecasts when all crystal balls are cloudy

As the old saying goes: “Everyone’s crystal ball is cloudy.” Why spend your limited time reading, viewing and participating in conversations related to forecasting?

3. Sending multiple emails instead of engaging in verbal communication
Ever notice a long chain of emails attached to one email? This is a great example of where a scheduled call could save time over a group of people typing email responses. Schedule the call and keep the time short. Avoid sending emails for every communication.

4. Losing time (and important information) to desk clutter
It is difficult to guess how much time is wasted by moving piles of paper around a cluttered office. Searching through piles of desk clutter for the critical information needed for a call or meeting requires time. The time-saver is to move toward an efficient paperless office with a system that still allows you to take files with wherever you go.

5. Browsing the Internet, including social media
Digital media usually starts out with a search for specific information, but it can quickly lead to a deep dark hole of distraction and procrastination. Instead, limit Internet browsing to a certain amount of time per day, much like a scheduled call or meeting. The way things are going, Facebook may be taking up less and less of your time.

6. Implementing technology tools before they are efficient
Attempting to use technology before it is fully installed or before your training is complete is a big time-waster. If it does not work properly, it is a time-waster. Using technology in this way could cause loss of data or excess data retrieval searching. This applies to everyone from busy professionals, to busy homemakers to retirees.

7. Completing administrative tasks
It is easy to drift away from your goals of the day by getting bogged down in administrative tasks that could be accomplished by someone else. I recommend avoiding these tasks by using the following four Ds:

  • Don’t do it if it is not worth anyone’s time.

  • Delegate it to someone else if it is worth doing, but not by you.

  • Defer if it can be done only by you, the wealth manager, but is also a task that can wait.

  • Do it now if it can be done only by you, but it must be done now.

The problem with administrative tasks occurs when we default to “do it now” without considering the other three options above.

8. Reading and replying to email on demand
Email has become one of our greatest tools—when it is properly used. If it is not properly managed, email becomes one of our greatest time-wasters. Successful people are not at their desks waiting to send the next email. I recommend setting aside scheduled time in the morning and afternoon to manage email. The same applies to text messaging. It doesn’t have to be instant! Also, I recommend the following approaches to managing incoming emails:

  • Delete the email without reading it if it is from an unwanted sender.

  • Scan the email if you are unsure of its content, then take the appropriate action.

  • Read the email and determine whether a reply is necessary.

  • Reply to the email only if required.

  • File the email only if it needs to be saved.

  • Save the email if it contains sensitive information.

Conclusion

There is a great deal of competition for your time and attention no matter what stage of life you are in. We have found that the happiest and most successful people determine the most valuable use of their time and avoid the time bandits that prevent their success.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

Am I Eligible for Social Security if I’m Divorced?

Social Security has a spousal benefit which is intended to provide payment for the spouse in a household in which there is only one income earner.  This is essential for couples who have one stay-at-home spouse, as it allows them to still collect some amount of Social Security.  Often times, divorcees are surprised to hear that they still may be eligible for Social Security benefits based on their ex-spouse’s earnings.  Read on to see if you qualify for Social Security benefits from a previous spouse.

Is your ex-spouse alive?

If you answered “yes”, move on to the next question.  If your ex-spouse is deceased, you may still be eligible for survivor benefits.  See the “Am I Eligible for Social Security Benefits as a Surviving Spouse?” flowchart here.

Were you married to your ex-spouse for at least 10 years?

If you answered “yes”, move on the next question.  If your marriage lasted less than 10 years, you will not be able to collect spousal benefits.

Did you have more than one marriage that lasted more than 10 years?

If you answered “yes”, you will be able to pick the ex-spouse that provides the greatest benefit.  If not, your benefits will be based off the ex-spouse you were married to for longer than 10 years.  Either way, move on to the next question.

Did the divorce occur at least two years ago?

If your divorce was less than two years ago and your ex-spouse has not filed for benefits, you will have to wait until they file for Social Security before you are eligible for benefits.  If the divorce was greater than two years ago and you do not have plans to remarry (remember you must not remarry to be eligible for ex-spouse benefits), then you can claim benefits if you are at least 62 years of age.

Collecting Social Security benefits from an ex-spouse is complicated, and there are a lot of different requirements.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategies for Social Security, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

 Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Can I contribute to my Roth IRA?

Roth IRAs were created with the Taxpayer Relief Act of 1997 as an alternative to the Traditional IRA.  Although they share contribution limits, they differ in tax-treatment.  Traditional IRAs are tax-deferred, similar to a 401(k) plan.  This means that pre-tax money is contributed to the plan, and is taxed at ordinary income rates as it is withdrawn.  The Roth IRA gave taxpayers a different choice: pay tax now and avoid paying tax on future growth.  Read below to see if you can contribute to a Roth IRA. 

Do you or your spouse have earned income?

“Earned income” means income from wages, salaries, or bonuses.  An example of “unearned income” would be investment income or an inheritance.  If you have earned income, move on to the next question.  If you do not have any earned income, you are not eligible to contribute to a Roth IRA.  Note that if you only contribute to IRAs up to your earned income.  For example, if your earned income is $3,000 then your maximum contribution is $3,000.

Did you make a contribution to a Traditional IRA for the tax year?

If you have contributed to a Traditional IRA this tax year, the amount contributed will count against your $6,000 (2019) allowed IRA contribution for the year.  If you have not contributed to a Traditional IRA or have not contributed the full allowable amount, then you will be able to contribute to your Roth.

What is your tax-filing status?

Married

If your Modified Adjusted Gross Income (MAGI) is less than $193,000, then you and your spouse can make a full contribution. If your income is between $193,000 and $203,000 you will be subject to the contribution phase-out.  You will be able to make a partial contribution to your Roth IRA.  If your income is $203,000 or greater, you are above the income limit and allowed no Roth IRA contribution.

Single

If your Modified Adjusted Gross Income (MAGI) is less than $122,000, then you can make a full contribution. If your income is between $122,000 and $137,000 you will be allowed a partial contribution. If your income exceeds $137,000, no Roth IRA contribution is allowed.

If you’ve made it this far, there is a good chance you can contribute to a Roth IRA.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about contributing for a Roth IRA, give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

What Should You Do If You Strike It Rich?

If a few million dollars—or more—fell into your lap tomorrow, what would you do?

Sudden wealth isn’t a common or reliable way to get rich, but it can and does happen. Some big drivers of sudden wealth include:

  • Receiving a substantial inheritance

  • Getting a major settlement in a divorce or a lawsuit

  • Receiving a big payout because of stock options or the sale of your company

  • Winning the lottery

But while sudden wealth may sound like a dream come true, it’s often accompanied by serious challenges resulting from the “sudden” aspect of that money. With sudden wealth, everything about being rich—the good and the bad—happens all at once. In contrast, most people who build wealth slowly are able to address issues and concerns incrementally over time.

The result: Sudden wealth can be an emotionally charged and overwhelming experience. Sometimes there are emotional challenges because of the source of the money—a relative who died, for example. Feelings of panic or guilt can go hand in hand with the feelings of excitement. All those swirling emotions can cause recipients of sudden wealth to make bad—sometimes exceptionally bad—decisions about the money and about their lives.

Here’s a look at how you—or someone you care about, such as your children—can prepare to deal with sudden wealth effectively to realize amazing opportunities while avoiding the many pitfalls of “striking it rich.”

Click here to learn more:

What Should You Do If You Strike It Rich Flash Report

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Will My Roth IRA Conversion be Penalty-Free?

There are several situations in which a Roth Conversion could benefit your future tax situation.  Whether you have lower income this year or want to take advantage of low tax rates, you will want to make sure you avoid any penalties.  Let’s take a look:

Are you converting a Traditional IRA?

If your answer is “yes”, move on to the next question.  If you are converting a SIMPLE IRA, the answer is a bit more complicated depending on how long you have had the Simple IRA.  Check out our chart to learn more.

Are you expecting to take a distribution within 5 years of your conversion?

If you are far from retirement, then your answer to this will likely be “no”, then you can convert any amount.  Remember that any conversion amount is taxed as ordinary income and could increase your Medicare Part B & D premiums.  If you plan to take distributions within 5 years and are under 59.5, you may be subject to a penalty. If you are taking Required Minimum Distributions then you will have to take your RMD before any conversion.

Advantages of a Roth IRA

Roth IRA’s are particularly advantageous if there are changes (increases) in tax rates. Here are ways you could be subject to higher taxes in the future.

1.      The Government raises tax rates.

2.      One spouse passes away and now you are subject to single rates instead of married rates. When a spouse passes away, your expenses are not cut in half but the brackets are cut in half.

3.      Your expenses dramatically increase because you are in an assisted living facility or a nursing home.

If you’ve made it this far, there is a good chance you can make a Roth IRA conversion penalty-free.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategy for converting a IRA to a Roth IRA, give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.