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Should I Refinance My Home?

By Arlen T Olberding, CFP® on November 1, 2016

The 30-year fixed-rate mortgage dipped below 3.5% a couple of days ago. (The 30-year rate has been gradually decreasing over the last year and the 15-year rate has been fairly flat in 2016.) So, this might be a good time to ask, “Should I refinance my mortgage?” If the current interest rate is lower than your existing rate, this is worth looking at.

As you begin to evaluate the benefit of refinancing your home loan, you won’t be surprised to learn that many of the decisions you make when taking out a home loan are similar to other investment decisions you make. For example, you’ll be thinking about interest rates, tax effects, risk tolerance and many of the other things you consider when making your non-real estate investments decisions.

Here are some of the decisions you’ll need to make as you consider refinancing your home loan:

Does this make financial sense? You can use one of the online calculators to see how much you might save with a lower interest rate and what the effect of the closing costs will be. You’ll also want to look at the break-even time. For example, suppose your closing costs are $2,000 and that you’ll save $100 per month. Then, your break-even time is 20 months ($2,000/$100). So you should plan on staying in your home at least another 2-3 years for refinancing to make sense.
On a related note, you’ll need to decide on the best way to pay the closing costs. There are three common options: pay out of pocket, include the fees in the new loan amount or have the lender cover the fees in exchange for a higher interest rate. Out-of-pocket makes the most sense if you plan to keep the loan for a long time. This is also when bundling the fees into the new loan can make sense. The higher interest rate option is best used if you plan a sale or another refinance in a few years.
Do you want a fixed-rate loan or an adjustable-rate loan (ARM)? Your risk tolerance is certainly a factor here. Also, you’ll want to think about how long you’ll keep this loan. (This means how long you plan on living in this house or how long until you’re likely to refinance again.) It’s interesting that some conservative investors always go for a fixed loan even when they plan to move in a few years. This causes them to pass up the cheaper ARM loan even though it will be paid off before the interest rate resets. If you do go fixed rate, you’ll need to consider the term of the loan. Generally, the shorter the term, the lower the interest rate. Also, a shorter term reduces the total amount of interest you’ll be paying over the life of the loan. On the other hand, a shorter-term loan locks you into a higher monthly payment whereas you could take a longer-term loan and increase your monthly payments to retire the loan earlier without locking in a high mandatory monthly payment. Finally, some people like to have the term of their refinanced loan approximate the number of years remaining in their existing loan. (For example, if you originally took out a 30-year loan and have paid against it for 5 years, you might want the term of the refinanced loan to be 25 years.)
If your home has appreciated, you’ll need to decide whether to take some of its value out. There are considerations here too. First of all, if you take out too much money, your interest rate will rise. Also there’s the consideration of what you’ll do with the money once it’s taken out. If you plan to invest it, you’ll need to look at the after-tax effect of the investment versus the after-tax effect of having it reduce the home loan. Finally, you may have an immediate need for the money such as medical expenses, college expenses, remodeling expenses, retiring high-rate debts (like credit cards) and so forth.
People who are nearing retirement have a few special considerations. First of all, taking out a loan depends on your monthly income, so be sure to have the kind of loan you want before giving up your monthly paycheck. (By the way, this same logic applies to a home equity line-of-credit. You’ll want to set that up before you quit working.)

If you end up deciding to refinance your home loan, there are a couple of key pieces of information that you’ll need to get the process rolling:

You’ll need an estimate of your current property value. You can get this through a realtor or by looking at home sales in your neighborhood during the last 3-6 months using Zillow.com or Redfin.com.
You’ll need to know your current loan balance (this is the amount of principal left on your current mortgage). You can find this on your mortgage statement.

While refinancing your home loan can be very advantageous, you can see that there are quite a few important decisions to be made. Guidepost Financial Planning has helped many of our customers think this through and would be glad to talk things over with you too. Please visit our website or give us a call at 970.419.8212 so that we can discuss this important topic in a no-charge, no-obligation initial meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.

Posted in Fundamentals

Protecting Your Identity

By Arlen T Olberding, CFP® on October 1, 2016

Identity theft comes in various forms, but the bottom line is that it involves people stealing information about you for their own gain without regard to the theft’s impact on you. Estimates as to its frequency vary, but there’s no disagreement that it’s widespread. Recovering from identity theft takes a lot of your time and can hit you in the wallet. There is a lot of useful information on the prevention of identity theft. I’ve found the Federal Trade Commission’s site on this to be clear and useful. Their four-step approach to protecting your identity follows.

Keeping Your Personal Information Secure Offline

Lock your financial documents and records in a safe place at home and lock your wallet or purse in a safe place at work. Keep your information secure from roommates or workers who come into your home.
Limit what you carry. When you go out, take only the identification, credit and debit cards you need. Leave your Social Security card at home. Make a copy of your Medicare card and black out all but the last four digits on the copy. Carry the copy with you — unless you are going to use your card at the doctor’s office.
Before you share information at your workplace, a business, your child’s school, or a doctor’s office, ask why they need it, how they will safeguard it and the consequences of not sharing.
Shred receipts, credit offers, credit applications, insurance forms, physician statements, checks, bank statements, expired charge cards and similar documents when you don’t need them any longer.
Destroy the labels on prescription bottles before you throw them out. Don’t share your health plan information with anyone who offers free health services or products.
Take outgoing mail to post office collection boxes or the post office. Promptly remove mail that arrives in your mailbox. If you won’t be home for several days, request a vacation hold on your mail.
When you order new checks, don’t have them mailed to your home, unless you have a secure mailbox with a lock.
Consider opting out of prescreened offers of credit and insurance by mail. You can opt out for five years or permanently. To opt out, call 1-888-567-8688 or go to optoutprescreen.com. The three nationwide credit reporting companies operate the phone number and website. Prescreened offers can provide many benefits. If you opt out, you may miss out on some offers of credit.

Keeping Your Personal Information Secure Online

Know who you share your information with. Store and dispose of your personal information securely.
Be alert to impersonators. Make sure you know who is getting your personal or financial information. Don’t give out personal information on the phone, through the mail or over the Internet unless you’ve initiated the contact or know who you’re dealing with. If a company that claims to have an account with you sends email asking for personal information, don’t click on links in the email. Instead, type the company name into your web browser, go to their site and contact them through customer service. Or, call the customer service number listed on your account statement. Ask whether the company really sent a request.
Safely dispose of personal information. Before you dispose of a computer, get rid of all the personal information it stores. Use a wipe utility program to overwrite the entire hard drive. Before you dispose of a mobile device, check your owner’s manual, the service provider’s website, or the device manufacturer’s website for information on how to delete information permanently and how to save or transfer information to a new device. Remove the memory or subscriber identity module (SIM) card from a mobile device. Remove the phone book, lists of calls made and received, voicemails, messages sent and received, organizer folders, web search history and photos.
Encrypt Your Data. Keep your browser secure. To guard your online transactions, use encryption software that scrambles information you send over the internet. A “lock” icon on the status bar of your internet browser means your information will be safe when it’s transmitted. Look for the lock before you send personal or financial information online.
Keep passwords private. Use strong passwords with your laptop, credit, bank and other accounts. Be creative: think of a special phrase and use the first letter of each word as your password. Substitute numbers for some words or letters. For example, “I want to see the Pacific Ocean” could become 1W2CtPo.
Don’t overshare on social networking sites. If you post too much information about yourself, an identity thief can find information about your life, use it to answer ‘challenge’ questions on your accounts and get access to your money and personal information. Consider limiting access to your networking page to a small group of people. Never post your full name, Social Security number, address, phone number, or account numbers in publicly accessible sites.

Securing Your Social Security Number

Keep a close hold on your Social Security number and ask questions before deciding to share it. Ask if you can use a different kind of identification. If someone asks you to share your SSN or your child’s, ask:
– Why they need it
– How it will be used
– How they will protect it
– What happens if you don’t share the number
The decision to share is yours. A business may not provide you with a service or benefit if you don’t provide your number. Sometimes you will have to share your number. Your employer and financial institutions need your SSN for wage and tax reporting purposes. A business may ask for your SSN so they can check your credit when you apply for a loan, rent an apartment, or sign up for utility service.

Keeping Your Devices Secure

Use screen lock. Always lock your computer when you walk away – even at home to develop good habits. For Windows PCs, simply hold down the Windows key (the 4-square window-pane key) and press L (for Lock).
Protect sensitive information. Keep financial information on your laptop only when necessary. Don’t use an automatic login feature that saves your user name and password and always log off when you’re finished. That way, if your laptop is stolen, it will be harder for a thief to get at your personal information.
Protect cell phones, laptops, etc. Don’t leave them unattended when out in public (coffee shops, restaurants, etc.).
Use security software. Install anti-virus software, anti-spyware software and a firewall. Set your preference to update these protections often. Protect against intrusions and infections that can compromise your computer files or passwords by installing security patches for your operating system and other software programs.
Avoid phishing emails. Don’t open files, click on links, or download programs sent by strangers. Opening a file from someone you don’t know could expose your system to a computer virus or spyware that captures your passwords or other information you type.
Be wise about Wi-Fi. Before you send personal information over your laptop or smartphone on a public wireless network in a coffee shop, library, airport, hotel, or other public place, see if your information will be protected. If you use an encrypted website, it protects only the information you send to and from that site. If you use a secure wireless network, all the information you send on that network is protected.
Read privacy policies. Yes, they can be long and complex, but they tell you how the site maintains accuracy, access, security and control of the personal information it collects; how it uses the information, and whether it provides information to third parties. If you don’t see or understand a site’s privacy policy, consider doing business elsewhere.

If, despite your best efforts, your identity is stolen, you can mitigate the impact by taking certain steps. This can include placing a fraud alert in your credit reporting files and placing a credit freeze on your credit history. Guidepost Financial Planning would be pleased to discuss identity protection with you. Please visit our website or give us a call at 970.419.8212 so that we can discuss this important topic in a no-charge, no-obligation initial meeting.

Posted in Fundamentals

Teaching Finances to Children

By Arlen T Olberding, CFP® on September 1, 2016

Some people are better at managing their expenses than others, but money management is definitely a skill that can be learned. What some people don’t realize, however, is this that money management is a practiced skill that builds over time. Like many skills (e.g. learning a language or an instrument), learning how to earn money, budget and spend money are things that can be introduced in childhood. If you’re not already teaching your child about how to be financially savvy and are unsure of where to begin, we’ve got a few ideas.

Earning
Start by giving your kids an allowance. Give them just enough money to buy a few things they really want, but not enough that they don’t have to make difficult choices. Somewhere between 50¢ and $1 per year of age is fine. Suggest opportunities for them to earn more money for purchases like doing more chores, mowing the neighbor’s lawn, babysitting, or part-time jobs for teens.

Budgeting
Even a simple budget for younger kids will help when their expenses become more complex. Starting off, a money-in list can be comprised of allowance and/or a job and the money-out list could include spending, giving and saving. Once your children start keeping a weekly, bi-weekly, or monthly budget, they will be able to see how money management is related to personal responsibility.

Saving
Encourage your children to save money. Open up a savings account and talk about how the account grows from deposits and interest. To further motivate your child to save, consider matching some portion of every dollar they save. Help them save more money by having them put money aside right away when they receive their allowance. Tweens and teens can learn to save for larger goals if you require them to save for larger purchases like smartphones. Talk to them about saving for retirement, and why it is important to start saving early in life. As your children get used to saving, they will learn the importance of setting goals and discipline.

Spending
Teach your kids how to spend money wisely. Help them to understand the differences between their wants and their needs in life. Show them how to be frugal by shopping around to get a good deal, compare products and prices, limit waste and control impulse buying. You can ban certain items or brands, require that they set aside a portion for a charity or church, but for the most part is to allow them to make their own choices. As your children age, give them more spending responsibilities to strengthen their budgeting skills. If you set aside $30 for haircuts and $50 for new clothes each month, think about giving your child that money and having them pay those expenses themselves. Not only will they have to learn how to budget with added expenses, but they also learn how to pay for things themselves.

Borrowing
If your tween or teen asks to borrow money you might want to help them out, depending on the purchase. This is a great time to teach them about bills and credit cards. Talk to your child about paying bills on time, writing checks, making regular monthly payments, as well as how credit cards work and how to use them responsibly. Even though you might want to bail them out if they’ve found themselves in over their head, practice tough love. It will be easier for your child to make mistakes and learn how to deal with debt now rather than later, when they might make mistakes on a larger purchase that they can’t afford – like a brand new car.

Even young children can learn the value of a dollar. Kids will spend unlimited amounts of money as long as it’s yours, but when their money is on the line, their attitudes and thoughts about money shift. It’s important to teach your children how to be self-sufficient early on – both for their benefit and for yours.

Guidepost Financial Planning would love to talk with you about financial planning for your entire family. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.

Posted in Fundamentals, Saving

Sir John Templeton’s 50/50 Rule

By Arlen T Olberding, CFP® on August 1, 2016

Last month I introduced you to billionaire investor and philanthropist Sir John Templeton. This month, I’d like to look at his advice on savings. Sir John and his wife adopted the 50/50 rule — saving 50% of their income!

I know this is pretty aggressive for most of us, but what should we be saving? It’s funny, but my answer isn’t “as much as possible.” Why not? Simply put, this is a balance between enjoying life now and preparing for the future.

The worrisome piece is that many of us aren’t adequately preparing for the future. For example, my grandparent’s generation saved about 20% of income. My parent’s generation saved about 10%. The current savings rate is about 5%.

Suppose you start saving at age 35 and continue to age 65. Suppose your average income over that period is $80,000. And suppose your investments grow at 4.75% annually. The 20% plan will produce about $1,000,000. The 10% plan will produce about $500,000. And the 5% plan will produce $260,000.

Perhaps you can see why many financial advisors recommend saving 15-20% per year as a base plan. Naturally, there are a number of important factors that can influence this advice. For example, suppose you are starting to save later in life. If so, you’ll probably want to increase the savings rate. Or suppose you’re saving for some specific goal, such as you children’s college education, in addition to your own retirement. That would also increase your rate.

In addition to these kinds of factors, it turns out that there actually are times when the normal saver ought to consider the 50/50 rule. A great example of when this is advisable is when you receive one-time or periodic windfalls. For example, if you receive a yearly bonus, you should consider saving at least 50% of it (more if you are behind on your savings plan). Other examples include inheritance and gains from asset sales (such as homes or businesses).

Guidepost Financial Planning regularly advises people on the best savings rate for their situation. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.

Posted in Fundamentals, Saving

Sir John Templeton

By Arlen T Olberding, CFP® on July 1, 2016

Have you heard of Sir John Templeton? He was a billionaire investor and philanthropist. He began the Templeton Growth Fund in 1954 and it had an average annual return of 13.8% for the next 50 years! He sold the fund to the Franklin Group in 1992 and died in 2008.

Obviously Sir John’s investment philosophy stood the test of time. The Franklin Group has published his 16 Rules for Investment Success which you should find of interest. One of my favorites is Rule Number 7: Diversify. In Stocks and Bonds, as in much else, there is safety in numbers. This principle is well summarized in one of his many memorable quotes: “The only investors who shouldn’t diversify are those who are right 100 percent of the time.” (By the way, diversity is one of Guidepost Financial’s guiding principles too.)

Earlier this year, Tim Maverick, of Wall Street Daily, wrote an article discussing his five favorite Templeton principles. Here they are:

Buy low. Duh, right? Maybe, but how often do we see investors putting their money in the latest hot thing — into the fund that is doing well now or into the stocks recently publicized by a Wall Street Journal article?
Invest for the long term. While Sir John aggressively managed his holdings, he held many investments 5 or so years.
Diversify. We talked about this above. It’s noteworthy that Templeton was one of the earliest financial advisors to invest internationally to find bargains and to achieve diversity.
Learn from past mistakes. One of his famous quotes clarifies this point, “The only way to avoid mistakes is to not invest – which is the biggest mistake of all.” So, mistakes are part of the process. The key thing is to learn from them and not to panic when they occur.
Don’t be over confident. Things are constantly changing, so as the fine print says “past performance is no guarantee of future results.”

Guidepost Financial Planning uses many of the same investment principles that John Templeton advocated. We’d enjoy helping you check the diversity and other key characteristics of your current investments. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.

Posted in Fundamentals, News

New Fiduciary Rule for IRAs

By Arlen T Olberding, CFP® on June 1, 2016

A large number of people need help managing their long-term finances and hire someone to help them with the process. Some people don’t have the time or desire to manage their assets themselves, while others don’t know enough about the system to manage their assets well. When selecting an advisor, many people take recommendations from friends and family without doing research into what kind of advisor they are choosing to hire, and to what standards they are legally held. But if you don’t do your research, how do you know you are putting your money in the hands of someone you can trust to act in your best interest?

It appears that many people nationwide are being taken advantage of under the current system. A new conflict-of-interest rule (Fiduciary Rule) recently published by the US Department of Labor (DOL) will make it a requirement for advisors and institutions to be held to a fiduciary standard if they provide advice on retirement plans and IRA accounts. The plan will be phased into action beginning April 10, 2017 and all new procedures and systems are required to be in place by January 1, 2018.

There are currently two types of standards to which investment advisors and broker-dealers are held: fiduciary and suitability. In terms of the benefits for the client, a fiduciary standard is a much higher standard. Most investment advisors follow the fiduciary standard, which requires them to act in the best interest of the client, put the client’s interests first, avoids any conflict of interest and discloses any potential conflicts. Brokers are held to the suitability standard, requiring them only to make recommendations which are suitable to their client. On the surface these two don’t seem drastically different from one another, but we notice bigger differences if we dig deeper, especially in the way payments are received.

Brokers are generally commission-based, have a quota to reach, and a salary to make. They receive a payment of a percentage of each fund they sell. A fund with hefty fees attached to it might be recommended if the broker can make the case that it “suits” the investor, even though there might be a fund with lower fees out there. Because the broker is also thinking of his/her interest (and that of the firm’s), if the fund with a large amount of fees makes them more money, they probably won’t recommend the one that will cost the client significantly less in fees. Additionally, bonuses can be awarded for opening accounts, the firm’s success, or for selling lots of funds in a particular category.

Some investment advisors are fee-only, and the client pays the advisor an hourly rate or a percent of the assets. In either case, the advisor does not make a profit off the funds the client purchases. With hourly work and asset management, the advisor uses his/her knowledge and skills to guide the client towards good investments and smart decisions. Not only is the advisor required to put the client’s needs ahead of their own, but he/she also has an incentive to recommend funds that will grow your assets.

Even though the Final Rule laid out by the DOL calls for those giving advice on retirement accounts to adhere to fiduciary standards, this rule has been unjustly met with disapproval. One criticism, for example, is that no one will want to work with clients if they have a small level of assets. This criticism is absolutely incorrect. Many firms, like Guidepost, still offer hourly financial planning work. Another common misconception is that annuities and other products will no longer be available. Unfortunately, a last minute change kept the door open to selling annuities inside IRAs.

Also, keep in mind that this rule does not require advisors to act according to the fiduciary standard when advising on every type of account. Even with the new rule in place, the best way to protect yourself and your finances is to understand how your advisor is compensated and whether they are working for you or not.

From the client perspective the Final Rule created by the DOL should create a positive outcome once it is implemented. Basically, the Final Rule closes old loopholes and extends a fiduciary obligation to a wider range of financial advice related to IRAs. Under the Final Rule, financial advisors and institutions that provide advice to retirement plans and IRAs must provide advice in the customer’s best interest, avoid misleading statements, ensure their compensation is reasonable, and disclose to clients basic information about conflicts of interest and costs.

This makes so much sense, doesn’t it? Guidepost Financial Planning is a fee-only advisor who has always put your interests first. We do this in every matter, not just IRA investments. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.

Posted in Investing, News

The Importance of 403(b) Plans for CSU Faculty

By Arlen T Olberding, CFP® on May 1, 2016

Most CSU employees enroll in a Defined Contribution Plan (DCP) rather than in Social Security. If you’d like to learn more about a DCP, please see our previous blog called Retirement Planning for CSU Employees. Just like people who are enrolled in Social Security, DCP enrollees will probably not be able to afford the retirement they hope for unless they have a supplemental savings program. The most common way to supplement DCP savings is with a 403(b) plan.

In general terms, a 403(b) plan is a tax-advantaged retirement savings plan available for public education organizations (and others) and is similar to a 401(k) plan. Salary deferrals into a 403(b) plan are made before income tax is paid and are allowed to grow tax-deferred until the money is taxed as income when withdrawn from the plan. 403(b) plans can invest in either an insurance company’s annuity contract or in a custodial account made up of mutual funds. (By the way, we do not advise having an annuity plan within a in a plan which is itself tax-deferred.) 403(b) plans may include Roth contributions which are after-tax contributions that permit tax-free withdrawals if certain requirements are met.

Some 403(b) details for CSU follow. You may contribute 100% of your pay up to the IRS limits. If you are under age 50, federal tax law generally limits your contribution limit for deferrals to $18,000 for 2016. If you will be at least age 50 during the year, your plan allows you to contribute an additional $6,000 in “catch-up” contributions. CSU retirement vendors include Fidelity, TIAA-CREF and VALIC. Both traditional (pre-tax savings) and Roth (post-tax savings) accounts are available. CSU will not provide any “matching” to this retirement account.

Let’s take a closer look at the importance of having both a DCP and a 403(b) plan. CSU currently contributes about 11% and you contribute about 8% of salary to your DCP. Let’s assume you are 40 years old, will work to age 65, are an Assistant Professor earning $88,000 per year and that the DCP investments grow at 4.75% annually. Neglecting future increases, you’ll have about $807,000 at your retirement from DCP. That’s about 12 years of after-tax salary. Since there’s a good chance that you and your spouse will live past age 77, additional savings would probably be advisable. A 403(B) plan is the way most faculty members save these additional funds. If you save the maximum contribution of $18,000 from ages 40-49 and $24,000 (taking advantage of the so-called catch-up contributions) from ages 50-65, you will have an additional $1,000,000 at retirement. Now $1.8M is a nice nest egg. We can help you see if that will support you and your spouse during retirement or whether you’ll want to add a personal portfolio to create an even larger retirement fund.

As you can see, there are a number of important decisions to make and they’ll have the biggest impact on your retirement the sooner you’re able to start. Guidepost Financial Planning has experience advising CSU employees on their retirement plans and other financial matters and we’re located right here in Fort Collins. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.

Posted in Retirement Planning, Saving

Self-Employed Retirement Plans

By Arlen T Olberding, CFP® on April 1, 2016

A 2015 TD Ameritrade survey found that 28% of self-employed people do not currently save for retirement and that an additional 40% save what they can afford whenever they can afford it. There are a number of understandable reasons why 68% of self-employed people do not have a regular retirement savings plan, but here are two common ones. First, if the business is new, there are often severe cash-flow challenges. Second, owners personally deal with most or all of their business issues. This leaves no time for what some time-management experts call the important, but non-urgent issues.

Nonetheless, most self-employed people will retire at some point. So, it’s a great idea to start saving for retirement as soon as possible. Not only will this enhance your retirement lifestyle, but it will also lower your current taxes and create an investment that can grow on a tax-deferred basis.

There a several ways to save for retirement. These include SIMPLE (Savings Incentive Match Plan for Employees IRA), SEP (Simplified Employee Pension IRA), 401(k) and Defined Benefit Plan. Naturally there are pros and cons for each approach.

Many self-employed owners like the Solo 401(k) – also called a Self-Employed 401(k) or a One-Participant 401(k). It’s a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan (except for an exemption from ERISA (Employee Retirement Income Security Act of 1974) reporting.)

A Solo 401(k) allows you to contribute both as an owner and as an employee. This means that in 2016, you can contribute up to $18,000 ($24,000 if you’re 50 or older) as an employee and you can contribute another $35,000 as an employer. That equals $53,000 in annual savings ($59,000 if you’re at least 50).

Now if your business is too small to need the generous contribution limits of a Solo 401(k), you still have some simple retirement-plan options. Also, if you’re simply too busy running your business to mess with this, we can help you get started. Guidepost Financial Planning has helped other clients properly set up self-employed and other small business retirement plans and we’d be pleased to advise you on this and any other financial matters. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.

Posted in Investing, Retirement Planning

Is a Backdoor Roth IRA Right for You?

By Arlen T Olberding, CFP® on March 1, 2016

First of all, what is a Backdoor Roth IRA? It’s merely a way to contribute to a Roth IRA when your income exceeds the contribution limit of $183,000 (for a couple filing jointly).

The Backdoor Roth IRA procedure removes this restriction. It involves a simple two-step process. First you contribute up to $5,500 to a traditional IRA ($6,500 if you’re age 50 or older). You do not take a tax deduction for this contribution – it is ‘non-deductible’. Then you immediately convert these funds into a Roth IRA. If you want to be sure there are no taxes in the rollover, put your traditional IRA funds into some no- or low-interest investment since any gains are taxed as income when you convert a non-deductible IRA.

Now, if you’re eligible for the Backdoor Roth, you probably are establishing a pretty nice net worth. So, why mess with a $6,500 investment? Remember that Roth IRA growth is never taxed. Suppose you’re now 50 years old and you contribute to the maximum permissible age which is 70. Suppose your IRA grows at 3.5% per year for those 20 years. That produces about $190,000 in value. If both spouses do this, that’s $380,000. Now the real beauty of a Roth IRA can come into play. First, unlike a traditional IRA, there is no required minimum distribution for a Roth. So, you can withdraw funds later than 70-1/2 if you like. Second, you can never withdraw these funds and make them part of your children’s legacy. Then they can have a tax-free income stream for some number of years during their lifetimes.

There can be a few complications associated with a Backdoor IRA. For example, if you have any other (non-Roth) IRAs, the taxable portion of any conversion you make is prorated over all your IRAs — you can’t convert just the non-deductible amount. Another thing to watch is whether you’re eligible to contribute to a traditional IRA. (You are if at least one spouse has earned income that exceeds the amount both spouses put into their IRAs.) Guidepost Financial Planning has helped other clients properly set up Backdoor Roth IRAs and we’d be pleased to advise you on this and any other financial matters. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.

Posted in Estate Planning, Investing, Retirement Planning, Saving, Taxes

What If You Won the $1.6B Lottery?

By Arlen T Olberding, CFP® on February 1, 2016

Okay, I know three folks have already won this lottery, but it was pretty exciting while it lasted. If you had won, naturally you wouldn’t receive $1.6B. You’d have to split the prize with two other winners and pay federal taxes. (Fortunately for the winners, their states either have no income tax or no taxes on lottery winnings.) You’d also need to accept an annuity stream (rather than a lump sum) to approach the $1.6B mark. So, there are a number of things to consider should you hit the big one in a future lottery.

While your chances of winning a big lottery are very small, your chances of other forms of sudden wealth are much more likely. Inheritance and selling your business are examples of sudden wealth. Any form of sudden wealth requires some special financial considerations. Let’s take a closer look at inheritance to learn a bit more about the financial decisions you’ll need to make.

When you win the lottery, you have to makes some important financial decisions quickly. However, an inheritance often appears while you are grieving for the deceased. That’s why it’s best to have a period of inaction after the death of a loved one. Your judgement may well be temporarily impaired and there’s typically no need to rush out and do anything. After your grief has diminished, there are a few things you’ll need to attend to. Let’s have a look at them.

If you inherit an IRA, you’ll need to decide whether to take a lump sum or an annuity stream in order to satisfy IRS required distributions. An annuity stream allows the principal to grow and also defers the tax bill. For these reasons, many people choose the annuity approach.

Taxation is another area to consider. Many people aren’t completely clear on estate versus inheritance taxes. Estate taxes are the federal taxes and they are paid by the estate’s executor. Inheritance taxes are state taxes and they are paid by the beneficiary. Fortunately, only eight states have an inheritance tax and Colorado is not one of them.

Another important thing to look at is the form of the investments. It’s not uncommon for you to have a different investment approach than the deceased person had. For example, they might have a very conservative profile due to advanced age and you might be younger and benefit from a more aggressive investment approach. Another situation is diversity. You might inherit a handful of stocks or even a single stock and you’ll probably want to invest those funds in a different manner.

If you are planning for an inheritance, you may want to read our earlier blog entitled The Role of a Financial Advisor When a Spouse Dies. Whether your sudden wealth comes from inheritance, hitting the lottery jackpot or something else, it’s wise to have some experienced advice. Guidepost Financial Planning has helped other clients with these types of decisions. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.