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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.

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 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.

Posted in Fundamentals, News

2016 Financial Resolutions

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

According to a 2015 University of Scranton survey, the third-most-common New Year’s resolutions are money-related. (Number 1 is self-improvement and number 2 is weight-related.) The specific kinds of financial resolutions vary quite a bit, but a few things appear on most people’s lists. In general terms, these can be grouped into two categories — spending less and saving more.

At the top of the spending-less list you often find debt reduction, especially credit card debt reduction. The reason for this is that the money you pay in interest could be used to increase savings. And credit card debt normally includes very high interest rates. There are a number of ways to reduce credit card debt, such as debt consolidation under a lower-rate loan. Such lower-rate loans often include new credit cards with low or no-interest teaser rates. Another common approach is a secondary mortgage since rates are still pretty low and the interest is tax deductible (if you itemize).

There are two common saving-more resolutions. One is creating a rainy-day fund. This is a readily-accessible pool of money that can be used when one of life’s surprises pops up. This can include unexpected medical expenses or job loss. Experts typically recommend having 3-6 month’s salary in such a fund. Another popular way to save more is by increasing the amount you contribute to your employer-matched retirement account. A 401(k) is an example of such an account. The reason for this is simple. Many employers either partially or fully match the amount you put in (up to some limit). If they fully match your contribution, your investment immediately grows by 100%. You won’t find such guaranteed growth anywhere else!

Of course, the best resolution for you might be something else. For example, maybe you want to decrease your taxes, save for college, increase your charitable contributions or increase the amount of life insurance that you have. Guidepost Financial Planning can help you review your financial situation and determine the best financial resolution for 2016. 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

Changes to Social Security Claiming Options

By Arlen T Olberding, CFP® on December 1, 2015

On November 2, President Obama signed a two-year budget deal that was approved by congress on a bipartisan basis. It eliminates the possibility of a government shutdown, keeps the Social Security disability fund solvent and reduces premium hikes for Medicare Part B beneficiaries. These features caused it to earn the support of AARP and the National Committee to Preserve Social Security despite the fact that it also eliminates two popular social security claiming strategies – file and suspend and restricted application. It’s easy to get these two strategies confused since they work together. In short, file and suspend enables restricted application.

Here’s how file and suspend works. It’s really a two-step process. First, someone (for clarity, assume it’s the husband) who has reached at least the full retirement age, files for his benefits which establishes a “date for filing.” This enables his wife (or dependent children) to receive benefits based in his work history (if they file a restricted application). Second, the husband can then (optionally) suspend his benefits if he wishes to have them grow at 8% per year up to age 70. The new legislation allows people who have reached the full retirement age to still use file and suspend for six months.

After that, the restricted application can come into play. If his wife has also reached the full retirement age and she has not previously filed for benefits, she can file for a spousal benefit based on her husband’s work history. Without the restricted application, she would receive benefits based on her work history. The new legislation allows people who reach age 62 by the end of 2015 to still use a restricted application.

Still have questions? This all boils down to the following, if you suspend your Social Security payments, your spouse or dependent children will no longer receive benefits until you restart your payments. Also, if you’ve already employed either of these strategies, don’t worry, the change is not retroactive.

You can see that there’s a limited amount of time to use this popular strategy. We invite you to visit our website or give us a call at 970.419.8212 so that we can discuss your situation in a no-charge, no-obligation initial meeting.

Posted in Fundamentals, Retirement Planning

The Power of Goal Setting

By Arlen T Olberding, CFP® on November 1, 2015

Antoine de Saint-Exupéry, author of The Little Price, observed that “a goal without a plan is just a wish.” And yet many of us move through life without a plan or even a goal. When we do this, the outcome is unpredictable. Think of it like taking a road trip without a destination in mind (the goal) or without a map (the plan). Sure, we’ll get somewhere, but is it a place we really wanted to reach? Stephen Covey, the author of The 7 Habits of Highly Successful People, used to encourage people to write their own obituary. Sound a little weird? Maybe, but it really clarified life goals and gave you time to achieve them. If you want your obituary to talk about the wonderful volunteer work you did, it’s important to be doing such work.

Now financial results are probably not something that most people want in their obituary, but they can enable some of the things you may want mentioned — sending your kids to college, contributing to your favorite charity, traveling all over the world and so on. As part of the Guidepost Financial Planning process, we use a tool called SMART. You can see one of the related worksheets on our website. SMART is a planning acronym which means Specific, Measurable, Attainable, Realistic and Timely. Let’s take a brief look at each of aspect of SMART goal setting.

Specific. Your SMART goal should be a clear statement of what you want. For example, a general goal would be, “Get in shape.” But a specific goal would say, “Join a health club and workout 3 days a week.”

Measureable. There is an old saying that says “what gets measured gets done.” Making your goal measurable helps you see your progress, recognize if you are moving in the right direction and see how far you still need to go.

Attainable. When you identify goals that are most important to you, you begin to figure out ways you can make them come true. You develop the attitudes, abilities, skills and financial capacity to reach them. You begin seeing previously overlooked opportunities to bring yourself closer to the achievement of your goals.

Realistic. To be realistic, a goal must represent an objective toward which you are both willing and able to work. Your goal is probably realistic if you truly believe that it can be accomplished. Another way to know if your goal is realistic is to determine if you have accomplished anything similar in the past or ask yourself what conditions would have to exist to accomplish this goal.

Timely. A goal should have a time frame. With no time frame tied to it there’s no sense of urgency. If you want to lose 10 lbs., when do you want to lose it by? “Someday” won’t work. But if you establish a deadline, like “by May 1st,” then you’ve set your unconscious mind into motion to begin working on the goal.

It’s often helpful to have someone who can act as a sounding board when setting your goals. We have been exposed to many financial goals and can help you apply the SMART process to your own. 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 | Tagged fundamentals

Plan Now to Minimize Your Taxes

By Arlen T Olberding, CFP® on October 1, 2015

There are a number of ways that many of us can us to lower our tax bills. These include Traditional IRA and 401(k) contributions, gifting, charitable contributions, income deferral, offsetting investment gains with losses and so on. Many of these techniques can be implemented late in the year when your tax situation is more clearly defined. However, some of these strategies are best implemented now.

For example, for many people, the single-best savings strategy is a 401(k) plan. It’s funded with pre-tax dollars and many employers match your contributions up to some defined limit. The 2015 maximum is $18,000 for most people. If you’re 50 or older a catch-up contribution is allowed so your maximum is $24,000. You should at least capture your employer’s matching funds, so it’s good to see where you’re at now and increase your contribution rate if needed. Spreading this out over several months should make the reduction in your take-home pay more manageable.

Traditional IRA deductions are similar. If you are married and file jointly and your adjusted gross income is less than $98,000, you can contribute $5,500 if you’re less than 50 and $6,500 if you’re 50 or older. (For other situations, IRA deductibility varies.) You can contribute for calendar year 2015 until April 15, 2016 if you like. As with a 401(k), it’s easier to spread out your contributions to even out cash flow during the year.

Many companies offer flexible spending accounts (FSA). These are pre-tax savings accounts that must be used for child care or for qualified medical expenses. Currently, qualifying participants may be able to carry over up to $500 of unused funds to the next year (check with your employer). Since the contribution limit is $2,550, you may need to spend at least $2,050 in 2015. If you want to use these funds for elective medical procedures, eye care or other medical expenses that may have a lead time, it’s best to plan for them now rather than at the end of the year.

As usual, there are a number of important details that need to be considered here. Fortunately you don’t have to figure this out on your own. Guidepost Financial Planning is able to help you with this and all other aspects of your financial planning. 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 Taxes

Paying for Long-term Care with Health Savings Accounts

By Arlen T Olberding, CFP® on September 1, 2015

A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). There are no taxes on the contributions and no taxes on qualified withdrawals.

As the cost of long-term care (LTC) insurance rises and the benefits decline, alternatives are appearing on the market. An HSA is one such alternative. Here’s how it would work. You (and many times your employer) contribute the maximum permissible amount each year. For 2015, if you have self-only HDHP coverage, you can contribute up to $3,350; if you have family HDHP coverage you can contribute up to $6,650. Now here’s the trick, don’t withdraw funds to meet your current medical costs. Instead, pay those costs out of pocket. This allows your annual HSA contributions to grow tax free!

As an example, suppose you are currently 45 years old and are eligible for an HSA at work. Also, assume that you and your employer’s combined contributions hit the maximum allowed contribution of $6,650 (for you and your spouse) and that 1/12 of this amount is contributed at the beginning of each month. Assume that you make these contributions every year until you reach age 65 when Medicare makes you ineligible for HDHP insurance which makes you ineligible for an HSA. Finally, assume that your HSA funds grow at 3.5% per year. This will produce approximately $190,000 when you reach age 65.

A couple of key points about this:

It’s important to hold your HSA account in a place that gives you access to mutual funds. (Many HSAs default to a very low-rate bank account. Banks, credit unions, insurance companies and IRS-approved entities are generally the best places to look for an HSA custodian. Vanguard or another brokerage firm with low-cost funds is a good place to start. While companies like Vanguard can’t act as your HSA custodian, many of their funds are accessible through other companies. For example, HealthSavings Administrators specializes in HSA accounts and is the sole provider to offer only Vanguard investment options.
Many people feel the best age to purchase LTC insurance is in your mid-50s. With this HSA strategy, it’s best to start as young as possible. Often this is when you get your first job.
If $190,000 (or whatever your situation produces) doesn’t seem like enough protection, consider a hybrid approach. Build your HSA account and purchase a LTC policy to increase your coverage.
Note that your spouse can be your HSA beneficiary. Then, upon your death, your HSA will become your spouse’s HSA.