Can You Still Do Qualified Charitable Distribution in 2020?

Can You Still Do a Qualified Charitable Distribution in 2020?

Can you still do the Qualified Charitable Distribution in 2020? This is a question we received from a listener. We’ll tell you what a QCD is, who qualifies, how you do it, and offer a few tips.

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Today we have a question from Charlie. He asks, “I saw where we don’t have to take our required minimum distributions this year. Can we still do the charitable distribution from our IRA?”

The CARES Act suspended the need for required minimum distributions in 2020. But what Charlie is referring to is the qualified charitable distribution. This allows people who are at least 70½ to send a distribution from their IRA directly to a charity. There is a benefit to this, you don’t have to report it as income.

Tax benefits of a Qualified Charitable Distribution

Today, the standard deduction is much higher. Most people aren’t able to itemize their deductions. This means many people lost the tax benefits from charitable donations.

By not having to report them as income, you do get the tax benefit. And the benefit is even better. You don’t pay federal or state income taxes on the qualified charitable distributions. Itemized deductions don’t help you on your state income taxes.

How do you make a Qualified Charitable Distribution?

Here is what you need to know about Qualified Charitable Distributions:

  1. You have to be at least age 70½.
  2. Because the funds are not going to the account owner, most custodians are going to require a signed form. You’ll need the name and address of the charity.
  3. The custodian will then send the funds directly to the charity.

This distribution is going to show up on your 1099R as a normal distribution. You need to tell your tax preparer that this is a qualified charitable distribution. They will be able to handle it properly for your return.

Something to consider...

Even though you aren’t required to take money from your IRA this year, you can still do the qualified charitable distribution. But, keep something in mind. We are close enough to the end of the year to consider waiting until January to complete this. It will count towards your 2021 required minimum distribution. We’re not trying to discourage you from supporting those organizations now. But, if you wait a couple months, it will give you the biggest bang for your buck.

A tip for 2021 (and beyond)

Let’s say you go to church every week and you put $20 in the collection basket. Use the qualified charitable distribution and send them $1,000 from your IRA, instead. The church gets the same amount and you’ll get the tax benefits you didn’t receive before. If you have questions about how this could help you, talk to a financial advisor.
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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Is Gold a Better Investment than Stocks?

Is Gold A Better Investment Than Stocks?

Is gold a better investment than stocks?  Wendy asks, “I keep hearing ads advising us to sell our stocks and buy gold or silver. For an older investor, is this a valid point?” 

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Is gold a better investment than stocks?  

Gold is one of the ultimate fear assets. When things go haywire in the markets, people tend to turn to gold because it’s a tangible asset, and it has value everywhere.

We’re dealing with the possibility of hyperinflation. If that happens, gold could do very well. Another shutdown could increase the fear level of investors. Gold could also do well in that case. There are periods of time, like early 2020, where gold really shined.

Fact or Myth? Gold is safer than stocks

You have a gold bar locked in the safe. You paid $1,500 dollars for it. Unless you pay attention to gold prices, you know you have a gold bar and it has value. You may not know how much it’s worth, but it’s going to be worth something to somebody.

If you pulled it out earlier this year and thought to yourself, “I wonder how much this is worth?”, you discovered it was worth $2,000. Then, you put it back in the safe until next year. The next time you think about the bar, it could be worth $1,500. It could be worth $1,200.

Gold has extreme fluctuations in value, just like stocks. Let’s look at the last 13 years.

  • 2013 -28%
  • 2014 -2%
  • 2015 -10%
  • 2018 -2%.

Over the same timeframe, stocks were down

  • 2008 -37%
  • 2018 -4%.

Over 13 years, gold lost money four times, and stocks were down twice.

If you look at the last 48 calendar years, gold experienced declines 18 times. Stocks fell 11 times.

Gold is not a “safer asset” than stocks.

Is gold better than stocks?

Here is a link to a good article called, Gold’s Romantic Delusion. There’s a graph in that article which shows $10,000 invested in gold in 1980 versus $10,000 invested in stocks. On July 31 2020, the gold would have been worth about $36,000. Stocks would have been worth $761,000.

Is Gold Better Than Stocks

Source: Gold’s Romantic Delusion by Andrew Hallam.  Click here for the full article

Is it a better asset than stocks for older clients, or any client for that matter? In our opinion, no. The numbers say the opposite. Gold isn’t a bad investment, but I wouldn’t own gold instead of stocks.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Should I Start Social Security at 62?

Should I Start My Social Security At 62?

This question is from Lloyd. He asks, “I’m planning to retire in the spring when I turn 62. Should I start taking my Social Security or should I wait?”

This is a big decision. The only decision we have when we’re looking at social security is when to file for our benefits.

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The impact of retiring early

The year you were born determines your normal retirement age. When you start Social Security before your normal retirement age, your benefits are reduced. If you’re married, the spousal benefit is also discounted. It also means a lower survivor benefit. The dollar amount of your cost of living adjustments will also be smaller. The percentage will be the same, but the dollar amount of the increase will be smaller.

A lot of people still signed up for social security early.

  • 31% of men and 27% of women sign up for their social security benefits at age 62
  • 6% applied at age 63
  • 7% filed at age 64
  • 10% applied for social security at age 65
  • 33% filed for their benefits at normal retirement age
  • 6% waited until age 70 to maximize their benefits

A little more than half of the recipients file for their benefits early.

A look at some numbers

You can do a lot of calculations to help determine when to start your benefits. Delaying your retirement can lead to thousands of dollars of additional benefits over your lifetime. But, you must live long enough to make it work. Generally speaking, you have to live until you are in your early 80s.

Here is how this can impact Lloyd. Let’s say his full retirement benefit is $2,300 per month. If he starts Social Security at 62, his benefit shrinks to $1,640.

At his full retirement age, his wife’s spousal benefit, if he’s married, would be half of the $2,300 or $1,150. At age 62, the spousal benefit will be, at most, $820. The combined benefits are nearly $1,000 less each month.

If Lloyd waits to start his Social Security, his discount isn’t as big.

  • By waiting a full year to apply for benefits, his amount grows by 7%
  • If he waits two full years, his benefit grows by over 14%
  • Should he wait until age 65, three years later, his benefit grows by 24%

A big decision

Should Lloyd take his Social Security benefits at 62?

It depends. Is he healthy? Is he married? Can he afford to retire without taking his benefits and not to put too much stress on his savings? There are a lot of factors, and it’s hard to say yes or no.

Here is what we typically see. People start their social security when they retire—regardless of their age. Most of the time, it’s because they need the money. The ones who retire and delay their Social Security have been good savers and have low expenses.

You need to consider your entire situation. You can’t make the decision about Social Security in a vacuum. There are many other factors involved in this process.

If you are unsure what to do, talk to a financial advisor before you make a costly mistake.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Should I Use My Savings To Pay Off my Mortgage?

Should I Use My Savings To Pay Off My Mortgage?

This question is from Karen. She asks, “With interest rates so low, we aren’t earning anything on our savings. I’m also worried about another significant drop in the stock market. Should I take money from my savings to pay off my mortgage?”

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There are two parts to this. One is eliminating debt. The other is what is the better use of your money?

Paying off debt is never a bad thing, especially as you get closer to retirement. According to the Employee Benefits Research Institute, the largest annual expenditure for people 50 and older is housing. If you can pay off your mortgage before you retire, it can help you have a more successful retirement.

There is also a huge psychological boost to being debt-free. What happens if the economy shuts down again and you get laid off? Not having a mortgage payment can reduce your stress. It’s less stressful knowing you don’t have to come up with $1,000 each month when you’re not working. We cannot underestimate the value of being debt-free.

What is the best way to do this? Here are some factors to consider. These apply whether you’re using a lump sum or paying extra on your principal. 

Compare interest rates

The first thing is to compare your current interest rate to what you earn on your savings and investments. If your mortgage interest rate is high, 4% or more, and you’re earning 0.75% (or less) on your savings, this decision is easy. The difference in the cost of your money compared to what you’re earning is significant. Using your savings to pay down or pay off your mortgage makes a lot of sense. If your interest rate is closer to 3%, and you’re invested in something that has a potential to earn 8%, the math changes.

Your age

The second factor is your age. For someone under 40, the value of compounded returns from investing can be better for your future. If you are closer to retirement, the benefit to paying off that mortgage is more valuable.

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use savings pay off mortgage

How long will you live there?

Are you planning to stay in your house for a long period of time? If you’re planning to remain there for several years, paying off the mortgage makes more sense. If you’re planning to sell your home in the next 36 months, I’m not sure the answer is as clear. You may not want to pay off your mortgage if you plan to sell it in the very near future.

Tax costs

What are the potential tax costs to raise the funds to pay off your mortgage? Does that come from an IRA or a 401k? If it does, then the entire distribution can be taxable.

Here is an example. If you need $100,000 to pay off your mortgage, you may need to withdraw $133,000 from an IRA. The extra amount will cover the taxes. That is a very expensive way to pay off your mortgage.

Selling stock to pay off your mortgage can also result in a significant tax cost. Your sales proceeds are $100,000. You paid $50,000 for those shares. You will incur $7,500 in capital gains taxes and some additional state income tax. That is also an expensive way to pay off your mortgage.

If the money is in a savings account, there is no tax cost to use it for your mortgage.

Paying off debt is rarely a bad choice, but you need to look at it from all angles and make an intelligent choice.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Is Doing Nothing The Right Thing To Do?

Is Doing Nothing the Right Thing to Do?

During a Bear Market, many investors are tempted to sell their stocks and move to cash.  Many financial advisors will tell them to sit tight, and ride out the storm.  Is “doing nothing” the right thing to do?  Today we’ll share some interesting data that shows that in the last market, doing nothing was better than panicking.

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We’ve already been through a lot this year. And we’re still dealing with a lot. We have an election coming up in a few weeks. The Coronavirus is still part of our lives. There are questions about another major shutdown. And there are some concerns with all the government help that there is going to be hyperinflation. There are a lot of things that could cause another bear market.

Doing nothing

When we have major turmoil, people want to do something to protect their nest egg. In every bear market, we’ve had people call and ask if they should go to cash. Our answer has always been no. Sit tight right through any storm we encounter.

We believe you will be better off if you don’t make an emotional decision. Doing nothing is hard to do. In fact, it’s the second hardest thing to do as an investor.

Inevitably, we will have someone who can’t take it anymore and bail out. During the “dot com” bust and the Great Recession, we had clients who sold their stocks within a week of the market bottom after the damage was done.

Cash panickers

Is doing nothing the right choice? Recently, Vanguard did a study during the bear market this spring. They looked at over 31,700 accounts, both retirement plans, like 401(k)’s, and retail accounts. They found that 0.5% of those accounts panicked and moved to cash between the market high on February 19 and the end of May.

They looked at two things. They looked at the actual returns of those clients at three different points: March 31, April 30th, and May 31. And they compared those to the returns those clients would have realized if they had done nothing. Here’s what they found.

By the end of March, 56% of those clients who went to cash were in a better place than if they had done nothing. This means they had a higher balance than if they stayed invested.

The stock market rebounded very quickly. By the end of April, only one third of those clients were in a better place.

By the end of May, only 15% of those clients had a higher balance by going to cash. 85% of those clients who panicked would have had better results if they did nothing.

85% of those clients who panicked would have had better results if they did nothing.

Selling low...

Why is that? Most of them didn’t guess the correct time to move to cash. You have to make that decision very early in the process, so you don’t take part in the downturn. A good number of them went to cash after a significant amount of the damage was done.

When the market turned around and moved higher, they missed a great buying opportunity. They didn’t participate in the rebound. Essentially what they did was sell low and bought at higher prices. This is the exact opposite of what you’re supposed to do.

Is doing nothing the right thing
is doing nothing the right thing
is doing nothing the right thing

The cost of being wrong

If you sell now thinking things are going to get bad, you have to be aware that they may not get as bad as you think. For example, let’s take the 2016 election. I woke up that morning and saw that Donald Trump won the election and immediately turned to CNBC. The futures that morning showed that the Dow Jones Industrial Average was in for a rough day. When I got to work I had two calls before the market opened. These clients were extremely concerned about what was going to happen in the stock market. They thought it was going to be ugly.

By the time the market opened, futures were positive. Over the next several months, we saw the stock market race higher. Had those clients gone to cash, they would have missed that rally.

If things do get as bad as you believe, you might be right for a while— just like the folks in the Vanguard study. But will you have the confidence to buy at lower prices?

Most people think things are going to get worse before they get better. Stocks are forward looking. The stock market will turn around long before the economy turns around. Stocks will begin to increase long before people believe things will get better. If doing nothing is the second hardest thing to do, then buying stocks in the middle of a bear market is the hardest.

Vanguard found only 9% of those 31,000 accounts bought more stocks during the bear market.

If you have to...

If you’re convinced you need to go to cash, do it early. Do it before things get worse. We’ve already seen a minor pullback. Don’t wait until things are down 20% or more to sell. And you need to have a plan to buy at lower prices. You must have courage to buy when things look like they’re going to get much worse.

If you can’t make the decision to do both of those things, then do nothing. Sit tight and ride out the storm.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Should I Use The Roth 401k?

Should I Use the Roth 401(k)?

Our next question is from Mike. He asks, “My employer recently announced they’re offering a Roth 401k option. Should I be using the Roth 401k? Also, I’ve been putting money in the Lifecycle 2035 fund. Is that a good idea?”

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Should I use the Roth 401(k) or not?

Traditional 401k deferrals are done on a pre-tax basis. This means you get a current tax benefit, a tax deduction. Your money grows tax-deferred. When you get to retirement and you take it out, you pay taxes on your distributions.

Roth deferrals offer no current tax benefits. It’s an after tax contribution. The money in your account grows tax free. When you take it out, you will pay no taxes on the growth or the contributions.

The Roth option has a lot of benefits. There are some questions that you need to ask yourself to make this decision.

Will Your Taxes be higher today or in retirement?

If your tax rate is going to be the same or higher in retirement then doing the Roth makes a lot of sense. If you’re a higher income earner today, that tax benefit may be far more valuable than when you do retire.

Are you addicted to your tax deduction?

I make pre-tax deferrals in my 401k to reduce my tax bill. It’s very difficult for me to start sending the government more money. I’m addicted to my tax deduction.

Next year, I’ll be able to do the over 50 catch-up contributions. I plan to use the Roth 401k for these because I’m not used to that tax deduction.

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How long until you retire?

The longer you have, the better the Roth 401k is. If you can let this compound for 20, 30, or 40 years, then the Roth makes a whole lot more sense than the pr- tax deferrals.

How much have you saved in pre-tax accounts?

If you have a large balance in a traditional IRA or 401k funded with pre-tax contributions, you may want to use the Roth option. This can help with tax planning for your retirement income. Distributions from traditional IRA’s get taxed as ordinary income. Having assets in other types of accounts allow for tax planning in retirement.

In general terms, I like the Roth options. The longer you have, the better. If you’re under 40, you should absolutely be doing the Roth if you can. Taxes do matter, and it needs to be a factor in your decision. But the longer-term benefits are huge.

If you’re 50 or older, you may not benefit as much from the Roth. It does allow you that flexibility to plan going forward.

Target Date Funds

Lifecycle and Target Date funds are designed to be a one-size-fits-most option. The date in the fund is to help you identify which year is closest to the year you want to retire. The asset allocation of those funds depends on the length of time from now until the year in the name of the fund.

Here’s an example. Vanguard has lifecycle funds. Their longest one right now is 2060 or 40 years away. The 2060 Fund has 88% of its assets in stocks. Vanguard’s 2035 Fund looks at a retirement 15 years from now. It only has 72% of its assets in stocks. The 2025 fund has 58% of its assets in stocks. Each year the fund family will adjust that allocation as you get closer to that target date.

Does it make sense to use one of these? As long as you’re doing it, right, yes. Remember, just pick one and keep it simple. We see mistakes with this. Some people will put some in the 2060 fund, some in the 2035 fund, and some in the 2025 fund. That’s not how they’re designed to work.

If you want to control your allocation, use a combination of the other funds that are available. Otherwise, use one target-date fund.  

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Can I Max My Roth and My 401k?

Can I Max My Roth IRA and My 401k?

Sandy wants to know if she can max her Roth IRA and her 401k contributions.  Let’s dig into the rules.

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Transcript: Can I Max My Roth IRA and My 401k?

This question is from Sandy. She asks, “Can you contribute the maximum amount to a Roth IRA and the Roth account in the government’s Thrift Savings Plan?”

The answer is yes—if you qualify to make a Roth IRA contribution.

Here are the contribution limits for 2020. For retirement plans whether it’s the Thrift Savings Plan, a 403b plan at the hospital or a school, or a 401k plan, you can contribute $19,500. If you’re over 50, there’s a catch-up contribution. That amount is $6,500. You can contribute $6,000 to a Roth IRA. If you’re 50 or older, you can contribute an additional $1,000.

If you wanted to maximize both, and you’re under age 50, that’s $25,500. If you’re 50 or older, that’s $33,000 total per person. If you’re married, you can do both, and your spouse can do both. If you have that much extra income, that’s phenomenal!

There are income limits for Roth IRA contributions. You can make the maximium Roth IRA contribution if your modified adjusted gross income (MAGI) is below these limits. For married couples filing a joint return, the limit is $196,000. If you’re single, that limit is $124,000. If you’re married and you file separate returns, the income limit is $10,000.

If your MAGI is over those limits, your eligibility to make those Roth IRA contributions changes. You may be able to do a partial contribution or none at all.

The Married Filing Separately Tax Trap

The married filing separately thing is an interesting little trap. A lot of people will file separate returns to try to save on state income taxes. But it has a hidden impact on things like your IRA contributions. It impacts deductions for traditional IRAs, Roth IRA contributions and Roth conversions.

If you’re married filing a separate return and your income is over $10,000, a lot of those things disappear. You want to be very careful with that. You don’t want to get a surprise later on.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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How Do I Use My Savings To Create Income?

How Do I Use My Savings To Create Income?

Tim asks,”How do I use my savings to create income in retirement?”

In this episode, we’ll talk about:

  • Immediate Annuities
  • Bonds
  • Dividend Paying Stocks
  • Systematic Withdrawals

Listen now: How Do I Use My Savings to Create Income?

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Transcript: How Do I Use My Savings To Create Income?

1. Immediate Annuity

This is an insurance contract that creates an income stream for the rest of your life. You can add survivor benefits to this so it will be the rest of you and your spouse’s life. It’s guaranteed by the insurance company and their ability to pay.

Advantages

Eliminates market value risk

This eliminates any market value risk. There are no worries about the stock market going up or down.

Better payouts

You usually will get a higher payout than using the 4% rule. Immediate annuities typically pay out a greater percentage.

Income you can’t outlive

It will pay as long as you or you and your spouse are alive.

Disadvantages

Lose control of your principal

You lose all control of your principal. So if you need more income or a lump sum in the future, you likely won’t have access to the principal for those needs.

Fixed Income

The payout is typically a fixed amount. There are a few contracts out there that will provide some inflation adjustments. But those contracts will reduce the initial income benefit to account for the annual increase.

No Legacy

When you and your spouse have passed, there is no money to leave to your heirs. If you buy the contract, and two months later something tragic happens, that money is gone. There are a few policies that have refund provisions. But, that provision could reduce your monthly income.

Low Interest Rates

Low interest rates mean smaller payments. When interest rates increase, this will be a more attractive option.

This may be a reasonable choice for part of your savings. I wouldn’t recommend anyone put all their savings in one of these contracts.

What we often find is most people don’t like giving up control of their principal. And we believe there are better ways.

2. Income Producing Investments

You can also use income-producing investments. This means bonds and dividend paying stocks.

Bonds

Bonds pay an interest payment. Unfortunately, bonds are not a great choice right now. You might be able to find good interest payments on some bonds, but you have to pay a high premium for them. This means when the bond matures, you’ll get less than what you paid to buy the bond. Newer bonds won’t have good interest rate payments. This limits your income stream. Bonds also offer little or no appreciation potential.

Dividend Paying Stocks

Dividend paying stocks make sense. Over time, dividends tend to increase. There is also potential to see your principal grow

Constructing a portfolio that can generate a 3% yield or higher can be a challenge. You want to buy good dividend payers. This means companies that reliably pay their dividend and increase their dividends.

You can do it, but you introduce other variables. There’s risk for concentrating too much in a particular stock. Dividend cuts can create problems. This isn’t a risk-free strategy.

The last thing to consider is most people don’t want to be 100% invested in stocks. So that can limit your income as well.

Systematic Withdrawals

The third way is to use systematic withdrawals. This is one of the better inventions by the mutual fund industry. Over time, you sell shares of your investments to create income. It’s a very simple process.

You don’t have to use mutual funds to do this either. It can be done with exchange traded funds or individual stocks. You sell shares to produce your income.

You can combine this with a dividend strategy too. If you own a company that doesn’t pay a dividend, you could sell shares to supplement the dividends you get.

Here is something to remember when you’re looking at producing income. Snow or rain, it’s all water. If the “snow” represents dividends and the rain is “capital appreciation”, it all benefits you. It doesn’t matter if your income is from dividends or from selling shares.

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3. Managing Taxes

You also want to think about your taxes. If you have many sources of retirement funds, you have that ability. Distributions from Roth IRAs, for example, are tax free. Income from a personal or joint account may be more tax friendly. Distributions from IRAs and pre tax 401k plans are taxed as ordinary income. Most of the time, 100% of those distributions are going to be taxable. When you have separate sources of savings, you can manage your tax liability to some degree.

Unfortunately, for many people, their only asset for retirement income is their 401k. This limits your ability to manage your tax bill.

It can help to talk to an advisor about your situation. They can help you with a strategy that makes sense for you.

should i use the roth 401k

 

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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What Should I do With My Old Retirement Plan?

What should I do with my old retirement plan?

Today we answer a question from Adam.  He asks, “I changed jobs a couple of months ago.  What should I do with my old retirement plan?

We discuss:

  • Your options
  • The pro’s and con’s of each
  • The key factors in your decision
  • And what you should ask a financial advisor about a rollover

Listen now: What should I do with my old retirement plan?

what should i do with my old retirement plan

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what should i do with my old retirement plan

Do you want to hear the full show?

The full episode is over 25 minutes long.  And we’ve found that not everyone wants to spend that much time listening to things.  But if you want to listen to the entire episode, it is below.

We answer:

  • What should I do with my old retirement plan?
  • Can I use a trust to protect Mom’s assets if she goes to a nursing home?
  • Should I use my employer’s new Roth 401k option.
  • How do I use my savings to create retirement income?
  • Can I make the maximum contribution to both a Roth IRA and the Thrift savings plan?

Transcript: What should I do with my old retirement plan?

If you have changed jobs and left a retirement plan behind, you’ll have four options.

  • You can leave it in your old employer’s plan.
  • You can potentially roll it over to your new employer’s plan.
  • You can roll it over to an IRA.
  • Or, you can take a distribution

Leave it in your former employer's plan.

Advantages

  1. Cost. Your former employer’s plan may be one of the lower cost options. If that’s the case, then it may make sense to leave it there.
  2. Familiarity. You’re also familiar and comfortable with how the plan works.

Disadvantages

  1. Adds Complexity. Leaving your money in the plan makes it harder for you to keep things organized.
  2. Limited Investment Choices. With any retirement plan, your investment choices can be limited. You don’t have as many options to invest your money. Most plans have enough options to help you achieve your goals.
  3. Lack of Help. It may be difficult to get the help you want when you need it. You’re stuck calling a call center.

There aren’t many advantages to leaving it where it is.

Roll it to your new employer's plan

If your new plan allows it, you can roll it over to your new employers plan. Some plans don’t allow this.  You’ll need to check to see if your current plan does.

Advantages

  1. Simplicity. This can help you keep things organized. And it will help you see how you’re making progress towards your goals. That’s the biggest advantage.

Disadvantages

  1. Cost: You need to look at the cost of the plan. If it’s more than what you would pay in an IRA or your former employers plan it may not make sense to roll it to your current plan.
what should i do with my old retirement plan
old retirement plan what should i do

Roll it over to an IRA

You can do this many ways. You can work with a financial advisor, a bank, or insurance company. You can also use someone like Vanguard, Charles Schwab or TD Ameritrade.

Advantages

  1. Control. You control every aspect of that IRA. You control the investment choices and the cost.
  2. Nearly Unlimited Investment Choices. There are very few restrictions for what you can own in an IRA.
  3. Access to the Money. Some retirement plans may restrict your access to the money. You’ll have complete access to your money in an IRA.

Disadvantages

We can’t think of any disadvantages to this.

Take a distribution

This is probably the worst option, unless you’re in a dire financial situation. A distribution means taxes and penalties when you withdraw the funds.

Key factors in your decision

Costs

There are costs for any of these choices. Some costs are hidden. These are the internal costs of investment choices. Some of those are very low, some of them may be a lot higher.

Every plan has mutual funds or exchange-traded products. Those have an internal expense structure. In some cases, you may incur record keeping costs.

Many employers pass record-keeping costs on to their plan participants. They have to disclose it to you and it will appear on your statement.

Some plans have management fees. These also have to be disclosed. These will also appear on your statement. An IRA may have management fees, especially if you work with a financial advisor.

There could be other costs, too. You might pay commissions. If you select an insurance contract, you will likely pay a commission. You may also run into things like surrender charges, and other expenses for things like annuity contracts.

Control

IRAs allow you to control your situation. Retirement plans are more limited in that regard. They have limited investment options and limited access to your money. IRAs give you complete access to your money and complete control over the investments.

Convenience and Simplicity

Money is complicated enough. The more complications you add, the harder it is to reach your financial goals. You want to have it someplace where you can keep an eye on things and monitor your progress.

old
what should i do with my old retirement plan

Financial advisors and rollovers

Financial advisors make their living from retirement plan rollovers— including us. There is going to be a cost to you to do this when you hire a financial advisor. It may be more or less than what you currently pay.

Conflicts of Interest

This cost creates a conflict of interest. When an advisor prompts you to complete the rollover, it doesn’t matter if they’re a fiduciary or not. Whether they charge a commission or management fee, it doesn’t matter. Any financial incentive for the advisor to help you roll over your balance creates a conflict of interest.

But, if you see the value to having someone help you and the value is worth what they charge, hire that advisor.

Ask Questions

You need to ask relevant questions. Know how your advisor is going to be paid for that rollover. Is it going to be a commission or is it going to be a management fee? Know if what you’re going to pay is a one time charge or if it is ongoing.

And you need to know what other costs you’re going to incur. What types of investments is that advisor going to use? Are there surrender charges? Are there other hidden fees?

Be prepared and understand how the relationship will work.  Make sure you are comfortable with every aspect of the person you hire. 

If you would like to talk to us, please click here to schedule a phone call.

what should i do with my old retirement plan

 

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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Do You Need $8 Million to Retire?

Do You Need $8 Million To Retire?

Do you really need $8 million to retire? This is one of those articles that makes you scratch your head and say, “Where is this coming from?”

Watch Now: Do You Need $8 Million to Retire?

Do You Need $8 Million to Retire

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Do You Need $8 Million to Retire?

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Do You Need $8 Million to Retire?

Transcript: Do You Need $8 Million to Retire?

The article appeared last week on marketwatch.com. It was titled,  The New Savings Target for a Modest Retirement: $8 million? The article is based on a blog post written by someone who calls himself the Financial Samurai. The Samurai believes that the 4% Rule is dead. The actual safe withdrawal rate is 0.5%. Let’s dig into this.

Using the 4% Rule

The 4% Rule is something that a lot of financial advisors use. It starts the conversation about how much income you can generate from your retirement savings. You can use the rule to set a savings goal, or you can use it to determine how much income your savings will provide.

If you’re trying to set a savings goal, determine how much income you’ll need from your savings. If you need $40,000 from your nest egg, multiply $40,000 by 25. Your target is $1,000,000. (4% of $1,000,000 is $40,000 a year.)

Do You Need $8 Million to Retire?

Perhaps you’re getting close to retirement. You’re wondering how much income you can expect to get from your 401k. You’ve saved $500,000 in your 401k. Multiply that by 4% and you get $20,000 for the first year.

$8 million to retire

If you use 0.5% to compute your savings goal, it changes the math significantly. Instead of needing a million dollars to create $40,000 of income, you’ll need $8,000,000!

More on the 4% Rule

This video and blog post goes into greater detail about the 4% rule. 

Is This Realistic?

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Your $500,000 401k with a 0.5% withdrawal rate creates $2,500 of annual income. That’s a little over $200 per month.

Do You Need $8 Million to retire?

Is This Realistic?

Is this half percent safe withdrawal rate, the “new normal”? We disagree. We believe the 4% Rule is a valid tool to use to start the income conversation.

Academic minds developed the 4% Rule by studying past return data for stocks and bonds. The researchers were looking for a withdrawal rate with a very high level of success. We define success as not running out of money during your lifetime.

They tested it through all types of extreme market events. This includes bear markets like the “dot com” bust, the Great Recession, and the early 1970s. The 4% Rule held up in all those circumstances. It doesn’t mean it will hold up going forward. It’s not guaranteed.

Higher Withdrawal Rates Increase Risk

We know this. As you increase your withdrawal rate, you increase the chances of running out of money. You increase the odds of significant spending cuts because of adverse market conditions. The 4% Rule is not a silver bullet. We don’t know what future returns will be. But the 4% Rule remains a good starting point. The pandemic, an over-valued stock market, or low bond yields don’t change our opinion.

You don’t need $8 million to enjoy a modest retirement. People can retire and live a happy life on far less. They figure out ways to make it work.

The 4% Rule is a baseline. We work from there based on each individual’s circumstances to create a plan.

Do You Need $8 Million To Retire?
Do you Need $8 Million to Retire
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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

Our Most Recent Videos And Posts