Ep 26: How To Process A Rollover

On This Episode

Last episode we talked about the different items to take into account if you are thinking about doing a rollover. John and Nick will discuss how to actually process a rollover and some common mistakes to avoid.

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Disclaimer:

PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

 

Marc: Thanks for tuning in to Retirement Planning Redefined with John and Nick from PFG Private Wealth. We appreciate you tuning back into the podcast. We’re following up with our prior session on rollovers, if it’s right for you, having the conversation and this session is going to be a little bit more about how to kind of go through that. Some of the differences, some of the biggest mistakes sometimes that people might get themselves into when attempting to do this. So we’re going to dive in and get started. We’re just going to just hop right in.

 

Marc: Nick, differences between rollovers and transfers. Let’s just start there, kind of break it down a little bit for us.

 

Nick: Yeah, I would say, the reality is, is that this space from the standpoint or the perspective of the process of taking your money from one place in a retirement account and putting it into another place in a retirement account, the jargon or the terminology gets intermingled quite a bit. And some of those terms that get intermingled are rollovers and transfers, and we’ll talk about it a little bit more, but from the perspective of a direct rollover versus the 60 day rollover.

 

Nick: Just to kind of back up a quick second, when we are discussing or having this conversation we kind of preface it from the standpoint of the money that we’re talking about is money that is held in a retirement plan of either a former employer, so maybe it’s 401(k) or 403(b), and you are looking to move that money elsewhere.

 

Nick: Your options are typically you can take that money and you can do a direct rollover into either traditional individually held of IRA. Or if the funds are Roth funds, you can move it into a individually held Roth IRA. Or if you are employed with a new employer and you are eligible, you have to check with them, you may be able to move the money into the new plan at work and do it that way.

 

Nick: When you are doing that, usually when you are executing kind of this process, it either has to be done via a form, or via a phone call. Some places require a form and we’ve seen a lot of people make mistakes on completing the form correctly, so oftentimes we’ll help clients with it. And then if it’s a phone call, the issue is that you’re dealing with somebody and I will say the level of service probably over the last few years at companies has gotten better, but we still see a lot of mistakes.

 

Nick: Oftentimes you are working with somebody that’s working in a call center and although it is their job, mistakes happen. When you are kind of doing this process, understanding that the terminology of executing a rollover is when you are moving that money from that retirement account into an IRA or a new plan. A transfer is when you have an existing account that is an IRA or a Roth IRA, and you are moving it from one custodian to another custodian.

 

Nick: I’ll use an example just to try to make it a little bit more easily understandable. A direct rollover example is, okay, Mrs. Client, she just got done working at her company and their 401(k) was held at Fidelity. And now Mrs. Client would like to move the money from Fidelity into the IRA that she opened up at Vanguard. She’s able to call up and get the process going of processing that roll over from Fidelity, the 401(k) to the IRA at Vanguard. A transfer is you already have an IRA or somebody already has an IRA. We can say at T. Rowe Price and they have a new IRA, they no longer like T. Rowe Price, they have a new IRA at Fidelity, and they want to move that money from T. Rowe Price to Fidelity. That is a custodian to custodian transfer. And the reason that we mentioned that is because there are some limitations on what are technically rollovers.

 

Nick: John, can you give a little bit of an example of exactly what a 60 day roll over it?

 

John: Yeah. There actually kind of two ways to do it where if it’s coming from a plan. Let’s say if it’s coming to you directly. So John Teixeira gets a check from the plan, I have 60 days to put that into my IRA. Or if let’s say I have money in my IRA, and for whatever reason, I might need the funds and I pull it out, I have 60 days to put it back into the plan, and that would be a kind of a 60 day rollover period.

 

John: Important if you are processing it that way, definitely keep good records. You want to keep the records of when the money was distributed when you received it, and then when you deposit it, because if you ever were audited, you have to prove that the money went back in within 60 days or else everything is taxable.

 

Nick: And the issue with that 60 day rollover and what kind of give an example of kind of one of the most common ways that we’ll see it as a mistake is that you are only eligible to execute I believe it’s one of those per calendar year. Is that correct, John?

 

John: Yeah, that is correct.

 

Nick: So if somebody is making a mistake or even doing it on purpose, if they by mistake execute more than one of those in a year, there’s some pretty significant penalties that are involved in that, and that’s really something that you want to avoid. What we always like to see is the money moving directly from one custodian to the other custodian. And when that happens, the check is made payable from the old custodian to the new custodian. And we’ll kind of talk about that in a little bit more detail, but I wanted to give a kind of a quick example of where we see this mistake happen the most often.

 

Nick: The reality is that the majority of the people that are listening to this with how things are set up currently, they may not run into this too often, but where we have seen this issue come up quite a bit is if they are helping their parents with finances. Maybe their parents are in their 70s or 80s. And oftentimes that age demographic loves CDs and they love chasing rates at banks. And there will be confusion from the standpoint of, hey mom has a CD at BB&T Bank, and the CD is actually inside of an IRA. And she goes into the branch to move the CD from BB&T bank over to Bank of America because Bank of America is offering an extra 0.2%. And so she’s working with the teller at the bank and she says, “Hey, I want to take out my money because I’m moving it to another bank.”

 

Nick: What we’ve seen happen is that teller will sometimes have that check made payable to the client, to mom, in her name. And at that point it’s considered that starts at 60 day window. The reality is that we want that check made payable to the new institution for the benefit of mom. This is where we’ve seen issues kind of pop up and arise where mom might try to do this a couple of times a year. Now she has done more than one 60 day rollover in a year because it was done incorrectly. It wasn’t necessarily her fault and it just creates this total kind of quagmire and tax nightmare.

 

Nick: We always like to kind of bring that up to make sure that people understand that that’s an issue. And again, because the terminology is oftentimes intermingled and not done correctly, having that done the proper way is really important. I know John does a good job of explaining the best way that people can make sure that they execute that properly.

 

John: Thank you, Nick. I do a very good job at explaining that, actually. So I appreciate that. So yeah, just kind of walk you through the process of doing a direct rollover. First step is contacting the investment provider for the retirement plan and you need to determine, can they do this over the phone or is it a form as Nick mentioned earlier? Let’s just assume it’s over the phone and you’re putting your money into, let’s say TD Ameritrade. TD Ameritrade is the custodian, they’re the ones holding the funds. They’re like a Fidelity or Vanguard. So you want to make sure that check is made payable to the custodian, and that way you’re not the one getting the receipt of the funds, it’s the custodian, and that’s the main reason why it doesn’t kind of execute that 60 day rollover kind of window.

 

John: It’s a direct transfer to the custodian and the checks going to be written out to in this example, TD Ameritrade for benefit of you. So if I’m doing it, it’s going to be check’s going to be made out to the TD Ameritrade for Benefit of John Teixeria. Now, once you receive that check, we were going to say it now, do not sign the check, because it’s actually not written out to you, it’s written out to the custodian. We do have some people that will say, “Do I sign it?” Or, “I signed it. What do I do?” Don’t sign it. There’s no need to.

 

John: Once you receive the check, the next step is now it needs to get deposited into your IRA. And if you’re working with an advisor, typically you pass it off to him or her. And if you’re just working directly with an investment company, you’re going to want to go ahead and get it to the investment company and have them deposit into the IRA for you. If you are mailing checks, just some people like to be cautious and kind of make sure it has some type of a tracking number which is something you can request from the retirement provider, not necessarily, but some people just prefer that so they can kind of keep track of where it’s at.

 

Marc: Okay. So obviously there’s a lot that can go into this and there’s mistakes that are going to happen as you just alluded to. So what are some things to maybe avoid, just kind of some simple things to check off for folks?

 

Nick: I would say the first one and we talk about this whole process in the class that we teach. And I have a slide that I bring up and it’s a huge picture of a train fire. The biggest mistake to avoid again, is to do a lump sum distribution when the money’s paid directly to you. That is the number one. And I know we’ve kind of harped on it quite a bit, but it can be confusing because especially on some of the forms that companies use. They say, “Hey, I want to take all my money out, because I’m going to move it to this new place. So that’s a lump sum distribution, right?”

 

Nick: Well, depending upon where it is, that might mean that that money is coming directly to you, which it enters you into that 60 day window, which is what we want to avoid. Making sure that you do a direct rollover versus a lump sum distribution is really important. That’s probably the number one mistake.

 

John: Yeah, and if we see the lump sum, what the 401(k) or whatever, 403(b) provider will have to automatically do. If I were to receive the money directly to me, they would have to withhold 20% automatically. 20% is going to uncle Sam, so that could create an issue if you’re trying to get all your money back into another IRA within 60 days.

 

Marc: Well you mentioned 401(k), and then you said another. I would assume that this is kind of the same for several of those alphabet soups, right? Whether it’s a 403(b) or TSP, is that same kind of process in general?

 

John: Yes. Yeah.

 

Marc: Okay.

 

John: I mean, yeah, exactly. Employer retirement plans, it’s-

 

Marc: Gotcha, okay. Because sometimes people-

 

John: … across the board.

 

Marc: … get confused by that, right. They’ll think, “Oh, well I don’t have a 401(k). I have a 403(b) or whatever.”

 

John: Yeah, 401(k), 403(b), 457-

 

Marc: Right.

 

John: [crosstalk 00:11:41] plans.

 

Marc: Right. Yeah.

 

John: All of them.

 

Marc: All of them. Yeah, the whole alphabet soup. Exactly.

 

John: Yeah.

 

Marc: Nick, any other mistakes to avoid anything too that we might’ve missed as we’re kind of winding down here?

 

Nick: I know it’s come up a couple of times, but sometimes people will worry about timing. From the perspective of there’s… As an example, the last five months really kind of post-Corona market drops, et cetera, et cetera. And people will say, “Hey I’ve lost a bunch of money in my account, is now the time to move it? Should I wait for it to bounce back?” And the reality is that you want to take a broader perspective and look at it from the standpoint of that you’re moving it from market to market. So the goal is to do it as quickly as possible, but the perspective of, hey, should I let this bounce back before I move it? Isn’t necessarily always valid because as long as you’re in a similar allocation and maybe even a better allocation with a higher level of management, the reality is, is your bounce back could be quicker and/or better potentially by making a change the sooner the better. It all depends, but that’s usually a pretty low priority variable in the whole conversation is time.

 

Marc: Okay. All right. Well, there you go, folks. So as always, there could be some moving parts here, it’s not always very too complicated, I suppose, maybe is a good word, but it can be, especially if you’re not focusing. The best way to do it is to avoid some of those mistakes by reaching out and talking with a qualified professional before you take any action, getting some helpful tips, getting some advice, whatever the case might be. But before you take action, reach out to someone who does this on the regular. So call John, call Nick, give them a jingle at (813) 286-7776, that’s (813) 286-7776. When you’re talking about doing a rollover and if it’s right for you, there’s just a lot of questions that they can help you walk through and get you some advice going in the right direction. Also, stop by the website at pfgprivatewealth.com, that is pfgprivatewealth.com.

 

Marc: While you’re there, subscribe to the podcast, Retirement Planning Redefined, you can find them on Apple, Google, Spotify, whatever platform you choose. So there you go, that’s going to do it for the series here on rollovers guys. Thanks for your time as always. I appreciate it. Obviously, there’s so much that goes on in the financial world. It’s good to just do these since you’re not doing classes right now, doing a lot of things online or podcasts. It’s good to go through and kind of get this information out for folks.

 

Nick: Thanks, Marc.

 

John: Thank you.

 

Marc: Appreciate your time. We’ll talk to you next time here on Retirement Planning Redefined with John and Nick of PFG Private Wealth, and we’ll see you next time.

Ep 25: Is A Rollover Right For You?

On This Episode

Company retirement plans can be expensive and many people are considering to rollover their account. But what considerations should be thought about before you take any action? Today John and Nick discuss the fee structures, investment options, and a few more factors when deciding if a rollover is right for you.

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Check out all the episodes by clicking here.

 

Disclaimer:

PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

 

Marc Killian: Hey, welcome into the podcast folks. Thanks for tuning in here as we talk about retirement planning redefined with John and Nick from PFG Private Wealth. What’s going on, guys? How you been, Nick? What’s up buddy?

 

Nick: Doing pretty well, doing pretty well. Just kind of getting settled back in over the last couple of weeks. With the lockdown going on as long as it’s been going on, I decided to take a little bit of a road trip. So I drove up north and stayed up north for about six weeks total.

 

Marc Killian: Oh, wow.

 

Nick: Yeah. So it was pretty cool. The virus situation in my hometown is a little bit better, which is Rochester, New York. Once we knew that we weren’t going to be meeting face to face with any clients here anytime soon as the numbers got worse here locally, I decided I needed to take care of my cabin fever and get out of Dodge a little bit.

 

Nick: So I drove up, made some stops. Stopped in Savannah and Pittsburgh on the way up, and then outside of Philadelphia and DC on the way down. Stayed with friends and family and had a good time. It was good to get away.

 

Marc Killian: You couldn’t get any more diverse than saying Savannah and Pittsburgh in the same sentence.

 

Nick: Yes, yes, definitely. But I’ll tell you what, I was pretty impressed with Pittsburgh.

 

Marc Killian: Oh no, it’s actually a nice town. They’ve made a lot of changes. I used to live not far from there, back in the late 70s, early 80s. I was just a kid, but yeah, I’ve definitely made a lot of changes.

 

Nick: Yeah. Yeah, it was my first time there so I’ll be back.

 

Marc Killian: Very cool. Well, nice extended holiday. John, what about you buddy? I know you got the little one there. Did you do anything with the little baby?

 

John: Yeah, so we normally, the last couple of years, we’ve gone up to Pigeon Forge, Gatlinburg area and rented a house there. But this time, after that last drive with a seven month old for 11 hours, I decided I didn’t want to do that again until she was facing front because she doesn’t like being in a car. We decided to change and go to Sanibel Island here in Florida.

 

John: So that was nice, actually. I’m not normally a like sit around the beach type person, but we had nothing to do. So it was about a week of just nothing to do where normally on vacation I’m either going up to Boston where I’m from and I’m seeing a bunch of people and doing all this other stuff, or going to Pigeon Forge and just trying to do as much as we can within a week period. But this time it was actually pretty relaxing where we’d wake up and we wouldn’t figure out our day until about 10, 11:00. It was a change of pace for me, so it was actually pretty nice.

 

Marc Killian: Very cool, yeah. Well, we’re going to talk today about rollovers. Actually, we’re going to do a two part series on rollovers and things to know and think about. But I want to ask you real fast, this kind of bit of an extended vacation, did she put the phone down a little bit? Because I got to say for my wife and I, when we can put the digital leash away for a little bit, you just feel so better. Did you get a chance to do that at all?

 

John: I did at Sanibel and it wasn’t because I wanted to, I was kind of forced to with the service. Where we were at, the service where we stayed, it wasn’t the best. So it kind of forced us to do that, and the wifi was terrible. So, it was nice.

 

Marc Killian: But you wound up saying that you really had actually a great time. I think your words were, “Yeah, I actually really enjoyed it.” So that might’ve been part of it, having that digital lease put away. What about you, Nick? Did you put it down?

 

Nick: So, the first week that I got up to Rochester, I kind of used that as a vacation time and I was a little bit more unplugged. It was really the week of the fourth so it was pretty easy. But then the rest of the time I was still working. It was just that working remote up north versus down here.

 

Marc Killian: That’s okay.

 

Nick: Summertime’s always a little bit slower, so I would take my time in the morning to knock stuff out and definitely used it less than I normally do, which is normally like a 24/7 schedule. So it was good.

 

Marc Killian: I mean, even a week. So that’s my public service announcement to our podcast listeners is even if you can give yourself just a few days from time to time just to put that digital leash away, it does wonders for how you feel. Sometimes we just have to kind of set it down and step away from it. But anyway, I’m glad you guys had a good time. Good, safe, little bit of a holiday break there.

 

Marc Killian: So let’s get back to work and let’s talk about rollovers. As I mentioned a few minutes ago, we’re going to do a two part-er here on some things to know. Deciding on a rollover for your retirement funds, if it’s the right thing for you. That’s pretty much the first step, right John? Determining if it’s in your best interest.

 

John: Yeah. And that will happen. We’re getting a lot of questions right now. “Hey, I have a 401k plan at a previous employer or a job change,” and the question is, “Should I roll it out and what’s the process?” Which next week, Nick will go into details on what the process is.

 

John: There’s definitely some factors that you need to kind of go through. I’ll say one of the main ones is the investment options in your current plan. So, we work with a lot of different people and we’ve seen some plans where it’s really limited as far as what you can go into. They might only have 15 different options and the selections really aren’t that good. We’ve also seen some other plans where there’s 20 or 30 options and there are some good tools within the platform to use.

 

John: So to me, that’s the first step is really evaluating, what am I options within this 401k plan or retirement plan at work? And is it enough for me to be efficient and actually build a quality portfolio? Especially in this kind of volatile time period that we’re in.

 

Nick: If I were to jump on that a little bit from the perspective of not a lot of people realize that really the size of the plan that they are in is the determining factor for what the fee structure is in the funds that they use. So, sometimes they can be in a fund that costs much more inside of the plan than it would even outside of the plan. So there’s a lot of different variables to take into consideration on that investment selection process.

 

Marc Killian: Well, are they limited more so in those types of plans? When you’re talking about that, you mentioned the investment options. A lot of times, I do think people feel that they are a bit more limited, and I know advisors think that. Is that how you see it as well?

 

John: Yeah, you’re limited to what they are for you, and then also some plans actually limit how many exchanges you can do per year. I’d say nowadays, that might be rare, but it’s still out there. So that’s something you want to look into where if you’re thinking about rolling it over, let’s say you go into just an individual retirement account, IRA, really have unlimited investment choices. It’s kind of an open architecture platform and there’s no limitations and you can almost invest in anything you want to. When you have that open architecture plan, that’s where you can really be creative and efficient on your portfolio and making sure that you have the right choices to weather some volatile markets.

 

Marc Killian: Yeah. Well, Nick, you mentioned fees. So let’s dive into that a little bit because often that becomes the case for people. When you get down to all the different nuts and bolts, it’s the fees that they tend to be most interested in.

 

Nick: Yeah. I mean, we find on a pretty consistent basis that when we tally up the aggregate fee that they’re paying inside of the 401k plan and we compare it to what we can do outside of the plan, especially with how prevalent exchange traded funds are these days and with how much lower the costs are, that oftentimes, even if we combine the expenses on the underlying holdings in the portfolios that we manage and add in our investment management fee, they’re coming in either equal or under what they were paying fees before. The fees are now more transparent than they were before because oftentimes, as many have come to find out over the years, they don’t really understand what fees they’re paying in their 401k plans. So many times we’re able to reduce the fee and then add on a much higher level of management, as well as roll in additional services like the planning services, et cetera, et cetera. So, quite often you can get a lot more for the money.

 

John: And to go with that, a lot of people don’t realize within a 401K plan, there’s a lot that goes into it. I mean, there’s the advisor that’s on the plans getting compensated. There’s typically a third party administrator, which basically helps out with the construction of the plan and the filings and stuff like that that gets compensated. The fund company are using. So that’s why we see, just to reference what Nick said, the fees can add up in there as important to understand what type of plan you have and what your fees are.

 

Marc Killian: Yeah, definitely. And is this consolidation of accounts, can that help kind of bring all that into, I guess, better focus?

 

Nick: I would say absolutely. So there’s a couple of things that I’ve seen pretty much on a consistent basis from the standpoint of experience working with clients are that number one, obviously, when you consolidate it’s a little bit easier to have a good grasp on what your overall allocation is from the underlying investments.

 

Nick: But quite frankly, what I would say is the bigger benefit is that when people have their accounts scattered in multiple places, they tend to just be more anxious about their overall situation in general. They feel like they don’t necessarily have a good grip on what they have and what’s going on. They don’t have a full understanding of what their overall strategy is. There’s usually not a plan in place, which is a big indicator of anxiousness and anxiety when it comes to the whole retirement planning conversation. Really what that ends up then leading to are just poor decisions. So, non-coordinated decisions, maybe making a rash decision when we were going through what we were going through a few months ago when the market initially dropped.

 

Nick: So it’s really kind of a trickle down, snowball effect where consolidating accounts, building a plan, having a concise roadmap for where you’re trying to go with how your investments are managed and making sure that they correlate to your overall plan really helps with your decision making process and peace of mind.

 

Marc Killian: If people want to have someone do this for them, they want to kind of delegate that out, what’s some steps to think about? What’s some stuff they should be working towards? Things of that nature.

 

John: Yeah, so all the factors we’ve already gone through is part of that and what we find that when people are near retirement or in retirement, they really don’t want to do it themselves anymore or have to check on it on the 401K platform. So what they’re looking for is to work with an advisor and have them do it for them in retirement so they don’t have to worry about it. It’s just kind of something else where it’s off their to do list and it provides some peace of mind.

 

John: So we’ve seen a lot of that where clients and prospects are… No one’s monitoring this for me and I definitely need some help and I don’t want to do it so I need to hire someone. So that’s another reason to consider rolling it out.

 

Marc Killian: For a lot of people. I talk to guys all across the country, guys and gals, and it seems like the level of service sometimes from the providers or from the companies gets pretty frustrating. I mean, even prior to COVID, same kind of thing, right? You feel as though you got to go through this process and it’s automated a lot of times, or you’re just not getting the answers you want.

 

Nick: Yeah. I would say, because the reality is that inside when the funds are inside of your 401k, it’s still your responsibility and your obligation as the account holder to make any investments, decisions and changes. From the standpoint of needing or requiring any sort of guidance, if you’re calling a 1-800 number and you’re talking to people in a call center, oftentimes those people don’t have a good grasp and understanding of your overall situation. If you have gotten to that point where you’re looking to make those sorts of changes, you’re probably under some sort of stress or duress and having guidance and having somebody that understands what you have going on is a pretty big deal.

 

Nick: We saw that quite evident during the end of quarter one when the market was tanking with COVID and just being able to have conversations with clients, them knowing that, hey, we understand their situation and what’s going on, we understand the longterm planning. And them knowing that, as part of our services and when we’re managing assets for them, the changes that we make inside of a portfolio are proactive. We’re going to automatically make those changes for all of our clients at once versus on a one-to-one, or one off basis, makes for a much more efficient process and a lot more peace of mind.

 

Nick: So it’s a much higher level of service. I mean, sometimes we refer to it as, if you use a sports analogy, going from the minor leagues to the major leagues where it’s just a whole different service level and engagement level, which we think is really, really important, especially as people get closer to or are in retirement.

 

John: Some other things to consider are, we have seen some people get aggravated with the 401k plan moving to a different company where all of a sudden it might’ve been Vanguard and they’re changing to Fidelity and that requires blackout periods and stuff like that. Some people just don’t enjoy that process because now it’s time to really keep track of it.

 

John: Or if you move, it’s your responsibility to tell basically the human resource where you moved to so they could start sending all the notifications to you. So there’s just kind of just some inconveniences with keeping the money yet a retirement plan that you may or may not be aware of.

 

John: I’ve actually seen one plan where they got audited and no one could touch the funds for a couple of months because they were doing an audit investigation of the plan itself. So it’s your money, but at the same time they were auditing so some people’s funds were frozen. They weren’t happy campers for that month period.

 

Marc Killian: I bet not. That definitely can be a pretty frustrating situation. So hopefully that’ll help you out a little bit here, folks on the first part of our series on deciding on rollovers, if it’s the right for your retirement funds. Nick, anything you want to add before we sign off for this week? I know we’re going to talk more about some things next week.

 

Nick: No, I think this was a good overview and I think the reality is that, in our session next week, we’ll get into the details a little bit more of how you actually process these and the things to look out for and that sort of thing.

 

Marc Killian: Fantastic. All right. Well, I’ll tell you what, for that we’re going to sign off then. So if you’ve got questions or concerns, again, about doing a rollover or if it’s right for you, reach out to John and Nick, give them a call at (813) 286-7776. That’s (813) 286-7776, or go to PFGprivatewealth.com. That’s PFGprivatewealth.com.

 

Marc Killian: While you’re there, subscribe to the podcast, click on the podcast page. You can check out past episodes, you can listen to future episodes. You can subscribe to them on various apps that are out there. Or if you’re using Apple, let’s say, just type in retirement planning redefined in the search box and you can also just like it that way. So lots of different ways you can find us, and we certainly appreciate it. We’ll see you next time here on Retirement Planning Redefined. For John and Nick, I’m your host Marc Killian. We’ll talk to you next time.

Ep 24: Importance Of Risk Management & Asset Protection

On This Episode

When it comes to retirement planning, many people focus on filling in an income gap, or making sure they will have enough money to get them through retirement. While this is fundamental to the plan, it’s important to make sure your assets are protected. John and Nick will explain what investment vehicles have some sort of protection and will also give a hypothetical example.

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Check out all the episodes by clicking here.

 

Disclaimer:

PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

 

Speaker 1: Hey, everybody. Welcome in to Retirement Planning – Redefined with John and Nick of PFG Private Wealth, serving the Tampa Bay area. Thanks for tuning into the podcast. As we talk investing, finance and retirement, and we’re going to jump in and get started with the conversation. Guys, I hope you’re doing well. We were kind of laughing right before we started the session recording here that John’s been doing some swim lessons with his kids and it’s been going really well. And I wanted to make the joke that Nick, you finally learned how to swim.

 

Nick: Yeah, no, all joking aside, I can swim and swim well, but besides that-

 

John: You’re welcome, Nick. We’ve been doing some Zoom swim lessons [crosstalk 00:00:41].

 

Speaker 1: Zoom tutorials on swimming.

 

Nick: Yeah. I get in the bathtub with goggles and see what happens. But no, I’ve been doing well. Things are starting to slowly get back to normal from the standpoint of, I want to say last week I went out to dinner for the first time at a restaurant outside in a few months, so that was pretty cool. So things are slowly starting to get back to normal, although it’s going to be interesting is some of the numbers seem to spike here, how things will adapt over time, but no complaints, no complaints here.

 

Speaker 1: Yeah, it will be interesting to see as this cluster bang of a year continues to wobble on. So we’re about halfway through 2020 at this point. So we’ve still got a lot to go, so we’ll see how it shakes out. But that’s good. Glad to hear that there’s some good positive spots here and there. So let’s jump into our topic. So let’s review the importance of risk management and asset protection. Let’s just start with a basic overview, Nick.

 

Nick: Yeah. So for those that are listening that have been through our class that we hold at the local colleges, this will sound a little bit familiar, but we’ve had a couple of things pop up with clients and questions from friends and things like that. So we thought it would be a good topic to re-review where oftentimes people get focused on the fun or more exciting aspects of planning, which may be investments or talking about retirement and those sorts of things, but really risk management is a super important part of overall planning because really the objective is to increase your probability for success by reducing your risk. And then ultimately, overall the goal by doing that is to do it while keeping your costs down. So when we go through the planning process with clients, we do review their property and casualty insurance. We’re looking for how their accounts are titled. We’re looking and analyzing things from the standpoint of, “Are we making sure that things are protected?”

 

Nick: So we always like to make sure that people do realize, because it isn’t necessarily something that is top of mind and oftentimes, when you talk to people, the reality is that when they’re shopping out their homeowners insurance, their car insurance, they end up having been with the company for a long period of time. Usually it’s price dependent. So we’ve seen where people made a change to cut costs, six, seven, eight, nine, 10 years ago and now they’re in a completely different financial situation and they haven’t made adjustments to correlate to that from a risk management standpoint. So we just kind of want to walk some people through that.

 

Nick: So one of the first things that we review and talk about and help people to understand are that, there are certain assets that are creditor or protected in the state of Florida. This is something, again, we’re not attorneys, we’re not property and casualty agents, but these are topics that we review. And this is one of the perfect examples of something there where we can provide feedback, give you help, provide you with questions to ask and then help connect you with or you connect with an existing relationship that you have with a property and casualty agent, with an attorney if there are legal documents that need to be involved, that sort of thing. But in the state of Florida, it’s important and many people know that you can declare your primary residence as your homestead.

 

Nick: And there are a lot of protections built into declaring your home a homestead. So many people just focus on the tax benefits and that’s one thing, but really it provides a creditor protection and asset protection for your home. So that’s a big deal. If you own non-qualified annuities and/or have life insurance that has a cash value component to it, those are protected in the state of Florida. Qualified accounts, so in other words, 401k, IRA accounts, those accounts are protected in the state of Florida. One kind of caveat to that where we’ll have some people say, “Well, hey, I’m 60, 70 years old and I’ve got these accounts and my home, why do I need any sort of additional protection?” And one of the things that we like to remind people are that those qualified accounts, you do have to start taking money out at a certain point. And at the time that they go from qualified to non-qualified that becomes something that could be available.

 

Nick: From the aspect of different types of trusts, there are certain types of trusts that can be set up to provide protection for assets that’s absolutely 100% in the realm of working with an attorney. John’s going to talk about one of the misconceptions that a lot of people have when it comes to trusts. And just a basic thing that is important for people to consider, let’s say you own a business and you are not structured as an LLC, you could be putting yourself a little bit of risk from that standpoint.

 

Speaker 1: Yeah. Certainly there’s a lot of pieces in there. So again, homestead, annuities, qualified accounts, LLC, certain trusts, some of these things are the protected assets or at least in Florida. John, what are some of the non protected?

 

John: Yeah. So some of the non-protected assets would be cash accounts or your bank accounts, things like that, CDs, non-qualified investment accounts. Someone might have a brokerage account that they’re just putting money into monthly, or just maybe just put a lump sum in there. Just understand that just because your retirement accounts are invested and you have investments there and they’re [inaudible 00:06:27] protected. If it’s in a nonqualified account with investments, it’s not protected.

 

John: One other thing with the qualified accounts is to understand that there are limits to what is actually protected. So actually an ERISA plan, which is a 401k, 403(b) type plan, it’s typically fully protected, no matter what the amount is and IRA, and this does go up, it used to be a million, and I believe right now it’s about 1.3 million if an IRA is actually credit protected.

 

John: And then a recent rule change in the past few years, inherited IRAs are no longer credit are protected. So it’s important to understand that if you inherit an IRA from somebody, it is not credit protected at all. Something that will come up, Nick mentioned with the homestead where your primary home is credit protected, any secondary home you have is not. So that’s a misconception we see sometimes if you have a rental property, or let’s say your, like a second vacation home, it’s not credit protected. And then with the businesses, if you’re a sole proprietor and you never develop any type of LLC, so example I have a [inaudible 00:07:32], but I’m not LLC, that is not creditor protected. So that’s why it’s important to, if you’re working with an attorney, you want to ask these questions, “Hey, should I create an LLC with the business?” And you definitely want to have them help you draft the documents so they’re done correctly.

 

John: One of the biggest questions we get when we’re doing planning and part of the planning is we look at the estate side of it. We don’t draft any documents, but we are knowledgeable enough to have people ask the right questions and point them in the right direction. But it’s with trusts. A lot of people feel like, “Hey, if I set up a trust, does that protect my assets?” And if it’s a revocable trust, the answer’s no. So a revocable trust basically just get to the meat of it. You still have control of that trust. So you either are owner of it, or you make decisions of it. And basically with that, it’s still considered part of your estate [crosstalk 00:08:22] and for that reason it’s not credit protected.

 

Nick: Yeah. And just for further emphasis on those protections kind of tend to kick in after you pass and the trust stays, but while you’re alive, it’s includable in your estate and it doesn’t provide those protections. And one other caveat or thing to consider think about are for those non-qualified accounts, non-qualified investment accounts or non IRA, if you hold them jointly in the state of Florida using Tenancy by the entirety for those types of accounts, if you hold it with a spouse, so it has to be with a spouse to use that, that does provide some additional level of protection. Although it’s not the same as like a retirement account per se.

 

John: Definitely, as you can tell, it gets confusing. So you definitely want to ask the right questions if you’re wanting to know what is and what isn’t and just asks the right people and adviser will know enough, and attorney would definitely be the best resource.

 

Speaker 1: Yeah. I’m definitely say if you’re working with an advisor, obviously bring the conversation up with them, have them bring the attorney in and so on and so forth. And of course, John and Nick can help you in that arena as well. Now you mentioned property and casualty, so let’s do a quick review of that as well. What are some things to consider?

 

Nick: Sure. So the main types of property and casualty policies that people are going to have are going to be their car insurance, homeowners insurance, and maybe an umbrella policy. So one of the examples that we tend to give from the perspective of a car insurance policy is, really just walking you through a scenario. So when you look at your car insurance policy, you’re going to see that there are limits that are provided, that are referred to liability, and then you will see a designation for what’s called uninsured motorist or UIM.

 

Nick: So the example that we usually use is, let’s say John and I are both driving down the highway and we get into an accident. So we’re both in our late 30s, business owners, our incomes continue to go up. John has a family, I don’t, but if something happens to me, I do have assets going to parents and brother and that sort of thing. So let’s say we’re driving and we get into an accident and because John likes to multitask a lot, he was texting and it’s his fault. So we’re going to blame him. So I have the-

 

John: Wait, wait, wait, full disclosure, I never text and drive. I do multitask, but I do not do that.

 

Speaker 1: Good [inaudible 00:10:57].

 

Nick: That’s good. That’s good. So we get into an accident. I have damages, fairly serious damages and I’m going to go ahead and I’m going to sue him. There’s kind of a negative connotation oftentimes with the whole aspect of suing somebody, which the reason that we use this example is because, here we are, we’re friends, we’re colleagues, in many ways business partners, that sort of thing. But the reality is, is that if there’s damages and mistakes happen and mistakes are made, ultimately my responsibility for me and family is to try to become whole again, from a financial standpoint. So I go ahead, I sue him. The first thing that’s going to be reviewed and looked at are going to be his liability limits. So the liability limits protect him from lawsuit, from somebody else when he is at fault, essentially.

 

Nick: So let’s say he has one of the most common levels of coverage that we see is what’s called like 100/300. So what that means is 100,000 per person in the accident, a total of 300,000 in the vehicle. So in this instance, in this situation, I’m the only person in the vehicle, so the maximum amount of his car insurance company is going to pay out that they’re going to send their lawyers to deal with this lawsuit, the maximum amount that they’re going to pay out is 100,000. If I happen to have other people in the vehicle, that’s where that 300,000 limit would come into play. But let’s say my damages are 250,000 and the most his insurance company is going to pay out as the 100. So, now what? So at that point, what’s going to happen, there’s going to be kind of a different phases. So I’m going to have an attorney. And my attorney is going to look at, “Hey, does John have additional assets that are not protected, like we talked about earlier that are available through suit?”

 

Nick: So that’s something that he’s going to request, some sort of inventory, financial inventory, asset balance sheet via the lawsuit. The other thing that they’re going to look at is, “Hey, Nick, do you have uninsured motorist coverage?” And luckily because I do this sort of thing I have planned ahead and I have uninsured motorist coverage. So what uninsured motorist coverage does is it protects me in the case of having damages that are above and beyond what the person who inflicted the damage has. So in this case, my limits for uninsured motorist, let’s just say there are 250,000, I can essentially sue my own insurance company to fill in that gap, to get me up to that 250,000, so that coverage has protected me.

 

Nick: So the liability limits protect the person at fault against the person having damages and not having enough coverage. So, because we do see people oftentimes outright reject uninsured motorist coverage, and knowing that, especially in the state of Florida, people are often underinsured or uninsured, having uninsured motorist coverage is something that we think is important to have a level of protection.

 

Nick: So the same scenario, I was injured and John had coverage and I had substantially much more significant damages. Let’s say that I was permanently disabled and I wasn’t going to be able to work anymore, so the amount that the amount of protection and coverage that I’m looking for is going to be substantially more than the 100,000 that John has, or even the 250,000 that I have in the uninsured motorists. And that’s where something like an umbrella policy could come into play. So what an umbrella policy will do is, it’s a type of coverage that essentially goes above what you have for the auto coverage.

 

Nick: So an umbrella policy can be both liability and uninsured. So in this example, what we’ll use for the example is we’ll say, “Hey, Nick has an umbrella policy. And because my damages were a million dollars and John’s insurance company has paid out 100,000, my insurance company has paid out 250,000, there’s still a gap of 650,000. Essentially, I can go ahead and sue my insurance company from the standpoint of the umbrella to try to fill in that additional gap. So if John had had an umbrella policy, they would have tried to use that for protection. But in this scenario, me having an umbrella policy and being the one that had the damages really comes to the point of being able to protect me in my assets.

 

Speaker 1: Yeah. And certainly it’s important to review your risk management, your asset protection, because something like an accident can certainly derail retirement plans, it can really wreak a lot of havoc and other things that you had going on as well. There’s countless stories out there along situations like that. So if you’ve got some questions or concerns about this week’s topic, and you need some help, reach out to John and Nick, and of course they can help point you in the right directions for some of the things they don’t do as mentioned earlier. It’s always important to review and have these conversations about all these little assets. It’s not just about income, which obviously that’s super important in retirement, but there’s all these other little facets. So this week we focused on some risk management and asset protection when it comes to some of the things that are protected in Florida, not protected and a bit about the property and casualty as well.

 

Speaker 1: So reach out to them if you’ve got questions on these topics at 813-286-7776, to have a conversation about your own situation, 813-286-7776, or share the information with a friend who might benefit from that well and go to pfgprivatewealth.com to learn more about John and Nick and their practice, pfgprivatewealth.com, a lot of good tools, tips, and resources. You can also click on the podcast page, you’ll see that right at the top. And you can subscribe to us on whatever platform you like to listen to. And we would certainly appreciate it. Guys, thanks so much for your time this week. As always, I appreciate all that you do to help us out here and continue to do a good job with those swimming lessons there John.

 

John: Thanks.

 

Speaker 1: And Nick, maybe one day, you can take the floaties off, you’ll be good.

 

Nick: Hopefully.

 

Speaker 1: All right, guys, have a great week. We’ll talk to you soon. Stay safe, stay sane, and we’ll see you next time here on Retirement Planning – Redefined.

Ep 23 : Should You Be Thinking About Refinancing?

On This Episode

With rates being at historic lows, a lot of clients have been asking questions about refinancing. So this week we answer the biggest questions people have.

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More Episodes

Check out all the episodes by clicking here.

 

Disclaimer:

PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

 

Marc: Hey everybody. Welcome in to this edition of Retirement Planning Redefined with John and Nick from PFG Private Wealth. And we’re here today to talk about investing, finance, and retirement. And we’re going to talk about refinancing actually a little bit here on this first podcast. Guys, what’s going on? Nick, how are you, buddy?

 

Nick: Doing pretty good. We’re staying busy. Today we’re in the little bit of a midst of a market pullback, so today’s been an interesting day. But besides that pretty good.

 

Marc: Good, good. Yeah, it’s been a little all over the map the last week or so the market has been for sure. So John, how are you, my friend?

 

John: I’m good. I’m good, I’m actually just started coming back in the office this week. So it’s been nice to say the least, although I miss seeing my kids 24/7, it’s nice to have a little break from screaming madness. It’s a good change.

 

Marc: Yeah. A little mental break from time to time is certainly a good thing. Well, I mentioned we were going to talk about refinancing. So a lot of people have been sending questions in that they are thinking about it with the rates being what they are. So let’s dive in and talk about it. Why refinance?

 

John: Yeah. So over the last month, Nick and I have got a lot of requests of just really helping clients as far as just analyze, “Hey, you know, the rates are dropping, and is it now a good time to refinance?” And, full disclosure, we’re not mortgage brokers. We’re not in that industry, but we’re familiar with our clients’ situations. So we’re able to at least help them navigate and ask the right questions in this situation. So we’ve definitely seen an uptick over the last month. So we figured this would be a good time to kind of discuss it.

 

John: So just understanding really initially what a refinance is. And it’s basically, you’re taking your current mortgage and you’re paying it off with a new one. Some reasons why you might want to refinance is obviously the biggest one is lower interest rate environment, which we’re seeing currently. And when interest rate’s lower, and Nick correct me if I’m wrong, typically rule of thumb, a 1% drop, you may want to look into it. It could really reduce your monthly payments, and over time it could really help you build equity in the house as well, if you’re going to be in there longterm.

 

John: So, just a quick example. A 30 year mortgage at 5.7%, let’s say 300,000 mortgage balance. The payment on that’s about $1700 per month. Let’s say the interest rate’s dropped to 4%. That same 30 year mortgage payment’s going to be about $1432, roughly $271 per month saving. You’re looking at about $3,250 per year, which is a pretty big number. And then especially if you’re looking at, if you still have 20 years left in the mortgage, that can really add up. So, that’s one thing you want to consider.

 

Nick: Yeah, I would say one of the other times where it can make a lot of sense is, let’s say for example, you took out a home equity line a couple of years ago and use the home equity line either to make improvements on the home, purchase a second home, use it for a down payment on a second home, or whatever the reason may be. A lot of times those equity lines had a really, really good rate in the first year or two. And then they start to kind of jump up. So the consolidation of the two together, and while reducing the payment and also potentially reducing the term of the loan can be a really useful scenario, situation for people.

 

John: Yeah. And I’ll say one thing, when we do a lot of planning with clients, one of the biggest goals we see is, “Hey, I want to make sure my mortgage is paid off when I go to retire.” So now could be a good time to analyze and say, “Hey, I’m 10, 15 years out from retirement. Do I want to adjust to a 10 to 15 year mortgage?” And we’ve been finding in this environment, we’ve seen clients keep the payment the same as they’re currently doing, but they’re shortening the terms. So again, it’s really just a matter of your situation and what works for you.

 

Marc: Well, are there any right moves? I mean, how can we determine is it the right move to make, is there some things, some bullet points we can kind of consider? Obviously talking with the qualified professionals, the right people, goes a long way, but is there some things we could go through on our own checklist ahead of time?

 

John: Yeah, I mean, the main thing really is how much are you going to be saving monthly? So you kind of start there and evaluate that. And then you kind of look at it longterm. One of the biggest negatives with refinancing is the closing cost, which can range from application fees, to recording fees, and whatever else. And we’ve seen them range from 1% to almost 4% sometimes.

 

John: So you want to evaluate, “Hey, is it worth refinancing, incurring those costs into my mortgage?” And that’s where it’s important to work with someone to help you analyze and crunch those numbers. And one of the biggest things that we’ve seen, it depends how long you going to live in the home. So you want to ask for an amortization schedule whenever you’re looking at it to say, “Hey, if I’m going to only be in the home for 10 more years, does it even make sense to refinance this?” And that’s one of the biggest things I think people don’t take a look at, is just figuring out, “Hey, how long am I going to be in this house and does it make sense.”

 

Nick: Yeah. That term, that length of being in the home is probably the biggest reason that it may make sense for somebody not to refinance. Because the reality is that the monthly payment, if it’s staying the same or reducing, if it’s very small, because there are costs associated with refinancing, it may not make a whole lot of sense unless you have kind of a strategy and a longterm plan. So we have seen those scenarios where people have said, “Hey, we don’t plan on being here any longer than a couple of years, does it make sense for us to spend this, to do that?” And we recommended no, dependent upon the situation. So that’s absolutely something to keep in mind.

 

Nick: I will say as well, that there are companies out there that will kind of advertise “no closing costs” or “we pay your closing costs,” that sort of thing. And while that may be true, and they still may be offering good rates, one other thing to make sure you do is we always recommend get three offers from three different companies, banks or lenders, because we’ve seen, “Hey, we’ll pay your closing costs, but you’re going to pay more on the rate.” You know, they make it one way or another. But we’ve had clients recently getting quotes at anywhere from 2.5, to 3, 3.25, dependent upon the length of the term, dependent upon if it’s their primary residence versus a rental property, those sorts of things. So, all things to consider, keep in mind.

 

Marc: Well, if you are refinancing, some might say you’re resetting the clock. You’re adding years. I mean, obviously you’ve got to have these conversations. You might get a lower rate, but you might be tacking on more years.

 

Nick: Yeah. And I would say that it’s rare that we’re going to recommend anybody tack on any extra years. The one thing that I will kind of comment on is, their other habits have a big impact on whether or not something like that could make sense. So for example, if somebody is, by default, a very good saver, and let’s say a 30 year mortgage will add on five years. But let’s say it’s going to free up $500 a month. And the reality is that they’re not going to be in that home for more than another 10 years. And they’re really good at recapturing that money. So in other words, instead of paying that $500 a month, they’ve proven over time that they’re a good saver and they’re going to actually save that $500 or even set up a schedule to save that money right away. And maybe they’re very comfortable in the market and investing and their thought process is, “Hey, I’d rather have control of this extra $500 a month than have the lender or the bank have control of the money.”

 

Nick: That’s a scenario that we may consider saying, “Okay, that’s something that could make sense for you.” But I would say that it’s pretty rare where we’re going to really kind of give our okay or green light on somebody extending the term of their loan. Usually it’s keeping it the same, reducing it a few years, and if we can reduce it four to five, six years and keep the payment the same, that’s oftentimes a win for the client. Conversely, if the reality is that having that mortgage payment a little bit higher for them is a forced, quote unquote, savings by reducing their liabilities, that’s something that we take into consideration and that’s the important part of us understanding and knowing our clients, knowing their tendencies and helping to put them in a position to succeed.

 

Marc: Well, if you’re thinking about refinancing, again, you need to go through of these questions. Why do you want to do it? Is it the right move? Have the right conversations with the correct people. John, anything in the summary that you want to add as we kind of wrap up this podcast about this?

 

John: Really, just if you’re thinking about it, just make sure it aligns with your overall financial plan and your goals. It’s just important. You don’t want to do it just because the rate has dropped. You really want to make sure it makes sense for you. And we highly recommend working with people that understand your situation versus just someone random that’s just trying to go ahead and “Hey, let’s just do it” just to do it. So definitely want to do due diligence and make sure that aligns with what you’re trying to accomplish.

 

Marc: Yeah, because I’m sure a lot of people keep getting things in the mail, right. “Our rates are so low.” I mean, I think I get something probably almost every other week to contact whomever about refinancing. So, that’s a great point. You want to make sure that it works in conjunction with what you’re trying to accomplish and not just doing it for the sake of, because we keep getting hit with these things that are like, “Oh, let’s look at this rate.” So on and so forth, right. Have a conversation, make sure the whole scenario plays out correctly in the way that you want it to. And we talk about that often on the show anyway, is make sure whatever steps you’re taking, whatever you’re doing, it’s part of your overall plan and an overall strategy to get us to and through retirement.

 

Marc: So that’s going to do it this week for the show, Retirement Planning Redefined. If you’ve got questions again about today’s topic, make sure you reach out to them and let them know you’d like to have a conversation. We’ve already had quite a few people bring this up, which is why we talked about it today. So give them a call at (813) 286-7776. If you’ve got questions before you take any action, (813) 286-7776. You can also go to PFGprivatewealth.com. That’s PFGprivatewealth.com. Don’t forget to subscribe to the podcast by hitting the subscribe button on Apple, Google, Spotify, whatever application you like to use. But check the guys out there at the website. And with that, gents, I’m going to let you go this week. Thanks for your time, as always. I hope you stay safe and sane, and we’ll see you soon.

 

John: Thanks.

 

Nick: Thanks. 

Ep 22: Case Study- Implementing Roth Conversions

On This Episode

We spent last podcast talking about what exactly a Roth conversion is. Today we will examine a financial plan and see how implementing Roth conversions can potentially improve this situation.

 

Case Study Before Implementing Strategy:

Dual income Household: Ages 55 & 53 

  • Existing Accounts:
    • $500k Pre-Tax 401k Funds
    • $25k Roth IRA Funds
    • $50k Cash
    • Mortgage on the home – paying extra on mortgage ($250/m) (5% rate on 30 year loan, 10 years in)
  • Income:
    • Person 1: $110k
    • Person 2: $60k
  • Current Savings strategy:
    • Total Joint Savings 18% of income ($30.6k/yr.) – all into pre-tax
    • Each person has 3% company match for pre-tax ($5.1k/yr.)
    • Total being saved: $35,700
      • EE Contributions: $30,600
      • ER Contributions: $5,100

 

New Strategy:

    • Refinance Mortgage to a 15 year loan with significant reduction interest rate lowers total monthly payment, allows for $250/m extra payment recapture & additional $150/m savings
    • New Total being saved: $40,500
      • 401k EE Contributions: $21,400
        • Pre-Tax: $15,900
        • Roth: $5,500
      • 401k ER Contributions: $5,100
      • Roth IRA Contributions: $14,000
    • Person 1 strategy: EE Total: $23,600, ER Total $3,300
      • EE Pre-Tax 401k Contribution: $11,100 (10%)
      • EE Roth Contribution: $5,500 (5%)
      • ER Pre-Tax 401k Contribution: $3,300 (3%)
      • Max Roth IRA: $7,000
    • Person 2 strategy: EE Total: $11,800, ER Total $1,800
      • EE Pre-Tax 401k Contribution (No Roth Available): $4,800 (8%)
      • ER Pre-Tax 401k Contribution: $1,800 (3%)

 

Subscribe On Your Favorite App

More Episodes

Check out all the episodes by clicking here.

 

Disclaimer:

PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

 

Marc: Hey, gang. Welcome into another edition of The Retirement Planning Redefined Podcast with John and Nick from PFG Private Wealth. Mark Kelly in here along for the ride as we talk investing, finance and retirement with the guys. And this week, actually, we got sort of a follow-up to our prior podcast. We’re going to talk about implementing … Really a case study about implementing Roth strategies into your plan, some things to think about there. Again, if Roth conversions are on your mind, this is a great podcast for you. And as always, if you’ve got questions or concerns, let the guys know. Reach out to them at PFGPrivateWealth.com. John, what’s going on this week, man? How are you?

 

John: I’m good. I’m good. Nick still hasn’t taken me up on that race offer, but I picked up some yoga in the meantime.

 

Marc: Oh, okay.

 

John: So, I’m doing well.

 

Marc: All right. So rowing and yoga. After a couple of weeks, you should be lean and mean and you should be ready to roll.

 

John: I’m trying. I’m trying to get in shape for when I go back out in public.

 

Marc: Did you get the quarantine 15?

 

John: Yeah. A lot of Oreos eating over here.

 

Marc: Oh, yeah. I hear you. Nick, how are you doing, bud?

 

Nick: Pretty good. Pretty good. Yeah, John’s definitely going to have to spend a little bit more time rowing before he can catch up. I’ve got a month head-start on him.

 

Marc: Oh, okay.

 

Nick: And luckily, the irony for me is because I’ve been forcing myself to get out I’ve actually been losing weight, which is kind of nice.

 

Marc: Oh, nice.

 

Nick: And going out to eat a little bit less. It’s funny when you see what kind of difference that makes, for sure.

 

Marc: Yeah. It really does. And everybody has their vice. Oreos, as John was mentioning. Everybody’s got their vice. Yeah, during the quarantine, in lockdown, I certainly was no stranger to my own vices as well. And I was like, “Yeah, this isn’t good. I’m getting fat.” Not happy about it so I’m right there with you, John. Wasn’t Oreos but just as bad.

 

Marc: Anyways, let’s jump into our topic this week and talk about this case study, really, and ways it helps you see implementing how a Roth conversion may or may not work. Nick, take it away. Give us a quick breakdown on what this is and just walk us through it.

 

Nick: Yeah. What we wanted to do with this session is kind of mix it up a bit where … One of the things that we found just communicating with people, especially in the classes that we typically do is when we walk through almost a little bit of a case study and give a sample example of a household, what they have in assets, what they have in income, how they’re currently saving and the things that we can do with pretty minor changes within the structure available to really try to improve their overall situation and planning.

 

Nick: The scenario that we had put together was a dual-income household, ages 55 and 53.

 

Marc: K.

 

Nick: And their existing accounts were pretty heavily dominant to the pre-tax side. Half a million dollars in pre-tax 401K funds. They had about $25,000 in Roth accounts, $50,000 in cash between checking and savings, 30-year mortgage … About 10 years in to a 30-year mortgage. And they were paying an extra $250 a month towards the mortgage to try to get it paid down.

 

Nick: One of the most common questions that people have when they come in to see us or come into a class is, “Hey, I’m saving. I’m doing a good job with saving. But am I saving in the right area? Should I be paying this extra money towards the mortgage, et cetera?” The breakdown in income was person one, $110,000, person two, $60,000 of income. So, total household income of about $170,000. And the reality is that both of them were getting a company match into their 401K and they were saving … Between the two of them, they’re saving essentially 18% of their income but they’re putting it all into pre-tax accounts. The Roth accounts that they have on their balance sheet are essentially accounts that they’ve had for a long time. They funded it early on and then at a certain point they got phased out because they made too much in income.

 

Nick: Their main question or, I should say, potentially goal when they came to us was, “Hey, again, we have a good income. We’re living comfortably. We live within our means. We save a good amount of money. But are we doing it the right way?” One of the first things that we did was evaluate the mortgage and, really, what we’ve seen in John’s work on these quite a bit with a few different clients is that mortgage rates have obviously dropped in the last …. These clients were 10 years in so mortgage rates have dropped. And they went ahead and spoke to their credit union and they were able to refinance. One of the things you always want to look into is try to keep down closing costs, et cetera. And they were able to reduce the payment.

 

Nick: And so, really, with rates where they are, they were able to go from having 20 years left on their mortgage to refinancing to a 15-year mortgage, which is something that they felt much more comfortable with. When we discuss mortgages, we always have the conversation of pure finance decisions versus a comfort level as well. They were able to reduce their monthly principle and interest payment by $150 a month over their 30-year. Essentially, what we’re able to do is we’re able to recapture the $250 a month that they were paying extra towards the mortgage to try to shorten it, take five years off the mortgage with the refinance and save an additional $150 a month. Really, we’ve got a $400 a month savings plus we shaved five years off the mortgage automatically. The goal being how do we redeploy that money?

 

Nick: John, any tips for people when they’re looking for refinancing on the mortgage and some things to look into?

 

John: Yeah. One thing, you just want to analyze what the rates are, what you’re currently at. I know a lot of people use the rule of thumb of basically if you can lower it by one percent it might be a good idea to at least look into it, and that’s where we start is look into it depending on what rates are and what your current rate is and then work with an advisor or some type of mortgage specialist to evaluate exactly, does this make sense for me? A decent website just to see where rates are at is BankRate.com. Just be wary putting your name into anything because we have had some people where they … “I put my name into this. I’m getting bombarded with phone calls from everybody.” BankRates is a good place to view but ultimately, you definitely want to work with someone and just figure out what’s best for your situation.

 

Nick: For sure. From there … Again, part of the emphasis for us, and I know that a lot of our listeners and our clients have heard us talk a lot about the importance of balancing … Trying to create some sort of balance or equity in portfolios from the standpoint of we want to diversify future taxation and current taxation. With this client, they were very heavy on the pre-tax. Half a million in pre-tax, only $25,000 in Roth dollars. Client one, essentially their plan at work allows for Roth 401K contributions where client two, their plan does not allow for Roth contributions. That’s one of these things where sometimes households we’ve seen when there’s a dual-income household they try to make everything even and it’s not always the best strategy when we look at it from a global standpoint.

 

Nick: The other thing that we’ve seen people not necessarily consider or quite realize or understand is that when their employer is making a match contribution for them, those match contributions are pre-tax contributions so there’s additional money going in. Previously, for the household, they were contributing on their own about $30,000 a year into retirement accounts and they were getting about $5,000 a year of company contributions. And now, after the refinance, what we’re actually able to do is increase the amount that they’re saving.

 

Nick: One of the first things that we’ll look at for clients is the income test on whether or not they have the ability to contribute to an individual Roth IRA account. This household came in underneath the limits, which means … And they’re over the age of 50, which means that all of them are able to contribute $7,000 a year into a Roth IRA account. The benefit, obviously, of having an individual IRA account is that they’re going to have some more flexibility on the investment options that they have and if they want to work with us and have us invest the money for them, they have that option. Whereas when they’re dealing with accounts that are strictly held at their employer they’re required to use the funds that are inside of there.

 

Nick: Previously, again … And I know it gets a little confusing in this sort of format, but essentially they were saving $30,000 a year pre-tax. Their employers were putting about $5,000 a year pre-tax. So, about $35,000 a year pre-tax into accounts and then another $3,000 a year into their mortgage, extra. Now what we’ve done is we’ve said, “Okay, we’re able to recapture those dollars from the mortgage and the total amount that’s going to be saved has increased up to $40,000 a year, which is a nice jump.” That breakdown is going to be $14,000 between the two of them into Roth accounts, $7,000 each. The employer contributions are staying the same, so that’s still a little over the $5,000. But client one, because they have access to both pre-tax and Roth options in their 401K, they’re going to put a little less than $16,000 a year into the pre-tax and about $5,500 into the Roth per year.

 

Nick: What we’ve done, in this case, is where previously they weren’t putting any money into Roth accounts, they’re not approaching $20,000 a year of Roth contributions that they weren’t completely aware of how to be able to take advantage of that. And again, we think that that’s a super important step to be able to build in diversification to not necessarily … If a conversion down the road makes sense for them, they can do a conversion. But if we can do it up front, take advantage of the low tax rates that we are currently in in this current environment and not have to worry about future brackets from the standpoint of dealing with conversions, this is something that really allows them to start to build up their Roth funds.

 

Nick: John, do you want to talk a little bit about … From the standpoint of how we might adjust their actual holdings and risk allocation in a Roth versus the traditional funds?

 

John: Yeah. One thing that you want to look at when you’re looking at allocation, overall funds, it’s typically … And I say typically because everyone’s situation is different. You want to be more aggressive or take a little more risk in the Roth IRA or Roth 401K accounts because that has more potential for growth so that gives you a little bit more, again, potential to have more money down the road in a Roth bucket, tax free.

 

Nick: Yeah. We like to try to capture that upside, especially because when you look at it from the standpoint of the total amount of funds when you look at the overall nest egg, the money that’s in the Roth is a lot less money so we feel a little more comfortable taking a little bit more risk with those dollars because it’s a much smaller chunk of the pie. And then we dial back the risk on the pre-tax dollars because that’s a bigger piece of the pie and try to create some balance. And for anybody that may have gotten tripped up with some of the details, because we know there are a lot of moving parts in this, we will have the breakdown in the show notes to be able to walk you through to check that sort of situation out; to see if something like that might make sense for you.

 

Marc: Okay. All right. Absolutely. Definitely a little bit different this week on the podcast, but it’s certainly and interesting way to take a look and see about how different strategies can be implemented into unique scenarios and help things along. As Nick pointed out, follow along with the show notes. They’ll have a break down in there for you, as well, on that. And anything else we need to wrap up with this week on implementing this case study that we were talking about?

 

Nick: I would say that the biggest thing is just for people to make sure that … Again, where people will often times analyze the decisions that they’re making from an investment standpoint is with the sorts of holdings they have and not necessarily with the types of accounts that they have. Just making sure that the methodology that you’re using and how to save and put money into accounts is something that you’re looking at and looking into, whether it’s with your employer, asking, “Hey, do we have a Roth 401K option in our plan?” And if not, getting a few people together to try to push for something like that can really open up options for you. That sort of process is always important.

 

Marc: All right. There you go. All right, folks. Great episode here this week on Retirement Planning Redefined. Hopefully you enjoyed this case study; a bit of a break down and look into implementing Roth strategies. Again, follow along with the show notes on the website. Go to PFGPrivateWealth.com, click on the podcast page. That’s PFGPrivateWealth.com and then you’ll see the podcast page. Click on that and you can follow along in the episodes. And, of course, subscribe to us if you have not yet done so on Apple, Google, Spotify; whatever platform you like to use for your podcast needs. And if you do have questions, if you do want to talk about a conversion or implementing a strategy, reach out to John and Nick. Let them know you want to chat by calling 813-286-7776. That’s 813-286-7776, serving the Tampa Bay area. Get on the calendar, have a chat with them.

 

Marc: Please, before you take any action you should always check with a qualified professional like John and Nick at PFG Private Wealth. And with that, guys, we’ll say goodbye this week. Hope you guys have a great week. Stay safe, stay sane and all that good stuff. For John, Nick, I’m Mark. We’ll talk to you next time here on the show and we’ll see you later on Retirement Planning Redefined.