Ep 27: Understanding Annuities – The Basics

On This Episode

There are a lot of strong opinions on annuities. Some people heavily advocate for them, while others claim they are a bad investment. Today John and Nick will break down the basics for us by discussing what an annuity is and some important terms to know.

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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:

 

Speaker 1: Hey everybody. Welcome into the podcast. Thanks for tuning into Retirement Planning Redefined with John and Nick from PFG Private Wealth. We appreciate your time as we’re going to get into understanding annuities, we’re going to do a series on annuities, several podcasts coming up but we’re going to start out with the basics, annuity basics. So, stick around for that, we’re going to get into that in just a second. But first, let me say hi to the guys. What’s going on, Nick? How are you?

 

Nick: Staying pretty good, just waiting for the weather to cool down a little bit here in Florida. We are ready for, I guess what we would consider our winter or fall one.

 

Speaker 1: Do you get fall? Isn’t it just summer, winter?

 

Nick: I feel like when I first moved here, there was some fall back in ’03, ’04, ’05. But the last few years, it feels like it’s just kind of jumped from one to the other. But whatever it is, where it’s not 90 plus and sticky out, I’m ready for it.

 

Speaker 1: Right. Yeah. John, how you doing my friend?

 

John: I’m good, I’m good. I’m with you. I was thinking we’re just chatting about the weather and it’s still 87 here and it feels like 92 and I’m ready for a low 80s and no more humidity.

 

Speaker 1: There you go. Yeah, the humidity can be the bear, that’s for sure. Well, good. I’m glad you guys are doing well since our last time chatting here on the podcast. So, we’ve got a lot to cover, we’re going to try to keep this into our timeframe. We’re trying to keep this into a digestible amount of time for folks here. So, let’s jump in and start talking about annuities, understanding them and again, as I mentioned, we’ll start with the basics.

 

Speaker 1: It’s just really important to understand them because they can offer some things to people, it can be a vehicle that some may find useful. There’s risk reduction, retirement income, tax deferral, death benefits, so let’s just get into some of this stuff. What is an annuity to kind of start off with guys?

 

John: When you break it down, it’s a contract with an insurance company. So, that’s kind of the premise of it all and what that contract, typically, you’re getting some type of guarantee and we’ll dive into that a little later but it could be some type of a principal protection guarantee, income guarantee, death benefit guarantee. So, that’s what you’re looking for. And it’s really important again, kind of going back to understanding it because it is a contract with an insurance company, so you need to understand all the details of it, just because it could come back to bite you. And we’ve seen that happen quite a few times as we’re doing some reviews with clients. They just don’t truly understand how it works because these are pretty complex vehicles and there’s a lot of moving parts.

 

John: So, it’s just important to understand how, going back to the overall plan, how does the tool work with everything else? And then one thing that we, again, being a contract, the guarantees are based on the paying ability of the company that you’re with. So, one of the things that we always kind of look at is what’s the rating of the company you’re going with because if you want to set the contract for some type of guarantee, you want to make sure that they’re going to be around to actually give you that guarantee.

 

Speaker 1: Right, yeah. Yeah. So, Bob’s insurance is not necessarily the best idea, right?

 

Nick: Yeah. And I will say one other thing that we like to preface this sort of conversation with and part of the reason that it is so confusing for people is that there are many different subsets or different types of annuities. And so, oftentimes people have heard the term annuity but they don’t realize all of the different types and that their experience may pertain to one of 10 different types. So, as we get into the differences and kind of the nuances, we’ll kind of joke sometimes in our classes that we almost wish that they were called different things. It’s like saying, “Hey, should I buy a vehicle? Well, do you want a car? Do you want a truck? What are you trying to do? Is gas mileage important to you? Is off-roading important? What is it?” And that same sort of mentality is important when you are talking about it.

 

Speaker 1: Well, you could think about that analogy Nick with and just leave it at cars because many people would just say, “I need to get a new car.” Even when they’re looking at like an SUV or something like that, they don’t really refer to it that way. So yeah, that’s a great way of thinking about that. And we will cover, we we’ll get into, like I said, we’re starting with the basics today but we’ll get into some of the different types, their names, what they are, so on and so forth. So, John gave us kind of what the gist of it is. There’s a couple of phases to think about, what are the phases?

 

Nick: As we get into it and when we’re talking about deferred annuities, there’s essentially what’s called an accumulation phase and a withdrawal phase. So for the accumulation phase, what that is referring to is, between the time that you initiate or deposit money into the annuity and between that starting point and then the period in time in which you start withdrawing money, it’s called the accumulation phase. And that’s important to know because there’s different rules, which we’ll sort of get into but that accumulation phase is important to understand because by itself, an annuity does provide tax-deferred accumulation or tax-deferred growth during that phase.

 

Nick: So, if somebody says an example of that is the easiest way to compare it is, client has $100,000 in a money market account at the bank and they get to collect, when they get interest on that account, they get a 1099 at the end of the year, they pay taxes on the interest in the year that the interest is incurred. In the annuity, in its own chassis, it’s going to provide tax-deferred growth, which means that that growth just compounds without having to pay any taxes on it until the point that you start taking it out. That’s a pretty big deal and could be a really useful tool for higher income earners that are looking to put money in places that are more tax beneficial especially if we do enter into a higher tax bracket, phase, which we may in the next four to eight years.

 

Nick: And then for the withdrawal phase, it is that money starts to come out. So, the first thing that people need to understand is that when you take that money out, if it’s non-qualified or non-IRA money, there is going to be some form of taxation. It’s going to be ordinary income, which means whatever tax bracket they’re in, those withdrawals, as long as they’re part of the gains that have happened in the contract, those earnings are going to come out first and they’re going to be taxed at ordinary income.

 

Nick: So, understanding how that works is kind of an initial importance. There is a term and a methodology of taking out money inside of an annuity via what’s called annuitization. Again, this is one of those things where you wish that they would just come up with words that aren’t confusing, annuity, annuitization, et cetera. So, annuity is basically like a noun, it’s a type of account. Annuitization is an action essentially. Annuitization is when the company liquidates your lump sum of money and starts paying you in it whether it’s a monthly or an annual payment. And one of the benefits of annuitization is that they can actually spread out your gains over a longer period of time and it can be a more tax-efficient way and can guarantee you payments over a certain period of time.

 

Nick: And so, in one of the other future series, we’re going to get into that process a little bit more. But the easiest way for people to think about it is kind of like a pension payment, a fixed amount of money that’s going to be paid out over a certain period of time. And then, there are guaranteed withdrawals and we’ll talk about that a little bit where you can kind of structure how you want to take out withdrawals. So, it is confusing, there’s a lot of moving parts and it’s a good example of why we’re going to have in-depth series on this.

 

Speaker 1: Yeah. That’s a good example of why to work with an advisor as well to help you go through some of these things. And John, there’s definitely caveats that go with it. There’s things you’ll want to know, some big bullet points if you will. Give us a few of those in the basics of an annuity.

 

John: Yeah. Important again, any contract you go into important to understand what the rules are and these are things you want to consider. So, similar to an IRA where there’s that 10% penalty if you withdraw before 15 and a half, annuity has the same scenario. So actually, this just came up with some advisors I was working with and we were doing some planning and the client needed money in a four-year period and really needed to, they wanted to make sure there was some guarantees to it. So, it was discussed of kind of an annuity to provide some type of principal guarantee. But by the time they would need the money, they would have only been 58. So, it was decided, “Hey, this isn’t a good vehicle for you because you can’t touch it ’til 59 and a half due to do that 10% penalty.”

 

John: So again, important when you’re going into anything, just understand the rules because had they put that money into it and then in four years when they needed it, they wouldn’t be able to access it penalty-free. So, just important to understand that one. Another one that we see a lot of people mistake or not understand how it works is the surrender period. Some of these contracts basically, when you give the money to the insurance company, there’s a period of time where you actually can’t get access to all your money full and clear. And this is separate from the 59 and a half but the surrender periods can be as short as three years. So, let’s say you give your money to XYZ insurance company, they give you these guarantees and they tell you, “Okay, for a three-year period though, you can’t get full access to your money. We’re basically keeping it.”

 

John: So, it can be three years and we’ve seen as high as 16. And that’s one of the things you really want to understand what you’re getting into because unfortunately, we’ve seen some people where they’ve gotten to the 16-year period, is that they had no idea they we’re getting into it and they have limited access to their funds. And we’ll go through … There is a piece of money you can get at but you just want to make sure how long has this contract going to be before you can get out of it. And with that is what we call the surrender charge. So, let’s say your surrender period is seven years and in year five, you want to pull out money. Well, there’s actually a descending surrender charge. So in year five, if you decide, “Hey, I can’t do this anymore. I need to get access to my money,” the insurance company might charge 4% of your principal for you to actually get out of the contract.

 

John: So, an example of that would be seven-year contract. First year surrender charge could be 8%, second year would be 7% and so on. So, that’s where you really want to understand exactly, “What’s my surrender period? And if for whatever reason, I need to pull out of this contract early before the surrender period’s up, how much am I going to get charged to do so?” Again, it’s all about reading the fine details in the contract.

 

Nick: And within that, many contracts have a 10% free withdrawal amount that will avoid you having to pay a penalty even that surrender charged during that surrender period but that can be confusing as well. And sometimes, that’s used to oversell or kind of force people into not necessarily force, but convince people to put more money than they feel comfortable with into something like that. But many of them do allow for a 10% withdrawal each year.

 

John: Yeah. So an example of that, so I’m glad you brought that up, Nick is, let’s say you had $100,000 in an annuity and you’re in year three. And you don’t necessarily need to cancel the whole contract but you do need access to some funds, you could pull out. Typically we see a max, they allow up to 10%. We’ve seen some as low as 5%. But in a 10% scenario, you could pull out 10 grand in that year free and clear of any charges. So, that’s important to understand exactly what’s your free withdrawal amount. And then, one thing to understand is once the surrender period is up, so if you’re in a seven-year contract, once that seven years is over, you can move your money wherever you want or you can keep it in the current contract. So, once a surrender period’s up, it’s 100% liquid at that point in time.

 

Nick: And just one other thing on that surrender period, if somebody out there is evaluating them, a good question to ask is whether or not the surrender period is what’s called rolling or not on rolling. So, what that means is that if it is a non-rolling surrender period and it’s a seven-year contract like John explained or kind of detailed, the seven-year period starts when you first deposit the money and it never extends. So, you can make an additional deposit down the road, say in year five and that new deposit does not have its own seven-year surrender period, it only has two years left just like the rest of the money.

 

Nick: So, that can be a really useful tool for somebody that’s trying to sock away some money, make ongoing contributions to it but still maintain access to their money. Whereas a rolling surrender charge period, each deposit has its own seven-year surrender period which can get really squirly and hard to keep track of. So, that’s an important thing to look out for.

 

Speaker 1: And so, you mentioned some of those bullet points there, John, to think about, you mentioned guarantees and the insurance company and so on and so forth. Are there protections in there? A lot of times people wonder what kind of creditor protections are there?

 

Nick: So, creditor protection tends to vary from state to state, which is actually a good kind of segue. So, one thing that people may notice, especially we’re in Florida and we have a lot of people that live in different states, et cetera, or at least part of the time. Insurance companies are regulated state by state. So, even though XYZ insurance company may have contracts in 50 different states, the rules and benefits that they provide in each state can be different. So in Florida, and this is always something where you want to, before you make any major decisions, you want to check in with an attorney, especially in estate planning or asset protection attorney, somebody that really works in that space.

 

Nick: But in the state of Florida, annuities fall into one of the categories that have a level of asset protection via loss, kind of joke that it’s the OJ Simpson rule, why he became a resident here many years back after he was found liable in court for the murders back in the ’90s were because the State of Florida provides asset protection on annuities for their residents. So, that is an area where we’ll have people that are high income earners, maybe physicians, specialists in medicine, things like that, where they’re very worried about asset protection, they may use annuities as a place to put money for growth but also provide them with a level of protection.

 

Speaker 1: Okay. And does that apply to a probate things of that nature in some protections, wills, so on and so forth? Is that caveat also?

 

Nick: So, probate typically is the process of essentially the court system, implementing the direction of a will or your estate and there’s a fee for probate. So, because an annuity is considered an insurance contract, you can actually list the beneficiary in the insurance contract, which will allow that process after a death of the funds to transfer directly to your beneficiaries and avoid them having to go through probate to get those assets, which can be a savings of somewhere from three to 5% of the assets in there. And not only that, it keeps it private instead of a public process, which probate is, but it just is a much cleaner way to be able to leave assets by listing the beneficiaries in the insurance contract, which is the annuity in this case.

 

Speaker 1: Okay. So, let’s talk about some more basics here. We often hear the term riders, make sure you get something with a rider and this has that so on and so forth, different options. John, what’s a rider?

 

John: So, a rider’s basically an additional piece to the contract that you can add, some type of guarantee or some type of benefit. And let me preface it by saying, most riders will have some type of cost associated to it. So, an example of a rider would be like a death benefit. You could put a death benefit rider on the contract where your initial principal payment, that’s your guaranteed death benefit. So, if you were in a, we’re talking about variable annuities, but if you’re in a variable annuity and the market dropped, you put in 100,000 and the market dropped to 80 due to market fluctuation, your death benefit stays at 100 or there could be a rider where the death benefit could potentially increase each year by a guaranteed rate.

 

John: Some other riders could be like a principal guarantee where you can’t lose any of your initial purchase payment amount. And then, the most popular one that we see is a guaranteed income rider, where it will guarantee income throughout the life of the contract similar to, when Nick was talking about what the pension and we’ll dive into this a little bit deeper on how this works in some of our future sessions, but when people are asking questions like, “Hey, what is this rider?” It’s typically some type of benefit or guarantee within the contract. And there is more often than not some type of fee associated with it and it’s important to understand how that fee works and then how the rider works on your contract if you like that type of benefit.

 

Speaker 1: It kind of goes into the factor of, is it worth it or not for that purchase that you’re making for what it is you’re trying to accomplish, right? What you want that vehicle to do for you.

 

John: Yeah and with the annuities, it really all comes down to the guarantees and if that’s what you’re looking for. Are you going to be guaranteed against some type of loss, guaranteed some type of income and is the cost of that guarantee worth it in the annuity contract? And for some people it’s great, it really gives them peace of mind and for other people, they don’t want to pay that extra fee or any type of cost on their money. Anything I missed there, Nick?

 

Nick: No, I would just say the way that you want to view any sort of, really any sort of investment vehicle itself, but especially annuities are through the realm of yourself, your specific situation, your plan. Because there are so many different variations of annuities and there are lots of bad ones and there are a bunch of good ones. Oftentimes, where we see the biggest mistakes made are when people implement a strategy that was good for their friend, their neighbor, their brother, their sister, but not good for them. And so because of that, and because of that decision it’s like, okay, these are bad,” where instead it should have been, well hey, you used the wrong strategy, you used the wrong type, this wasn’t something that made sense for you because X, Y and Z.

 

Nick: So, when you kind of evaluate these sort of things and as you kind of listen through the upcoming sessions and we talk about the positives, the negatives, some of the features and the benefits, et cetera, you really want to look at it through the realm of yourself and your specific situation because your brother, your sister, your neighbor, your friend, they may have different tolerances for risks, for expenses, their income levels may be different, they may have a pension where you don’t. So, every situation is different and I think that gets amplified by a significant amount when it comes to annuities and it’s part of the reason why they’re so often misunderstood.

 

Speaker 1: Well, and like any financial vehicle you already said that you want to make sure what’s the right fit for you. There’s so many vehicles out there, so many different financial products, there’s pros and cons to everything. And so, it’s finding the right balance, the right fit for you. Well, we’re going to wrap this up here in just a second. So, you mentioned, actually John mentioned variables, there’s basically three types. So, what are the three types we will be covering on the future conversations?

 

John: Yeah. So, we’re going to jump into fixed annuities and breaking down those and the pros and cons of variable annuities and then also fixed index annuities. We’re really going to try to do a good job of giving people details so they have the education and the knowledge to have good conversations, whether with their advisor or for themselves to really figure out if it’s the best decision for them.

 

Speaker 1: Makes sense. And so, we’ll finish it off by saying, make sure you subscribe to the podcast if you haven’t done so yet, they’ll also send this out for those folks if you’re getting that already. You can do a couple of things. You can either just go to the website, pfgprivatewealth.com, that is pfgprivatewealth.com or you can type in retirement planning redefined on whatever app you’re using like Apple or Google or Spotify. You can find it on all the most popular apps as well, just type in retirement planning redefined in the search box and you should have that pop up and you can subscribe to it that way.

 

Speaker 1: If you’ve got questions or before you take action, you should always call a qualified professional like John or Nick at PFG Private Wealth. They are financial advisors here in the Tampa Bay area. So, give them a call at (813) 286-7776, it’s (813) 286-7776. And we’ll also address guys that we’ll find a little bit here, it’s just a bias. You kind of alluded to it. People, they hear things and it’s like, “Oh, I don’t even want to talk about them because I know they’re all bad.” So, we’ll also discuss a bit of the biases for them and against them.

 

John: Yeah. So, with the biases, we find a lot of people based on stuff they read and articles and things they’ve listened to, they really come in with a bias, whether for them or against them. And one of the things that we like to just say is say, “You have an open mind and just learn about it and figure out if it works for your plan because if you’re reading an article and it’s telling you that annuities are bad, all the stuff,” and I’ll say like, “Fisher Investments, they’re really dog annuities,” but when you look at it, what they do is asset management. So, their primary focus is getting money, going into stocks, bonds, mutual funds, things like that. So, they’re not really offering annuity so they’re basically, they’re going to be against them.

 

John: And vice versa, we’ve seen some advisors that aren’t actually licensed but they have an insurance license and all they can offer is an annuity. And guess what’s the greatest thing out there? It’s an annuity for you because they can’t do anything else. So, whatever you’re reading, you got to kind of look at it from a perspective of, “Is this person open-minded to it?” And that’s where Nick said it’s really important to look at the tool, the annuity, the pros and cons to it and does that fit with your plan and what your goals are?

 

Speaker 1: Well, that’s a great way to end the podcast this week. Thanks so much for your time here with John and Nick as we were talking about understanding annuities on the podcast. This has been Retirement Planning Redefined. We appreciate your time. Make sure you hit that subscribe button on whatever app you use or reach out to John and Nick at pfgprivatewealth.com and we’ll see you next time.

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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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: 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.

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 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 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. 

Ep 21 : Roth Conversions

On This Episode

With our tax brackets being at historically low rates, many people are looking at implementing Roth conversions in their plan. John and Nick will explain what exactly this concept is and how this may be able to save you some dollars on taxes in the future.

 

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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:

 

Speaker 1: Hey everybody. Welcome in to this edition of “Retirement Planning – Redefined” with the team from PFG, private wealth serving you in the Tampa Bay area. John and Nick once again with me on the show, as we talk investing, finance, and retirement. Nick, buddy, how’s it going? How you doing, man?

 

Nick: Pretty well. Pretty well. Just still kind of moving through this pretty crazy time, but no complaints. Pretty fortunate overall.

 

Speaker 1: Good. Good, good, good. John, how you doing, my friend?

 

John: Doing good. Doing good. Recently purchased a rower. Nick sold me on it. He got one about a month ago, and he’s been ranting and raving about it. And I joined the club. So, done a couple of sessions and excited to do a little more.

 

Speaker 1: A rower. So it’s like an exercise machine, like one of those rowing, or actually going out and rowing in a boat?

 

John: No, no. Rowing in my garage, an exercise machine.

 

Speaker 1: Gotcha.

 

John: Once I get good, I might link up to Nick and we’ll race down some fake river on a video screen.

 

Speaker 1: There you go. We’ll have to set that up. We’ll have to shoot that on Zoom or something. That’d be good.

 

Nick: Yeah, ranting and raving may be a little bit of an overstatement, but.

 

Speaker 1: Just a little?

 

Nick: As to be expected these days.

 

Speaker 1: Gotcha. Well, there you go. Well, hey, at least you’re exercising, doing things to stay fit. It’s good for stress and all that kind of stuff as well. So, always good.

 

Speaker 1: Well, listen. Today on the topic, basically we’re going to talk about Roth conversions. If you determined a Roth was right for you, are you interested in converting if we’re going from a traditional to a Roth? Things of that nature. So, we’ll just jump in and start talking about it here today on the podcast. John, let’s kick it off with tax liability. If you’ve determined that a Roth is right for you and you are interested, let’s talk about some of the key components to maybe consider in tax liability would certainly be one of those.

 

John: Yeah. Yeah. Just understanding how a Roth conversion works. When you convert a traditional IRA to a Roth IRA, you pay income taxes at your current tax rate, and in return for that, you’re getting tax-free withdrawals during retirement. And we’ll talk about different strategies with that as we go on on this. But just to give an example, let’s say someone’s taxable income is $100,000, and they meet with their advisor and decided it’s a good idea to do some type of conversion. They say, hey, let’s go ahead and convert $50,000 of your traditional IRA to a Roth. Your new taxable income for that given year is $150,000. So that’s how it would work from a tax liability standpoint. Whatever amount you’re converting ends up being added to your taxable income for that given year.

 

Nick: Yeah. And the biggest thing we like to just remind people when they do a conversion is they want to make sure they have the money off on the sidelines to pay that tax. They don’t want to do it with the converted money, especially if they’re under 59 and a half.

 

Speaker 1: Okay. All right. So, with some of the monies and stuff like that, you want to, again, make sure you’re having those conversations, to the guys’s point. So what kind of strategies should we employ to kind of work our way through this? Kind of like the lump sum approach, we do it over time? There’s lots of conversations out there about ways to go about a conversion.

 

John: Yeah. So one of the things that we do, we focus quite a bit on retirement planning. And when we do that, we’re able to actually model out and estimate what someone’s going to pay in taxes throughout their retirement. And we have certain scenarios where someone might go ahead and retire early. And let’s say, they retire at 62, and they don’t really have much income coming in other than maybe lowered social security amount or they have some non-qualified, basically non retirement assets that they don’t have to pay income taxes on. And we would look at that. There could be a period from 62 to 72 where they’re not paying much in taxes.

 

John: So what we’ll do is we’ll develop a strategy over that five to 10-year period where we’re actually converting the traditional IRA in increments throughout that period of time to really take advantage of that period of time where they’re in a lower tax bracket.

 

John: Well, if you look at that through the life of someone’s 20, 30-year time horizon, that can make a big difference in their overall tax liability throughout their plan. So it’s a nice thing to be able to look at and say, hey, what am I going to pay in taxes? And how can I take advantage of paying less ultimately overall? I know I’ve been talking a lot here. I’ll let Nick jump in on kind of the flexibility of having different buckets of money, whether it’s pretax and after tax, going into retirement.

 

Nick: Yeah, really, both fortunately and unfortunately, one of the things that we tell people that they can count on while they’re working and then in retirement is that there will be changes. And usually the area that there’s most often changes are in tax law. And we’ve seen that over the last couple of years. And so, sometimes people get a little bit caught up on the thought process of which is better, pretax or Roth money. And in our minds, and when we say it a lot, but we try to continuously emphasize it, is that it’s important to have options. And so, to have options, you need to adjust how you contribute or take advantage of Roth contributions and that sort of thing, so that not only are you diversifying from an actual investment standpoint, but from an account type standpoint, which means giving yourself flexibility from a tax standpoint as you take out withdrawals. We find that really, really important.

 

John: Yeah. And where that comes into real life is, let’s say someone wants to buy a car in a given year. They don’t want to take out a loan. You don’t want to take out 40 grand out of a taxable account. That’s really going to increase your tax liability, where if you had some Roth money, you might say, hey, I don’t want to pay any more taxes. I’ll just pull it from that. Or it could be some type of health emergency where it’s unexpected and you’re pulling 40 to 50 grand out in one pop for whatever reason. So, it’s nice to have that option to avoid paying unnecessary taxes.

 

Speaker 1: Okay. So, when we’re talking about doing these conversions, obviously clearly taxes right now are lower. And so, that’s something that is appealing to people, but we also have been dealing with this down market. Is that another component that should be obviously considered? And what’s your thoughts from a conversion standpoint with that in play?

 

John: Yeah. And everyone’s situation is different, and this is something that, this recent downmarket, some people took advantage of, where basically, the market dropped almost 30%, 40% from the high. And they went ahead and said, let me go ahead and convert my IRA and this lower balance, pay tax on the lower amount, so when it recovers, basically everything’s tax-free moving forward. So, just a quick example of that is, say you had an account that was a $100,000 before the market dropped. Assuming 15% tax liability on that money, and it’s a $15,000 tax hit if you were to pull it out. After a 40% drop, the account balance is 60 grand, and a 50% tax on that is $9,000. So you’re looking at about a $6,000 tax difference at that point in time. But the reason you would do it is obviously after market downturns, just typically recoveries and all that growth that you get is now tax-free moving forward. So, that’s a nice little benefit.

 

Speaker 1: Well, and again, any time you’re thinking about that conversion, always check with your advisor, always talk with an advisor. If you’re not working with one, reach out to John and Nick and have a conversation with them about it. But it’s certainly, even before the whole COVID thing in 2020, it’s just been a very popular conversation point, due to the fact that the tax rates that we’re in have been so low. So again, if you do have questions around, is it a good time to convert, should I convert, things of that nature, make sure you’re running your specific scenario past a qualified professional financial advisor like John and Nick. And of course, you can always reach out to them at (813) 286-7776. That’s (813) 286-7776. Or go to pfgprivatewealth.com.

 

Speaker 1: Okay, guys, another place to consider would be the legacy portion. Is that something we should throw into that mix for converting?

 

John: Yeah. So a Roth IRA is actually a great vehicle to pass on to beneficiaries because they receive it tax-free. So, some strategies that Nick and I have implemented with clients in the past is basically converting it so their heirs can get it tax-free, and kind of this scenario where someone doesn’t necessarily need the IRA money for income today. It’s more of a kind of a cushion for them. And the goal is to pass it on to kids, grandkids, whatever it might be. So, to just kind of give a situation here, client’s 68. Don’t need the money for current income. Tax bracket’s 12%, one of the lower ones. And kid’s, daughter’s, in a 35% tax bracket. So, the strategy that this person is doing is, over a 10 to 15-year period, again, going back to estimating the taxes, they’re converting pieces of the IRA to a Roth. Okay?

 

John: Now you’ve got to remember that retirement really is a 20 to 30 -ear period. So you could do this over 10, 15, 20 years. Okay? So during that 10 to 15 years, they’re basically just making all that IRA money. They’re paying taxes in a lower bracket. It’s becoming tax free. So when they do pass away, their daughter in this situation inherits it tax-free. In this current situation, the daughter is actually in a 35% tax bracket. So you could see it as a big tax savings there, because once the daughter inherits it, it’s all tax-free, versus her paying it at 35%. So, kind of just summary, the client pays the taxes at a 12% tax bracket, daughter inherits it in a 35% tax bracket, but it’s tax-free because of the conversions happening.

 

Speaker 1: Okay. And with the stretch going away, does that make that strategy more appealing at this point? Nick, what do you think?

 

Nick: Yeah, I would say, so previously what would happen if we had these kinds of conversations, in a good scenario, or I would say maybe a pretty typical scenario with what John just outlined is, maybe it’s a widow. And between Social Security and pension houses paid off, etc., so they have good income. They don’t really need to take much from their retirement account. They have a daughter that’s a physician, making a really good income. And the strategy is to pass the money down. Well, previously, they might have said, hey, if we pass traditional IRA money to the daughter, it’s not as big of a deal. Ideally, a Roth would be better, but with the way that stretch IRAs work, she would only have to typically take a small amount each year out, but do it over her lifetime. Now that that money needs to be taken out in a 10-year period versus over the daughter’s lifetime, the tax impact is much more pronounced and harder to navigate.

 

Nick: And so, we’re pretty confident that these sorts of conversations with those changes are going to happen much more consistently over the next couple of years. So, that’s just kind of a good example of why and how some of the recent changes make it important to be able to adapt and be flexible.

 

Speaker 1: No, I definitely agree with you. And obviously, there has been a lot of changes. There were changes to start the year. And then, of course, the COVID changes also altered some things. So, if you’re thinking about or have questions about, again, going over a Roth conversion, if it’s right for you, how you want to implement that into your overall plan, or maybe you don’t have a plan and you need to do all of those kind of pieces, well, reach out to John and Nick at PFG Private Wealth and let them know you want to talk about it. It’s certainly a huge topic point, and it can be a very beneficial component or tool to your retirement planning tool belt, if you will. So, definitely have that chat with them. (813) 286-7776. That’s (813) 286-7776. And don’t forget to subscribe to the show, “Retirement Planning – Redefined” on Apple, Google, Spotify, or whatever platform you like to use for your podcasts.

 

Speaker 1: We’ve made it available for you to find at the website pfgprivatewealth.com. That is pfgprivatewealth.com. A lot of good tools, tips, and resources to be found there as well. And of course, you can always just search it out by typing “retirement planning redefined” on whatever platforming app you choose.

 

Speaker 1: All right, guys, is there anything else we need to address with the Roth conversions this week before we go?

 

John: No, I think we’re good. Appreciate your time.

 

Speaker 1: Yeah. As always, we appreciate you guys stopping in, chatting with us for a few minutes. If you’ve got questions about those Roth conversions, again, reach out to them, folks, here on “Retirement Planning – Redefined.” John, Nick, you guys enjoy the rowing machines, and I’ll be looking forward to that competition coming up soon. And we’ll catch you next time here on “Retirement Planning -Redefined” with John and Nick, financial advisors at PFG Private Wealth.