Wealth Management Blog

Should You Consolidate Your IRAs?

By JJ Burns

July 9, 2012

Everyone’s financial situation is different, but people at various stages of life often share similar concerns. Here’s a question from a client we encountered under such circumstances:

“I am in my 60s and recently retired from my full-time job. Over the years, I’ve opened several traditional IRAs and a Roth IRA. Also, I have a ‘rollover IRA’ with funds from a 401(k) at a previous job. Should I consolidate all of these IRAs into one for tax purposes, or should I just leave things the way they are?”

While there is no real tax benefit one way or the other, there is a trap to watch out for if you do consolidate. Combining the assets of your traditional IRAs into a single IRA could provide a few advantages, however.

For starters, it may be more flexible and cost-efficient to have just one IRA, as well as relieving you of considerable clutter if you’re still receiving paper statements from all of your IRA custodians. Also, if one IRA has provided better investment returns than the other or offers other advantages, it might make sense to shift more funds to the IRA with those advantages. (Of course, past performance is no guarantee of future results.) And you may find it easier to coordinate your plans for retirement, and focus on your main objectives, with a consolidated IRA.

Moreover, consolidating accounts might help you avoid a complication that can arise when you start taking “required minimum distributions” (RMDs) from your traditional IRAs. The law mandates that you begin taking RMDs no later than Apri1 1 of the year following the year in which you turn age 70½. These withdrawals from your account, the amount of which is based on life expectancy tables, must continue annually for the rest of your life. If you have several IRAs, you’ll have to choose the source of your annual RMD. It can come from one or multiple IRAs. But no matter how you arrange the distribution, the IRS treats it for tax purposes as coming from all of your IRAs on a “pro-rata” basis.

Let’s say you have four IRAs with a combined value of $500,000, and this year you withdraw $20,000 from one of them. The applicable percentage is 4% ($20,000 divided by $500,000), so it’s calculated as if you had withdrawn 4% of the balance in each IRA. Consolidating your IRAs would eliminate any confusion.

Finally, be aware that you can’t commingle the funds in traditional and Roth IRAs. This is the trap we alluded to earlier. Because Roths have an edge over traditional IRAs—qualified Roth distributions are tax-free and you don’t have to take lifetime mandatory distributions—you wouldn’t want to put them together anyway. Should you consolidate all of your Roth IRAs? Many of the same considerations that apply to combining traditional IRAs also are applicable to Roths.

Where There’s a Living Will, There’s a Way

By JJ Burns

July 9, 2012

Will your family members know how to handle a life-threatening illness or injury involving a loved one? A “living will” can point them in the right direction.

Simply put, a living will is a legal document that establishes guidelines for prolonging or ending medical treatment. It’s important to have a living will created for yourself, and for relatives such as your spouse and parents, to inform health-care providers in case of a medical emergency or terminal illness.

A living will indicates the types of medical treatments you want or do not want applied in the event you suffer a terminal illness or fall into a permanent vegetative state. The living will doesn’t become effective unless you’re incapacitated. Typically, a physician must certify that you have a terminal illness or that you’re permanently unconscious.

To cover situations in which someone is incapacitated and can’t speak, yet the condition isn’t so dire that the living will becomes effective, you can execute a health-care power of attorney or health care proxy.

The requirements for living wills vary from state to state. Have an attorney who is experienced in these matters prepare the living will based on applicable laws. The best approach is to coordinate your living will with your regular will, any trusts or powers of attorney you may have, and other estate-planning documents.

Do You Understand Investments?

By JJ Burns

July 2, 2012

People who find themselves owning complex investment vehicles often leave the driving to the professionals. And that’s perfectly acceptable, but even “passengers” should have a basic understanding of how a particular investment works—especially when it’s your hard-earned money on the line.

Consider a retiree who’s looking into purchasing an annuity. Is it an investment product, an insurance product, or both? Will the annuity continue to pay income to heirs if the owner dies? Is the principal protected in case of a severe economic downturn? Surprisingly, many investors—including owners of annuities—are stumped by these basic questions.

Other commonly used terms often befuddle investors. Do you know the difference between an “annual effective yield” and an “average annual yield”? How about an “annual percentage yield”? It’s important to distinguish among different types of yield so you can make valid comparisons of investments.

Do you consider yourself an investment expert? Here are a few simple questions—with the answers below—to see how you measure up.

1. An insurance company generally begins payments under an annuity when:

  1. The accumulation phase begins.
  2. The accumulation phase ends.
  3. The annuity owner dies.
  4. The annuity owner retires.

2. Payments under a variable annuity are based on:

  1. Fluctuations in the current interest rate.
  2. Fluctuations in the current inflation rate.
  3. Performance of underlying stocks. 
  4. Performance of the Standard & Poor’s (S&P) 500 index.

3. An annual effective yield is described best as:

  1. The annual return before interest is compounded.
  2. The annual return after interest is compounded.
  3. The annual return before inflation.
  4. The annual return after inflation.

4. The average annual yield often is used to:

  1. Compare the past performance of mutual funds.
  2. Distinguish Treasury bills from Treasury notes.
  3. Factor in the tax-free element of municipal bonds.
  4. Account for a guaranteed minimum-income benefit.

5. When you buy Treasury bills at auction, the rate is:

  1. Based on the current interest rate for loans. 
  2. Based on the S&P 500. 
  3. Equal to par.
  4. Discounted from face value.

6. A “private activity bond” is best described as:

  1. A corporate bond eligible for capital-gain treatment.
  2. A corporate bond exempt from income tax. 
  3. A municipal bond that is completely taxable. 
  4. A municipal bond that can trigger alternative minimum tax (AMT) problems.      

7. An exchange-traded fund (ETF):

  1. Trades like stocks.
  2. Trades like mutual funds.
  3. Involves trades between major stock exchanges.
  4. Involves trades between different currencies. 

Answers: 1-b; 2-c; 3-b; 4-a; 5-d; 6-d; 7-a

What Will Europe’s Debt Crisis Mean for America?

By JJ Burns

April 17, 2012

The European continent is an ocean away from the United States, but Europe’s debt crisis may hit close to home for U.S. investors.

Your investment portfolio almost certainly contains some exposure to Europe. You could own European companies through investments in international funds, or you may be invested indirectly through multinational corporations that do business in Europe. Moreover, if the European debt crisis worsens, that could lead to increased volatility in U.S. and global investment markets.

You’re also affected because Europe’s economy directly affects the U.S. economy through bank lending, trade, and other economic connections. Europe is the largest U.S. trading partner, accounting for 20% of U.S. exports. At the same time, U.S. banks hold a lot of European debt, and worries about Europe’s economic health have already dampened business investment and hiring in America.

Some analysts believe the credit crisis in Europe has been contained and that further impact on world markets should be minimal. Others continue to warn that Europe’s problems are likely to send the global economy into another recession this year.

Either way, it’s vital for investors to take into account events in Europe and position their portfolios accordingly. We are watching the debt crisis very closely and we can help you take a proactive stance.

What Are the 401(k) Limits in 2012?

By JJ Burns

April 17, 2012

The 401(k) plan continues to be, by far, the most popular company-sponsored retirement plan in the land. And it’s no wonder. This unique retirement-saving vehicle offers tax advantages to employees and can also be a valuable tool for employers looking to recruit and retain top talent.

The basic premise is simple: You arrange to have a portion of your pre-tax salary deposited in a separate account. Frequently, an employer will agree to match each dollar that plan participants contribute, up to a specified percentage of compensation. For example, if you earn $100,000 and put $10,000 a year into your 401(k), your company, providing a 3% match, would kick in another $3,000 annually.

There’s no current tax on investment earnings within the account, though you also don’t get to claim a deduction for losses. Distributions from the account, usually during retirement, are taxed at ordinary income rates. If you change jobs or retire, you normally can choose among keeping the money in your old company’s plan, shifting it to a new 401(k), or rolling over some or all of the account to an IRA.

That’s the short story. But there are numerous other legal limits and restrictions to contend with. One of the biggest is the annual limit on how much salary you can defer, a number that rises based on an inflation index. Furthermore, the plan must satisfy strict, complex nondiscrimination requirements.

How well do you know the current rules? See how you fare on this brief quiz.

1) The maximum amount an employed 45-year-old can contribute to a 401(k) in 2012 is:

  1. Zero.
  2. $17,000.
  3. $21,500.
  4. $22,500.

2) The maximum amount an employed 55-year-old can contribute to a 401(k) in 2012 is:

  1. Zero.
  2. $17,000.
  3. $21,500.
  4. $22,500.

3) The maximum amount a retired 65-year-old can contribute to a 401(k) in 2012 is:

  1. Zero.
  2. $17,000.
  3. $21,500.
  4. $22,500.

4) The minimum number of employees required to establish a 401(k) plan is:

  1. 1.
  2. 10.
  3. 25.
  4. 100.

5) If you aren’t a company’s owner, you must begin taking distributions from its 401(k) plan:

  1. At age 59½.
  2. At age 70½.
  3. When you retire.
  4. At age 70½ or your retirement date, whichever comes later.

6) A rollover from a 401(k) plan to an IRA is subject to a 20% withholding tax unless:

  1. You complete the rollover within 60 days.
  2. You arrange a trustee-to-trustee transfer.
  3. You retire before the end of the tax year.
  4. You are under age 59½.

7) If you receive a $10,000 “hardship distribution” from a 401(k) in 2012 and you’re in the 25% tax bracket, your income tax liability is:

  1. Zero.
  2. $1,000.
  3. $2,500.
  4. $3,500.

Answers: 1-b; 2-d; 3-a; 4-a; 5-d; 6-b; 7-c