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June, 2009:

The Granddaddy of ‘em All: Keogh Plans

Jun 29th, 2009
by jblankenship.
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Ah, poor, misunderstood and neglected Keogh (KEE-og) Plan.  You don’t get the press that your fancy relatives 401(k), IRA and Roth, or even SIMPLE achieve… it seems as if the investment discussion world is completely abandoning you.

keogh-plan-1First brought into existence in 1962 (yes, it’s a post-boomer like me!) the Keogh or HR10 plan is essentially a vehicle for the self-employed to establish pension plans just like the big companies.  A Keogh plan can be either a defined benefit (traditional pension) or a defined contribution (such as a 401(k)) plan.

The Keogh plan has the same attributes as most other qualified plans, including the age 59½ limit for qualified withdrawals, as well as the age 70½ required minimum distribution rules.  Depending upon the type of plan established, most common investments can be made in a Keogh plan.

The real benefit of a Keogh plan over a SIMPLE or other types of plans is in the higher limit for contributions.  In the Keogh plan, up to $49,000 (for 2009) can be contributed and deducted, limited to 25% of the compensation of the employee.

Recent implementation of the so-called “solo 401(k)” has lessened the need for the Keogh plans in the defined contribution arena, but for establishment of a defined benefit pension plan or a money purchase pension plan, the Keogh remains a very important piece of the puzzle for sole proprietorships and other unincorporated businesses.

One particular downside to the Keogh plan:  If you have no employees, your Keogh plan is not necessarily protected from creditors.  If there are employees in the plan (other than owner/partners) then ERISA law protects the accounts from creditors, but without employees, ERISA has no jurisdiction over these accounts, and your assets may be subject to creditor claims, depending upon applicable state laws.  Just something to keep in mind with the Keogh.

You’re eligible to participate in a Keogh retirement plan if you are:

  • self-employed, a small business owner, or an active partner in an unincorporated business who performs personal services for the company
  • a sole proprietor who files Schedule C
  • in a partnership whose members file Schedule E (in this case, the partnership, not you, must establish the Keogh plan)
  • working for another company, but working for your own business as well (for example, if you’re a writer with a day job and you’re earning royalties on your first book, the royalties count as self-employment income)

You are not eligible to participate if you are:

  • a salaried worker for an incorporated business, with no other source of income
  • retired and not receiving compensation from a business
  • a volunteer at the business that offers the plan

For more information, see IRS Publication 560.

Photo by Tony Linck/Time Life Pictures/Getty Images

Random Thoughts and Links

Jun 26th, 2009
by jblankenship.
2 comments

royal links by danperryHere’s an excellent blog post over on the Keener Financial blog from a colleague, Jean Keener, who is a fellow Garrett Planning Network member.  This post is about 10 Tools to Build an Emergency Fund – and contains some very good tips on this important subject.

Also, my friend Helen Maynard over at Affine Financial Services just wrote about a unique way that Bostonians can utilize a grass roots effort to stimulate local business as well as to benefit along in the process.  Her post can be found here.

Along those lines, I recently became aware of a project going on here in Central Illinois, called the Capital Area Independent Business Alliance.  This group is promoting a “Buy Local” initiative, and challenges us during the week of July 1 to 7, to spend at least 50¢ from every dollar at local (truly local, not franchises or chains) businesses.  Interesting campaign, sounds like a good idea!

Reading through some articles recently, this one from Kiplinger caught my eye – Why I Would Avoid Index Funds – by Steven Goldberg, who quite often seems downright sane in his writing, but misses the mark on this one, at least with his first point.  It seems that Mr. Goldberg’s logic is that these funds he’s pushing have already experienced losses over the past year, so from a tax standpoint they should be very good investments.  So far, so good – he’s right, that particular issue would be helpful to a new investor.

However (and there’s always a however in life, right?) apparently if you follow Mr. Goldberg’s advice you’d have already been invested in these same funds (he says so in the very last paragraph) and as such you’d have been paying the extra costs for the dismal return and the tax break would look more like a consolation prize at this point.  Seems like the point would have been taken a little more seriously had that last paragraph been excluded.

Okay, that’s all for now – let me know if you have interesting links to share!

Designated Roth Account (Roth 401(k)) Distributions

Jun 25th, 2009
by jblankenship.
2 comments

Sen._William_V._Roth_(R-DE)In a previous post we discussed the general information surrounding Designated Roth Accounts – eligibility, tax treatment, and contributions.  In this post we’ll go over the nuances involved in distributions from a Designated Roth Account under a 401(k).  Distributions are a little different from most other retirement plans, as you might guess…

Required Minimum Distributions

One of the first things that is different about a Roth 401(k)’s distributions is that the Required Minimum Distribution (RMD) rules apply to these accounts.  This is different from the Roth IRA, as RMD is not required under present law.  RMD for a Designated Roth Account is the same as the RMD rules for all other accounts to which the RMD rules apply.

The way to get around the RMD rule is to roll over your Designated Roth 401(k) account balance to a Roth IRA.  Obviously this is a tax-free event, since both accounts are non-taxable in both contributions and earnings.  As long as this is done before the first year of RMD, these rolled over funds will never (under current law) be subject to RMD rules.

Qualified Distributions

Another difference for the Designated Roth 401(k) account is in the definition of qualified distributions.  As with other retirement accounts, qualified distributions can occur when one of the following events occurs:

  • account owner reaches age 59½; or
  • account owner dies; or
  • account owner becomes disabled (per IRS definition).

In addition to one of those events, in order for the distribution to be qualified (and therefore tax-free), the account must have been in existence for at least 5 years.

Non-Qualified Distributions

A non-qualified distribution is, as you might guess, when the rules for a qualified distribution (above) have not been met.  Of course, there are complicated rules associated with any non-qualified distribution from a Designated Roth account.

Pro Rata Rule for Non-Qualified Distributions

A pro rata rule applies (instead of the ordering rules that apply to Roth IRA accounts) for non-qualified distributions.  For example, if the account had received contributions of $5,000 and had grown to $10,000, when a distribution occurs before the account has been in existence for 5 or more years, 50¢ of every dollar will be taxable.  This is different from the rule associated with a rollover, as you’ll see.

Ordering Rule

Just to confuse matters, when rolling over a portion of a Designated Roth 401(k) account to a Roth IRA in a non-qualified distribution, ordering rules apply, so that the first portion rolled over is the taxable amount (the earnings).  If the rollover was a qualified distribution, all amounts are considered basis in the new account.

Rollovers

Now, let’s see how the IRS has really muddied the waters:  when rolling funds over from an existing employer to another employer’s Roth 401(k) – it’s a straightforward activity if you do a trustee-to-trustee transfer – same as for a transfer to a Roth IRA.  However (and there’s always a however in life, right?) if you do a non-qualified 60-day rollover things really get complicated.

Complications With a 60-Day Rollover

Here’s what happens with the 60-day rollover to a new employer’s Roth 401(k) plan:  first of all, only the growth (or earnings) from your old employer’s plan can be rolled over to your new employer’s Roth 401(k) plan.  In addition, the earnings portion of the account will be subject to mandatory 20% withholding, even if you roll the entire amount into the new employer’s plan, which would be a tax-free event.

Here’s an example:  your Roth 401(k) account has $20,000 in it, of which $5,000 is earnings.  You decide to roll over this account to your new employer’s Roth 401(k) plan.  If you don’t do a trustee-to-trustee transfer, you will only be allowed to put $5,000 (the earnings) into the new account.  When you take the distribution, you’d receive a check for $19,000, which is your $15,000 basis plus the $5,000 earnings minus 20% ($1,000) mandatory withholding tax.  You are allowed to put up to $5,000 into the new plan, and up to $15,000 into your Roth IRA, all tax free, even though you were forced to have $1,000 withheld.

Of course, that amount that was withheld will be available to you as a credit against your tax obligation at the end of the year, or as a refund if it caused an overpayment.

If you did a trustee-to-trustee transfer, none of this withholding or pre-tax limitation would have applied, so it makes good sense to do the trustee-to-trustee transfer whenever possible, to avoid such a situation.

5-Year Rule

Rollover To Another Roth 401(k) or Roth 403(b)

The last nuance about Designated Roth 401(k) accounts that we’ll talk about is the 5-year provision and how rollovers affect it.  If you do a trustee-to-trustee (either qualified or non-qualified) rollover of funds to a new employer’s Roth 401(k) account, the “5-year” starting date will follow your account – or rather, whichever account was established earlier will apply to those funds going forward.

If you do a 60-day (again, either qualified or non-qualified) rollover to a new Roth 401(k), the age of the new account will apply, even if the funds had been in the old Roth 401(k) for a significant period of time.  Only the taxable or earnings component will be allowed to rollover in a 60-day rollover, so the age of the account is a moot point.

Rollover to a Roth IRA

For the same situations as in the paragraphs above, but the transfers are to a Roth IRA, no matter what kind of rollover is done, direct (trustee-to-trustee) or 60-day, qualified or non-qualified, the results are the same – the 5-year holding period will be that of the receiving Roth IRA account, no matter how long the funds were held in the Roth 401(k) account.  However, each individual conversion or rollover to a Roth IRA has its own 5-year period.  This is a good reason to establish a Roth IRA immediately, to have a vehicle to receive such transfers if the situation arises.

The one wrinkle with rollovers into Roth IRA accounts has to do with taxability of the rolled over funds:  If the distribution is qualified, then all of the funds rolled over are considered basis, and when distributed for any reason the basis is tax-free (no matter the holding period).  If the distribution is non-qualified, the funds retain their original characterization from before the rollover – part is contributions (basis) and part is earnings (taxable until qualified).

So you can see some of the great benefits of doing a trustee-to-trustee transfer over the 60-day transfer – especially if the rollover is to be non-qualified.  As always, consult your financial advisor before doing any of these, just to make sure you don’t make a mistake!

* 1000 extra points to the first person who can correctly name the 3 Rothsketeers famous Roths that I’ve depicted as “hosts” for my Roth IRA articles.

What Your Employer Has in Store For Your Retirement Plan

Jun 24th, 2009
by jblankenship.
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bovine in store by bluerasberryYesterday, I read this article in the US News & World Report on changing trends that are anticipated with employer-sponsored retirement plans. There are some good things in store, as well as some things that don’t make a lot of sense.  Keep in mind this was in response to a survey from Schwab, so the results may require a dash of salt.  I’ll summarize it here:

  • Reducing Automatic Enrollment. The argument here is that, the more people that are participating in the plan, the more it will cost the employer, in terms of administrative fees and matching dollars.  I think this is pretty short-sighted, personally, since the employer is impacted by lower participation as well.  When lower-paid employees are not participating at a high enough rate, the highest paid employees (the owners, in most cases) are limited in rate of participation in the plan.  I think that the costs could be reduced across the board by looking to lower fees and inherent expense ratios in the plan, among other efficiencies (some of which are listed later).
  • More Hand Holding. I think this is a very good idea, as many (most!) folks have little to any clue about what should be driving their decisions with regard to investment choices.  Additional help provided by the employer is a good idea – and if the coming legislation requiring this assistance to be fiduciaries is enacted, employees will be assured of receiving advice that is in their own best interests.
  • Reducing or Eliminating Employer Match. While this is a big benefit, if it doesn’t make sense to the bottom line, then the employer has to make tough decisions like this.  I wouldn’t expect to see this happen on a long-term basis – it’s a strategic benefit that most employees expect.
  • More Online Services. In today’s world, the efficiency and cost/benefit of this is a no-brainer.  If it irritates you to get an electronic statement instead of a paper statement, you need to join the 21st century.  If you simply have no means of receiving an electronic statement, you get a pass on this one, although this should be a small percentage of folks I’d think.
  • Lower Fees. I think this one makes a lot of sense in the long run.  Fees and expense ratios are the biggest drag on investment returns that most 401(k) investors face, so for the employer to concentrate on providing low-cost alternatives is a wonderful move.  Seeking out the lowest fee custodians only makes sense as well – and could likely make up the difference in expenses noted in the first bullet point. Increasing participation should drive down costs in the long run.

So that’s my take on the story, what do you think?

Photo by bluerasberry

Designated Roth Accounts (Roth 401(k) or Roth 403(b))

Jun 23rd, 2009
by jblankenship.
2 comments

Designated Roth Account

hymen rothA Designated Roth Account or Roth 401(k) is simply a 401(k) plan that allows employees to designate all or part of their elective deferrals as qualified Roth 401(k) contributions. Qualified Roth 401(k) contributions are made on an after-tax basis, just like Roth IRA contributions. This means that employees’ contributions and earnings are entirely free from federal income tax when distributed from the plan, subject to qualifications. Contributions are not deducted from income (as regular 401(k) or IRA contributions are). This article discusses qualified Roth 401(k) contributions.

Caution: 401(k) sponsors don’t have to allow Roth contributions to their plans. But if they do, the 401(k) plan can’t be a “Roth only” plan. That is, if the 401(k) plan allows Roth contributions then employees must be allowed to make both Roth contributions and pre-tax contributions.  SIMPLE 401(k) and safe-harbor 401(k) plans can also allow Roth contributions, as can 403(b) Plans.  The rules discussed in here generally apply to Roth 403(b) accounts as well.

Roth 401(k) contributions

In general

Technically, an employee makes a Roth 401(k) contribution by making an elective deferral under the 401(k) plan, and then irrevocably designating all or part of that deferral as a Roth 401(k) contribution.  Roth 401(k) contributions are treated the same as pre-tax 401(k) elective deferrals for all plan purposes, except that they’re included in an employee’s wages for tax purposes at the time of contribution (i.e., Roth 401(k) contributions are after-tax contributions).

A 401(k) plan must establish a separate Roth 401(k) account to track each employee’s Roth 401(k) contributions. The Roth 401(k) account is treated as a “separate contract” under the 401(k) plan, requiring separate accounting for the Roth contributions and any gains or losses on those contributions. The taxation of distributions from the Roth account is also determined separately from any other plan dollars.

Even though a Roth 401(k) account is treated as a “separate contract,” the amount a participant can borrow, or withdraw on account of hardship, is determined based on the participant’s combined Roth and non-Roth plan account balances.  In addition, Roth and non-Roth account balances are combined to determine whether a participant’s vested accrued benefit is $5,000 or less, allowing it to be involuntarily cashed-out upon termination of employment. However, the Roth and non-Roth account balances are treated separately when determining whether a cashed-out participant’s vested accrued benefit exceeds $1,000, requiring an automatic rollover to an IRA in some cases.

Eligibility

Any employee who’s eligible to participate in a 401(k) plan can make Roth contributions (assuming the plan allows Roth contributions). Unlike Roth IRAs, no income restrictions apply to a Roth 401(k) program. Even highly paid employees who aren’t eligible to contribute to a Roth IRA can make Roth 401(k) contributions.

Contribution Limits

Because Roth contributions to a 401(k) plan are treated as elective deferrals, careful attention must be paid to the elective deferral limits. In 2009, an employee can’t contribute more than $16,500 of his or her compensation to a 401(k) plan. Participants who are age 50 or older may also make additional “catch-up” contributions of up to $5,500 in 2009.

These limits apply to the aggregate elective deferrals (including both pre-tax contributions and after-tax Roth contributions) that an employee makes during a year to any 401(k) plan, 403(b) plan, SAR-SEP, or SIMPLE plan, whether or not sponsored by the same employer. The employee is responsible for making sure the overall limit isn’t exceeded if he or she participates in plans of more than one employer during a calendar year.

Example(s): Joe begins working for a new employer on July 1, 2009. Joe has already made $10,000 of elective contributions ($5,000 Roth and $5,000 pre-tax) to his former employer’s 403(b) plan in 2009. Joe can only contribute an additional $6,500 to his new employer’s Roth 401(k) plan in 2009 ($12,000 if Joe is age 50 or older).

If an employee contributes too much in any particular year, the employee must withdraw the excess (and applicable earnings) by April 15 of the following year to avoid adverse tax consequences. If an employee fails to do so, the excess Roth 401(k) contributions, which normally would be tax-free, and applicable earnings, will be subject to income tax (and a potential early distribution penalty) when distributed from the plan, and will not be eligible for rollover to another employer plan or IRA. A distribution of excess Roth deferrals and applicable earnings can not be a tax-free qualified distribution.

Total annual additions to an employee’s 401(k) plan account in 2009 – including employer contributions, forfeitures, and employee pretax, Roth, and non-Roth after-tax contributions – can’t exceed $49,000 (plus any allowable catch-up contributions). You must treat all defined contribution plans you maintain (including qualified plans, 403(a) annuity plans, 403(b) plans, and SEPs) as a single plan for purposes of calculating the annual additions limit.

Treatment of Roth 401(k) contributions as elective contributions

Roth 401(k) contributions are treated as elective deferrals for all 401(k) plan purposes. That is, except for the tax treatment, they are treated the same as pre-tax 401(k) contributions.

For example, Roth 401(k) contributions:

  • Can be distributed only for one of the following reasons: severance from employment, age 59 ½, disability, hardship, or death (and a hardship distribution will generally trigger a minimum six-month suspension penalty)
  • Must be included with pre-tax contributions when performing 401(k) nondiscrimination testing
  • Must be distributed starting at age 70 ½ (or, in some cases, after retirement)
  • Can be borrowed (if the plan allows)
  • Qualify for the retirement plan “Saver’s Credit”

Employer contributions

An employer can match employees’ Roth 401(k) contributions, pre-tax contributions, or both, but employer contributions are always made on a pre-tax basis, even if they match employees’ Roth 401(k) contributions. That is, employer matching contributions, and earnings on those contributions, aren’t added to an employee’s Roth 401(k) account. They will be subject to federal (and most state) income taxes when distributed from the 401(k) plan regardless of whether they match an employee’s pre-tax or Roth 401(k) contributions.

A 401(k) plan can require that an employee have up to 6 years of credited service before the employee is fully vested in employer matching contributions.

While employers aren’t required to contribute to traditional 401(k) plans many employers match all or part of their employees’ contributions. Employer’s can also make discretionary profit-sharing contributions to a 401(k) plan. (Special rules apply to SIMPLE 401(k) plans, safe-harbor 401(k) plans), and 401(k) plans that contain a safe-harbor qualified automatic contribution arrangement (QACA).)

In another post we’ll cover the specifics of distributions from a Designated Roth Account.

Why We Include Real Estate in Investment Portfolios

Jun 15th, 2009
by jblankenship.
3 comments

We construct portfolios out of various asset types in order to diversify, or spread out our risk associated with any one asset type.  Most often these asset types include equities (stocks) and fixed income (bonds), which provide for basic diversification.  Quite often we include additional asset types in order to achieve further diversification. Examples of additional asset types include commodities, foreign equities, foreign-denominated bonds, timber, and real estate.

It is important to keep in mind as we review various asset classes for inclusion in our portfolio, that we must achieve appropriate return for the inherent risk associated with the specific asset class in question.

Why Include Real Estate?

prime-real-estate-by-thelizardqueenIt is for that very reason that we choose to include real estate as a component of the well-rounded portfolio – due to real estate’s ability as an asset class to deliver a greater reward-to-risk ratio than most any other asset class.  This goes, in general, for both personally-owned real estate and real estate owned via Real Estate Investment Trusts (REITs), which are a sort of mutual fund of real estate holdings, primarily commercial real estate holdings.

During periods of high inflation (as many folks expect that we may experience again soon), residential real estate has always provided a good hedge against rising inflation – even in these times when some residential real estate has lost value.  The fact remains that, although many folks have been hit and hit hard by having purchased real estate at grossly-overvalued prices, present value is generally expected to appreciate at a greater pace than inflation in the long run.  On the downside, commercial real estate doesn’t necessarily share residential real estate’s inflation-hedge benefits.

However, global commercial real estate will provide the opportunity to benefit from currency gains where domestic inflation is higher than that of the countries that you hold property in.  This is a similar benefit to owning foreign-currency bonds.

In a period of deflation, another similar benefit is found, although it is more related to the appreciation of foreign currencies due to appreciating yields.  But the greater benefit during deflationary periods is found because commercial property rental rates tend to lag the market, which in turn produces real gains to the owner of commercial property.

As we know, during a normal (not inflationary or deflationary) economic period, residential property (directly owned, as in “your own home”) provides both an economic benefit and many emotional ones.  Commercial property on the other hand, provides not only a generally more stable return with less risk than equities, but a higher return than can be found with bonds.  In other words, the reward-to-risk ratio that you achieve with real estate is greater than with bonds or real estate, although the risk is different.

Correlation

We use a term – correlation – when describing how various asset types are affected by similar circumstances.  If, for example, when one asset increased in value by 10% and a second asset class always increased by the same amount, 10%, then we would indicate that the two asset classes are perfectly correlated.  If another asset class only followed the first asset class about half the time, sometimes increasing more, sometimes less, or even decreasing when the first increases (or vice versa), then we might indicate that this third asset class is 50% correlated to the first asset class.  (The math is much more complex than this, but I wanted to give you an easy-to-follow example.)

By investing in the first and third asset classes in equal amounts, it stands to reason that we’d benefit by having different sorts and degrees of risks that affect our investments, and not all of our funds would be negatively impacted at any one time.  Real estate is just such an asset class, when related to equity or stock investments.  Historically speaking, real estate in general is only about 40% correlated with equities, making it a very good diversifier.

Bottom Line

I realize that you may not necessarily agree with all of this in light of what we’ve seen happen lately in the real estate world, but there is reason to believe that the same sorts of returns will continue in the future for commercial real estate.  Plus, it is very important to keep in mind that real estate is only a small part of your overall allocation – in no case have I recommended more than a 5% allocation to this investment class, and many times we’ve avoided it altogether (eg., last couple of years).  But now, valuations should be in a good position to bring this asset class back into your portfolio – to do the job of diversification that we expect.

Photo by TheLizardQueen

Converting Directly From a 401(k) to a Roth IRA

Jun 14th, 2009
by jblankenship.
3 comments

conversion by OnTaskBack in the olden days prior to 2008, it was against the rules to convert funds directly from a 401(k) plan (or other CODA plan, like a 403(b)) to a Roth IRA.  At that time, you were required to do the “conversion two-step” wherein you would first rollover or direct-transfer your funds from the 401(k) plan to a traditional IRA, then do a conversion from the trad IRA into your Roth IRA.  This was an unnecessarily complicated process, and the IRS logically waited until it got ridiculous and then relented listened to taxpayers, allowing a direct conversion from these qualified retirement accounts into a Roth IRA.

The process is identical to the process for converting from a traditional IRA to a Roth IRA.  You can make this conversion from your or your spouse’s:

  • Employer’s qualified pension, profit-sharing or stock bonus plan (including a 401(k) plan),
  • Annuity plan,
  • Tax-sheltered annuity plan (section 403(b) plan), or
  • Governmental deferred compensation plan (section 457 plan).

You are allowed to convert all or part of the account, subject to the MAGI limitation of $100,000 that we’ve covered before, which is eliminated for 2010.  Any pre-tax amount converted must be reported as income in the year of the conversion.

The conversion can be done either via a direct trustee-to-trustee transfer or a rollover.  In general, the trustee-to-trustee transfer is the preferred method since a rollover involves making a check payable to you, which requires the payor to withhold 20% of the rollover.  Any amount that is not successfully converted within 60 days would be taxable AND subject to the 10% penalty unless other conditions applied.

So in other words, when you convert these funds over to your Roth account, in order to pay the tax on the withdrawal you’ll need to either hold out a portion and pay the 10% penalty on those funds, or pay the tax from another source.

Independent Advice for Your 401(k)? Coming Soon. Maybe.

Jun 12th, 2009
by jblankenship.
1 comment

There is a bill coming up for vote in committee (House Education and Labor Committee) soon that proposes to address the issue of independent advice for your investing activities in your 401(k) plan.  I wrote about this problem a while ago: in this post here and a little bit here.

409-conflict-by-ape-ladThe wonderfully-named Conflicted Investment Advice Prohibition Act of 2009 reckons to disallow conflicted advisors (those who are beset with conflicts of interest in providing advice) from providing employer-sponsored advice to 401(k) plan participants.  Namely, those advisors who stand to benefit personally in terms of compensation from the counsel that they might provide to 401(k) plan participants.

This is very important legislation because earlier this year, the Department of Labor completed a ruling that gives permission to the brokerages and investment houses to provide advice to 401(k) plan participants (this was a clarification of a law set forth in the Pension Protection Act of 2006).  The advice that they provide represents major conflicts of interest for the participant, since the advisor stands to benefit from various choices made with the plans.

While I believe it would be beneficial to the 401(k) plan participant to have investment advice available to them as they make decisions about their investments, I believe that conflicted advice doesn’t fit the bill.  The appropriate advice would be independent of compensation-oriented conflicts of interest – meaning the advisor is not related to the custodian and receives all compensation from the participant or the participant’s employer. Period. Oh yes, and the advisor should act as a fiduciary on the participant’s behalf.  Not too much to ask, don’t you think?

Look for more updates as this legislation moves its way through.

The Importance of IRA Custodial Documents

Jun 11th, 2009
by jblankenship.
No comments yet

taxes-by-x_jamesmorrisRemember when you opened your IRA account? And the broker or advisor handed you that 37-page document with the custodial agreement in it? Read that cover-to-cover, dintcha?

Unfortunately, too many of us don’t read these documents closely, and end up getting a big surprise later on.  What sorts of surprises, you might ask…? Well, here are two major surprises that could await you:

Per Capita or Per Stirpes? If you have multiple beneficiaries of your IRA, this will be important to know – because it’s up to the custodial document to determine how your account will be distributed.  Here’s why – Per Capita means that, for example, if you have three equal beneficiaries designated on your account and one of the beneficiaries pre-deceases you, the account will then be split in two, between the two remaining beneficiaries.  If the account were to be split Per Stirpes, the two remaining beneficiaries would each receive a 1/3 share, and the beneficiaries of the deceased beneficiaries would receive the remaining 1/3 share.  Typically there is a check-box on the beneficiary form to help you designate your beneficiaries as you wish, but ultimately the control comes down to the custodial doc.  This becomes even more important with the second consideration…

Divorced, but forgot to change beneficiary form? Depending upon the custodial agreement, the custodian could follow the court’s ruling, wherein the divorce decree declares that all property is split as indicated and named in the document, with no other splitting to be done; or, the custodian could go strictly “by the book”, where the beneficiary form indicates a specific individual as the primary beneficiary, regardless of any other outside document.  And here is how the Per Stirpes/Per Capita issue becomes important in this case:  what happens if the former spouse is the only named beneficiary on the account (no secondary beneficiary(s)), and the former spouse pre-deceases the account owner?  If the custodian holds to the Per Stirpes definition, the former spouse’s heirs could reap the benefits of the account… scary huh?

So, in the end, it pays to know a little about the custodial documents on your IRA account, just so you don’t have any surprises.  If you don’t understand it or can’t follow what the document is telling you, make your advisor explain it to you – especially these two factors mentioned above.  That’s part of an advisor’s job – to advise you – and you’re paying them to do that sort of thing.

BrightStart / Oppenheimer Update

Jun 10th, 2009
by jblankenship.
2 comments

my-birthday-by-hamed-saberAs we previously discussed in this post, the Illinois State Treasurer, Alexi Giannoulias is taking Oppenheimer to task for it’s sins with regard to the BrightStart 529 plan, an Illinois-based college savings plan.  This is in regard to Oppenheimer’s use of inappropriately risky investments in a supposedly safe, bond-oriented, allocation for the plan.

Just recently, on June 8, reports from Giannoulias’ office indicate that families who lost portions of the estimated $85 million in these funds are likely to recover up to $77 million of the losses.  This is due to an agreement under way between Oppenheimer and Illinois.  Specific details are unknown at this point, but I thought it was important to keep you all updated.

Photo by Hamed Saber
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