Getting Your Financial Ducks In A Row Rotating Header Image

16 Ways to Withdraw Money From Your 401k Without Penalty

Photo courtesy of Lucas Theis on unsplash.com

Photo courtesy of Lucas Theis on unsplash.com

When you have a 401k plan and hard times befall you, you may wonder if there is a way to get your hands on the money. In some cases you can get to the funds for a hardship withdrawal, but if you’re under age 59½ you will likely owe the 10% early withdrawal penalty. (The term 401k is used throughout this article, but these options apply to all qualified plans, including 403b, 457, etc.)

Generally it’s difficult to withdraw money from your 401k, that’s part of the value of a 401k plan – a sort of forced discipline that requires you to leave your savings alone until retirement or face some significant penalties. Many 401k plans have options available to get your hands on the money, but most have substantial qualifications that are tough to meet.

The list below is not all-inclusive, and each 401k plan administrator may have different restrictions or may not allow the option at all.

Keep reading…

Not All Index Funds are Created Equal

bite-out-of-money1As readers of this blog know we believe that markets are generally efficient and any time they’re not we accept that we won’t be the ones to exploit such inefficiencies. Readers further know that our choice of investment vehicles for both our clients’ and our money is index funds.

But that doesn’t mean that just any old fund will do. Even index funds can be different and by that we mean the expenses they charge.

Generally, an index fund at least in theory should charge significantly less than its active fund counterpart. The reason being is that index fund manager really isn’t actively managing anything. They’re simply replicating whatever index they are supposed to be replicating according to the fund’s parameters.

So a person may logically think that all index funds should charge roughly the same expenses. But that isn’t the case. Take for example the well-known Vanguard S&P 500 Index Fund charging just .05% for expenses. A similar fund by State Farm charges .75% in expenses in addition to a 5% load (commission). The Rydex S&P 500 Fund charges 1.57% in expenses with an additional 4.75% load (commission).

Generally an index fund’s objective will be to mirror the returns of the index before fees and expenses. The paragraph above explains what happens to investors’ return after fees and expenses are paid. The result is a return far different than what the index did Disclosure: this also includes any fees deducted by fee-only advisors – such as our firm. But the same adage is true: generally the lower the fees and expenses, the better for your returns.

Even Morningstar says that fees and expenses are important considerations in looking at return. Finally, Morningstar has an excellent glossary of terms to help investors understand what many of the terms tied to fees and expenses mean.

If you’re a proponent of index funds that’s good; now, be a proponent of cheap index funds.

8 Questions: Social Security Survivor Benefits

Photo courtesy of Patrik Goethe on unsplash.com

Photo courtesy of Patrik Goethe on unsplash.com

In this previous article we addressed some of the most common questions about Social Security Spousal Benefits. Keeping with the theme of developing FAQ sheets, today I’ll go through some of the most common questions about Social Security Survivor Benefits.

Survivor Benefits are available when a Social Security recipient passes away and leaves surviving dependents – spouse, children, and other dependent family members.

Keep reading…

Should You Have Gold in Your Portfolio?

American Gold Eagle

American Gold Eagle (Photo credit: Wikipedia)

We had a great question come in by request this week that we address the question of whether folks should have gold in their portfolios.

Gold can be included under the umbrella of a larger asset class known as commodities. Think of commodities as items used to make or produce other items – such as gold is used to produce jewelry, circuitry and coinage, while timber is used to make lumber and paper, while coal is used to make electricity and disappoint not-so-good kids on Christmas morning (sorry, couldn’t resist).

Getting back to gold, the reason an investor may want to consider it as part of their portfolio is because gold is correlated differently from the stock market. Simply put; its pricing moves differently relative to the stock market. This does not mean I’m recommending investors buy gold. Here’s why.

Imagine a lump of gold sitting on your kitchen table. What does it do? Nothing. It simply sits there. It produces no income, and according to a 2013 article in the Financial Analysts Journal, there was little evidence that gold was a hedge against inflation.

Even the great Oracle of Omaha, Warren Buffett has this to say about gold:

“What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.” http://www.berkshirehathaway.com/letters/2011ltr.pdf

My personal and professional opinion is that if an investor is bitten by the “gold bug”, consider putting your emotions aside and ask yourself why you want to invest in gold. Is it because everyone else is doing it, or is it because you know something the market doesn’t (likely rare)? I have joked with clients and students saying that if there’s an absolute “black swan” and the entire US and World economies collapse, what good is gold going to do us? We can’t eat it, can’t drink it, and it produces nothing in and of itself. Time to grow a vegetable garden as food will be a more valuable commodity at that point.

One area where gold may be a good investment is for numismatic purposes. Collecting various gold coins in various conditions and ages can be fun, rewarding and make an excellent hobby that can be passed on to heirs. Additionally, gold coins such as American Gold Eagles, South African Krugerrands, Canadian Maple Leafs and Chinese Pandas tend to hold their value more than the bullion will – simply because it has the numismatic value of collection, scarcity, and condition.

Finally, you may already “own” gold in your portfolio if you hold a broad based index such as a total stock market index fund or ETF (which our investment clients do). The reason I say you already “own” the gold is by owning broad index funds you’re already investing in companies that mine for and produce the precious metal. While you don’t technically own the asset; generally when the price of gold increases so does the stock of the companies that mine it.

There are even ETFs and index funds that hold commodities in general. While not specific to gold they hold gold, silver, timber and other commodities for additional asset allocation correlated differently to the market.

Other than starting a hobby or becoming a serious numismatist, there generally isn’t a need to own gold in order to achieve adequate diversification for potential long term portfolio success.

10 questions: Social Security Spousal Benefits

Photo courtesy of Dan Ruswick on unsplash.com

Photo courtesy of Dan Ruswick on unsplash.com

I recently had the pleasure of taking part in a live interactive event with Yahoo! Finance, where folks were able to ask virtually any question they wished. We received and responded to over 200 questions – they’re all on Facebook on the Yahoo! Finance page (click the link to go to the page). One recurring theme played out over and over: Social Security Spousal Benefits are not understood by a vast number of folks.

Naturally I find this to be disturbing.  Social Security Spousal Benefits often represent a large part of the total benefits available to a couple.  This benefit is even more important for many divorced spouses, as it might represent the only benefits available to many divorcees. Understanding this benefit is very important, as SSA staff often isn’t fully-conversant in the options that you have available.

Keep reading…

Social Security Wage Base Projected for 2015

Update 10/22/2014: The wage base has been set for 2015. See the article Social Security Wage Base Set for 2015.

According to the Social Security Administration trustees, the Social Security wage base for 2015 is projected to be $119,100.  This represents an increase of $2,100 from the 2014 wage base of $117,000.

This is an increase of 1.79% – and won’t be finalized until October when the other increases for Social Security amounts are announced. This is a relatively small increase when compared to recent annual increases we’ve seen.  The previous 3 years’ increases have averaged 3.09%.

This is different from the COLA (Cost of Living Adjustment), which has increased an average of 2.27% in the past three years. The 2014 COLA (applicable to 2015 benefits and other figures) will be released later in the year, typically in October.

What Keeps Your Planner Up at Night?

stressed and worried

stressed and worried (Photo credit: Wikipedia)

I thought I’d share some of the things that go through my mind, financially, even though I’m “in the business” of being a financial planner and teach classes on finance and investments. The goal is to help readers understand that although we give an objective point of view when working with you there are times with our own financial well-being that we too have worries and concerns. We’re certainly not immune.

Keep reading…

RMD Avoidance Scheme: Birthdate Makes All The Difference

Photo courtesy of Lizzy Gadd on unsplash.com

Photo courtesy of Lizzy Gadd on unsplash.com

As you may recall from this previous article, it is possible to use a rollover into an active 401(k) plan as an RMD avoidance scheme. Of course, this will only work as long as you’re employed by the employer sponsoring the 401(k) plan and you’re not a 5% or greater owner of the company. In addition, the rollover must be done in a timely fashion, prior to the year that you will reach age 70 1/2 in order to avoid RMD.

An example of where timing worked against a taxpayer (at least temporarily) recently came to me via the ol’ mailbag: Keep reading…

File For Part B Medicare – COBRA Isn’t Enough

Photo courtesy of Lukasz Szmigiel on unsplash.com

Photo courtesy of Lukasz Szmigiel on unsplash.com

For most folks, when you reach age 65 and have ceased regular work, filing for Medicare Parts A & B is an automatic thing. If you don’t file during the 3 months before or after your 65th birthday, you may have penalties to pay. This applies even if you have recently been laid off of work and are covered for health insurance under a COBRA plan. Part A carries no cost if you’re fully covered (40 quarters of coverage), but Part B requires a monthly premium.

When laid off from an employer who has provided health insurance coverage to you while employed, you have the option of continuing the health coverage for a period of time, up to two years. This continuation of coverage is called COBRA, named for the law that put it into place (Consolidated Omnibus Budget Reconciliation Act). You have to file in a timely manner for Medicare – COBRA coverage doesn’t remove that requirement.Keep reading…

Should a CFP® Be Required to Always Act as a Fiduciary?

English: Halo

English: Halo (Photo credit: Wikipedia)

Folks interested in engaging a professional for financial planning help and advice should generally seek out the advice of a CFP®. A CFP® has had the education, experience, ethics and exam (the Board’s 4 E’s) that qualifies he or she to hold the mark. We often encourage clients that they should look for this designation at a minimum before engaging with a financial planner and then meet with the planner to decide if the client and planner are a good fit.

Due to an excellent marketing campaign by the CFP® Board many clients understand what a CFP® is, what they do, and how they may be able to help. Many folks choose to work with a CFP® because they know that the CFP® is held to a higher standard. Some may believe that the CFP® is always a fiduciary – meaning the CFP® must always put the best interests of the client first. What a potential client may not know is that isn’t the case.

Keep reading…

Windfall Elimination Provision May Impact Spousal Benefits but not Survivor Benefits

danny and sandyWhen your Social Security retirement benefit is subject to the Windfall Elimination Provision (WEP), you’re likely painfully aware of the reduction to your own benefit by this provision. What you may not be aware of is that the effect goes beyond your own benefit – your spouse’s and other dependents’ benefits are also impacted by this provision. However, the impact of WEP does not continue after your death. Keep reading…

Don’t Let the Premium Tax Credit Hang You Out to Dry

Photo courtesy of Charles L. on unsplash.com

Photo courtesy of Charles L. on unsplash.com

When you are using the Health Insurance Marketplace for your family’s health insurance, you may be receiving assistance with the premiums in the form of a premium tax credit.  This credit is paid to the health insurance provider, allowing your monthly premium to be lower.

These premium credits are based upon your residence, income, family size, and eligibility for health insurance via other avenues, such as through a new employer.  If something has changed in your life, you may be receiving too much or too little in premium tax credits.  The IRS recently issued a Health Care Tax Tip designed to help you understand if you need to make a change to the premium credit you’re receiving to avoid unpleasant surprises at tax time. Keep reading…

Book Review – All In Startup

Pocket Aces

Pocket Aces (Photo credit: John-Morgan)

If you’ve ever had a million dollar idea and perhaps even pondered taking that idea to the next level and turning it into a business, then reading this book will help you correctly identify the right direction you need to take.

Set in the bright lights and big city of Las Vegas the book takes us into the life of a struggling entrepreneur contemplating whether to remove his business from life support while finding himself moving closer and closer to the final table at the World Series of Poker.

Author Diana Kander does a remarkable job of tying together the similarities to a successful poker strategy and a budding entrepreneurial startup.

What I really enjoyed about the book was not only its quick to-the-point chapters, but Mrs. Kander’s amazing ability to tell the risks and pitfalls of starting a business though story – a story that follows the whirlwind plight of a man struggling to make sense of the downfall of what he thought was a sure thing.

Mrs. Kander’s background makes her more than qualified to write such a book (just read the book jacket or do a Google search). As for me, a business professor (among other hats I wear), this book will be required reading for my students. Hopefully my students won’t feel it’s required once they immerse themselves in the logic and wisdom the book offers. I’m hoping they go all in.

3 Do Over Options For Social Security Benefits

do overs as easy as jumping in the lake

Photo courtesy of Brooklyn Morgan on unsplash.com

You’re allowed to file for your Social Security retirement benefits when you reach age 62 (in general). Most advisors recommend that you delay filing until some later date to better maximize your lifetime benefits. But what do those advisors know anyhow?

At least that is what you were thinking when you first filed. After all, you’ve paid into the system for your entire working life, you deserve to get the money back out, right? Plus, who knows when Social Security will go bankrupt, right? Gotta get the money while you can!

Then a couple of years pass and you realize that you short-changed yourself (and your spouse) by taking early benefits. Turns out that you didn’t need that money at 62 – you could have delayed. And you’ve come to realize that Social Security is not likely to go away, at least not in your lifetime. (Maybe those advisors were right after all?) Keep reading…

Retrieving a Prior-Year Tax Return Copy

my tax return copy is lost somewhere in this city

Photo courtesy of Philipp Henzler on unsplash.com.

Sometimes you need access to a previous year tax return copy, and dadgummit you just pitched the box of tax copies from 2011, thinking you couldn’t possibly need it again!  There are ways to get this information – some easier than others.

First of all, if you prepared and filed your own return using one of the commercial programs, and you’ve maintained your access to the program over the years, you should be able to go back and re-print a copy of the return from that year.  This is the quick and simple method.

If you had a tax professional prepare and file the return for you, she should have a copy of your return – if not the fileable copy, then at least a client’s or preparer’s copy, which should be adequate for fulfilling most requirements.  Many preparers retain these copies, with supporting documentation, for many years for just this sort of purpose.  Our office maintains copies of all returns we’ve filed, for example.  Keep reading…

Should Insurance Agents Provide Financial Advice and Services?

see no evil

(Photo credit: McBeths Photography)

Over the last few weeks I’ve had the opportunity and fortune to work with graduate students on a number of financial and ethical issues presented to them in their classes. Of the many issues presented there was one issue that we discussed (argued) over more than any other topic; it was the suitability versus fiduciary standard.

Most of our readers know that our firm not only follows but embraces the fiduciary standard where we are legally bound to act in the best interests of our clients.

This brings me to the title question of this piece – should insurance agents provide financial, advice and or financial services?

Keep reading…

Using First Year RMD Delay to Your Advantage

Photo courtesy of Alicja Colon on unsplash.com.

Photo courtesy of Alicja Colon on unsplash.com.

When you are first subject to RMD (Required Minimum Distributions), which for most folks* is the year that you reach age 70½, you are allowed until April 1 of the following year to receive that first minimum distribution.  For all other years you must take your RMD by December 31 of that year.  For many folks, it makes the most sense to take that first year RMD during the first tax year (by December 31 of the year that you’re age 70½), because otherwise you’ll have two RMDs hitting your tax return in that year.  However, in some cases, it might work to your advantage to delay that first distribution until at least the beginning of the following year – as long as you make it by April 1, you’re golden.

There may be many circumstances that could make this delay work to your advantage – maybe you’re still working in the year you reach age 70½ and your income is much higher than it will be the following year, for example. Keep reading…

How to Deal With Missed Required Minimum Distributions

fixing missed required minimum distributions can be like staring into the sun

Photo courtesy of Sunset Girl on unsplash.com.

What happens when a beneficiary doesn’t act in a timely fashion with regard to taking Required Minimum Distributions from the inherited IRA?  In other words, what are your options if you’ve missed Required Minimum Distributions (RMDs) in prior years?

The Inheritance

So, let’s say you inherited an IRA from your mother – this was her own IRA that she had contributed to or rolled over funds from a qualified plan at some point, and had designated you as the sole primary beneficiary.  Things get really hectic and confusing after the death of a parent, and sometimes we don’t cover all of the bases properly… and in this example, you didn’t realize that you needed to begin taking Required Minimum Distributions (RMD) from your inherited IRA as of December 31 of the year following the year of your mother’s death.  As of now, for example’s sake, let’s say we’re in the fourth year after your mother’s passing. (see Notes below) Keep reading…

Apple Pie and Ice Cream…Vanilla Ice Cream

Apple pie

Apple pie (Photo credit: Wikipedia)

From time to time we get asked by our clients and prospective clients why we manage our clients’ money the way that we do. Some even gravitate to our firm because of the way that we invest and our philosophy. Others shy away because they are looking for management that will beat the market and always make money and never lose money. Note: This is impossible. But hey, some folks still chase that illusion.

As many of our readers know our investment philosophy is pretty plain – like apple pie and ice cream. To make this summer analogy more apropos, when you go to the store to buy ice cream vanilla is generally cheaper and in more supply. As you peruse further into the freezer you start to come across more exotic flavors, combinations and brand names that not only look (and may taste) more appealing, but are also more expensive and you get less (.75 quarts instead of 1.75).

Granted these flavors look good initially, but eventually over time you’ve paid more for less.

Keep reading…

Annuity in an IRA? Maybe, now

Annuities can produce mountains of fees

Photo courtesy of Martin Staněk on unsplash.com.

Forever and a day, the rule of thumb has been that you should not use IRA funds to purchase an annuity – primarily because traditional annuities had the primary feature of tax deferral. Since an IRA is already tax-deferred, it’s duplication of effort plus a not insignificant additional cost to include an annuity in an IRA.  This hasn’t stopped enthusiastic sales approaches by annuity companies – plus new features may make it a more realistic approach.

Changes in the annuity landscape have made some inroads against this rule of thumb – including guaranteed living benefit riders, death benefits, and other options.  Recently the IRS made a change to its rules regarding IRAs and annuities that will likely make the use of annuities even more popular in IRAs: The use of the lesser of 25% or $125,000 of the IRA balance (also applies to 401(k) and other qualified retirement plans) for the purchase of “longevity insurance”, which is another term for a deferred annuity. Keep reading…