The Diversified Blog

A wealth management blog dedicated to creating a long lasting sustainable retirement.

Starting Out: Begin Funding for Your Financial Security

Congratulations! You’ve graduated from school and landed a job. Your salary, however, is limited, and you don't have much money (if any) left at the end of the month. So where can you find money to save? And, once you find it, where should this cash go?

Here are some ways to help free up the money you need for current expenses, financial protection, and future investments -- all without pushing the panic button.

Get Out From Under

For most young adults, paying down debt is the first step toward freeing up cash for the financial protection they need. If you’re spending more than you make, think about areas where you can cut back. Don't rule out getting a less expensive apartment, roommates, or trading in a more expensive car for a secondhand model. Other expenses that could be trimmed include dining out, entertainment, and vacations.

If you owe balances on high-rate credit cards, look into obtaining a low-interest credit card or bank loan and transferring your existing balances. Then plan to pay as much as you can each month to reduce the total balance, and try to avoid adding new charges.

If you have student loans, there's also help to make paying them back easier. You may be eligible to reduce these payments if you qualify for the Federal Direct Consolidation Loan program. Though the program would lengthen the payment time somewhat, it could also free up extra cash each month to apply to your higher-interest consumer debt. The program can be reached at 800-557-7392.

What You Really Should Buy

How would you pay the bills if your paychecks suddenly stopped? That's when you turn to insurance and personal savings -- two items you should “buy” before considering future big-ticket purchases.

Health insurance is your first priority. Health care insurance is now also mandatory under the Affordable Care Act. If you're not covered under an employer plan, look into the new state or national health insurance exchanges, which offer a variety of coverage options and providers to choose from. You may also qualify for a subsidy if your taxable income is under 400% of the federal poverty level.

Life insurance is the next logical step, but may only be a concern if you have dependents.

Disability insurance should be another consideration. In fact, government statistics estimate that just over 25% of today's 20-year-olds will become disabled before they retire. 1  Disability insurance will replace a portion of your income if you can't work for an extended period due to illness or injury. If you can't get this through your employer, call individual insurance companies to compare rates.

Build a Cash Reserve

If you should ever become disabled or lose your job, you'll also need savings to fall back on until paychecks start up again. Try to save at least three months' worth of living expenses in an easy-to- access "liquid" account, which includes a checking or savings account. Saving up emergency cash is easier if your financial institution has an automatic payroll savings plan. These plans automatically transfer a designated amount of your salary each pay period -- before you see your paycheck -- directly into your account.

To get the best rate on your liquid savings, look into putting part of this nest egg into money market funds. Money market funds invest in Treasury bills, short-term corporate loans, and other low-risk instruments that typically pay higher returns than savings accounts. These funds strive to maintain a stable $1 per share value, but unlike FDIC-insured bank accounts, can't guarantee they won't lose money. 2

Some money market funds may require a minimum initial investment of $1,000 or more. If so, you'll need to build some savings first. Once you do, you can get an idea of what the top-earning money market funds are paying by referring to iMoneyNet, which publishes current yields. Many newspapers also publish yields on a regular basis.


Build Your Financial Future

Some long-term financial opportunities are too good to put off, even if you are still building a cache for current living expenses.

One of the best deals is an employer-sponsored retirement plan such as a 401(k) plan, if available. These tax-advantaged plans allow you to make pretax contributions, and taxes aren't owed on any earnings until they're withdrawn. What's more, new Roth-style plans allow for after-tax contributions and tax-free withdrawals in retirement, provided certain eligibility requirements are met. Another big plus is direct contributions from each paycheck so you won't miss the money as well as possible employer matches on a portion of your contributions.

Don't underestimate the potential power of tax savings. If you invested $100 per month into one of these accounts and it earned an 8% return compounded annually, you would have $146,815 in 30 years -- nearly $50,000 more than if the money were taxed annually at 25%. 3 Bear in mind, however, that you will have to pay taxes on the retirement plan savings when you take withdrawals. If you took a lump-sum withdrawal and paid a 25% tax rate, you'd have $110,111, which is still more than the balance you'd have in a taxable account.

If you're already participating, think about either increasing contributions now or with each raise and promotion.

If a 401(k) isn't available to you, shop around for individual retirement accounts (IRAs), both traditional and Roth, at banks or mutual fund firms. In 2016, you can contribute up to $5,500 to traditional IRAs or Roth IRAs. Generally, contributions to and income earned on traditional IRAs are tax deferred until retirement; Roth IRA contributions are made after taxes, but earnings thereon can be withdrawn tax free upon retirement. Note that certain eligibility requirements apply and nonqualified taxable withdrawals made before age 59½ are subject to a 10% additional federal tax.

Stop Waiting for the Next Paycheck

Beginning your working life with good financial decisions doesn't call for complex moves. It does require discipline and a long-term outlook. This commitment can help get you out of debt and keep you from a paycheck-to- paycheck lifestyle.


Source(s):

1.  Social Security Administration, Fact Sheet, March 2014.

2.  An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

3.  This hypothetical example is for illustrative purposes only. It does not represent the performance of any actual investment.


Required Attribution

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2017 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. .

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

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Defined Benefit Plans

The defined benefit plan is a powerful tax strategy for high income individuals with self-employment income. It's great for small business owners who want to catch-up on their retirement saving and save a tremendous amount on taxes.

Click here, or in the image below, to view our latest webinar on Defined Benefit Plans.




Click here to read a case study.
 
Why is a defined benefit plan a powerful tax strategy for high income individuals with self-employment income and small business owners?

The small business defined benefit (DB) plan is an IRS-approved qualified retirement plan that allows independent professionals and consultants, individuals with self-employment income and small business owners to make large contributions and accumulate as much as $1-2 Million in just 5-10 years. The contributions are deductible and can potentially reduce income tax liability by $40,000 or more annually. To read more about examples where a defined benefit plan would be beneficial click here The Defined Benefit Plan.pdf
 
New Flexibility in Defined Benefit Plans
 
Independent professionals and consultants, small business owners, and individuals with self-employment income often are so busy with their day-to-day responsibilities that they don't take the time to think about preparing for the day they finally retire. Since they aren't thinking about the future - at least not one that includes life beyond their daily work - they may not accumulate retirement savings sufficient to maintain their pre-retirement lifestyle. Business owners are also more likely to put the needs of their business ahead of their well-being... to read more click here New Flexibility in Defined Benefit Plans.pdf


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail i This email address is being protected from spambots. You need JavaScript enabled to view it. .

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.
 
 

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Own a Retirement Account? Keep Your Beneficiary Designations Up to Date

Many investors have taken advantage of pretax contributions to their company's employer-sponsored retirement plan and/or make annual contributions to an IRA. If you participate in a qualified plan program you may be overlooking an important housekeeping issue: beneficiary designations.

An improper designation could make life difficult for your family in the event of your untimely death by putting assets out of reach of those you had hoped to provide for and possibly increasing their tax burdens. Further, if you have switched jobs, become a new parent, been divorced, or survived a spouse or even a child, your current beneficiary designations may need to be updated.

Consider the "What Ifs"

In the heat of divorce proceedings, for example, the task of revising one's beneficiary designations has been known to fall through the cracks. While (depending on the state of residence and other factors) a court decree that ends a marriage may potentially terminate the provisions of a will that would otherwise leave estate proceeds to a now-former spouse, it may not automatically revise that former spouse's beneficiary status on separate documents such as employer-sponsored retirement accounts and IRAs.

Many qualified retirement plan owners may not be aware that after their death, the primary beneficiary -- usually the surviving spouse -- may have the right to transfer part or all of the account assets into another tax-deferred account. Take the case of the retirement plan owner who has children from a previous marriage. If, after the owner's death, the surviving spouse moved those assets into his or her own IRA and named his or her biological children as beneficiaries, the original IRA owner's children could legally be shut out of any benefits.

Also keep in mind that the law requires that a spouse be the primary beneficiary of a 401(k) or a profit-sharing account unless he/she waives that right in writing. A waiver may make sense in a second marriage -- if a new spouse is already financially set or if children from a first marriage are more likely to need the money. Single people can name whomever they choose. And nonspouse beneficiaries are now eligible for a tax-free transfer to an IRA.

The IRS has also issued regulations that dramatically simplify the way certain distributions affect IRA owners and their beneficiaries. Consult your tax advisor on how these rule changes may affect your situation.

To Simplify, Consolidate

Elsewhere, in today's workplace, it is not uncommon to switch employers every few years. If you have changed jobs and left your assets in your former employers' plans, you may want to consider moving these assets into a rollover IRA or your current employer's plan, if allowed. Consolidating multiple retirement plans into a single tax-advantaged account can make it easier to track your investment performance and streamline your records, including beneficiary designations.

Review Your Current Situation

If you are currently contributing to an employer-sponsored retirement plan and/or an IRA contact your benefits administrator -- or, in the case of the IRA, the financial institution -- and request to review your current beneficiary designations. You may want to do this with the help of your tax advisor or estate planning professional to ensure that these documents are in synch with other aspects of your estate plan. Ask your estate planner/attorney about the proper use of such terms as "per stirpes" and "per capita" as well as about the proper use of trusts to achieve certain estate planning goals. Your planning professional can help you focus on many important issues, including percentage breakdowns, especially when minor children and those with special needs are involved.

Finally, be sure to keep copies of all your designation forms in a safe place and let family members know where they can be found.

This communication is not intended to be tax or legal advice and should not be treated as such. Each individual's situation is different. You should contact your tax or legal professional to discuss your personal situation.


Required Attribution


Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. .

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

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Consider the "Autopilot" Option for Your Plan

These days, it is vitally important for individuals to set money aside for retirement during their working years. Unfortunately, not every employee thinks so. Which explains why some employer-sponsored retirement plans have low participation rates. If your company's retirement plan participation rate disappoints you, there may be an easy fix. Why not put your plan on autopilot?

The Nuts and Bolts

Putting a retirement plan on autopilot simply means introducing an automatic enrollment feature. In other words, employees are automatically enrolled in the retirement plan unless they elect otherwise. A specific percentage of the employee's wages will be automatically deducted from each paycheck for contribution to the plan unless the employee opts out.

Once enrolled in the plan, employees can change their contribution rate and choose how to invest their contributions from the plan's investment menu. If they don't make their own investment selections, their contributions are automatically directed to a qualified default investment alternative (QDIA), which is typically a target date fund, a balanced fund, or an account managed by an ERISA-qualified investment manager. Employees whose contributions are invested in the default option can later switch into another plan investment, if desired.

Does It Work?

According to recent research, approximately 75% of employees participate in their employer's retirement plan.1 The same study found that 62% of plan sponsors offer an auto-enrollment feature, 97% of those offering auto enrollment are satisfied with their program, and that 88% of sponsors believe auto enrollment has had a positive impact on their plan participation rates.2

A Win-Win

Many employees are confused about retirement planning. Many want guidance. Automatic enrollment makes the tough decisions for them and starts them on the path to a more secure financial future. Having a robust retirement plan usually helps businesses attract and keep talented employees. Automatic enrollment may be just the enhancement you need to get more employees to participate in -- and appreciate -- the benefits of working for you.
 

Source:

1. & 2.  Deloitte Consulting, LLP, the International Foundation of Employee Benefit Plans, the International Society of Certified Employee Benefit Specialists, "Annual Defined Contribution Benchmarking Survey, 2015 Edition."


Required Attribution


Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. .

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

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Cash Balance Plans: Offering a Break to Successful Small Business Owners

For successful small business owners, cash balance plans can offer larger contributions than 401(k) limits allow.

Are you a small, highly profitable business owner looking for ways to (a) reduce your current taxes and/or (b) dramatically step up your tax-sheltered retirement savings?  If so, a cash balance plan may be worth looking into for your company.

What Is a Cash Balance Plan?
A cash balance plan is a retirement savings vehicle, crafted with the small business owner in mind. When combined with a safe harbor 401(k) or profit sharing plan, it can allow you to make significant, tax-deductible contributions to your own and select partners’ retirement savings, while controlling the costs of your contributions to employee retirement accounts.

What Are the Potential Benefits?
Here are a few of the possibilities a cash balance plan can offer:
•  It can position you to contribute considerably more toward your tax-sheltered retirement savings than 401(k) limits allow – up to $200,000 or more annually (depending on your age, income, years in business and other IRS limits).
•  Your annual contributions are tax-deductible.
•  You can make varying levels of contributions for you and partners in your firm.
•  You must contribute to your employees’ 401(k) accounts, but the contributions can be modest, typically in the range of 5.0–7.5% employee’s salary.

What Does It Take to Set Up a Cash Balance Plan?
In addition to accompanying it with a 401(k) or profit-sharing plan as required, your cash balance plan usually works best when all of these conditions are met:
•  You are a small business owner, age 40 or older, with 1–10 employees.
•  Your expected income is relatively predictable for at least the next five years.
•  You can contribute up to $200,000 or more annually for the next five years.

How Does It Work?
To establish your cash balance plan, you open one trust investment account for the plan, where investments are pooled for participants. Participants typically include you, and any partners or key employees. As the business owner and plan sponsor, you are the plan’s fiduciary trustee, charged with prudently managing its investments (or selecting and monitoring an investment manager to do so for you).

Each cash balance plan participant has a hypothetical “account” that earns a set interest credit annually, regardless of the plan’s actual investment performance. Contributions are then adjusted annually as needed, to fill any under-performance gap that may occur.

Investment Strategy Counts
If you’re reading between the lines, the structure of your plan means that it is both your fiduciary duty as well as in your best financial interests to be careful about how you invest your cash balance plan’s pooled assets.

You probably have taken or are continuing to take plenty of rewarding risks in your thriving business. Your cash balance plan serves as venue for offsetting those risks with a stable approach to preserving the wealth you’ve worked so hard to accumulate. Typically, we’d suggest something in the range of a three percent performance target, generated by a conservatively managed, low-cost portfolio.


Cash Balance Plans in Action


Case #1 – A Medical Practice with 1-10 Employees*

 

Dr. Curtis, age 53, is a successful internal medicine practitioner with four employees. During the next decade, she wants to maximize her own retirement savings while contributing to her staff’s retirement accounts. Here’s how that might look:

...
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Retirement Confidence Leveled Off in 2016

Americans' confidence in their ability to retire in financial comfort has rebounded considerably since the Great Recession, but worker optimism leveled off in 2016. According to the 26th annual Retirement Confidence Survey -- the longest-running study of its kind conducted by Employee Benefit Research Institute in cooperation with Greenwald & Associates -- worker confidence stagnated in the past year due largely to subpar market performance.

The percentage of workers who reported being "very confident" about their retirement prospects hit a low of 13% between 2009 and 2013, recovered to 22% in 2015, and stabilized at 21% in 2016. However, significant improvement was reported among workers who said they were "not at all" confident about retirement, as their numbers shrank from 24% in 2015 to 19% this year. Curiously, the attitude shift away from being not at all confident came from those respondents who reported no access to a retirement plan.

It's All in the Plan

The data clearly shows a strong relationship between the level of retirement confidence among workers and retirees and participation in a retirement plan -- be it a defined contribution (DC) plan, a defined benefit (DB) pension plan, or an IRA. Workers reporting they and or their spouse have money in some type of retirement plan -- from either a current or former employer -- are more than twice as likely as those with no plan access to be very confident about retirement.

Still Not Preparing

Underlying the generally positive trend in the 2016 survey was the persistent fact that most Americans are woefully unprepared for retirement, having little or no money earmarked for retirement. For instance, among today's workers, 54% said that the total value of their savings and investments (excluding the value of their home and any defined benefit plan assets) is less than $25,000. This includes 26% who have less than $1,000 in savings.

Retirement Plan Dynamics

Not only do workers and retirees that own retirement accounts have substantially more in savings and investments than those without such accounts, on a household level, these individuals tend to have assets stored in multiple savings vehicles. For instance, according to the 2016 RCS, about two-thirds of those with money in an employer-sponsored plan also report that they or a spouse have an IRA. Further, 90% of survey respondents with access to a defined benefit pension plan either through their current or former employer also have money in a defined contribution plan.

Retirement Age

Perhaps as an antidote to their lack of savings, some workers are adjusting their expectations about when they will retire. In 2016, 17% of workers said the age at which they expect to retire has changed -- of those, more than three out of four said their expected retirement age has increased. Longer-term trends show that the percentage of workers who expect to retire past the age of 65 has consistently crept higher -- from 11% in 1991 to 37% in 2016.

For more retirement trends among workers and retirees or to review the 2016 Retirement Confidence Survey in its entirety, visit EBRI's website.


Source:

Employee Benefit Research Institute and Greenwald & Associates, 2016 Retirement Confidence Survey, March 2016.


Required Attribution


Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. .

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

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What Is a Custodial IRA?

A custodial IRA is an IRA managed by a parent or guardian for the benefit of a minor child, as long as that child works and has earned income. As with other types of IRAs, the maximum annual contribution for 2015 is $5,500 (indexed annually for inflation) and the underlying investments can be determined by the person managing the account, in this case the parent or guardian, prior to the child reaching majority age. A custodial IRA can be either a traditional IRA or a Roth IRA. 

 

Although an adult typically oversees the account, the funds belong to the minor child and must be turned over at the age of majority, which varies depending on the state. IRAs present tax benefits, and opening an account when a child is relatively young may enhance these advantages. As long as the money remains invested, contributions and investment earnings may potentially compound free of taxation. The longer the time period when contributions are made and the money can compound, the greater is the opportunity to build wealth. Required minimum distributions (RMDs) from traditional IRAs, which are taxed as ordinary income, are mandatory after age 70½. For Roth IRAs, RMDs are not required, and the assets could potentially compound for a lifetime. Restrictions, penalties, and taxes may apply. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.

 

Withdrawals

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Brush Up on Your IRA Facts

If you are opening an IRA for the first time or need a refresher course on the specifics of IRA ownership, here are some facts for your consideration.

 

IRAs in America

 

IRAs continue to play an increasingly prominent role in the retirement saving strategies of Americans. According to the Investment Company Institute (ICI), the U.S. retirement market had $24.7 trillion in assets at the end of 2014, with $7.3 trillion of that sum attributable to IRAs.1 Today, some 41 million -- or 34% -- of U.S. households report owning IRAs.2

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Retirement Confidence: It's All in the Plan

Americans' confidence in the ability to afford a comfortable retirement continues to rebound from the lows reported between 2009 and 2013. The increasing optimism is coming largely from workers who indicate they and/or their spouse have a retirement plan, such as a defined contribution (401(k)-type) plan, defined benefit (pension) plan, or individual retirement account (IRA). This is one of the key takeaways from the 25th annual Retirement Confidence Survey (RCS) -- the longest-running survey of its kind, conducted by the nonpartisan Employee Benefit Research Institute (EBRI) and Greenwald & Associates.

 

According to the 2015 RCS, among workers with access to some type of retirement plan, more than one in five (22%) are "very confident" they will have enough money to live comfortably in retirement, up from 13% in 2009 -- a time when devastating losses to retirement plan assets caused by the financial crisis of 2007-2008 crushed investor confidence. This year an additional 36% reported being "somewhat confident" in their ability to live comfortably in their later years, while 24% are "not at all confident" in their retirement prospects. This percentage has remained statistically the same for the past two years.

 

Paying the Bills

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Where You Live Matters: Counting the Cost of Long-Term Care

It probably comes as no surprise that the cost of long-term care services -- including nursing homes, assisted-living facilities, and home-based care -- continues to rise steadily across the country.

 

Among the various services tracked by Genworth's annual Cost of Care Survey, home-based care costs are rising at a slower pace than other forms of care. Specifically, Genworth's most recent report found that, on a national basis, home-based care rose just 1% to 1.5% over the last five years, while costs at nursing homes and assisted-living facilities have increased 2.5% to 4% over the same five-year period.1

 

Genworth also tracks long-term care cost data on a regional and state-by-state basis. For planning purposes -- either your own or for an aging parent or other loved one -- this is vital information to know and discuss with your financial professional when forecasting retirement income scenarios.

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Planning for Known -- and Unknown -- Health Care Costs in Retirement

The issue of health care costs in retirement -- and planning for them well in advance of retirement -- is becoming a centerpiece of any retirement planning discussion.

 

A recent study by Employee Benefit Research Institute (EBRI) projected that in 2014, men and women who wanted a 90% chance of having enough money to cover out-of-pocket health care expenses in retirement would need to have saved $116,000 and $131,000 respectively by age 65. 1 This is a sobering goal when you consider that just 42% of workers in their 50s and 60s report total savings and investments in excess of $100,000. 2

 

Part of the problem with putting a price tag on retiree health care expenses is that every situation will vary depending on an individual's health, the type of health care coverage they carry, and when they hope to retire. That said, EBRI has identified some "recurring expenses," or standard elements of cost that can be estimated and planned for in advance as well as "non-recurring" expenses that are less predictable but tend to increase with age.

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Early 401(k) Withdrawals Hamper Long-Term Retirement Savings

As the IRS released the 401(k) contribution limits for 2015, attention turned, as it has in prior years, to the large number of plan participants who come nowhere close to contributing these amounts. In contrast, many individuals use their 401(k) accounts as a means to pay off loans and other current expenses.

 

The amounts withdrawn are not negligible. According to a recent study by Vanguard, the average withdrawal represents one-third of the participant's account balance. Additionally, most withdrawals are not for hardship -- non-hardship withdrawals outnumber hardship withdrawals 2-to-1, and the rate of new non-hardship withdrawals doubled between 2004 and 2013.1

 

So, why are so many withdrawals occurring? One reason is to pay off debt, including student loans. Another may be to help make ends meet when people are between jobs. Fidelity reported earlier this year that 35% of participants took all or part of their 401(k) savings when leaving a job.2

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Roth 401(k)s Gaining Ground, Enhancing Retirement Readiness

The use of Roth 401(k)s by retirement plan sponsors has been on the uptick for the past several years. According to research conducted by PLANSPONSOR.com, 52.4% of employers now offer a Roth-type defined contribution account, compared with only 11% in 2007. Among the largest plans (those with more than $1 billion in plan assets), 61% now offer the Roth option.

 

Because taxes are paid on Roth accounts now instead of when withdrawn -- typically in retirement -- industry analysts observe that funding retirement with a Roth 401(k) can help to reduce concern over taxation -- specifically whether employees will be in a higher tax bracket when they retire and throughout their retirement years. This in turn helps to facilitate sound retirement income planning.

 

Financial planners also point out the advantages Roth assets bring to the table with regard to planning for health care costs in retirement. Because the taxes paid on Roth contributions do not get added to the modified adjusted gross income (MAGI) calculation, proceeds from Roth accounts do not affect an individual's tax bracket, which is used to determine the cost of Medicare Parts B and D premiums in retirement.

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New IRS Ruling Eases Plan-to-Plan Rollover of Assets

In an effort to ease the administrative burden placed on plan sponsors and to foster portability of retirement savings for plan participants, the IRS has issued guidance that simplifies the transfer of assets between all types of qualified retirement plans.

 

IRS Revenue Ruling 2014-09, published in April, allows the plan administrator for the receiving plan to forego the burdensome task of verifying the legitimacy of the incoming plan -- a process that typically involved multiple rounds of communication and paperwork between the two plans with the employee acting as the middleman -- and thus ease and expedite the rollover process for both the employer and the employee.

 

Now, the plan administrator for the receiving plan need only access the most recently filed Form 5500 (annual report) for the incoming plan that is stored online on the EFAST2 database maintained by the Department of Labor. The guidance is effective immediately.

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Target-Date Funds Will Garner Majority of 401(k) Contributions by 2018

Target-date funds continue to gain ground in the employer-based retirement plan arena. It is estimated that by 2018, they will garner more than 63% of total defined contribution plan participant contributions and account for 35% of total 401(k) plan assets.

 

A new study by Cerulli Associates reported these findings and revealed other key trends influencing target-date funds' popularity. For instance, 84% of plan participants cited the risk management and asset allocation features of the funds as being "very important," while 42% were attracted to target-date funds' built-in diversification qualities.

 

By definition, target-date funds are mutual funds that automatically reset their asset mix of stocks, bonds, and cash equivalents to maintain a risk profile that is appropriate for a particular investor's "target date" for withdrawals, such as retirement.

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Employers Ramping Up Retirement Plan Features, Advisory Services

Employers are taking action to boost their retirement plan programs. Find out what actions are the most prevalent.

 

Employers are enhancing their retirement plans and increasing access to professional investment advice in an attempt to bolster employee retirement readiness.

 

A new study by Aon Hewitt, which polled more than 400 plan sponsors serving 10 million plan participants, revealed a number of initiatives being taken to strengthen employee ability to achieve greater financial security in retirement. Key actions include the following:

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Survey: Retirement Confidence Recovers for Those With Retirement Plans

EBRI's annual Retirement Confidence Survey found a marked increase in confidence among workers who participate in retirement plans.

 

The Employee Benefit Research Institute's (EBRI) annual Retirement Confidence Survey found a marked increase in retirement confidence among workers with higher household incomes who also participate in one or more retirement plans -- including defined contribution plans, defined benefit plans, and/or IRAs.

 

Specifically, more than half (55%) of survey respondents are now very or somewhat confident about having enough money to live comfortably in retirement. The number of workers who are "very confident" rose from 13% in 2013 to 18% this year, while 37% said they were "somewhat confident." The number of workers who are "not at all confident" stayed statistically unchanged from last year at 28%.

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New 401(k) disclosure laws are in effect-How do you interpret them?

Legislation that took effect last summer was a huge step towards clarifying and enlightening plan sponsors and participants as to the fees they are paying for their 401(k) plans. Each plan must provide plan sponsors and their fiduciaries a 408(b)2 document, also known as a fee disclosure report. Many studies have revealed that the majority of plan participants feel that they are not paying any fees to participate in their 401(k) plan. Plan participants must now receive a 404(a)5 fee-disclosure and that is usually incorporated into their quarterly statements.  Unfortunately, most plan sponsors and participants do not know what to do once they receive these fee disclosures and are often overwhelmed by all of the jargon that is used in the disclosure documents.  There are several steps to take to ensure that the fees for the 401(k) plan are fair and reasonable for the size of the plan.

The first course of action should be hiring an outside professional/consultant to review the fee disclosures.  Fee disclosures are complex and complicated, making it difficult to understand the information provided. Typically, a professional with a CFP®, a background in finance, or specific training regarding 401(k) plan consulting will be able to decipher and interpret the disclosures.

Another good practice to better analyze a company’s 401(k) plan is to benchmark the plan. The plan sponsor must determine if the fees are reasonable for the services provided to the plan. Benchmarking the plan will compare the company’s 401(k) plan to plans of similar size in terms of total overall assets in the plan. With benchmarking, side by side comparisons show how the company’s plan measures up, while fee disclosure documents simply report on the plan’s fees, with no comparison to other plans.

A good 401(k) benchmark report should include the following:

  • Plan Fees Summary: Comparison of the plan’s fees to the appropriate benchmark group.
  • Service Provider’s Fee Disclosure: Summarizes the fees which are paid to the primary service providers.
  • Investment Lineup Summary: Summarizes the investment expenses of the plan choices compared to the benchmark group.
  • Relative Plan Complexity: Compares an estimate of the plan’s complexity relative to other similar size plans.
  • Participant Success Measure: depicts how well the participants are utilizing the plan to prepare themselves for retirement.
  • Advisor/Consultant Services: Highlights the key services the advisor/consultant is providing to the plan and it’s participants.

The Appendix of the benchmarking report should include:

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Re-Creating Your Paycheck in Retirement

From our research, the most pressing issue as retirement looms for successful corporate executives and small business owners is re-creating your paycheck during retirement.

There are many aspects involved in creating your retirement paycheck, many of them quite complicated and complex. The process must start with determining how much money you will need, before tax, during retirement to maintain the lifestyle you are accustomed to living.

Your goal is to cover your monthly expenses, minimize your income taxes and keep as much money working for you tax-deferred. Using your diversified portfolio of assets, a withdrawal rate that is sustainable for the rest of your life is determined. Your withdrawal rate will be applied to your portfolio and investments that are the most tax advantageous will be used to draw from to create your cash flow.

Once the cash has been created through rebalancing of your portfolio, the cash is transferred to your bank account, in essence, creating your retirement paycheck.

The process of creating your retirement ‘paycheck’ can be simplified into these steps:

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