IRAs – Roth IRA Calculator
Roth IRA Calculator
Do you have your Roth IRA calculator handy? No? That’s okay – we’ll use mine. The Dallas Morning News had a full page advertisement from a Floridian man – as a Plano Financial Planner I had to wonder what it cost him to run this (and how many cities he’s running it in!) I guess I should have seen this coming: “Save Taxes Now! Ask Us How!” screams the head of the ad. It’s remarkable. “Special Notice to IRA owners! Call today for the free special report outlining the Roth IRA Annuity Tax Relief Program™.”
He even trademarked his plan – how enterprising! Here’s my favorite part:
“Under the Roth IRA Tax Relief Plan™ we can show you how with the NEW Roth Conversion Law you can arrange to have paid between two-thirds to all of the taxes with little or no reduction of your principal! AND have tax free income and growth for you and your heirs forever…TAX FREE!”
My Roth IRA calculator is all warmed up, so I’m going to expose how he’s doing this. He’s not doing anything illegal – but I don’t think he’s being completely honest either. First, he refers to the “New” Roth Conversion Law. New?! The Roth IRA was introduced in 1997. The changes to the conversion law came in – what – 2002? 2003?
Second, they are moving people into a fixed indexed annuity, or equity indexed annuity, and taking the bonus to pay the taxes. That’s not necessarily a bad thing, but there is a problem. First, is that many people taking this deal are still going to pay some substantial amounts of tax, and many of those don’t have the time horizon to recoup that erosion of investing capital. An investing technique, no matter how clever it is, is not a good idea if it moves you away from the overall goals of your investing plan.
Something else this guy isn’t telling you that my Roth IRA calculator is telling me. In order to get the big bonus (to pay part of the tax bill) you’re giving up something else. Let me illustrate. Say you move all your money into this annuity. You’re getting a 10% bonus and an 8% guarantee from the income rider. So you’re not paying taxes this year, you’re paying them in 2011 and 2012. So you’re earning 8% on your money in 2011, plus another 8% in 2012, on top of the 10% bonus at the conversion, for a total of 26%! Maybe more with compounding! I’m kind of surprised this guy didn’t say he can cover your entire tax bill! Maybe he didn’t think that was believable enough.
The problem, says my IRA calculator, is all this is being made up from one feature of this deal – the income rider, or the bonus. And those aren’t really yours until you hold for a period of time, and then only if you use the account in certain ways. Those things aren’t a problem by themselves, but if this is your only strategy, you’re leaving your retirement vulnerable. Diversification is key, and if you lock up your whole retirement account in one idea – even a good idea – it’s a bad move.
Be very careful when you see someone who wants to move your whole investment nest egg into one investment, especially if you don’t have your own Roth IRA Calculator handy. A clever idea like this might be part of your portfolio, but it shouldn’t be the whole thing. So here’s my suggestion: Build Responsible Portfolios! Ask Me How!
If you are looking for a Financial Planner in the Plano area that is not going to trick you into a product sale, give me a call!
Dallas Financial Coach – IRA Planning
Dallas Financial Coach – IRA Planning
People come to me for financial services – IRA planning, for example. I want people to understand why they should use me for these kinds of services than somebody else, and I think I’ve hit upon an analogy that makes sense. I am the Good Doctor.
What does being a doctor have to do with IRA planning? Think for a moment about a recent doctor visit you may have had. But now imagine that as soon as you stepped in the doctor’s office, he glanced at you and handed you a prescription for Nexium. “What’s this for?”, you ask the doctor. “Ah,” he says, “you see, I have a lot of stock in Astra-Zeneca – which is the pharmaceutical company that makes Nexium. I want their stock price to go up – and that means they need sales! Plus, purple is my favorite color, and Nexium is the Little Purple Pill, after all!” I think we can all agree that someone acting this way is a Bad Doctor.
Doctors selling medical services, like financial planners selling IRA planning services, should be expected to be a little more deliberate with their clients. A Good Doctor would ask questions to find out what the problem is, find out what the patient is looking to gain from the treatment, and then pick a treatment plan that would move the patient toward the desired outcome. This seems obvious, but I’m sometimes surprised at how many of my fellows in the financial services market are like my fictional Bad Doctor. Good financial planners find out what your financial situation is, identifies your goals, and selects investment vehicles that will get you where you want to go. I wish they were all like that.
Some people doing IRA planning are Bad Doctors. When you step into their office, they already know what financial product they want you to walk out with. All they need to do is to find a way to convince you that what you need most is the one thing they sell. They may ask you questions, but at the end of the day, they’ve got a big supply of Nexium that they need to move, and you just stepped into a Nexium showroom without knowing it. Don’t fall for this. Stay away from the Bad Doctors who want you to put all your money into their favorite product (which is usually the one that gives them the best commission). Hire the Good Doctor… me!
Which Is Best: IRA vs. 401k
IRA vs. 401k – From A Financial Planner’s Perspective
What’s better, an IRA or a 401k? This is a popular question in financial planning. But let me tell you something you didn’t know about IRAs – and give you a fun game to play at cocktail parties. Dare somebody who thinks they know about personal finance to tell you what IRA stands for. “That’s easy”, she’ll tell you, “Individual Retirement Account.” And she’ll be wrong. Take a look at IRS publication 590. In nice big letters, the IRS (whose opinion is really the only one that matters) calls them Individual Retirement Arrangements. You may think this is meaningless, but as a Financial Planner, I can assure you that it is not.
Now, when people ask me, as a financial planner, about the benefits of an IRA vs. a 401k, what they are usually asking me is if they should move their money from their 401k to an IRA. The short answer is, move it. Move it now! Always! Now, let me qualify that a little bit. If you are less than 59 ½ years old, and you’re still working at the company where you have the 401k, you’re kind of stuck – just keep contributing enough to maximize the company match, if you have one. But as soon as you change companies, move that thing! Get it in an IRA as fast as you can! IRAs are almost always – 99% of the time – cheaper than being in the same investments in a 401k. In the fight between IRAs vs. 401k, IRAs win again and again.
Why? In a word, costs. The costs inside of a 401k are appalling. Yes, I know this is probably the first time you are hearing this, but I can assure you that as a Financial Planner, I am ready to prove it to you. The average management costs of a 401k is 1.28%, according to a Pension and Welfare Benefits Administration study – and that’s above the costs built in to the mutual funds that your 401k is invested in. Because it’s a 401k, you’ve got costs layered on top of other costs.
In an IRA, there’s no management fees – you’re the manager. You’ll notice that some mutual fund companies will push back if you want to move money out of their 401k and into an IRA with their same funds, saying, “hey, it’s all the same, right? Just leave it in the 401k!” Don’t be fooled. It’s not the same.
From my perspective as a financial planner, I would probably move money out of the 401k as soon as you can do it without a penalty. Are you debating the benefits of an IRA vs. 401k? Bet on the IRA.
The 401k Jockey
The 401(k) Jockey
In another article, I analogized fees on mutual funds to jockeys on racing horses. My point was that there are some great, well managed mutual funds out there, but that some of those funds that have such staggering fees that they become like a prize-winning race horse saddled with a chubby jockey.
I had some new clients come into my office today. They had been retired for over 10 years, and still had a large portion of their retirement money in a 401(k). I looked over their portfolio, and found that not only were there fat jockeys riding the mutual funds in the 401(k), but the 401(k) had its own fat fees on top as well! These poor folks were betting their retirement on a horse with two fat jockeys on it!
A lot of investors with money in a 401(k) should make preparations to move that to an IRA right away. Why do I say that? I have a Labor Department report on 401(k) fees and expenses here on my desk that was published in 1998. This report identified the median of all 401(k) annual fees (the fee with as many fees above as below that number). The median was 1.32% in fees on the 401(k). The mean (average) was 1.28%. The bottom line is you are losing one and a quarter percent more money to fees that you could have avoided if that money was in an IRA instead of a 401(k).
Now don’t forget, there are always exceptions. If you’re under 59 ½ and still working for the company where you have the 401(k), there are good reasons to leave it there. But if you’ve stopped working, or left your company, or even if you’re still with the company but you’re over 59 ½, pull that money out now! You’re betting your retirement on a horse with twin jockeys on his back!
