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Know Your Retirement Plan Options

Earlier this week, the IRS made some adjustments to the required minimum distribution (RMD) rules for 2020.  First, some background.  With the passage of the SECURE ACT, an RMD for 2020 is no longer required.  But what if you had already taken your RMD?  Can you put it back?  Well, that depended on when you took it.  For those people who took their RMD out during the March through June window, they were allowed to reverse the transaction and put it back into their account without penalty.  In April, the IRS announced it would allow distributions that were taken in the month of February to be returned.  However, if you happened to have taken your RMD anytime in January, you were out of luck and could not put that money back into your retirement account. 

Just this week, things changed when the IRS announced that anyone who had taken withdrawals, regardless of when they were taken, would be allowed to put the money back into their retirement account as long as it was done prior to August 31st.  Effectively, this was an extension of the normal 60-day rule.

Depositing the funds back into your retirement account has several possible benefits and considerations:

  • Lower income usually means lower taxes.  You should certainly check with your CPA regarding your particular situation as to whether it is beneficial for you to return some or all of this year’s distributions, but in doing so you likely will save on this year’s taxes.
  • The lower income for 2020 could impact your Medicare rates, again this should be discussed with your CPA.
  • Consider converting the RMD into a Roth IRA. In this scenario, you would not put the distribution you received back into the same account, but rather into a Roth IRA where the amount can be invested, tax-free.
  • For some that may have taken the RMD and simply deposited into a non-qualified investment account, moving the money back is a relatively simple process. 
  • For others, particularly if you are using the funds as a source of regular retirement income, coming up with the money to deposit the funds back into the retirement account can be a bigger challenge.
  • However, if the RMD is not needed for monthly retirement support or a specific purpose, it may even make sense to borrow the money for a few months in order to avoid the extra taxes.  This should be determined on an individual basis as to what makes sense for you, but an example could be:
    • A client could draw on a home equity line or take a short-term margin loan in order to generate the cash needed to deposit the funds back into their retirement account.
    • Since they will not be needing the 2021 RMD for living expenses, they will simply use that money to pay off the loan in early 2021.

In short, every investor, whether it is a traditional IRA or perhaps an inherited IRA should review their situation and determine whether reversing the RMD is beneficial to them or not.  If you and your CPA decide it is beneficial then we welcome the opportunity to assist you with finding a source of funds to make the deferment a reality.  Whether you are an existing client or simply need some independent guidance in regards to these questions we hope you feel comfortable contacting us for a complimentary review of your specific situation.

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Tackle Your Student Loan Debt

If you are one of the 44 million borrowers saddled with student loan debt, it can be a heavy burden to carry. According to Forbes, student loan debt is the highest it has ever been at more than $1.5 trillion. That ranks second, behind only mortgage debt, as the highest consumer debt category. The Institute for College Access and Success pegs the average amount owed for borrowers in the 2017 class at $28,650. 
There are many contributory factors to the student debt crisis, but three in particular stand out. The first is the cost of education. Using inflation adjusted data for Americans 25 – 34 years old, as reported by the Philadelphia Inquirer, the cost of a four-year public education is 2.5x more expensive than it was in 1977. The second factor is the median level of debt has increased 3.3x. And lastly, the median income has stayed exactly the same at $34,000. Simply stated, we have a situation where costs are going up, debt levels are going up but income is staying the same. This is otherwise known as a recipe for disaster.
Beyond the dollars and cents, carrying high levels of debt can affect your mental and emotional well-being by causing stress, anxiety, insomnia and even feelings of isolation. Financial anxiety is no stranger to most Americans. However, letting it overcome you will not make it go away, it will only make it worse. There are strategies to tackle your debt and begin on the road to financial freedom.
First Things First
The first step is to know what debt you have, as in how much is owed, are they federal or private loans, and what interest rate (cost) you are paying? This information is important and a needed first step in making a plan to tackle the debt load.
Spending and Cash Flow
Now that you have a clear picture of your debt, it is important to prioritize your monthly spending. It’s unwise to sacrifice all other planning and opportunities due to the overhang of the student debt. For example, you need to work on building an emergency fund to cover the unexpected turns in life. Everybody’s circumstances are different but a good rule of thumb is to start by shooting for two to three months of expenses.
An opportunity that you should take advantage of because it will pay off in the long run is your 401k and IRA’s. Not saving for your retirement simply because you have debt is a bad idea. There are tax benefits, possible matching money contributed by your employer and not to mention, the greatest benefit of all which is the opportunity for compounding interest on your investments over time.
Making the Payments
Depending on your monthly cash flow, the quickest and most efficient way to tackle your debt is to pay more than what is owed. If you are able to get into the habit of putting even a little extra per month on top of the minimum this will save you money over the life of the loan. If this is not an option based on your circumstances then look for opportunities throughout the year to add to your payment by using extra funds that you may earn from a bonus, raise or side gigs. The takeaway here is that anytime you can accelerate your payments beyond the minimum, you will save money in interest charges that otherwise would be applied to the loan.
Restructuring: Consolidation vs Refinancing
Consolidation typically refers to federal student loans that get combined and repackaged as one loan with an extended term. Since the term of repayment has been extended, the monthly payment most likely will go down. The interest rate will be fixed but it becomes a weighted average of your previous loans that were combined. Bottom line, if you pursue this option, do know it is free and can be done online through the Department of Education. Take a skeptics approach and perform due diligence on any service offering to handle your consolidation for a fee.
Refinancing, while technically a form of consolidation, largely centers around private lenders combining your private student loans into one. If you have both federal and private loans, they can be refinanced together as well. The lender will look at your entire financial picture to determine the refinancing offer so the terms and interest rates will vary. Depending on such things as your credit score, job and salary, it may or may not make sense to refinance so be sure to evaluate each lender and offer on its terms to understand total costs.
Get Started Now
Whether it’s student loan debt, credit card debt or even just concerns over retirement planning or preparedness take the time to sit down with a financial advisor and establish a plan designed to meet your specific needs. Our firm provides this type of guidance in a complimentary fashion and as an independent fee-only RIA we always act as a fiduciary and do what is in our client’s best interest. There are many free resources available and addressing your financial future now will be beneficial on so many levels. Let us know if we can help.
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2581 Hits

Be Generous With Your IRA Withdrawals

We are not tax advisors, but over the past few months a clear trend has developed during our conversations with clients and income tax professionals – The new higher standard deductions have made charitable contributions less beneficial and often non-deductible.

In actuality, it’s a combination of things, the higher standard deduction, limits placed on the amount of state and property taxes that are deductible as an itemized deduction, and so forth.  Although everyone’s specific financial and tax situation is different, there is a common theme that appears beneficial to most.

Historically, clients would take their annual required minimum distribution (RMD) from their IRAs, SEP’s, SIMPLEs or 401-k plans.  This RMD is the amount the IRS requires you to withdraw each year from your retirement plan(s) once you reach age 70 ½.  The amount of the distribution is generally included as ordinary income and is taxable in most situations.  In the past, most clients would report the income and then they would itemize their taxes to include charitable contributions and as long as their total itemized deductions exceeded the standard deduction, they received a financial benefit from making the charitable contributions.

In 2018, however, the new tax law essentially doubled the standard deduction level.  Meaning if you no longer have expenses that qualify as itemized deductions on your return, then essentially you receive no financial benefit from making the charitable contributions.  To illustrate:  Assume John & Mary are 71 years old and normally itemize for tax purposes.  In 2017 between state and property taxes, charitable deductions, mortgage interest and any other qualifying expenses they had $20,000 in itemized deductions.  In this case they benefitted from their charitable contributions.  In 2018, the $20,000 would be below the standard deduction so they would benefit more taking the standard deduction and by not itemizing.  In other words, the money they gave to charities in 2018 provided them with no benefit tax-wise.  They would have received the same level of deductions had they not given any money to charities. 

Most of us like to give.  We want to help out worthy causes and the deductions for income tax purposes always made it that much more appealing.  So, what is a person to do?

As I stated in the beginning, there is a solution that is increasingly beneficial.  Sending your IRA distributions directly to a charity allows you to reduce your taxable income by the amount donated to the charity and doesn’t impact your taxable deductions because you still qualify for the higher standard deduction level. 

For example, if your RMD is $50,000 for 2019.  If you take it as a normal distribution you will report $50,000 as income; however, if your RMD is $50,000 and you give $20,000 of the $50,000 directly to charities then you will only report $30,000 as income.  If you don’t itemize you still get the same standard deduction level you would if your income was the $50,000.  Even if you still itemize, taking the reduction from your income is usually much more beneficial than taking it as an itemized expense.

Consult your tax advisor to see if this strategy can benefit you as much as it has benefitted several other clients of ours.  If you are not yet taking distributions from your IRA, but know others that are (parents, family or friends) encourage them to also get tax advice in regard to this scenario.

If you have any questions or would like to talk about your specific situation, please contact our office.

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Firms Threaten to Pull Business if Fiduciary Rule is Set

We need to talk about Nevada, where leading broker-dealers including Morgan Stanley, Edward Jones, Charles Schwab, Wells Fargo and TD Ameritrade have sent letters to the state threatening to stop doing business or reduce investment services for investors if a fiduciary standard is put into place.  They argue it is too expensive and the burden of compliance to meet a fiduciary duty would have a negative impact on investors, particularly low-and-middle income investors.

Wait, what?  If the state of Nevada implements a rule which essentially states brokers and advisors must put the best interest of clients above all else, these firms are taking their ball and going home?  That, is unbelievable.  Are they going to leave New Jersey and Maryland as well since both states have put forth fiduciary proposals?  Before we rush to judgement, let’s be fair and look at what Nevada is proposing, maybe we are missing something.


Well, that seems pretty straightforward and reasonable – that somebody performing any of the above actions or holding themselves out to be a financial advisor will be held to a fiduciary standard of putting the best interest of the client first and foremost.  Morgan Stanley had this to say about it:

Absent substantial changes to the proposal, Morgan Stanley will be unable to provide brokerage services to residents of the state of Nevada.

That seems a bit extreme, does it not?  Regardless, let’s dig deeper.  Maybe the backlash stems from the definition of what actually constitutes investment advice per Nevada’s proposal.


I don’t see the debate here either.  I guess if I was forced to play devil’s advocate, I could argue that providing security analyses or reports needs more clarity or redefined in order to trigger a fiduciary relationship.  Otherwise, the framework presented here is spot-on.  Think about it this way, re-read the above bullet points but this time in the context of, “An advisor does not have to put their client’s best interest above all else when they provide …”  That definitely feels uncomfortable and misaligned.

There must be more to the story that has these firms and lobbyists all twisted up and bothered.  Let’s keep going and look at the exemptions to the rule and another hot topic which is how a dually registered representative is treated.


To summarize, Nevada has carved out space for transactional services by limiting the duration of the fiduciary responsibility of the broker or sales rep.  The proposed regulations go even further in providing exemptions.  For example, there is no fiduciary duty applied to brokers who execute unsolicited transactions for clients whose assets they are not managing.  Additionally, the standard does not apply to clearing firms or to those who are executing orders from a registered investment advisor.  Still there is more:


But yet it’s still not enough for the broker-dealers.  Puzzling, right?  What exactly is behind the threat to leave Nevada simply because they want to implement regulations that require brokers, sales reps, advisors, etc. to put a client’s best interest above their own?  There appears to be ample exemptions and room for everything from selling proprietary products to receiving commissions.  Enter the dually registered representative.


Now, we might be onto something serious.  Why?  Because what this says is an advisor can’t switch hats anymore.  What most people do not understand is their advisor can be dually registered.  In other words, they can be a broker (who is not a fiduciary nor required to act in such a capacity) and an investment advisor (who is a fiduciary and must act at all times as such duty requires).  Therefore, under current regulation, an advisor can act as one or the other or even switch hats within a relationship based on a variety of factors. 

Nevada is saying no more.  If you’re dually registered, you’ll be held to the fiduciary duty at all times.  This will impact, if not fundamentally change, the business model of these firms, their brokers and sales representatives.  Whereas before, they could technically work with the client however it best suits their business, now there would be a burden of proof to act in the client’s best interest.  I presume this is inconvenient and less profitable and these firms simply don’t want to do business this way.

I do not buy for one second the argument that holding an advisor to a fiduciary duty excludes low-and-middle income investors.  What excludes low-and-middle income investors are the firms and advisors who do not want to work with them unless they can transact business on a commission basis out from under a fiduciary duty.  Why?  Because it is more lucrative and there’s less responsibility to the client. 

To be clear, there is nothing inherently wrong with commissions or the business of brokering transactions in the marketplace.  What is outrageous is presenting the argument these firms are fighting for what’s in the best interest of investors, regardless of account size, by NOT implementing a fiduciary standard – which by the way mandates the client’s best interest remain first and foremost above all else.  Think about that for a second.  It makes zero sense.

AIMA, Inc. is proof a fiduciary model works

Ables, Iannone, Moore & Associates, Inc. is a fee-only, SEC registered investment advisory firm located in Savannah, GA.  We provide asset-management to clients in over 20 U.S. states, Europe, Asia and South Africa.  We are fiduciaries and do not impose minimums on our clients because we believe the size of the account should not dictate the quality of service or the depth of the relationship. 

As an independent advisory firm, we get to know our clients and put ourselves in their shoes.  We have a fixed and transparent fee structure that is easy to understand.  Our investment process combines independent research, information from analysts and think tanks and we listen to the companies themselves.  Next, we apply our beliefs and expertise within the markets and ultimately invest for our clients as if we were in their specific situation.  Our business model, growth and support from our clients proves a fiduciary model works if the advisory firm wants it too. 

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Powerful tools for the self-employed and business owner

This time of the year brings a myriad of questions surrounding retirement plans for the self-employed and the business owner.  Whether you are a sole proprietor, small business owner, medical practice or larger corporation, retirement plans are essential tools for tax and retirement savings.  We understand every business is different and welcome the opportunity to discuss your needs and help design a plan that makes sense.  If you currently have a plan in place and would like to review it, we would be more than happy to look at it with you.  In the end, there are few tools more powerful than retirement plans for the business owner – they can create annual tax savings, provide tax deferred growth to fund retirement and if applicable, aide in the recruiting and retention of employees.


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4637 Hits

Midterm Madness and the Markets

The highly debated midterm elections have come and gone. After the dust settled, Congress is split as the Democrats secured enough seats to flip the majority and retake the House while the Republicans added seats to their majority in the Senate. Let’s take a look under the hood, courtesy of our friends at CFRA Research, and see what history tells us about post-elections, political gridlock and market returns.

This was the 19th midterm election since 1946. 

Did you know? 

  • From election day to the end of the year, the S&P 500 has averaged a 3.3% gain and it has advanced 67% of the time.
  • Looking at the six months after the election, the S&P 500 has advanced 13.8% on average and did so 94% of the time.
  • Going out a year after the election, the average price gain in the S&P 500 was 14.5% and it advanced 100% of the time.


History is only a guide, not a guarantee, but what stands out most to us is the 100% advance rate in the 365 days after the election in comparison to only 2/3rds of the time in the short timeframe up to year’s end.  Clearly, investors become more and more bullish once the midterm elections pass.  A large part of that bullishness can be credited to the fact that the uncertainty leading up to the election is now minimized, if not gone entirely.  Will it happen again after this midterm election, in this environment?  That is the million-dollar question, as the saying goes.  The actual legislative environment does matter so let’s dig even deeper and see what history tells us about political gridlock.

  • Since WWII, the best market returns as measured by the S&P 500 occurred when the Government was unified. In other words, the President and controlling majority in Congress were from the same party.
  • The second-best scenario for the S&P 500 occurred when Congress was unified but the President was from the other party.
  • The third-best scenario overall for the S&P 500 occurred with a split Congress.


The Unified Government scenario is by far the best and it makes clear sense because there is little need for compromise to get legislation and policies approved.  The 80% frequency of advance is the telling number in that scenario.  Under a Unified Congress, there is still room to approve stimulus and policy, albeit with a bit of compromise.  The least favorable set-up is a Split Congress because both sides typically dig their heels in and all but refuse to compromise.  We believe volatility and returns will be influenced by how Congress decides to govern.  The President will likely focus in on key areas where his executive powers can be maximized such as tariffs.  Other legislative items such as immigration, further tax overhauls and healthcare reform will likely face stiff headwinds.

It is important to remember that markets are a reflection of several variables, domestic politics being just one of those inputs.  We believe a couple of the challenges facing this market are very real but controllable, namely tariffs and Fed monetary policy.  A healthy skepticism is welcomed as we progress forward under a split Congress, in this global economic environment at this stage of the corporate earnings cycle.  However, on balance we believe history has written a strong case for continued market gains post midterms.  We take a wide-angle view and understand this is not the first-time investors have differed on politics or faced trade wars, inflation or rising interest rates.  The short-term view isn’t always the clearest one so we must continue to invest with the long-term in mind.

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Why we use individual bonds vs bond mutual funds

One important note to distinguish us at Ables, Iannone, Moore & Associates from other firms is we use individual stocks and bonds.  This helps us manage portfolios with tremendous flexibility, control and transparency.  It also allows us to reduce costs.  We believe this makes it easier to align our management to the goals of the client vs a one size fits all feel that is associated with model portfolios and financial products.

The other week I wrote a post about some of the opportunities we are seeing in the fixed income space in current market conditions.  I won’t rehash that discussion but it largely centered on individual bond structures we like in a rising rate environment.

What you may have noticed is it did not include bond mutual funds or ETF’s for that matter.  Here are 3 reasons why:

  1. The mechanics of a traditional bond mutual fund make it impossible to guarantee your return of principal because you don’t own the actual bonds in the fund, you own proportional shares of the mutual fund’s net asset value (NAV). More importantly, there is no maturity date established in a traditional bond fund.  This is because they are pooled investment vehicles in which thousands of investors aggregate their money together with a manager who is charged with following the investment goals of the fund in perpetuity as outlined in the prospectus.  Therefore, when an investor wants to redeem their money they do so at the NAV of the fund at the end of that given day.  In response to this, fund sponsors developed mutual funds and ETFs that have a defined maturity (DMF).  These products do offer a close approximation to a return of principal in the form of a final investment value but may still fall short of actual principal return due to costs and other factors in running the fund.  Further research shows that DMFs can produce more volatility than traditional funds due to their structure and carry higher costs which can drag on overall performance.  Contrast this with owning bonds outright.  Minus an issuer default or another agreed upon structure to the bond, the investor gets their principal back at maturity regardless of the fluctuating value of the bond during the holding period.
  1. It’s hard to actually get fixed income out of them because of the numerous variables in determining the yield of the fund. It is beyond the scope of this post to dive into all the factors that determine bond fund yields but suffice it to say, it can get complicated.  However, it is important to understand that distribution yields are calculated on a per-share basis, typically dividing the most recent per-share distribution by the current per-share net-asset value (think share price of the fund).  That means if either of these inputs change it will result in a fluctuating distribution yield (think payout to you as shareholder).  And it will change because new bonds are constantly being added, cash is constantly moving in and out of the fund, prices of existing bonds will change and the manager is under pressure to maintain a competitive yield in order to attract new investors.  Is your head spinning yet?  You’re not alone.  Years ago, the Securities and Exchange Commission stepped in to mandate a standardized yield calculation, called the 30-day SEC yield, largely in response to the fact managers were manipulating their fund’s stated yield to appear more attractive than it actually paid out.
  1. They seem expensive when factoring in all the fees and expenses. Many investors miss or don’t understand the true cost of ownership which may include commissions, 12b-1 fees, soft dollar arrangements, transaction and brokerage costs, tax implications and annual expense ratios.  Depending on the fund, these costs can range between 2% - 4% per year.  This would be in addition to whatever you may be paying your finanical advisor.

Let’s recap.  There is no guarantee made as to the return of principal.  It’s hard to nail down the cash flow that will be generated from owning shares of the fund.  And they are expensive.  So why use them?  First and foremost they are easy to own.  It makes getting diversified exposure to fixed income really simple.  Also, there are times in which no alternative exists such as inside a company 401k or other retirement plan.  On the more nefarious side, advisors can be incentivited for selling or using the funds in client portfolios.  We see this quite a bit with the big name places – looking through a statement and seeing the firm’s own funds conveniently being used.  I digress. 

Our goal isn’t to rail against bond mutual funds or ETFs and it’s not to suggest you are going to investment hell for using them.  Rather, it is to highlight the alternative of using individual bonds to customize specific fixed income solutions.  Instead of pooling that money with thousands of other investors under one goal of a fund manager, we find it is superior using individual bonds to manage various risks such as duration, reinvestment, interest rate, principal and credit for our clients.  It provides flexibility and clarity on what you own, how much cash flow will be generated and an end date for when we can expect a return of principal.


Ables, Iannone, Moore & Associates, Inc. is a fee-only, SEC  registered investment advisory firm providing asset-management to clients in over 20 U.S. states, Europe, Asia and South Africa.  We have over 50 years of combined experience in the financial services industry.

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How can I put money to work in these market conditions?

This is literally a question we get asked all the time, regardless of the market environment.  It is understandable – not all portfolios are created equal regarding entry price and allocation – and people come to us at differing times with new money or cash positions asking what is the best route to take?  How can we help get their money working harder?  Of course the answer to those questions are very specific to each client but we thought it would be helpful to show an example of an opportunty we are seeing right now in the markets.  Something you could possibly adapt to your own personal situation.

Let’s start in the stock market, fresh off its all-time highs.  We do see some attractive names, but in general stocks seem fairly priced.  In other words there aren’t a lot of great deals to be had.  Some?  Yes, but not a lot.  It rarely does us any good to chase prices.  Instead, taking some profits where appropriate, waiting for better pricing on entry and slowly building positions has been our recent approach with equities.  That said, we also aren’t feeling any dramatic recession is upon us.  How about elevated volatility?  Sure, but nothing more than the healthy garden variety type.

Now let’s look at the fixed income side of things.  We know bond yields are gradually rising.  Remember, when interest rates rise, the price on existing bonds fall.  With the FED continuing to increase short-term rates, we know market forces will also gradually increase the yield on the bonds available.  This is largely due to supply and demand.  Foreign yields are a drag on this at the moment, but eventually longer-term bond yields should rise back toward normal levels.  This can cause a decline in the value of your portfolio of existing bonds and leave you with a multi-year underperforming asset.  Many investors see this backdrop as a catch-22.  But there are creative ways to invest in this environment and we have been successfully using a hybrid approach to boost yields during this time.

Specifically, we see a ton of opportunity in short-term corporate bonds linked to underlying stocks.  Because of the structure of the bond this has produced attractive yields with short maturities.  Another area is in longer-term bonds that have adjustable rates tied to economic measures such as the consumer price index (inflation) or the difference between say the 30-year treasury rate and the 2-year rate.  Take the 30/2 example for instance, since there is virtually no difference currently in the spread, these bonds are being sold at a deep discount.  However, if you believe as we do that the yield curve will eventually return to a more normalized level, you could see bonds such as these appreciate in price and produce rising coupons simultaneously.  That is a good thing.

Here’s the point of all this.  Instead of sitting around fearful of the next bear or trying to perfectly time the markets, there are ways to take advantage of opportunities as they are presented.  Currently, it happens to be with some creativity and a hybrid approach to fixed income while maintaining discipline within the equity market.


Ables, Iannone, Moore & Associates, Inc. is a fee-only, SEC  registered investment advisory firm providing asset-management to clients in over 20 U.S. states, Europe, Asia and South Africa.  We have over 50 years of combined experience in the financial services industry.

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What investors should know about the Department of Labor Fiduciary Rule

This rule has been hotly debated over the past several months and although it can impact many individuals, many individual investors don’t seem to care or want to know the details. Frankly, that is understandable as so much in the financial sector is a bit ‘cloudy’ shall we say.
With that in mind I thought it may be helpful to give you a clear summary of the major benefits and discuss a couple concerns.
• The first thing an investor needs to understand is the difference between a broker and a registered investment advisor (RIA). As an investment advisor we are held to a higher standard of operations than a broker in dealing with a client’s account. How so?
o First as an RIA we are required to put the client’s best interest ahead of ours. I know it seems hard to believe that a financial advisor would not have to do that, but sadly it’s true. Registered investment advisers are "fiduciaries." In that way, they're more like doctors or lawyers — obligated to put their clients' interests even ahead of their own. That means disclosing fees, commissions, potential conflicts and any disciplinary actions they have faced. As a fee-only advisor we don’t earn any commissions on any purchases or sales nor do we have any conflicts of interest. Simply put, we work with a client to determine a risk profile, overall investment objectives and then we put ourselves in our client’s shoes and invest the money as we would if this was our own personal funds. Do for our clients what we would do for ourselves.
o This is not the case when it comes to the broker side of the business. In fact, the difference between a broker and an RIA is significant though most people don’t realize it. Brokers buy and sell securities and other financial products on behalf of their clients. They also can provide financial advice, with one key stipulation: They must recommend only investments that are "suitable" for a client based on his or her age, finances and risk tolerance. So, for example, they can’t pitch penny stocks or real estate investment trusts to an 85-year-old woman living on a pension. But brokers can and often do push clients toward a mutual fund or variable annuity that pays the broker a higher commission than other equally suitable products — even without disclosing that conflict of interest to the client. For example, we regularly see clients that invest in an annuity inside of an IRA or 401-k plan. I will never understand why this would be done to a client. The two main benefits of an annuity are tax deferment and a guaranteed stream of income upon withdrawal. An IRA or 401-k is already tax deferred so that benefit is no benefit at all. Secondly, the insurance companies who sell annuities guarantee a certain stream in the future. Though investing in individual stocks and bonds doesn’t come with the same ‘guarantee’ it is extremely likely that an advisor investing your assets appropriately will be able to provide an equal or greater stream of cash flows once needed. Annuities are products designed to generate a profit for the insurance company so their projections and guarantees are very conservative. In other words, they know with near certainty that they will earn more than enough to guarantee your stream of flows in the future. So why do brokers do this? Money in their pockets. The broker collects 5% to 7% of the deposits made in an annuity for the first two years. Good for him or her, but very costly for you.
With these stark fundamental differences now clearly defined, we can turn our discussion toward the specific Department of Labor (DOL) rule and how that will impact you. First, let me say that generally I am not for regulations. Market forces in most cases should take care of any anomalies that may occur. That is when information is clearly disseminated. In this case, I think it is needed though as most investors don’t even understand the basic differences discussed above between a registered investment advisor and a broker.
• First, any of our clients or anyone else dealing with a fee-only RIA will not notice any changes as we have already been meeting or exceeding these new fiduciary requirements.
• Those of you working with a broker or commission based advisor should see some significant improvements. First, you will likely be moved to a fee-based approach as the costs of the products you have been sold in the past will be tough to justify under the new guidelines.
• The advice you are given should now be what’s best for you not what is most profitable to the broker.
Of course there is always the other side when it comes to regulations…
• The primary complaint I hear is that small investment accounts will be neglected because the fees earned will be limited in comparison to selling the client a product. I for one discount this issue. First of all there are already many advisors that place minimums on their clients. In other words if a client doesn’t have $250,000, $500,000 or even in some case $1,000,000+ then the company won’t manage the client’s account. That being said there are numerous firms like ours that don’t have minimums and yet somehow are able to thrive. We take the approach that everyone needs guidance and if we can add value to the process of accumulating wealth and securing a solid financial future then we want to be a part of it. If we do our job in tandem with the client’s commitment to financial security then the client won’t be ‘too small’ forever!
• One area that I am concerned about is greater government intervention. Let’s face it the Social Security system is a failure. Yes, it allows many people a steady stream of income, but if that same 15.3% of their pay (7.65% taxes withheld plus company 7.65% match) was invested in a private account in even conservative investments over the life of the working individual people would have accumulated significantly more than they get from the system today. Likewise, they would not only be able to draw similar levels of money during retirement, but would likely have a tidy sum left to pass to heirs in the future. The social security system returns on your money are only about 1% and when you die there is nothing left. The current administration has designed a new IRA type account, the myRA, which is similar to a savings bond approach. The concern here is that over time the government will expand its reach and require deposits under a certain level to be in government bonds, etc. At this point is probably more conspiracy theory, but the general skepticism is not unwarranted. The Social security program was originally designed to be kept separate from the everyday operating budget, but then when the money was just too tempting they combined it and issued treasury bonds in place of the money in the Social Security trust fund. Initially it passed scrutiny, but now years later as the US is burdened by debt from overspending the security of the funds is no longer as comfortable sitting in US Treasury investments. A similar thing could happen here, put your money with the government for security in our treasuries, which would give a politician another pool of money to invade. Again, not likely at this point, but certainly a possibility if history is any guide.
So, what should you do about the change?
• First, understand what category you fall under. If you need help feel free to contact us for clarification of your current situation.
• Next, discuss directly with your broker when you will be moved to lower cost investments. This rule allows brokers to do a gradual phase in of the requirements so by pushing the issue you are likely to realize the savings sooner rather than later.
• You need to ask yourself if you want to continue working with a commissioned based broker or advisor. Keep in mind that in many cases they are losing income by changing to the fee model. If they have other non-retirement accounts they manage for you and don’t change those from a product based approach it is time to move. The fiduciary rule does not cover non-retirement accounts, but these types of accounts are no less important so you should not continue being fleeced in these either. If an advisor changes one type of account and not the other then they are still more interested in their own income than in doing what is best for the client’s wealth creation.
I hope you find this information helpful as a starting point. Naturally, those against the rule stand to lose billions of dollars annually in fees. That being said every individual’s financial situation is different ranging from risk aversion levels to investment objectives. Make sure your advisor, whether you have large balances or small balances, is fee-only. That is the best manner to assure that the advisor is more concerned with your well-being than his or her income.
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9414 Hits

Take advantage of the current market volatility

Despite the stock market’s decline this year this is not the time to panic. Instead, take advantage of the markets. Here are a few thoughts that may be beneficial.

·         Convert all or a portion of your traditional IRA to a Roth IRA.

o   IRA’s grow tax deferred, where Roth IRAs grow tax free.

o   You will pay taxes on the amount converted from your IRA to a Roth IRA, but the market decline means the amount that is converted in dollar terms will be lower than a few months ago. In addition, when the market rebounds the securities you converted will rebound tax free not tax deferred as they are in the current IRA.

o   You should discuss your specific situation with your CPA to determine if converting the IRA to a Roth makes sense for you. If you have any general investment questions regarding your IRA or Roth IRA please feel free to contact me.

·         Next, those of you with 401-k plans that are active should make sure you reevaluate your risk profile and if appropriate consider rebalancing your asset allocations. This will allow you to remain adequately diversified while also allowing you to structure your investments to take advantage of the current market decline.

o   I realize many 401-k plan providers will not make specific recommendations regarding an individual’s risk profile and asset allocation. As an independent fee-only RIA we will gladly review your 401-k asset allocation and investment choices and give you our independent recommendation for your particular asset allocation. This is a complimentary service so please feel free to contact us for help.

·         Finally, dollar cost average your individual equity holdings.

o   If you liked the companies you were invested in a few months ago and nothing has changed with the company’s fundamental outlook then this is an excellent time to add to your positions. Long-term investors can use this strategy to take advantage of short-term volatility.

o   This is not a recommendation to buy or sell any particular investment as each individual’s portfolio and risk profile is different. However, if you would like a specific consultation we are happy to do so. Just contact me and we can discuss your specific investment objectives as it relates to your investment portfolio and determine if any adjustments should be considered.

Jeff A. Iannone

This email address is being protected from spambots. You need JavaScript enabled to view it.

912 272-2880
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8978 Hits

The Real Cost Of Owning A Mutual Fund

Thank you to my friend Randy Gipson who sent me this article from Forbes, Inc.  I am reposting this as I think it provides excellent insight into the real costs of using funds versus utilizing indivual stocks and bonds and it illustrates some of the many reasons we only use individual stocks and bonds in managing our client's investments.

In over 25 years of business, our firm has never had an initial meeting with an investor who completely understood the total costs of the mutual funds they owned. The following article seeks to simplify the many complexities of mutual fund expenses so investors are able to discover the true costs associated with mutual fund ownership. To simplify this topic, six different costs will be evaluated: expense ratio, transaction costs (brokerage commissions, market impact cost, and spread cost), tax costs, cash drag, soft dollar cost and advisory fees.

Expense Ratio
The expense ratio is frequently the only cost that many investors believe they pay when owning a mutual fund. The expense ratio is frequently used to pay marketing costs, distribution costs and management fees. This ongoing cost can be identified by reading a mutual fund’s prospectus. The average U.S. Stock fund now costs .90% per year according to a recent Morningstar article (1).

Transaction Costs
A study by Edelen, Evans and Kadlec found U.S. Stock Mutual Funds average 1.44% in transaction costs per year (2). These costs can be difficult to determine, are not found in most prospectuses, and are not included in the aforementioned expense ratio. A group of cost conscious investors called the Bogleheads breaks down transaction costs into three categories: brokerage commissions, market impact, and spread cost (3).

1. The first type of transaction cost is brokerage commissions. Brokerage commissions result from mutual fund managers buying and selling stocks for mutual fund investors inside of the fund company’s brokerage account(s). Discovering the additional expenses due to turnover can be a difficult endeavor. This task can be accomplished by making estimates based on information found in the Statement of Additional Information, a document mutual fund companies must make available upon request, but don’t generally distribute to investors.

2. The second transaction cost even more difficult to estimate is market impact cost. The Bogleheads define market impact cost this way: “A mutual fund making a large transaction in a stock will likely move the stock price before the order is completely filled.” This negatively affects mutual fund owners in three distinct ways. First, individuals receive less favorable prices on certain stocks being bought and sold. This occurs when an investor’s mutual fund manager is buying or selling large quantities of stock that drives the price artificially higher or lower. Second, a fund manager may alter its investment management strategy to avoid excessive market impact costs. This can happen if a manager chooses to enter and exit stock positions over long time horizons in an effort to mitigate sudden short term movements in the securities it is trying to sell or acquire. Last, a mutual fund manager may be forced to include less favorable stocks in its portfolios to alleviate the market impact pressure on its favorite stocks. Market impact cost can be a lose-lose situation for mutual fund investors because they may get unfair pricing on both the buy and sell side of stock transactions in addition to having their mutual fund managers compromising their stock picking prowess to avoid excessive costs.

3. The final transaction cost is called spread cost. This cost also occurs when a mutual fund manager buys and sells stocks for mutual fund owners. Spread cost reflects the difference between the best quoted ask price and the best quoted bid price. This cost is also difficult to quantify. Generally, it is more excessive when a mutual fund is trading international or smaller, less liquid stocks (3).


As illustrated below, transaction costs can add substantially to the overall expense of an investor’s mutual fund. In addition to being substantial, these costs are nearly impossible to accurately quantify.

Tax Costs
Many investors pay more than their fair share in taxes when owning mutual funds. This problem is most transparent when mutual funds are owned outside of an IRA, Roth IRA, 401(k), or other tax-deferred accounts. An investor who buys into a mutual fund that is holding stocks that have appreciated prior to the purchase of the fund runs the risk of paying for these stocks’ capital gains taxes. Essentially, even if the investor did not benefit from the stocks’ gains, this investor will share proportionately in taxes due from the sale of these appreciated stocks when the mutual fund manager makes a change. Ultimately, one can end up paying taxes on investments that other investors profited from. Before purchasing an actively managed mutual fund in a taxable account, an investor should consider contacting the company to determine the level of embedded gains within the mutual fund. According to     Morningstar,     the average tax cost ratio for stock funds is 1% to 1.2% per year (4).

Cash Drag
Another cost of owning a mutual fund is cash drag. Cash is frequently held by mutual fund managers to maintain liquidity for potential transactions and potential redemptions by mutual fund owners. This may stifle the performance of a mutual fund if stocks increase in value greater than the cash held. According to a study by William O’Rielly, CFA, and Michael Preisano, CFA, the average cost from cash drag on large cap stock mutual funds over a 10-year time horizon was .83% per year (5). This cost results from investors paying the mutual fund’s expense ratio on 100% of the money invested despite the fact that not all of the assets are invested into stocks or other securities. Someone who holds cash in a bank savings or money market account on an individual basis generally does not have to pay these extra costs. Essentially, buy and hold investors are subsidizing other investors’ liquidity needs. It should be noted that cash held within a mutual fund could be beneficial during a time when stocks do poorly and incrementally more expensive when stocks perform well relative to cash.

Soft Dollar Cost
One of the most difficult mutual fund expenses to estimate is called soft dollar cost. This cost comes into play when mutual fund managers are buying and selling stocks within the mutual fund’s brokerage account(s). Frequently, mutual fund managers may direct the money being managed to brokerage companies providing them with research and/or other services, even if the brokerage companies are not providing the most cost efficient brokerage commissions involved with buying and selling stocks. Essentially, this is a quid pro quo arrangement. The mutual fund manager gets special services and/or research, and the brokerage company gets the brokerage business at a premium rate. This effectively keeps this cost out of the public’s eye, giving a fund the artificial appearance of lower than actual expenses. A research study by Stephen M. Horan suggested that U.S. soft dollar brokerage commissions may total $1 billion annually, or up to 40% of all equity trading costs (6).

Advisory Fees
The final cost is only relevant to individuals working with fee-based financial and/or investment advisors who select mutual funds for their clients. Many fee-based advisors will manage an investor’s portfolio for an annual fee commonly ranging from .25% to 2.50% of the portfolio’s balance. This fee is required to be disclosed on investors’ statements, and is charged in addition to the other mutual fund costs discussed.

Cost Summary
The following summarizes the average quantifiable costs described. Advisor and soft dollar costs are excluded due to the large range in advisory fees and the difficulty of quantifying soft dollar costs. When working with a financial advisor, it is important to add the advisory fee to the mutual fund costs listed below for an accurate depiction of total potential costs.

Non-Taxable Account

Taxable Account

Expense Ratio .90%

Expense Ratio .90%

Transaction Costs 1.44%

Transaction Costs 1.44%

Cash Drag .83%

Cash Drag .83%

Tax Cost 1.00%

Total Costs 3.17%

Total Costs 4.17%

As illustrated, hidden costs have infiltrated the mutual fund industry and are being paid by many unsuspecting investors. Despite potential drawbacks, investors can acquire broad tax efficient diversification at a fair price by utilizing mutual funds properly. In addition to potentially utilizing mutual funds, high net worth investors can obtain broad tax efficient diversification through direct ownership of securities or through privately managed accounts. These possibilities can increase transparency and eliminate many of the costs directly linked to mutual fund ownership. Cost considerations are one of many factors to analyze when allocating your portfolio and making investment decisions.

Ty A. Bernicke, CFP, is an independent financial advisor with Bernicke & Associates Ltd., in Eau Claire, Wisc. His research interests include portfolio theory and retirement income planning. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. Any opinions are those of Ty A. Bernicke and not necessarily those of Bernicke & Associates Ltd., or firms it is affiliated with.

1. Kinnel, Russel. “Mutual Fund Expense Ratios See Biggest Spike Since 2000.” 19 April 2010. Morningstar Advisor. 31 January 2011.

2. Eldelan, Roger M, Richard B Evans and Gregory B Kadlec. “Scale Effects in Mutual Fund Performance: The Role of Trading Costs.” 17 March 2007.

3. “Mutual Funds: Additional Costs.” 3 November 2010. Bogleheads. 11 January 2011.

4. Rushkewicz, Katie. “How Tax-Efficient is your Mutual Fund?” 15 February 2010. Morningstar. 17 January 2011.

5. O’Rielly, William and Michael Preisano. “Dealing with the Active.” 2000. Index Universe. 17 January 2011.

6. Horan, Stephen M and D. Bruce Johnsen. “Does Soft Dollar Brokerage Benefit Portfolio Investors: Agency Problem or Solution?” George Mason University School of Law (2004): 4.
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14319 Hits

Why is the rapid decline in oil prices causing market volatility?

Over the past several weeks the price of a barrel of oil has dropped from approximately $100 per barrel to closer to $50 per barrel. On the surface this seems like a tremendous economic benefit. Gas prices have been cut significantly from $3.50 or so to around $1.90 per gallon. Less money spent on gas means more money to spend elsewhere. Restaurants, retailers and so forth should be thrilled. So why aren’t the markets feeling the joy?

Deflation concerns are the answer. What is deflation and why is it bad for investments? First, let me say that it is a complex issue, but I am going to try and take a surface level approach here. Naturally, there are numerous factors in a worldwide economy that can occur that would have an impact. It is impossible to address all of those possibilities. In short, however, deflation indicates a significant change in economic conditions and if it persists can spiral out of control and have long-lasting repercussions.

Deflation is a decrease in the general price level of goods and services and it occurs when the inflation rate falls below 0% (a negative inflation rate). The fall in oil prices is a good example. Although we may like it when we are standing at the pump, the reason oil prices have fallen can be of concern. First let me say that oil and food prices are volatile. That is why they are excluded from government inflation measurements (CPI). That being said, in this case there is an increasing glut of oil and subsequently oil reserves have increased. The cause of this lies predominantly with the US drilling and fracking techniques that have allowed more domestic production. This has reduced our dependency on OPEC nations as we now consume a greater amount of our own oil; rather than from foreign sources. China is another major oil consumer. Though their economy continues to expand at about 7% per year, it is far below the double digit growth rates of the recent past. The slower growth combined with lingering poor economic conditions across the European Union and sanction based slowness in Russia we have seen an economic slowdown that has caused a shift in the demand curve. Producers of oil need to sell their products and to do so with current inventory levels prices must fall.

The simple answer seems to be to stop producing as much product. Although reducing supply would gradually have the desired impact of increasing demand, it is getting to that point that is an issue. OPEC has chosen to try and smoke out the US fracking companies. By maintaining production levels and driving prices down many of these new US companies find it unprofitable to drill. Their cost structure is high as they are highly levered and payments on equipment and manpower start to strain these startup companies cash flow. OPEC’s hope is that eventually these companies will go bankrupt and the production declines will be from fewer non-OPEC participants. Think of it in this way, OPEC has long enjoyed the swimming pool greatly to itself. Over time, however, more and more people have been jumping in and now the space is overcrowded. The pool may be uncomfortable right now, but the members of OPEC want to return to the days where they were the primary users of the pool. Rather than to climb out themselves or come to the pool less frequently they have decided to jump in and stay. Over time they want to drive the new members out.

Deflation can impact several areas of the economy. Initially, the prices of goods and services in other areas may start to fall. Lower prices in oil mean cheaper manufacturing costs, lower delivery costs and so forth. This can further reduce prices at the grocery store or retail outlets as oil based products such as plastics cost less to make. Near term this can be good for companies and profitability. Lower costs and firm retail pricing seems like an option. But gradually everyone wants price adjustments. The retailer knows the manufacturer is making a greater profit so they want to share in the bounty. Demanding lower costs they purchase the products for less. The manufacturers typically will do that particularly if the retailer buys at higher volumes. The retailer is willing to do so because they know that they can lower their prices to move the merchandise since they paid less initially. However, competitors follow suit and the price decline spreads across the economy. Now margins start to get squeezed and profits actually decline. When profits decline companies look for more efficiencies and start reducing labor forces. Reduced labor or higher unemployment means less demand for goods and services. Less demand in a higher inventory environment means even lower prices and lower profits, more layoffs and the spiral continues.

Now, this scenario is not playing out as we sit here today, but it is the reason that investors are a bit nervous. The FED has a long history of monetary intervention to try and stem inflation and control interest rates. Deflation although it rarely happens is also a major concern and would be fought vigorously by the FED. To do so there are two primary tools. The first is lower interest rates. This generally spurs economic activity. However, worldwide interest rates are already so low that there is little room here at this time. More likely, the contraction of the monetary supply or some level of stimulus such as tax relief would need to be used to increase demand.

I don’t think we have reached this point yet. In fact, I believe the FED will increase rates starting this year and will try to do so at a steady measured pace. This may cause some slow down economically, but likely it would be offset by the increased consumer discretionary money. It may also stem production expansion. Finally, if rates are increased and at some point rates need to be decreased to offset deflation the FED would have room to do so.

In the end, the effects of the financial meltdown in 2008 are still having an impact. The FED artificially stimulated the economy with lower interest rates and government spending. Now they are trying to maintain the balance of avoiding runaway inflation while not sending the economy into deflation. I expect periods of volatility to arise periodically in our long trek back toward normal rates and economic conditions. Central bank intervention between the US and European countries should allow us to avoid any major long-lasting or catastrophic occurrences. We continue to monitor conditions and act accordingly. One final comment is that any economy is like a large ship. It doesn’t turn quickly rather it is gradual and adjustments take time. Choppy waters and storms arise, but a steady course and investing strategy allows for growth in various stages of the economic cycle.
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16098 Hits

Umbrella insurance: Financial Protection Everyone Should Consider

A retirement nest egg may make you feel like you've locked down your financial future, but don't get too comfortable. Getting hit with a liability lawsuit in your retirement years could turn your life upside down.

While your insurance may cover some damages or legal fees, an umbrella insurance plan goes further. It protects you and your assets if you are held liable for a claim exceeding the coverage of your other insurance policies. Without such coverage, your assets could be in trouble.

Say, for example, you're five years into retirement and you get into an auto accident. Your car is just a little banged up, but the other driver and his passengers are seriously injured. You're hit with a claim of $1.5 million, but your liability auto insurance only covers $100,000.

If you don't have an umbrella policy extending your coverage, you'll be responsible for $1.4 million. If you don't have that kind of cash on hand, your assets will be seized.

What is an umbrella policy?

Umbrella insurance is liability coverage that goes above and beyond what your homeowners, renters and auto insurance policies provide. Umbrella coverage has higher limits with a broader range of coverage, including claims involving bodily injury, property damage and issues such as libel, slander and defamation of character.

If you're sued or found liable for damages, umbrella policies will pay not only the monetary damage costs, but also attorney fees and other court costs. Having such coverage can prevent another party from going after your assets if damages and legal costs exceed the limits of your regular policy.

It's important to note that employee retirement accounts and IRAs are usually protected under federal laws even if you don't have umbrella coverage, so your retirement account will likely remain safe even if a legal case were to bankrupt you. But as for the rest of your assets? Not so much.

How much should I get?

Typical umbrella policies start at $1 million in coverage and are sold in million-dollar coverage increments. You'll usually need to carry minimum underlying liability coverage on your homeowners or renters policy before you can buy umbrella insurance.

In general, you'll want enough coverage to at least cover your net worth, says Fernandez. Calculate the value of your retirement and other assets you have vs. your debt to determine your net worth. For most, $1 million in liability coverage will be enough; if your net worth is higher, consider bumping up your coverage accordingly.

Before choosing a plan, it's a good idea to sit down with your property and casualty agency to make sure you will be adequately insured in case of a liability lawsuit.

Generally, this type of insurance is relatively inexpensive and I strongly recommend it. If you don’t have a property and casualty agent that you are comfortable with please don’t hesitate to ask us. We can refer you to folks in that arena that we feel very confident will provide you with unbiased advice.

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11734 Hits

Happy New Year

Quinton, Terri and I hope everyone had a prosperous 2014 and is enjoying the Holidays with their family and friends. We appreciate the support all of you have shown to us in 2014 as we finish our 11th year at Ables, Iannone, Moore & Associates. Here’s hoping that 2015 is the best year ever for you and your family.
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10666 Hits

Roth IRA: Part of a major new tax-savings rule from the IRS

Roth IRA accounts are a big part of new guidance from the IRS on long-term retirement savings. A new rule allows for the after-tax portion of 401(k) plans to be separated from the pre-tax portion and moved into a Roth IRA, resulting in tax-free growth from then on for that account.

The Internal Revenue Service has recently issued guidance that presents a significant tax-saving opportunity for investors who have made non-deductible (after-tax) contributions within a 401(k) or Traditional Individual Retirement Account.

Most of the time, when a contribution is made to a 401(k) or Traditional IRA, the investor receives a deduction for the full amount of the contribution. The money then grows tax-deferred and taxes are paid both on the contribution and growth when a distribution is made, typically in retirement.

Conversely, some investors use Roth options, which do not provide a tax deduction when the contribution is made, but allow for tax-free growth and withdrawal in retirement, subject to a few rules.

A non-deductible contribution represents money that is put into the former, a 401(k) plan or Traditional IRA, but due to varying circumstances, the investor is not allowed to deduct the contribution. As a result, the original contribution is not taxed on distribution, but the growth is.

This ends up being the worst of both worlds. There is no tax-deduction and no tax-free growth. The only advantage is the deferral of taxes until distribution. The result is in an account that has a portion of after-tax money (also called “basis”) that continues to generate growth that will someday be taxed. When the funds are withdrawn, the growth and basis are considered to be distributed pro-rata, resulting in a distribution that is only partly taxable, depending on the current balance of pre-tax and after-tax dollars in the account.With the recent guidance, the IRS has allowed for the after-tax portion of 401(k) plans to be separated from the pre-tax portion and moved into a Roth IRA, resulting in tax-free growth from then on for that account. This is different than a Roth Conversion and, consequently, has different rules and implications.

This split can be done through either an in-service distribution or upon retirement, though earlier is better to allow for longer tax-free growth within the Roth IRA. According to the IRS, the distribution from the 401(k) still occurs pro-rata with both pre-tax and after-tax dollars coming out. However, the guidance allows the pre-tax dollars to be directed into an IRA rollover, while the after-tax dollars go into a Roth IRA. Neither of these events is taxable.

Unfortunately, this method cannot be used directly for investors who have non-deductible contributions in an IRA. But there is an indirect strategy that may work in certain circumstances. If someone has a 401(k) in addition to an IRA rollover, he may be able to roll the pre-tax IRA assets into the 401(k), leaving the after-tax assets, which can then be converted tax-free into a Roth IRA. Of course, this strategy requires a 401(k) plan to be effective.

Investors without a 401(k) plan may convert IRA assets directly into a Roth IRA, but the conversion is pro-rata, meaning the assets that are converted will consist of both pre-tax and post-tax dollars, resulting in tax liability for the pre-tax portion. Also note that for the purposes of the pro-rata determination, the IRS looks at the collective value of all IRAs owned by the taxpayer, so it does not matter which IRA the conversion comes from.

The ability to move after-tax contributions into a Roth IRA presents an opportunity for significant long-term tax savings. This recent guidance goes a long ways to clarifying a process that tax preparers and investors have speculated about and tiptoed through for years.

ByDavid Munn,December 16, 2014

  11066 Hits
11066 Hits

Five Ways to Maximize College Financial Aid

I hope everyone had a Happy Thanksgiving. I found the following article that I thought may help those of you looking at college for either children or grandchildren.

Some parents assume that if they position their assets creatively, they can strengthen their child’s chances of receiving financial aid. But in most cases, this isn’t financially smart or necessary. Some assets will matter, but not as much as you might assume; schools ignore qualified retirement accounts, and most institutions don’t even ask about home equity. Maximizing eligibility for aid can often only be tweaked at the margins. Here are five suggestions:

·         1. Check the EFC

Many affluent parents worry unnecessarily about how their investments will hurt their chances for financial aid. They should use an Expected Family Contribution calculator to generate a rough idea of what they would be expected to pay for one year of college. If their EFC, expressed as a dollar figure, is fairly close to a school’s price tag, they won’t qualify for need-based aid. In this scenario, parents should look for schools that provide merit scholarships to high-income students, and the vast majority of colleges and universities offer these awards.

Whether a child will receive the maximum financial aid award for which he or she is eligible is heavily dependent on the child’s college list. Parents may position their income and assets in an effort to obtain more aid, but if the schools that their children apply to are stingy, a larger financial aid package could simply include more loans. In contrast, if you are wealthy and seeking merit scholarships to help defray college costs, applying to many of the most elite institutions—such as the Ivy Leagues—would be unwise because these schools only give need-based awards.

Parents shouldn’t expect schools to alert them about their financial-aid deadlines, because these institutions can potentially save money if a student doesn’t seek financial aid. Many parents also overlook filing a second aid document called the CSS/Financial Aid PROFILE, which about 260 schools—nearly all of them private—also require.

To see how many FAFSA applications are submitted at individual high schools in a particular area, go to

·         4. Move Money Out of a Child’s Name

Parents should consider moving money out of a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account that is treated as a child’s asset, and into a custodial 529 account, which enjoys more favorable treatment. The FAFSA assesses children’s assets at 20 percent, and the PROFILE assesses them at 25 percent. In contrast, the aid formulas assess parent assets at much lower rates —a maximum of 5.64 percent for FAFSA and 5 percent for PROFILE.

Here’s an example of how a $50,000 account would impact financial aid if it was treated as the student’s versus the parent’s. This is how the PROFILE would calculate aid eligibility:

$50,000 (child asset) X 25 percent = $12,500

Financial aid eligibility would drop by $12,500.

$50,000 (parent asset) X 5 percent = $2,500

Aid eligibility would decline by $2,500.

Parents can shut down a custodial account, pay any applicable taxes on the withdrawal and then move the money into a custodial 529 savings account to obtain the more favorable aid treatment.

Schools don’t look at qualified retirement assets when calculating the financial need of a family. The FAFSA also ignores nonqualified annuities, while the PROFILE does count them.

But the FAFSA instructions are not clear about what assets parents need to include on the aid application. The FAFSA, for instance, asks, “As of today, what is the net worth of your (and your spouse’s) investments, including real estate (not your home)?” Unfortunately, the aid form does not specifically tell parents to exclude retirement assets on the form.

In addition, the form does not make clear that retirement money shouldn’t be included when it asks about the value of the parents’ cash, savings and checking accounts.

Remember, each family’s circumstances are different and what works for one family may not be right for another. It’s the same with investing, tax planning and insurance for example. The key is to find a trusted advisor in each of these areas that can help you make the correct decision for you and your family’s particular situation.

If you need any assistance in the area of college planning or any other financial guidance please don’t hesitate to contact us. Though we handle investments we have a solid network of qualified individuals that can help you in other areas such as this.

Lynn O’Shaughnessy is a nationally recognized higher-ed speaker, journalist and author of The College Solution. She writes about college for CBS MoneyWatch and her own blog,
  17320 Hits
17320 Hits

Thinking about lending money to family and friends?

I have had this conversation many times with clients and other friends or family members.  Some don't like to do business with family members.  Others don't want to say no, but are concerned about how to approach it.  Whatever your hesitation or lack thereof I think there are a few key points that you should consider.

First, if you are approached remember saying no is always an option.  Generally, you are being asked because the person is unable to get a loan from a traditional source such as a bank.  As the lender you need to remember that this loan has risk associated with repayment or what we will call default risk.  Should you decide that the loan makes sense for you it should be done with a few important points in mind.

1.  Get everyone on board.

It is important that your spouse and all parties associated with the deal be clear on the deal.  Get everything in writing and signed by all parties. This will avoid future misunderstandings or hurt feelings in the event the loan is not repaid or payments are made more slowly than anticipated.

2.  Only lend what you can afford to lose.

This is good advice with any investment, but particularly when dealing with family or friends.  The reason most people worry about doing business with a closely related party is that they value the relationship and don't want something like money to come between them.  If you go into the transaction with the mindset that this money will likely not be repaid then you can decide how much you are comfortable lending.

3.  Keep it professional.

Details of the loan should be in writing.  Though it may seem awkward, you have the right to know where the cash you are lending is going.  This will help you decide if this is a worthwhile loan.  Furthermore, the documents should spell out the exact amount being loaned, a specific repayment schedule, interest rate and possible late fees.  Again, this allows all parties to have the protection that there will be no future misunderstandings or hard feelings.

4.  Charge interest.

It is critical to remember that an interest rate should be charged.  The rate that is selected should be based on the likelihood the money will be repaid, the use of the funds and ultimately the opportunity cost to you of lending these funds to another person.  By opportunity cost I am referring to what you may have been able to earn had you invested your money in another manner, such as stocks, bonds or real estate.  I suggest you charge a rate that is competitive to other lenders and within IRS guidelines.

5.  Communicate regularly.

Remember, if you can't afford to make the loan then do not put yourself in financial distress out of a perceived obligation.  However, should the loan be made it is wise to establish open lines of communication and have regular conversations from the beginning.  Being proactive rather than waiting for a problem to arise will keep things running much smoother.  Maintaining honest and open dialogue regarding the loan will allow them to be honest if they incur repayment problems and you can address it directly together avoiding awkward or dishonest excuses from the borrower.

If you find yourself in this type of situation and are uncertain about how to handle it I suggest you contact a financial professional and discuss your particular situation with them.  Having a third party without an emotional investment in the process is almost always beneficial.
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14119 Hits

New IRS rules for IRA rollovers

Back in March, the IRS announced that an individual can do only one rollover from one IRA to another in 365-day period, noting that the rule wouldn't apply before Jan. 1, 2015.

The regulation only applies to rollovers from one IRA to another, as well as one Roth IRA to another. Rollovers out of retirement plans and Roth conversions aren't covered under this rule. 

The latest announcement from the IRS provides additional clarity on the timing and application of the regulation.  For one thing, the agency confirmed that the rule will take effect on Jan. 1, putting to rest concerns that rollovers made anytime in 2014 might be subject to the regulation.

Further, the IRS's announcement clarifies that the rule applies to all of a given individual's accounts. Previously, some people thought that the rules applied individually to IRAs and Roth IRAs, hence permitting one IRA-to-IRA rollover and one Roth-IRA-to-Roth-IRA rollover. That's not the case, you get only one of these transactions per 365-day period.

Clients who are moving an IRA and who end up getting a check need to ensure that the check is being made to the receiving IRA and not to them personally. A check made directly to the client is considered a rollover, and the rules will apply. A check made to an institution, however, is considered a trustee-to-trustee transfer.

Naturally, with all tax law changes, you should consult your CPA to see how such a change may impact you directly.

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12161 Hits

New IRS Adjustments to Retirement Plans for 2015

The Internal Revenue Service has just announced the cost-of-living adjustments and other dollar limitations for retirement plans that take effect January 1, 2015.

Maximum Defined Contribution Plan Annual Addition
$53,000 - increase of $1,000 from 2014.
Effective for limitation years ending in 2015.

Salary Deferral Limit
$18,000 - increase of $500 from 2014.

Catch-up Limit for 401(k), 403(b), and 457 Plans
$6,000 - increase of $500 from 2014.

HCE Compensation
$120,000 - increase of $5,000 from 2014.
Applies for determining HCE's in 2016, based on compensation in 2015.

Maximum Compensation for Retirement Plan Purposes
$265,000 - increase of $5,000 from 2014.
Applies to plan years beginning in 2015.

Compensation for Determining if Officers can be Key Employees
$170,000 - remains unchanged from 2014.

Taxable Wage Base
$118,500 - increase of $1,500 from 2014.

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11545 Hits