The Truth You Need to Hear: The value of a Dutch Uncle

Contributed by: Timothy Wyman, CFP®, JD

Recently, during a preliminary meeting with a new client, he told us that what he really wants us to be is his Dutch Uncle.  I vaguely recalled hearing the term before, but I asked him to clarify -- just to be sure we were on the same page.  The gentleman, in his 70’s, shared that what he really valued most was to work with someone who would give him frank advice, challenge his assumptions on some important financial issues he was wrestling with, and tell him what he needed to hear rather than what he wanted to hear – and do it with compassion. 

The interaction left quite an impression on me. I am glad that I asked for clarification, because if I would have just waited to Google “Dutch Uncle” after the meeting, I may have only seen definitions that address, “frank, harsh, blunt, stern and severe.” I might have missed out on the “with compassion” part; which is very important.

Frank, Candid & Compassionate

A few years ago I read “The Last Lecture” by Randy Pausch.  First, if you haven’t read it, get a copy now. Along with a box of tissue. Second, if you have teenage or adult children, get them a copy too. Third, if you’d rather watch the video, it’s here on YouTube with over 17 million views. You won’t be disappointed. Randy was a professor at Carnegie Mellon University in Pennsylvania. After being diagnosed with pancreatic cancer, he gave his last lecture titled “Really Achieving Your Childhood Dreams.” That was on September 18, 2007. He passed away on July 25, 2008. One of Randy Pausch’s experiences included a man he referred to as his Dutch Uncle. One day, this Uncle took him for a walk to share the truth that he needed to hear (that Randy’s arrogance was getting in the way of his long term success) in a frank, candid and compassionate way and it became a turning point in Randy’s life.

Sales vs. Advice

The Dutch Uncle analogy can also be used to illustrate the difference between sales and advice -- or perhaps, those acting in your best interest and those that do not.  An advisor, or someone interested in your wellbeing, will provide candid and frank feedback; because they want to see you succeed.  In my profession and from my perspective, this is the true litmus test of an advisor: Are you willing to lose a client relationship because you act as their Dutch Uncle (compassion included)?  If you are worried about losing a client because they might not like what you have to provide, share or recommend in your learned professional opinion; then you are really acting in a sales capacity and not an advisory role. Which is fine, just don’t refer to yourself as an advisor.

Nowhere is there a need more for a Dutch Uncle than in financial planning and investment management. Our brains, frankly, are wired to make the easy or wrong decision too many times.  Here’s one familiar example: Buy low and sell high.  But how difficult is this mantra to follow?  Studies suggest it’s extremely difficult. Can you think about what you were feeling and hopefully not implementing in March 2009 during the Great Recession? I bet a Dutch Uncle was pretty valuable.  Or, how about the question can I retire now? Sometimes the correct feedback is you are ready to retire – unfortunately your money isn’t!  A Dutch Uncle might suggest some tradeoffs such as continuing to work but at reduced hours, trading time for income. A Dutch Uncle might also say, sure, go buy X and accumulate additional debt; but also acknowledge that this action will have an impact on your financial independence.  It’s still your choice, but the funds need to come from somewhere.

If you don’t have a Dutch Uncle perhaps it’s time to seek one out – your success might just depend upon it.

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a contributor to national media and publications such as Forbes and The Wall Street Journal and has appeared on Good Morning America Weekend Edition and WDIV Channel 4. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), mentored many CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

---

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Timothy Wyman, CFP® and not necessarily those of Raymond James.

Part 4 – A Year of Lessons on Money Matters for your Children & Grandchildren

Contributed by: Matthew E. Chope, CFP®

Try it all and be prepared to make some mistakes.

That’s a good reminder to everyone, no matter the generation. But when it comes to passing on lessons about money matters to your kids or grandkids, I say try to keep those mistakes small and learn from them. Many of us like to have firsthand experience (I know I do) rather than just taking someone’s word for it. But if I could offer advice from my own experience, here’s what I’d say:

Start with Diversification

In my opinion, diversification is probably the number one most important rule in investing.  It will not make you rich but it can help keep you from going poor. You want to diversify your experiences greatly in your 20s because it’s easy to invest a lot of time and energy in one area and end up not liking where you get to.  Imagine climbing a ladder for 5-10 years only to find that it was leaning against the wrong wall! Use this time in life to literally and figuratively invest your time and money in anything that you’re curious about. Try things that make you uncomfortable.

Along the meandering path, realize you are going through this learning curve.  Try to take it all in. Notice your senses, your happiness and fulfillment relating to the different activities you invest in.  Most people get to the last quarter of their life seeking greater fulfillment and happiness from their life.  They never paid attention during the first quarter to the path they were on or the wall they were climbing. 

Along your journey consider that data is not information and information is not knowledge and knowledge is not experience and experience is not wisdom (as you’ll see in the diagram below).  Reflect on where you might be in each investment.

Digging Through the Data to Make Decisions

To take this idea a little deeper, we are continually inundated with data; the internet, TV, radio, people -- some with facts and some with opinions.  A key to financial success for many is being able to distinguishing useful data and information from nonsense. Knowing how to gather a collection of measured data that can be extrapolated into information is the cornerstone of constructive decision-making. 

Knowledge requires thoughtful discernment of information, combined with known truths founded on logic based proofs.  Notice I went far with math from the last statement.  So this is how my thoughts are structured and it works for me.  There may be other ways to get to constructive decision making also, but I believe this will determine a great deal of your financial success in life.  

Facts can strengthen beliefs to formulate knowledge, but this is where you will find disagreement.  My experience has been that a combination of well-formulated beliefs with accepted knowledge provides a basis for openness and understanding.

Throughout the coming years you will go through interpretations of knowledge gaining first-hand experience as events almost seem to repeat.  These experiences might not be exact but understanding the patterns over decades can eventually lead to wisdom.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

---

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Matthew Chope, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Diversification does not ensure a profit or guarantee against a loss.

Can You Roll Your 401(k) to an IRA without Leaving Your Job?

Co-Contributed by: Nick Defenthaler, CFP® and Matt Trujillo, CFP®

Typically, when you hear “rollover” you think retirement or changing jobs.  For the vast majority of clients, these two situations will really be the only time they will complete a 401k rollover.  However, you might not know about another type of situation in which you can move funds from your company retirement plan to your IRA.  This is what’s known as the “in-service” rollover and is an often overlooked planning opportunity. 

Rollover Refresher

A rollover is a pretty simple concept.  It is the process of moving your employer retirement account (401k, 403b, 457, etc.) over to an IRA that you have complete control over and is completely separate from your ex-employer.  Most people do this when they retire or switch jobs.  If completed properly, rolling over funds from your company retirement plan to your IRA is a tax and penalty free transaction because the tax characteristics of a 401k and IRA are generally the same.   

What is an “in-service” rollover?

Unlike the “traditional” rollover, an “in-service” rollover is probably something you’ve never heard of and for good reason.  First, not all company retirement plans allow for it, and second, even for those that do, the details can be confusing to employees.  The bottom line: An in-service rollover allows an employee (often at a specified age such as 55) to be able to roll their 401k to an IRA while still employed with the company.  The employee is also still able to contribute to the plan, even after the rollover is complete.  Most plans allow this type of rollover once per year, but depending on the plan, you could potentially complete the rollover more often for different contribution types.

Why complete an “in-service” rollover?

More investment options – With any company retirement plan, you will be limited to the investment options the plan offers.  By having the funds in an IRA, you can invest in just about any mutual fund, ETF, stock, bond, etc.  Having access to more options can potentially improve investment performance, reduce volatility and make your overall portfolio allocation more efficient.

Coordination with your other assets – If you’re working with a financial planner, he or she can coordinate an IRA into your overall plan far more efficiently than a 401k.  How many times has your planner recommended changes in your 401k that simply don’t get completed? (Tisk, tisk!)  If your planner is managing the IRA for you, those recommended changes are going to get completed instead of falling off your personal “to-do” list.     

Additional flexibility – IRAs allow certain penalty-free withdrawals that aren’t available in a 401k or other company retirement plans (certain medical expenses, higher education expenses, first time homebuyer allowance, etc.).  Although using an IRA for these expenses should be a last resort, it’s nice to have the flexibility if needed.

Exploring “in-service” rollovers

So what now?  The first thing is to always keep your financial planner in the loop when you retire or switch jobs to see if a rollover makes sense for your situation.  Second, let’s work together to see if your current company retirement plans allows for an in-service rollover.  It’s typically a 5 minute phone call with us, you and your HR department to find out.  With so many things going on in life, an in-service rollover is probably pretty close to the bottom of your priority list.  This is why you have us on your financial team. We bring these opportunities to your attention and work with you to see if they could benefit your situation! 

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s Money Centered and Center Connections blogs.

Matthew Trujillo, CFP®, is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

---

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler, CFP® & Matt Trujillo, CFP®, and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. IRA withdrawals may be subject to income taxes, and prior to age 59 1/2 a 10% federal penalty tax may apply. In-Service Rollovers mentioned may not be suitable for all investors. Be sure to contact a qualified professional regarding your particular situation before electing an In-Service Rollover. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss.

3 Steps for Coping with Financial Roadblocks

Contributed by: Laurie Renchik, CFP®, MBA

Going through a divorce or changing jobs can put your life in a spin. That wasn’t in your plan, so what’s next? Getting financial facts together, especially during a significant change in life, can easily get shifted to the back burner. I see these kinds of life events as potential financial roadblocks.  When you begin navigating through a financial roadblock, all of the answers may not be clear upfront.

Undoubtedly there are options and trade-offs involved.   People worry that they lack knowledge on financial topics.  If you find yourself in a position where financial planning in that moment seems overwhelming, intimidating, or you are just plain fearful of making a mistake, I recommend starting with these three steps to simplify, organize, focus and ultimately overcome your financial roadblock:

1. Create a realistic post-financial change budget.  This could be post-retirement, post-divorce or post-career change.  Maybe you haven’t paid enough attention to what you are spending or saving. You need to take into consideration a change in income. This fundamental step will help you understand what you can or need to do.

2. Invest in yourself by putting together a snapshot of your financial health.  This is accomplished with a personal net worth statement. The formula to use is:  Assets – liabilities = net worth.  There are a number of reasons why preparing a net worth statement is a good move.  It gives you a one page reality check to use as a planning tool, you can check progress toward financial objectives and it can help you identify potential red flags like an emergency fund that has dipped too low or debt that is rising faster than anticipated.

3. Address financial decisions proactively.  Instead of guessing or letting things roll along, begin by thinking about financial goals and obligations on a timeline.  This can be as simple as prioritizing in 3 buckets.  What do I have to do now (immediate action)? What can be tackled soon (big picture prep steps)? And what can be done later (accomplished after the priorities are under control)?

You may not know all of the answers today, but this exercise will at least help simplify, organize, and address the financial issues that are weighing on your mind. If you need help navigating through a financial change due to divorce or a career move don’t hesitate to call or email me.    

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Laurie Renchik and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. 

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

---

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Boomerang Drain: Can an Adult Child Derail your own Financial Goals?

Contributed by: Timothy Wyman, CFP®, JD

You’ve raised your children, launched them out into the world, and cut the purse strings, right? For many of us, the answer is no. Financially caring for those that left the nest but not the wallet is a sensitive subject, but a real one when it comes to planning for your own retirement. The National Center for Policy Analysis reports that more than half of parents of 18 to 39 year olds are providing some support:

59% of baby boomer parents financially support their adult children, often paying living expenses, medical bills and student loans.

For most of us, there is a relatively set amount of money/cash flow to work with.  If we spend more on financial support for adult children, this leaves less for other areas such as travel and/or saving. This is not making a judgment if such support is right or wrong. It is just math. 

Tactics for Setting Goals and Boundaries

If you find yourself wanting to provide financial support, consider setting both goals and boundaries.  Ask yourself these questions:

1. What expenses are you willing to contribute?

2. How long do you want to contribute? 

3. What are the expectations of your child?

In the past, I have worked with clients that have decided to provide financial support to their “boomerang” child.  They were glad that they were in the financial position to do so and acknowledged that some of their own plans were being put on hold because of their choice.  The parents set a 2-year window for their child, a son in this case, and laid out their expectations. It looked something like this:

• They decided they were willing to pay for their adult child’s rent and car for 3 months at 100%

• The next three months they covered 50% of the rent

•  After that, the child was fully responsible for the payment

 The plan worked out well for all of them and now mom and dad are back to enjoying the empty nest years.

More Retirement Goal Drains

Boomerang drain is just one of the pitfalls or obstacles to avoid if you want your empty nest years feel like being, “In college, only with money.” Many of us simply don’t make the time to plan what we want your empty nest years to be (here are my tips on that). Another obstacle can be debt, which doesn’t have to be a four-letter word.  Managing the use of credit is an important component to building and maintaining wealth and having flexible cash flow to accommodate travel or ramping up your savings for retirement. For more strategies on managing debt, click here.

When it comes to reaching retirement goals, I’m a where there’s a will, there’s a way kind of person. Is the glass half full or half empty? I prefer it filled to the rim with a napkin underneath to catch any potential drips. We all face challenges in retirement planning. The important part is overcoming those challenges by filling that glass to overflowing … and I’ve seen many clients do it over the years. If you are an empty nester facing any of these potential drains on your goals, talk to your financial planner. 

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

---

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Timothy Wyman, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

5 Ways to Locate Lost Assets

Contributed by: Sandra Adams, CFP®

Working for a firm that has been serving clients for 30 years, it is not surprising that we are often in the position of helping to settle estates, either for existing clients or their relatives. Aside from assets that are known, an important step in the process is to search for assets that might not have been documented, or assets that the deceased was unaware of. Here, I share some very useful resources that can be used to search out missing life insurance policies, unclaimed assets, or money due:

USA.GOV - the site provides links to various resources to search out unclaimed assets by state, lost pensions, unclaimed tax refunds, settlements for closed banks and credit unions, money due from mortgage transactions, savings bonds and more.

Michigan Money Quest - The Michigan Department of Treasury's site for unclaimed property.

NAUPA/MissingMoney.com - The National Association of Unclaimed Property Administrators.

NAIC - The National Association of Insurance Commissioners orphaned life insurance policy search.

MIB Solutions - Lost life insurance policy locator service.

If you are the executor of an estate or think you might be the beneficiary of a lost insurance policy or asset left by a loved one, consider searching these sites.

To ensure that you don't leave any "lost" assets for your heirs, search these sites during your lifetime and do your best to document all of your assets, income sources, and advisors using our Personal Record Keeping document.  And make sure your financial planner is aware of your full financial picture so that he or she can quarterback the estate settlement process when the time comes.

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012-2014 Sandy has been named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

---

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Sandy Adams, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. You should discuss any legal matters with the appropriate professional.

What to Consider Before You Buy a Second Home

Contributed by: Timothy Wyman, CFP®, JD

Well it’s that time of year again.  No not the cold and flu season – well actually it’s that time too.  Rather, I am talking about the time of year where my wife and I go up north for a few days and after a fantastic 24 hours have the conversation.  You know, should we buy our own vacation home/condo rather than mooch off our friends (hey they are good friends)? It’s a question that many of my Empty and Soon-to-be-Empty Nester clients ask.

First Steps to a Second Home

Our friends, we will call them John & Michelle to protect their identity, decided a few years ago to purchase a condo in God’s Country (that’s northern Michigan….not way up North).   So far the purchase has worked out well and I think they did a few things right.  They actually bought the condo with another family as they knew neither of them would use the condo fully on their own.  They spelled out their “parenting” time or who had first right of refusal for each Holiday.  And last but not least, they formed a Limited Liability Company (LLC) to own the property in order to shield other personal assets from potential liability. All in all, the purchase has been wonderful for us…..er I mean them.

Consider the “Carrying” Costs

For a short period of time a second home or vacation home sounds like a wonderful idea to us (wine is involved in many instances).  However, after a few minutes we decide that it is not for us.  Although interest rates are low, making the cost more manageable, we have some other financial priorities at this time.  Also, many folks do not fully consider, or fully appreciate, the “carrying” costs of owning a second home.  The real or total cost of owning a second home is much more than principal & interest payments.  Additional costs can include:

• Property taxes

• Association dues

• Utilities

• Insurance

• Repairs & maintenance (necessary year round, whether or not you’re there)

Additionally, simply furnishing and updating two homes is no cheap undertaking. For now, we are content renting for the couple of times that we make it up north. 

3 Factors in Buying a Second Home

That said, I wouldn’t be surprised if we decide to make a second home purchase in the future – for lifestyle purposes rather than investment.  And if we do, we’ll make the following a part of our decision-making process:

• Use: Do we expect to use it more than just a couple of weeks? If so then buying may make sense.

• Location: What area makes sense now and in the future? Are we willing to drive X hours?

• Price: What price point will still allow us to fund retirement savings? What are the ongoing expenses?

Adding a second home can have wonderful lifestyle benefits.  Many a family has built cherished memories thanks to the family cottage.  Make sure you weigh the full cost of owning a second home with the desired lifestyle benefits.

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

---

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James.

Your Go-To List for Record Retention – Just in Time for Tax Season

It’s hard to believe that it’s already time to start going through piles of records and getting your documents in order for tax season.  If you’re like me, going through this process reminds me of how much I hate to see stacks of paper and has me dreaming of a nice, neat desk!  Here is a concise list to help you determine what to keep and what to shred as you get organized this year:

Bank Statements: Keep one year unless needed for tax records.

Cancelled Checks: Keep one year unless needed for tax records.

Charitable Contributions: Keep with applicable tax return.

Credit Purchase Receipts: Discard after purchase appears on credit card statement if not needed for warranties, merchandise returns or taxes.

Credit Card Statements: Discard after payment appears on credit card statement.

Employee Business Expense Records: Keep with applicable tax return.

Health Insurance Policies: Keep until policy expires, lapses or is replaced.

Home & Property Insurance: Keep until policy expires, lapses or is replaced.

Income Tax Return and Records: Permanently.

Investment Annual Statements and 1099's: Keep with applicable tax return.

Investment Sale and Purchase Confirmation Records: Dispose of sale confirmation records when the transactions are correctly reflected on the monthly statement. Keep purchase confirmation records 3-6 years after investment is sold as evidence of cost.

Life Insurance: Keep until there is no chance of reinstatement. Premium receipts may be discarded when notices reflect payment.

Medical Records: Permanently.

Medical Expense Records: Keep with applicable tax return if deducted on tax return.

Military Papers: Permanently (may be required for possible veteran's benefits).

Individual Retirement Account Records: Permanently.

Passports: Until expiration.

Pay Stubs: One year. Discard all but final, cumulative pay stubs for the year.

Personal Certificates (Birth/Death, Marriage/Divorce, Religious Ceremonies): Permanently.

Real Estate Documents: Keep three to six years after property has been disposed of and taxes have been paid.

Residential Records (Copies of purchase related documents, annual mortgage statements, receipts for improvements and copies of rental leases/receipts.): Indefinitely.

Retirement Plan Statements: Three to six years. Keep year end statements permanently.

Warranties and Receipts: Discard warranties when they are clearly expired. Use your judgment when discarding receipts.

Will, Trust, Durable Powers of Attorney: Keep current documents permanently.

My best advice?  Print this list and keep it with your tax records to revisit each tax year.  And call your financial planner if you have any questions about what you need to keep. 

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012-2014 Sandy has been named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

---

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This list may not be a complete description of the documents available for shredding or their retention requirements. You should discuss any tax matters with the appropriate professional.

NUA: Answering 7 Questions about Net Unrealized Appreciation

The financial planning profession is full of acronyms such as RMD, IRA, TSA and NUA. One acronym making a comeback due to the increase in the US Equity market is “NUA”. NUA stands for net unrealized appreciation and anyone with a 401k account containing stock might want to better understand it. NUA comes into play when a person retires or otherwise leaves an employer sponsored 401k plan. In many cases, 401k funds are rolled over to an IRA. However, if you hold company stock in the 401k plan, you might be best served by rolling the company stock out separately.

Before getting to an example, here are the gory details: The net unrealized appreciation in securities is the excess of the fair market value over the cost basis and may be excluded from the participant's income. Further, it is not subject to the 10% penalty tax even though the participant is under age 59-1/2, since, with limited exceptions; the 10% tax only applies to amounts included in income. The cost basis is added to income and subject to the 10% penalty, if the participant is under 59.5 and the securities are not rolled over to an IRA.

Suppose Mary age 62 works for a large company that offers a 401k plan. Over the years she has purchased $50,000 of XYZ company stock and it has appreciated over the years with a current value of $150,000. Therefore, Mary has a basis of $50,000 and net unrealized appreciation of $100,000.

If Mary rolls XYZ stock over to an IRA at retirement or termination, the full $150,000 will be taxed like the other funds at ordinary income tax rates when distributed. However, if Mary rolls XYZ stock out separately the tax rules are different and potentially more favorable. In the example above, if Mary rolls XYZ out she will pay ordinary income tax immediately on $50,000 but may obtain long term capital treatment on the $100,000 appreciation when the stock is sold; thus potentially saving several thousand dollars in income tax.

Here are some critical questions to review when considering taking advantage of this opportunity:

Have you determined whether you own eligible employer stock within your workplace retirement plan?

Have you determined whether you have a distribution triggering event that would allow you to take a lump sum distribution of your employer stock from your plan?

Have you discussed the special taxation rules that apply to lump sum distributions of employer stock and NUA?

• Cost basis taxable as ordinary income

• Net unrealized appreciation taxable at long term capital gains rates when stock is sold

Have you discussed the criteria necessary to qualify for NUA’s special tax treatment?

• Qualifying lump sum distribution including stock of the sponsoring employer taken within one taxable year

• Transfer of stock in kind to a brokerage account

• Sale of stock outside of the current qualified plan

Have you discussed the pros and cons of rolling over your employer stock into an IRA, taking into consideration such things as available investment options, fees and expenses, services, taxes and penalties, creditor protection, required minimum distributions and the tax treatment of the employer stock?

Have you discussed the pros and cons of selling your employer stock within the plan, including the need for proper diversification?

Have you discussed with your tax advisor whether a NUA tax strategy would be beneficial from a tax planning perspective given your current situation?

These are a handful of the key questions that should be considered when deciding whether or not this opportunity makes sense for you. Professional guidance is always suggested before making any final decisions.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

---

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Matt Trujillo, CFP® and Tim Wyman, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Strategies mentioned may not be appropriate for all investors.

Fixed Annuities in Retirement

Who doesn’t like a level of certainty in life?  In a world full of unknowns, it’s human nature to feel more secure by having some type of guarantee.  For some, this might mean holding a certain amount of cash in the bank or having your home paid off in retirement, but the topic I’m tackling in this blog is fixed income sources in retirement.  Traditionally this meant a pension, social security, and annuity income.  However, with pension plans now being about as common as seeing a walkman CD player and social security having its own issues, I think it makes sense to explore other options to provide a guarantee for a portion of your retirement income need.

The 50% Fixed Income Rule of Thumb

One of the many questions we discuss with clients when working with them on their financial plan (especially when they are approaching retirement) is how much of their spending goal should be comprised of fixed income sources?  Ideally, we would like to see that percentage around 50%, but every client situation is different.  So if the annual spending goal is $100,000 gross, $50,000 of fixed income sources (social security, pension or annuity income) is desirable with the remainder of income being drawn from a well-balanced, diversified portfolio.  However, depending on the client’s risk tolerance and other assets, it could make sense to have that percentage higher or lower. 

The Bygone Pension Era

Since one of the main fixed income sources for a retiree was a company pension – now virtually non-existent – it’s often up to you. The burden has been placed on the employee to fund their own retirement through a 401k, 403b or other defined contribution plan.  While company matches certainly help the employee, they don’t come close to offering the same lifetime income benefit a pension provides.  As such, it could make a lot of sense to explore the option of utilizing a fixed annuity for part of your retirement need. 

Making Room in your Plan for Annuities

Annuities don’t make sense for everyone and they have rightfully received a bad rap. Many of them are expensive and were “sold” in situations where it just didn’t make sense for the client based on their needs and their personal situation.   However, annuities are around for a reason, because they can fit the need for certain clients for a PORTION of their financial plan.  With so many different options for income, annuities typically place the burden of risk on the insurance company offering the annuity for a guaranteed stream of income.  Having a portion of your spending goal met by a fixed income source, such as an annuity, gives many clients an added layer of peace of mind, knowing that the income stream will be there regardless of what the market is doing. 

In summary, annuities can have a place in your financial plan but like anything financial, they don’t make sense for everyone.  This is our job, as your financial team member, to work with you to see if they have a place in your plan.  Don’t cringe when you hear the word “annuity” like many do. Please have an open mind because they could play a very important role in your retirement!

---

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s Money Centered and Center Connections blogs.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation to buy or sell any investment. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. There are special risks associated with investing in bonds (fixed income) such as interest rate risk, market risk, call risk, prepayment risk, credit risk, and reinvestment risk. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. 

A fixed annuity is a long-term, tax-deferred insurance contract designed for retirement. It allows you to create a fixed stream of income through a process called annuitization and also provides a fixed rate of return based on the terms of the contract. Fixed annuities have limitations. If you decide to take your money out early, you may face fees called surrender charges. If you're not yet age 59½, you may also have to pay an additional 10% tax penalty on top of ordinary income taxes. A fixed annuity contains guarantees and protections that are subject to the issuing insurance company's ability to pay for them.