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Back Door Roth IRA Conversion

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A well-planned tax strategy has become increasingly important to investors, especially with overwhelming uncertainty of what tax rates could potentially increase to in the future. That’s why some investors look to Roth IRAs, a fairly new arrival to the investment world.  They were first released in 1997 and have become more and more popular.

A Quick Roth IRA Refresher

Contributions to a Roth IRA do not receive an immediate tax deduction like a 401(k) or deductible Traditional IRA.  However, earnings grow tax-deferred and if holding requirements are met, all withdrawals (including contributions and earnings) can be withdrawn 100% tax free.  Roth IRAs are an unbelievably attractive investment vehicle for those who believe they are currently in a lower tax bracket than they will be in retirement.  More specifically, young people, who are years away from their high earning years and wish to forego tax deductions (while most likely in the lowest tax bracket of their lifetime) now reap the benefits of tax-deferred growth and tax-free withdrawals upon retirement.  As a young person myself, I cannot stress enough how attractive the Roth IRA can be for investors if they fit the “Roth mold”.    

Who Is Right for a Roth?

There are income limitations on who can contribute to a Roth IRA.  For 2014, a married couple filing their taxes jointly must have an AGI less than $181,000 to be able to contribute the maximum to a Roth IRA. In 2014, individual contributions max out at $5,500, or $6,500 if you are over the age of 50.  The AGI limit for singles in 2014 is $114,000.  If you make over this income level, there is a tax “work around” in place that could still allow you to contribute to a Roth, depending on your personal situation.  Prior to 2010, there was an income limitation on who could convert Traditional IRA dollars to a Roth IRA.  Since 2010, theincome limitation has been completely lifted for conversions, meaning anyone, regardless of their income, can convert funds from a Traditional IRA to a Roth IRA.  This raised the eyebrows for number geeks like myself, who viewed this ruling as an excellent planning opportunity for clients. 

Lifting the Income Limit for Roth Conversions

The abolishment of the income limit on Roth conversions means that if you are over the income limit to contribute to a Roth IRA, you could open a Traditional IRA and immediately convert the funds to a Roth IRA.  There is, however, a catch to this “work around”.  The conversion would typically only make sense if the client did NOT have an existing Traditional IRA.  The tax calculation on the conversion gets very messy if the client does in fact already have a Traditional IRA and typically, it doesn’t make sense if they do.  One main point to also keep in mind is that employer sponsored plans such as a 401(k) or 403(b) are not taken into consideration like a Traditional IRA is when calculating tax due for completing the conversion.  

Back Door Roth Conversion Criteria

☑ If you are over the income limit to contribute to a Roth IRA ($181,00 for couples and $114,000 for singles)

☑ And you do not have an existing Traditional IRA because you are taking full advantage of employer retirement plans (401(k), 403(b), etc.)

☑ And you have additional funds to save

If you can check all three boxes above, the “back door” Roth IRA is something you may want to consider based on your individual situation and long-term goals. Since this is a fairly new planning opportunity, this type of conversion is something we are closely monitoring for our clients on an individual basis.  As with any financial decision, it won’t make sense for everyone.  But it is our job as your advisory team to walk you through your options and help you make a smart financial decision. 

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. C14-004799

Investment Conference Highlights Exchange Traded Funds & Key Market Trends

 Recently I was lucky enough to escape an extremely cold Michigan and head to Hollywood Beach, Florida for Inside ETFs.  While fun in the sun was top of mind, it was last on the agenda.  The conference was well attended by more than 1,500 advisors and industry professionals and helped me expand my understanding of Exchange Traded Funds (ETFs) and where they best fit in portfolios.

ETF University

The first day was appropriately themed ETF University.  Experts started from the most basic level of understanding explaining what ETFs are and why investors utilize them.  They went on to explain how to trade these investments as their liquidity throughout the trading day is their most unique characteristic.  This is also, clearly, the most confusing and aspect of an exchange traded fund versus any other investment.  Much of my time during and after the conference has been spent furthering my understanding of this topic.

3 Key Market Trends and Research

Besides muddling through EFT University, I had the chance to attend sessions focused on current events in the economy and markets around the world. Here are some key trends:

Emerging Markets in Crisis: Negative sentiment, fear and pessimism in emerging markets is reaching a crescendo, presenting potentially excellent buying opportunities. 

Secular Bull Market in U.S. Equities: Well-known economists Liz Ann Sonders and Jeremy Siegel argued we are in the midst of a new secular bull market that began in 2009.  While they expect corrections over the coming years, overall they feel the long-term trend will continue to be positive.

The Bond Bear:  While the outlook for bonds are bleak, with the rising interest rate environment perceived to be just on the horizon, they are still one of the best hedges to an equity portfolio.  Bonds continue to be one of the only negatively correlated asset classes to stocks.  In other words, when stocks fall bonds rise and vice versa.  This is very important to reducing overall volatility of a portfolio and should not be abandoned, even now.

These key themes resonated with me as our investment committee at The Center has been discussing and actively incorporating changes to reflect these concerns in clients’ portfolios over the past few years.

While I am a fan of the old adage, “If it ain’t broke don’t fix it,” this should never apply to your investment portfolio.  It is very important to continually monitor the investment and financial planning landscape because it constantly changes.  Exchange Traded Funds are likely here to stay and their benefits to some investor’s portfolios are undeniable.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

C14-005169

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Investment risk is real. Every day. Every year. In up and down markets.

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It is generally in good times – when, for example, US Equities are performing well  – that we all could use a friendly reminder like this:

The management of investment risk is constant in successful investing.     

Benjamin Graham, known as the “father of value investing”, dedicated much of his book, The Intelligent Investor, to risk.  One of his many timeless quotes states, “The essence of investment management is the management of risks, not the management of returns.”  This statement can be counterintuitive to many investors.  Risk does not have to be an alarm; rather a healthy dose of reality in all investment environments.

Our Take on Risk

How do we at The Center attempt to manage risk as stewards of approximately $850 million dollars? 

  •   Executing a defined investment process

  •   Individual investment policy statements

  •   Asset Allocation – both Strategic and Tactical

  •   Rebalancing guidelines

We have been managing client assets for over 28 years.  We fully understand and appreciate that investment returns are important. We also know that risk is an important element in constructing portfolios intended to fund some of life’s most important goals such as sending a child or grandchild to college, funding a long and successful retirement, having sufficient funds for long-term health needs, and passing a legacy to loved ones.  While no one can guarantee future investment returns, our experience suggests that those following our risk management tactics above may better stay on track with their financial plan. 

If you are a client, we welcome the opportunity to talk more about how your portfolio is constructed.  Not a client?  We’d enjoy the opportunity to share our experience and review your goals and risk.

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.

Investing involves risk and investors may incur a profit or a loss. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. C14-004278

Newest Team Member Already Calling Us Family

 There are a lot of things that wouldn’t get done around here without an Office Manager. That’s why we’re more than thrilled to welcome our newest staff member Nancy Sechrist to The Center team. Nancy joined us on February 3rd and after a few weeks, we’re happy to report that it looks like she’ll stick around for a while! In fact, when asked how it’s going so far, Nancy replied,

Everyone at The Center is great! It truly feels like an extended family.”  

Nancy comes with vast experience in human resources, finances and personnel management, making her a perfect fit for our team. Nancy and her husband reside in Macomb with their two daughters. So, the next time you stop by The Center, make sure to track her down and welcome her to the family.

Curtain Call

 The Center's Team enjoys sharing their knowledge with the press to help stories come to life, share facts and bring important topics to the forefront.  We are also honored when we are recognized by media and publications for our work and service to our profession. Here's what's new:

CNBC.com

Angela Palacios, CFP®: Angela was quoted on CNBC.com on January 30, 2014, in an article titled, “5 ETF myths that keep investors away” by Leslie Kramer.

Financial Advisor Magazine

Melissa Joy, CFP®: Melissa was quoted in Financial Advisor Magazine in October 2013, in an article titled, “Uncommon Talents” by Karen DeMasters.

Center Honored as an AHA 2014 Start! Fit-Friendly Platinum Status Company

For six consecutive years The Center has been recognized as an American Heart Association Start! Fit-Friendly Company. For the most recent two years the firm received Platinum status, the highest recognition level. To achieve this award the health and wellness program met the following criteria:

• Physical activity options in the workplace
• Healthy eating options at the worksite
• Promotion of a wellness culture
• Implement at least nine criteria outlined by the AHA in the areas of physical activity, nutritition and culture
• Demonstrate measurable outcomes related to workplace wellness

A14-002767, A14-003915

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Taking Charge: Why Every Woman Should Get Involved in Financial Planning

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You may have spent decades building a life with a significant other or spouse, perhaps even leaving the important questions about assets and investments up to them. In fact, it is not uncommon for couples to pick and choose household responsibilities and slide into a routine to divide and conquer.  All the ducks are in a row so what is missing?  Some things like picking up the laundry, getting your oil changed or planning that much-needed vacation can easily be delegated.  But a mistake I see women making is delegating away personal financial planning.  You can leverage your time by letting others take on this task, but there are some pitfalls that come with this strategy. 

Risks of Delegating Financial Decisions

  • If you are suddenly put in a position where there is no one but you to make the decisions, you may be unprepared.

  • Others may not fully understand the vision you have for your future. If you aren’t actively involved, you risk losing your say.

  • You may be delegating to save yourself time, but playing catch-up when the duties fall on you can be very time-consuming.

Making Yourself a Priority

If properly planning for the future of your design has been shuffled to the bottom of your inbox, it is time to reprioritize and here is why:

  1. Your vision is like a best friend.  It reminds you of what is most important in your life.

  2. Putting your vision in the context of a financial plan helps connect values and money.

  3. Financial planning doesn’t mean planning for the day your health begins to fail, it means asking, “Where do I want to be in 3 years?”

  4. For those who are more risk-averse, having a plan can change unknowns into quantifiable nuggets of information to reflect upon and serves as the basis for decision making.

  5. While it might seem ok now to let a spouse or someone you trust steer your financial plan, if you don’t have an active role or solid understanding of desired goals you may be disappointed at the end result.

Here’s my challenge to women of all ages and stages of life:  Let’s not kid ourselves – things get missed.  Think of yourself first and give your personal financial life the kind of attention it deserves!

Laurie Renchik, CFP®, MBA is a 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.

Any opinions of Center for Financial Planning, Inc. are not necessarily those of Raymond James C14-004276

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The Center finds balance at Dave & Busters

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How do you beat the winter blues? It was a question the Center for Financial Planning Social Committee had been pondering.  We kicked around many ideas but finally decided on Dave and Buster’s.  For those of you not familiar, Dave and Buster’s is a complex where food, drink, gaming, and fun collide.  We could beat the blues while trying to beat one another at some of the best games around. 

On the afternoon of February 6th, we headed to Dave and Buster’s in Livonia.  It was a great afternoon filled with lots of food, drink, and camaraderie.  We found out we are a pretty competitive bunch.  There was a fierce Pac-Man tournament that took place between Tim Wyman, Amada Toia, Kali Hassinger, and Jennie Bauder.  Matt Chope and Melissa Joy found a video-enhanced Soccer Game.  Matt Trujllio stationed himself at a cool skee ball game that paid out lots of tickets while many others spent some time shooting hoops, playing air hockey, and various arcade games.

We decided as a group we would pool the tickets we won and get something for the office.  The number of tickets won totaled somewhere around 19,000 (told you we had fun!). Walking through our office you may spy two large, brightly colored gorillas (stuffed, of course).  They are our happy reminders of the day our office beat the winter blues!

Downside Hedging: The Diversified Portfolio Effect

 Wow, what a year for the markets in 2013!  Despite a rough end to 2012, uncertainty regarding the affordable care act and fiscal cliff, political tension in Syria and a government shutdown, U.S. stock markets surged and reached record highs.  When all was said and done, the Dow was up 26.5% and the S&P 500 rose by 29.6% for the year.  When you see numbers like that, you may think, “My accounts did very well this year, but they aren’t up close to 30%!”  That is a perfectly natural reaction. One reason you most likely did not see these types of returns is due to diversified asset allocation. 

Building a diversified portfolio using asset allocation can be tricky.  Let’s use a 60% stock, 40% bond portfolio as our example. Stocks are typically more risky and bonds tend to be more conservative and they often work inversely with one another.  When one is doing well, the other may be lagging.  This can help to even out returns and reduce the large swings in account values.  Within those two categories, one may see several different classes that comprise the 60% stock and 40% bond allocation. The stock side may include domestic large and small cap equities, international, emerging markets, energy, real estate, etc.  The bond side may include options such as short-term corporate debt, international, emerging markets or government bonds, etc.  The key is to build a portfolio that fits an investor’s individual long-term goals and needs so that the proper amount of stock and bonds can be utilized to help achieve those goals over different market conditions. 

In the chart below, we compare a $500,000 portfolio that is invested in  60% stock, 40% bonds and one that is 100% invested in stocks, as represented by the S&P 500 from 2000 – 2013.  The results are pretty staggering.  As you can see, in years the market did well, the diversified 60/40 portfolio lagged the performance of the S&P 500.  This is something we would expect because of the portfolio’s exposure to bonds.  However, in years where the S&P 500 did very poorly, such as 2001 and 2008, the 60/40 portfolio was down significantly less compared to its counterpart.  The downside hedging is what I want to focus on.  When one loses 40% of their account values like many investors experienced in 2008, he or she would need to realize a 67% gain to get back to even.  It can take a very long time to recover such substantial losses like we saw in 2008.  Diversification is the main reason why the 60/40 portfolio is worth $272,000 more than the all-stock portfolio during the same time period.

Indices Used: S&P 500, MSCI EAFE, & Barclays Cap Agg

 

Sources: Barclays Cap Agg Indices, Standard & Poor’s Indices, MSCI EAFE, and Bloomberg Markets

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. 

Let’s be honest – we all wish we could have the best of both worlds.  Who wouldn’t want to eat poorly, not exercise and still have that six pack?  The same can go for investing.  Many investors want to achieve 30% returns like we saw in 2013, but they don’t want to lose money in an environment where stocks decline 30%.  This is why The Center builds diversified portfolios for clients using asset allocation.  Asset allocation is not necessarily a “flashy” way of investing, nor does it get a dedicated nightly television show like Jim Cramer.  However, the lack of media attention has no bearing on its potential effectiveness for long-term, disciplined investing.  We understand and can empathize with clients when they are concerned that their accounts may not be participating in a market run up as much as they are seeing in the headlines. However, it is our job as your financial planning team to discuss the reasoning for this discrepancy and to help keep you focused on the long-term plan, which is what ultimately leads to investor confidence.

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. C14-003064

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