What Fees Are Associated With Your Retirement Plan?

By Chris Chen CFP | Financial Planning , Investment Planning , Retirement Planning

There’s a little secret associated with your workplace -sponsored retirement plan.  Usually that is a 401k. However, it can also be a 403b, a 457, or a SIMPLE IRA. Most participants think their plan is free – That it doesn’t cost them anything to join, contribute, and invest.  Unfortunately, that’s not entirely true.

While employees typically aren’t charged any out-of-pocket costs to participate in their plans, participants do pay expenses, many of which are difficult to find and even more difficult to calculate. New regulations from the Department of Labor (DOL), which oversees qualified workplace retirement plans, should make it easier for participants to locate and comprehend how much they are paying for the services and benefits they receive.

Here’s a summary of the information you should receive.

1. Investment-related information, including information on each investment’s performance, expense ratios, and fees charged directly to participant accounts. These fees and expenses are typically deducted from your investment returns before the returns (loss or gain) are posted to your account. Previously, they were not itemized on your statement.
2. Plan administrative expenses, including an explanation of fees or expenses not included in the investment fees charged to the participant. These charges can include legal, recordkeeping, or consulting expenses.
3. Individual participant expenses, which details fees charged for services such as loans and investment advice. The new disclosure would also alert participants to charges for any redemption or transfer fees.
4. General plan information, including information regarding the investments in the plan and the participant’s ability to manage their investments. Most of this information is already included in a document called the Summary Plan Description (SPD). Your plan was required to send you an SPD once every five years, now they must send one annually.

These regulations have been hailed by many industry experts as a much-needed step toward helping participants better understand investing in their company-sponsored retirement plans. Why should you take the time to learn more about fees? One very important reason: Understanding expenses could save you thousands of dollars over the long term.

While fees shouldn’t be your only determinant when selecting investments, costs should be a key consideration of any potential investment opportunity. For example, consider two similar mutual funds. Fund A has an expense ratio of 0.99%, while Fund B has an expense ratio of 1.34%. At first look, a difference of 0.35% doesn’t seem like a big deal. Over time, however, that small sum can add up, as the table below demonstrates.

	Expense ratio	Initial investment	Annual return	Balance after 20 years	Expenses paid to the fund
Fund A	0.99%	$100,000	7%	$317,462	$37,244
Fund B	1.34%	$100,000	7%	$296,001	$48,405

Over this 20-year time period, Fund B was $11,161 more expensive than Fund A. You can perform actual fund-to-fund comparisons for your investments using the FINRA Fund Analyzer.

If you have questions about the fees charged by the investments available through your workplace retirement plan, speak to your plan administrator or your financial professional.

 

Note:   Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so you may lose money. Past performance is no guarantee of future results. For more complete information about any mutual fund, including risk, charges, and expenses, please obtain a prospectus. Please read the prospectus carefully before you invest. Call the appropriate mutual fund company for the most recent month-end performance results. Current performance may be lower or higher than the hypothetical performance data quoted. The hypothetical data quoted is for illustrative purposes only and is not indicative of the performance of any actual investments. Investment return and principal value will fluctuate; and shares, when redeemed, may be worth more or less than their original cost.

 

Have you received a tax refund this year?

By Chris Chen CFP | Financial Planning

If you have received a tax refund this year, especially a big one, you may look at it as a form of forced savings. If the money is automatically withheld, you cannot spend it, right? Maybe so. Another way to look at it is that you have lent money to Uncle Sam, and now you got it back interest-free.

There are better way to save than making an interest-free loan to our government. For instance, consider setting an automatic transfer from your checking to a savings, or money market account. The money will be available and you might get some interest. When interest rates go back up, it may add up to a nice little bonus.

If you prefer not to have the money available, consider setting an automatic deposit to an IRA or another investment account (be mindful of the contribution limits). This gets your money working for you right away, and may fit well with your long term planning.

Alternatively, you could pay down credit card debt. Your return would be equal to the rate of interest that the credit card charges you.

Leave a comment if you have other ideas!

Marriage and Building Wealth: Finding a Happy Balance

By Chris Chen CFP | Financial Planning , Retirement Planning

Marriage affects your finances in many ways, including your ability to build wealth, plan for retirement, plan your estate, and capitalize on tax and insurance-related benefits. Here are some considerations to keep in mind if you are thinking of getting married or have just tied the knot.

Building wealth

If both you and your spouse are employed, two salaries can be a considerable benefit in building long-term wealth. For example, if both of you have access to employer-sponsored retirement plans, your joint contributions are double the individual maximums ($17,500 for 2013). Similarly, a working couple may be able to pay a mortgage more easily than a single person can, which may make it possible for a couple to apply a portion of their combined paychecks for family savings or investments.

Retirement benefits

Some (but not all) pensions provide benefits to widows or widowers following a pensioner’s death. When participating in an employer-sponsored retirement plan, married workers are required to name their spouse as beneficiary unless the spouse waives this right in writing. Qualifying widows or widowers may collect Social Security benefits up to a maximum of 50% of the benefit earned by a deceased spouse.

Estate planning

Married couples may transfer real estate and personal property to a surviving spouse with no federal gift or estate tax consequences until the survivor dies. But surviving spouses do not automatically inherit all assets. Couples who desire to structure their estates in such a way that each spouse is the sole beneficiary of the other need to create wills or other estate planning documents to ensure that their wishes are realized. In the absence of a will, state laws governing disposition of an estate take effect. Also, certain types of trusts, such as QTIP trusts and marital deduction trusts, are restricted to married couples.

Tax planning

When filing federal income taxes, filing jointly typically results in lower tax payments when compared with filing separately.

Debt management

In certain circumstances, creditors may be able to attach marital or community property to satisfy the debts of one spouse. Couples wishing to guard against this practice may do so with a prenuptial agreement.

The opportunity to go through life with a loving partner may be the greatest benefit of a successful marriage. That said, there are financial and legal benefits that you may want to explore with your beloved.

 

Beware of the Mortgage Tax Deduction

By Chris Chen CFP | Financial Planning

Last week I wrote this short piece for the Boston Globe’s website series on tax planning for 2013 (it’s never too early!):

“For many of us, the mortgage tax deduction provides the single largest reduction in taxable income.

With mortgage interest rates continuing to be very attractive, it makes sense to consider refinancing your mortgage, if you have not already done so.

A mortgage refinance has the potential of reducing your payments, and improving your cash flow. It will also reduce reduce your mortgage tax deduction, and therefore increase your taxes due. Make sure to adjust your tax withholding so that you won’t owe taxes (and interest and penalties) as a result of refinancing.

http://www.boston.com/business/2013/04/22/bdc-minimize-uncle-sams-take-gallery/z4za5wNwPJlpIVjoZVAQkJ/story.html?pg=5

High-Yield Bonds: Income Potential at a Price

By Chris Chen CFP | Financial Planning , Retirement Planning

High-yield bonds have long been a popular source of diversification for long-term investors who seek to maximize yield and/or total return potential outside of stocks.(1)  High-yield issues often move independently from more conservative U.S. government bonds as well as the stock market.

These bonds — sometimes referred to as “junk” bonds — are a class of corporate debt instruments that are considered below investment grade, due to their issuers’ questionable financial situations. These situations can vary widely — from financially distressed firms to highly leveraged new companies simply aiming to pay off debts.

As the name “high yield” suggests, the competitive yields of these issues have helped attract assets. With yields significantly higher than elsewhere in the bond market, many investors have turned to high-yield bonds for both performance and diversification against stock market risks.

These are valid reasons for investing in high-yield bonds, especially long term. But as you read about what these issues could offer your portfolio, it’s also wise to consider how these bonds earned their nicknames.

The Risk-Return Equation

In exchange for their performance potential, high-yield bonds are very sensitive to all the risk factors affecting the general bond market. Here are some of the most common risks.

• Credit risk: A high-yield bond’s above-average credit risk is reflected in its low credit ratings. This risk — that the bond’s issuer will default on its financial obligations to investors — means you may lose some or all of the principal amount invested, as well as any outstanding income due.
• Interest rate risk: High-yield bonds often react more dramatically than other types of debt securities to interest rate risk, or the risk that a bond’s price will drop when general interest rates rise, and vice versa.
• Liquidity risk: This is the risk that buyers will be few if and when a bond must be sold. This type of risk is exceptionally strong in the high-yield market. There’s usually a narrow market for these issues, partly because some institutional investors (such as big pension funds and life insurance companies) normally can’t place more than 5% of their assets in bonds that are below investment grade.
• Economic risk: High-yield bonds tend to react strongly to changes in the economy. In a recession, bond defaults often rise and credit quality drops, pushing down total returns on high-yield bonds. This economic sensitivity, combined with other risk factors, can trigger dramatic market upsets. For example, in 2008, the well-publicized downfall of Lehman Brothers squeezed the high-yield market’s tight liquidity even more, driving prices down and yields up.

The risk factors associated with high-yield investing make it imperative to carefully research potential purchases. Be sure to talk to your financial professional before adding them to your portfolio.

Note (1): Diversification does not ensure a profit or protect against a loss in a declining market.

© 2013 S&P Capital IQ Financial Communications. All rights reserved.

 

Health Insurance Issues Post Divorce

By Chris Chen CFP | Divorce Planning

With children and income issues on top of the list of critical concerns, health insurance is often overlooked by divorcing individuals, their divorce mediators and divorce lawyers . Everyone agrees that health insurance is important, but expects or hopes that a solution will find itself.
In the case when one of the divorcing parties has employer provided health insurance, it is assumed that this will continue for the divorcing spouse, as mandated by Massachusetts law. In addition,, people usually don’t think of the tax consequences of continuing employer based health insurance for a divorcing spouse . That is because employer based health insurance is considered a non-taxable fringe benefit for the employee and his or her family under IRS rules. Yet that does not necessarily imply a tax free benefit for an ex-spouse.

Health Insurance, Divorce and the IRS

Under IRS rules, a benefit provided by an employer to the former spouse of an employee, is a taxable benefit to the employee. Hence the employee must pay federal income tax on his ex-spouse’s health insurance. In turn that imputed income could be deducted as alimony by the taxed employee. That would create additional taxable income for the ex-spouse.

Under IRS rules, a benefit provided by an employer to the former spouse of an employee, is a taxable benefit to the employee

To make matters worse, employers are just waking up to the issue. Starting in 2013, employers have started to apportion the value of fringe benefits on employees’ W2 forms. This will greatly facilitate including an ex-spouse’s share of health care insurance on the employee’s W2 form in January 2014, and, thus increase the employee’s taxable income.  In turn, should the employee deduct the insurance as alimony, the ex-spouse must add the amount to his or her own taxable income, or face the consequences of under-reporting income.

Dealing with Health Insurance in a Divorce

In a divorce negotiation where the amount of alimony and the sharing of tax benefits are vigorously negotiated between the parties, to add health insurance choices and their consequences to the menu may not be welcome. It would be hardly better, for the parties find out the consequences after the fact.
As financial planners with a divorce specialty, we recommend that the ex-spouse should get his or her own insurance as soon as possible. That is not always feasible in the short run. As an alternative, we recommend to choose the best option available with all eyes open to the consequences.
If you would like to learn more, ask for the white paper that I co-authored with Justin Kelsey, Esq., or call one of the authors for a consultation.

In a Divorce, can we share a Certified Divorce Financial Analyst™?

By Chris Chen CFP | Divorce Planning

Sometimes we get asked by clients who are working through a divorce whether it is OK to share financial analysts with their spouse. In some cases, it works.

For instance in a Collaborative divorce, the financial planner often works neutrally for both parties, while the spouses are represented separately by lawyers . In mediation cases, we have worked for both parties as well. In either the collaborative or mediation methods, the parties often aim to shape their divorce agreements in good faith as it best suits them. They will try to reach an agreement that is “fair and equitable” without the court making decisions for them. In those cases, it may make sense to share a financial planner. Indeed, it may even facilitate and speed up the process.

In the more common adversarial process (each party talks through their own lawyer), people ask us also whether they can share financial specialists.

We do not recommend it. We do not do it. We believe it is important in a divorce to get competent financial advice  in addition to competent legal advice, however, we could not provide that should our loyalties be split.  In that case, the answer is no.

 

Other posts you may find interesting

Pension Division in Divorce

4 Risks of Pension Plans in Divorce

Post-Divorce Investments 

 

Tax Season Dilemna: Invest Money in a Traditional IRA or a Roth IRA?

By Chris Chen CFP | Financial Planning , Retirement Planning

This being tax season, you may want to know, should you put your money in a (traditional) IRA or a Roth IRA?

In a traditional IRA, your contribution will be deductible from your taxable income, and will grow tax-deferred .  Income taxes will be paid when you take distributions at retirement.  The immediate benefit is that a contribution will help you reduce your taxable income, and, therefore, your taxes.  (For the 2012 tax year, you have until April 15 to make that contribution.)

For a Roth IRA, your contribution is not tax deductible .  However, it will grow tax free, and distributions in retirement will not be taxable.  Hence, your retirement income from the Roth would be tax-free.

The traditional IRA helps you save on taxes now , and the Roth IRA helps you save on taxes later .  What then should you do: save on taxes now or save on taxes later?

The answer is entirely about what you expect your taxes to be when you retire.  If you expect your tax rate to be lower in retirement than today, you may want to consider a regular IRA.  That is because, you will be saving a relatively large amount in taxes today, and paying at a relatively low rate in retirement.

On the other hand, should you expect your tax rate to be higher in retirement than today, you may want to consider a Roth.  That is because you would be paying at a low tax rate today, and saving even more taxes later on.

So, you might ask, how can you figure out what your tax rate will be in retirement?  That is a different question altogether!

Check out out other retirement posts:

Is the new tax law an opportunity for Roth conversions

Rolling over your 401(k) to an IRA

7 IRA rules that could save you time and money

Doing the Solo 401k or SEP IRA Dance

Roth 401(k) or not Roth 401(k)

 

 

 

Have you updated your financial plan yet?

By Chris Chen CFP | Financial Planning

As originally published in boston.com:

If we could predict the future, we would always be ready for anything that life throws our way, right?

The truth is that even for what we do know, many of us are not ready. We do know that most of us should probably contribute more to our retirement plans, that we should save for the college fund; and that we should purchase long term care insurance. Yet we don’t do it.

We do know that the sooner we contribute to a retirement plan, the more there will be when we need it. We do know that the more we contribute to the college fund, the easier the burden when our son or daughter goes to college. We do know that the longer we delay buying long term care insurance, the more likely we won’t be able to.

The reason is simple: We are overwhelmed. We are overwhelmed by all the things we know we need to do, and all the other things we need to spend on. We don’t know how to prioritize them.

Yet, imagine that we were to take a minute to prioritize all these very important issues, that we were to realize the benefits of planning sooner, and the penalties for delaying, then surely we would get back on track, wouldn’t we? Plan sooner.

Are your affairs in order?

By Chris Chen CFP | Financial Planning

While it is not  pleasant to think of one’s own passing, having your affairs in order can help ease the burden on friends and family, when the time comes, and can contribute to your own peace of mind knowing that you have done all you can to prepare. There are many factors that should be considered when trying to create an effective and comprehensive estate plan. Some considerations include:

• Instructions on your own care in sickness
• Guardians for your minor children should both parents pass
• Protection from creditors
• Charitable contributions
• Continuation of a family business
• Reducing or eliminating tax
• Maintaining family harmony
• Legacy creation and support of future generations

In addition, all these factors should integrate appropriately with your retirement income planning and your investment decisions.

Even if you already have an estate plan in place, you may want to conduct a review. Decisions made years ago may not accurately reflect your current wishes. Estate plans are not for the significantly wealthy alone. If you have children in your care or a business you wish to leave to future generations, it is important that protections and guidance are put in place now and are not put off until your retirement years. It is always a possibility that you may not have the luxury to wait so long.

A poorly executed estate plan, or the lack of one at all, could leave those you most care about suffering needlessly in your absence.  Get ready today to gain control of your estate plan!