You’ve Inherited an IRA. Now What?

You've Inherited an IRA. Now What?

Inheriting an IRA is quite a bit different than inheriting any other asset.  Unlike cash or investments in a traditional investment account, if you inherit an IRA you’ll need to start withdrawing from the account in order to avoid hefty penalties.  In this post we’ll cover what your options are when you inherit an IRA, and how you can best manage it for you & your family.

 

How IRAs are Passed After Death

Whereas many of your assets will be distributed to heirs according to your will, IRAs are instead distributed by contract. Your custodian (the brokerage firm that holds your account, like Vanguard or TD Ameritrade) lets you designate as many beneficiaries and contingent beneficiaries as you like.  Once you die, your account bypasses your will, the probate process, and is distributed according to this beneficiary designation.

When account holders don’t designate any beneficiaries things get a little murkier.  When the account holder dies, their account is distributed according to their custodian’s default policy.  At most custodians this default policy diverts the IRA back to their estate (and goes through probate) but at some it’s diverted to their spouse first.  Unfortunately, if the account holder didn’t designate a beneficiary while they were alive, you’re at the mercy of your custodian’s policy.

If the account is indeed diverted back to their estate, it’ll be distributed according to your state’s interpretation of their will.  And if they didn’t have one (meaning they died intestate), the state will make its own decision on who should inherit the asset.

The moral of the story?  Take advantage of the opportunity to bypass probate, and designate your beneficiaries formally while you’re still alive.

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Top Strategies for Managing Incentive Stock Options

Top Strategies for Managing Incentive Stock Options

Incentive stock options, or ISOs, are a pretty common way for companies to compensate management and key employees.  Otherwise known as “statutory” or “qualified” options, ISOs are a way to give management a stake in the company’s performance without doling out a bunch of cash.

While they can have wonderful tax benefits, far too many people who own ISOs fail to exercise them wisely.  Some estimates even claim that up to 10% of in the money ISOs expire worthless every single year.  If you own incentive stock options but aren’t sure how to manage them, read on.  This post will cover a few of the top management strategies at your disposal.

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How the Trump Presidency Could Affect Your Finances

How the Trump Presidency Could Affect Your Finances

Recently I’ve had a few questions from clients and readers about what they should be looking out for now that we have a new president in office.  As you know, Mr. Trump has had a pretty eventful first few weeks in office.  In fact, as I write this protests are underway at no less than 15 major airports across the country.

In this post I’m going to share some of the trends and data points that I’m keeping an eye on, and on some discuss how they might affect your financial situation.  This post is in no way political.  This isn’t an endorsement or criticism of president Trump or his policies.  My objective here is simply to share some thoughts about how our new president might impact our finances and what you might want to look out for.

As one of my clients phrased it recently, we’re all in this boat together.  Like or not we just have a new captain at the helm.

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What’s the Optimal Portfolio Rebalancing Frequency?

What's the Optimal Portfolio Rebalancing Frequency-

If you’ve read the blog for very long, you probably know that I’m a big proponent of thoughtful and customized asset allocation.  The percentage of your portfolio invested in stocks, bonds, cash, and real estate should vary based on your personal financial objectives and tolerance for risk.

In fact there are plenty of studies contending that asset allocation determines the vast majority of your portfolio’s return.  In other words, it doesn’t matter as much which stock or bond you choose to invest in.  It matters far more how much of your portfolio is invested in stocks or bonds in the aggregate.

 

The Importance of Portfolio Rebalancing

If you’ve ever managed your portfolio (or anyone else’s for that matter) you also know that over time your portfolio’s asset allocation will change as the market fluctuates.  If you start with 60% in stocks and 40% in bonds, you might find your portfolio weighted 70% in stocks and only 30% in bonds after an appreciation in the stock market – especially since bonds tend to fall when stocks rise.

This is why it’s important to rebalance your portfolio over time.  The whole point of building a customized asset allocation is to match the risk in your portfolio to your personal risk tolerance.  As your individual investments fluctuate in value, selling some of the appreciated positions and replacing them with some of the depreciated positions brings your portfolio back to its intended allocation.

For example, if a 60/40 portfolio became 70/30 after the markets moved, you’d want to sell stocks that represent 10% of your portfolio and use the cash to purchase bonds – returning to your original 60/40 allocation.  Without rebalancing, your portfolio would continue to stray over time, ensuring a level of portfolio risk that’s higher or lower than you’d like.

 

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Mutual Fund Capital Gains Distributions: What They Are & How to Avoid the Tax Hit

Mutual Funds Capital Gains Distributions: What They Are & How to Avoid the Tax Hit

If you’ve ever invested in a mutual fund, you may know that they’re required to distribute at least 95% of their capital gains to investors each year.  You may also know from experience that these gains are not always welcome since they come with a tax liability attached.

More often than not these capital gains are not large enough to cause investors to stir.  But every year there are a few funds that pass massive unwanted gains on to investors, leaving them with a big, stinky tax bill.

This post may be slightly tardy given that some mutual fund families have already distributed their year end capital gains.  Nevertheless, it’s an important topic that you should be aware of and keep an eye out for.

If your objective is to minimize your tax bill (hint: it probably should be) you’ll want to know about upcoming distributions at the end of each year, and avoid them when it makes sense.  This post will cover exactly what capital gains distributions are, why mutual funds distribute them, and when and how you might want to avoid them.

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The Top 7 Mistakes People Make when Planning for Retirement

The Top 7 Mistakes People Make When Planning for Retirement

Hello ATC Readers!

This post is to announce that I’ll be hosting a free retirement webinar in a few weeks.  I’ve been getting a lot of questions recently to the effect of “what am I doing wrong?” when it comes to retirement planning.

As you may know, we’re often our own worst enemy when it comes to retirement planning.  As human beings we tend to get emotional when it comes to our finances.  Rather than remaining logical, balanced, and objective, we often make poor decisions because our emotions get in the way.

I wanted to cover this issue in more detail than a traditional post, so I decided to focus a 60 minute webinar on the topic:

The Top 7 Mistakes People Make When Planning for Retirement

Presented by Grant Bledsoe, CFA, CFP®

In this live webinar we’ll cover some of the most pressing issues retirees face today:

  • The top retirement mistakes made today and how to avoid them
  • How to understand the fees you’re paying your advisor
  • How your emotions can affect decision making & how to overcome them to make consistently smart investment choices
  • The 5 components all effective retirement plans must have
  • How to tell whether your retirement savings are enough for you to stop working

There are two separate dates you can attend:

  • Tuesday, December 6th from 10:00AM – 11:00AM PST
  • Wednesday, December 7th from 1:00PM – 2:00PM PST

Even if you can’t attend at these times, make sure to register anyway.  After the webinar is over I’ll email you a replay copy you can watch at your own convenience (for a limited time).

Click Here to Register

401(k)’s, IRAs & Tax Deferred vs. Tax Exempt Investing

401(k)s, IRAs & Tax Deferred vs. Tax Exempt Investing

 

Should I contribute to a traditional or a Roth IRA?

This is a big question I get asked fairly frequently.  And really, the conversation expands beyond individual retirement accounts.  The decision whether to invest on a tax deferred or tax exempt basis is one you’ll likely make many times over your investing career.  Some people prefer a exempt account to “get taxes out of the way”, while others prefer to defer taxes as long as possible in order to “let their money work for them”.

In this post we’ll explore the topic and discuss which situations may be best for either strategy.  But first, let’s review exactly what tax deferred and tax exempt investing actually are.

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Case Study: Retiring With $1,000,000

Case Study Retiring with $1,000,000

Those of you who know me know that I’m a massive baseball fan.  And when it comes famous baseball quotes, most come from one player: Yogi Berra.

Yogi Berra was a long time catcher for the Yankees, and had an incredible hall of fame career.  He was equally known for his head-scratching quotes, which the world has affectionately termed “Yogi-isms.”

Yogi didn’t comment often on financial topics, but when I think about retirement planning one of his famous quotes stands out:

“A nickel ain’t worth a dime anymore.”

When we think about retirement planning, $1,000,000 is often considered a kind of “golden threshold.”  Many people think of a million dollars as the minimum nest egg they’ll need in order to retire comfortably.  But as Yogi pointed out, being a millionaire doesn’t amount to what it used to.

So is it even possible to retire with $1,000,000 these days?

Let’s find out.  In this post we’ll explore a hypothetical couple named John and Jane.  They’ve saved $1,000,000 and want to retire, which is a common situation for many Americans.

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Sequence of Returns: The Biggest Risk to Financial Independence & Successful Retirement

Sequence of Returns: the Biggest Risk to Financial Independence & a Successful Retirement

 

When you think about your retirement & financial independence, what keeps you up at night?  Is it the possibility that a market crash depletes your nest egg?  Is it inflation?  What about the cost of health care, or living too long and running out of money?

These are all common concerns I hear from people approaching their leap into financial independence.

Every now and then someone will ask me what they should be concerned about.  “What would you be concerned about if you were in my shoes?  What are my biggest risks?”

 

Average Returns & Volatility

Most of us approach retirement planning with expectations about the average returns we’ll see throughout retirement.  You’ve probably heard (maybe even from me) that the S&P 500 averages between 7.5% and 9% in annual returns – depending on the exact data set and who you talk to.  Over a 30+ year retirement, if we were to invest only in the S&P 500, we could expect an average annual return between 7.5% and 9%.  I’m confident this is true, based on the last 150 or so years of historical data in the financial markets.

As you know, this doesn’t mean that the stock market will gain 7.5% each and every year.  There will be years like 2001 and 2009 where the market falls 25%-30%.  There will also be years where it gains 25% or more.  The markets are volatileBut on average, the S&P 500 will see somewhere between 7.5% and 9% returns per year.

One of the statistical measures of volatility is called standard deviation, which is used to measure just how volatile a data set is around an average.  Since 1926, the standard deviation of the S&P 500 is about 18.5%.

Now, the image below is something you’ve seen before.  It’s a bell curve based on a normal distribution.  The simple explanation of a a normal distribution is that the results occur randomly around the mean.  In a normal distribution:

  • 68.2% of the results will fall within one standard deviation of the mean
  • 95.4% of the results will fall within two standard deviations of the mean
  • 99.6% of the results will fall within three standard deviations of the mean
  • 99.8% of the results will fall within four standard deviations of the mean

 

Sequence of Returns: The Biggest Risk to Financial Independence & Successful Retirement

What does this mean for the S&P 500?  If the S&P 500 is normally distributed and resembles a typical bell curve, annual returns will fall between:

  • -11% and 26.5% 68.2% of the time (7.5% – 18.5% & 7.5% + 18.5%)
  • -29.5% and 45% 95.4% of the time
  • -48% and 63.5% 99.6% of the time

I should note that many have argued the returns of the S&P 500 are not normally distributed, including William Egan and Nassim Nicholas Taleb.  And for the most part I don’t disagree with them.  This argument is beside the point of this post though, so for this discussion and the following examples we’ll assume a normal distribution fits the S&P 500 just fine.

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6 Ways to Minimize Required Minimum Distributions

6 Ways to Minimize Required Minimum Distributions

There’s a plethora of tax advantaged retirement accounts out there today.  Enough that the acronyms and numbers can get really confusing…

  • IRA
  • 401k
  • 403b
  • 457
  • Profit sharing
  • SEP IRA
  • SIMPLE IRA

Just to name a few – trust me, there are more.  The reason?  The government wants us to save for our own retirement.  And by offering an array of tax advantaged accounts, they’re incentivizing us to put money away.

But while the tax advantages are great, the government won’t let us shelter our money from taxes forever.  When you turn 70 1/2, they’ll force you start taking withdrawals called required minimum distributions, or RMDs.  If you don’t you’ll be subject to a hefty 50% penalty.

This poses quite a problem for many retirees, since each withdrawal raises their tax liability for the year.  So for those of you who want to keep Uncle Sam’s grimy mitts off of your hard earned retirement funds, here are six ways to minimize your RMDs:

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