YOU ASKED, WE ANSWERED. READ THE Q&A’s

Portfolio Review

Question: After a portfolio review, what comes next in the process of becoming a client of Annex Wealth Management?

Answer:

Portfolio Review

Question: What are the steps involved once I become a client of Annex?

Answer:

Taxes

Question: Under the new federal tax law for 2018, the standard deduction for joint filers has been increased to $24,000. Previously seniors, who filed jointly were allowed to increase their standard deduction of $12,700 by $2,500. Does the new tax law still allow seniors this increase? Or do seniors get the shaft again?

Answer: The new tax law did not remove the additional deduction for those over 65, blind or disabled. The amount for an unmarried taxpayer is $1,600 and for married couples it is $1,300 per person. For a couple over 65 their standard deduction would be $26,600, which is $24,000 plus $1,300 for each taxpayer.

Taxes

Question: Since we will have federal tax the next few years should I be taking a larger minimum required withdrawal from my IRA (I’m over 70). The withdrawal pushes me into a higher tax bracket and I pay more for my Medicare Part B and Part D IRMMA. If I withdraw a big amount now and put it in a managed account, would it pay to be in a lower tax bracket? But the earnings on the large withdrawal in the managed account would be taxed.

Answer:

If you’re in a lower tax bracket (10% / 12%), it may be beneficial to take an additional amount out over and above what your required minimum distribution is. Rather than putting that amount into a managed taxable account, you could do a Roth Conversion and put it into a Roth IRA. This will allow the earnings to grow tax free, and there’s no age limitation on Roth Conversions.

Taxes

Question: What is a good mix of accounts ( investment, taxable IRA, Roth IRA) with different tax implications (capital gain rates, ordinary income, and tax-free) ) during retirement and with no expectation of leaving a large inheritance? 

Is there any rule of thumb or thoughts on this? We have 34% investment, 42% taxable IRA. and 24% Roth. So the vast majority is taxable along with our mostly taxable pensions. Do we convert a portion of the taxable IRAs to Roth, but then pay them with taxable money? Or do the Roth conversion and pay taxes out of current Roth to reduce taxes on the transaction?

Answer:

It’s good to have a mix of accounts, as that provides tax flexibility during retirement when you start to draw on your savings. There’s no rule of thumb as everyone’s financial plan is different, and expenses during retirement differ as well. If you find that going into retirement you have a large IRA that you will not need to draw on, doing Roth Conversions when your income is lower can help reduce taxes during your life. 

Taxes

Question: Is there going to be something coming out on the specifics of what’s in the new tax reform package, as pertains to future financial management – i.e. do IRA conversions (to Roth) make more or less sense in the new environment and for what income levels, how will dividends and capital gains be treated in 2018 and beyond, are charitable donations still a deductible option under the new standard deduction picture, etc.

Answer: 

The general planning idea of taking IRA money and converting it to a Roth IRA in a lower income tax year will still be an important part of financial management.  Under the new tax reform the tax rates for all the brackets have decreased slightly, which may make it more attractive for certain taxpayers to do Roth Conversions.  Overall, we will be looking for low income tax years in person’s financial plan and be doing Roth conversions.  The new tax law did remove the ability to do Roth-re-characterizations, so extra care should be taken when doing a Roth conversion as you no longer have the ability to ‘undo’ it.

The rates at which qualified dividends and capital gains are taxed at did not change.  The prevailing rates are still 0%, 15%, and 20%.  Also, net investment income tax was retained, which is an additional tax of 3.8% for investment income over a certain threshold, for married couples that is $250,000.

The bill does exclude from qualified dividend income corporations that go through a corporate inversion after the bill is passed. As a result they wouldn’t qualify for the preferential rate.

Yes, we will be coming out with a summary of some of the significant changes to deductions.

Taxes

Question: Under the new federal tax law for 2018, the standard deduction for joint filers has been increased to $24,000. Previously seniors, who filed jointly were allowed to increase their standard deduction of $12,700 by $2,500. Does the new tax law still allow seniors this increase? Or do seniors get the shaft again?

Answer:

The new tax law did not remove the additional deduction for those over 65, blind or disabled.  The amount for an unmarried taxpayer is $1,600 and for married couples it is $1,300 per person.   For a couple over 65 their standard deduction would be $26,600, which is $24,000 plus $1,300 for each taxpayer.

Taxes

Question: I am in the 28% bracket, making about $190000 this year. Am I better to make a $15000 contribution to my church this year instead of next year when I think my new tax bracket will be 24%.

Answer: 

Thanks for the question! The new tax law that came into effect for 2018 created a higher standard deduction that will make it harder to match through itemizing your deductions. Therefore, receiving a tax benefit for your charitable donations may become harder.

So, it all depends on if you have enough other deductions to itemize during the year that will cumulatively exceed the higher standard deduction. If so, that would allow you to itemize your charitable donations to receive a tax benefit.

When looking to give to charity you first want to see if you’re going to be itemizing, and if so, what tax bracket will you be in this year and next year. If you’re in a higher tax bracket later it may be more beneficial to donate to charity next year.

Also, you may want to look into doubling up of charitable donations – giving two years’ worth in one year to help maximize that deduction.

Taxes

Question: Under the new federal tax law for 2018, the standard deduction for joint filers has been increased to $24,000. Previously seniors, who filed jointly were allowed to increase their standard deduction of $12,700 by $2,500. Does the new tax law still allow seniors this increase? Or do seniors get the shaft again?

Answer:

The new tax law did not remove the additional deduction for those over 65, blind or disabled.  The amount for an unmarried taxpayer is $1,600 and for married couples it is $1,300 per person. For a couple over 65 their standard deduction would be $26,600, which is $24,000 plus $1,300 for each taxpayer.

Taxes

Question: Since we will have lower federal tax the next few years should I be taking a larger minimum required withdrawal from my IRA (I’m over 70). The withdrawal pushes me into a higher tax bracket and I pay more for my Medicare Part B and Part D IRMMA. If I withdraw a big amount now and put it in a managed account, would it pay to be in a lower tax bracket? But the earnings on the large withdrawal in the managed account would be taxed. 

Answer: If you’re in a lower tax bracket (10% / 12%), it may be beneficial to take an additional amount out over and above what your required minimum distribution is. Rather than putting that amount into a managed taxable account, you could do a Roth Conversion and put it into a Roth IRA. This will allow the earnings to grow tax free, and there’s no age limitation on Roth Conversions.

For instance, if your RMD was $40,000, you still have to take out your RMD of $40,000 and either put it in a taxable account or bank account, but you could then do a Roth Conversion as an additional amount depending on your tax plan. Your total taxable IRA distributions for the year would be greater than your RMD.

If your additional IRA distributions cause you to go into a higher tax bracket and your Medicare premiums to be higher, it may not be advantageous to take additional money out of your IRA. We can help you project out what your tax rate would be in later years compared to now and see if taking money out earlier would be advantageous. Projections like that are typically part of Annex Wealth Management’s financial plan and comprehensive wealth management.

Interest Rates

Question: Looks like the Federal Reserve Board could cause major disruptions for the stock market if they continue to raise interest rates. what are your thoughts about how the Fed will move forward in the short and long term given their mission? Part of Annex Wealth Management’s financial plan and comprehensive wealth management.

Answer:

Interest Rates

Question: Looks like the Federal Reserve Board could cause major disruptions for the stock market if they continue to raise interest rates. what are your thoughts about how the Fed will move forward in the short and long term given their mission?

Answer:

Moving

Question: What’s your advice on moving after retirement?

Answer:

Roth 401K

Question: My company just began offering Roth 401K’s. When does it make sense to contribute to the Roth 401K vs regular 401K? 

My wife and are in our early 50’s, with no children and are 8 to 10 years away from retirement. We are maxing out retirement savings as allowed. My wife is a teacher with full WRS pension in 4 years. We have approx. 12% of savings in our current Roth’s. From this info, can you provide any guidance?

Answer: 

A lot of listeners know that Annex provides retirement plan services to some of the area’s best known companies, so our team regularly works with employees on their 401(k) savings. This is a question we get often.

Generally, it’s good to have some tax diversification within your investment portfolio, meaning some Roth and Traditional (regular) accounts.  How much to put into Roth retirement accounts depends on what tax rate you are paying now versus what you anticipate your tax rate would be in retirement.

If your tax rate will be higher in retirement, we would look to contribute to a Roth account now and pay tax when your rate would be lower. Conversely, if your tax rate is higher now than during retirement, funding more into a traditional account would defer the tax to when you are potentially in a lower bracket.

For specific guidance on what rate or amount to put into a Roth vs. Traditional 401(k), we’d be happy to sit down and go over some tax and financial planning.

IRA Contributions

Question: I would like to open an IRA separate from my current 401K account, how much could I open an IRA with and are there any contribution requirements? I receive a bi-annual profit sharing and would like freedom to contribute to IRA at my convenience or even have contributions come out of bi-weekly pay check. I and my wife are 44 years old and want to be ready. Thanks in advance!

Answer:

You are able to contribute up to $5,500 a year for both you and your wife into an IRA.  Once you turn 50 you would each be able to contribute an additional $1,000 per year into an IRA as part of a catch up provision.

There are no income limits when contributing to an IRA, but in order to receive an income tax deduction for the contribution your income has to be below a certain level.  You can contribute to an IRA at any point during the year and up to the tax filing deadline of the next year.  You can also contribute any amount during the year as long as it remains below the maximum contribution.

Similar rules apply to funding of Roth IRA’s, but there is an income limitation that prohibits you from directly contributing to a Roth IRA once your income exceeds that.

Roth Conversion

Question: I opened a Roth in 1999 and made contributions over the years. After I retired (and over 59-1/2), I’ve been doing Roth Conversions. I’m being told that if I access these conversion amounts before the 5-year waiting period, I would be subject to a 10% penalty. Wouldn’t the exception of being over 59-1/2 apply, if I made a distribution of these converted amounts?

Answer:

Great question! You are correct on your understanding of the five-year rules.

You have satisfied the requirement to have the Roth IRA open for five years and be over 59 ½ to take out any earnings tax free.

To avoid penalties, the converted amounts need to stay in the Roth IRA for five years unless you are over 59 ½. Since you are, the exception applies to you. And since you’re over 59 ½, you will not be subject to a 10% penalty if you were to make a distribution of the converted Roth IRA amount.

Hope that helps! Thanks for submitting a question to Ask Annex.

Investments

Question: Who makes the investment decisions for Annex Wealth Management?

Answer:

Investments

Question: I’m 62, my wife is 59. We have not been using a financial professional, I’ve tried to read and listen to everything I can as to where/what we should do with our money. We have money in current employers 401k’s, IRA’s with money rolled from a previous employers 401k and some additional IRA monies.

When it comes to re-balancing our portfolio, how do we know where we want to be in each of these investments? Is there a “score” or rating or a scale assigned to every mutual fund that we can put to each of the funds we have money in to determine how much we have at each “level”? And how much should we have at each “level”?

Answer:

Thanks for your question! The short answer is – no, there isn’t a universally-accepted score or rating that would help you sort through mutual funds.

Some businesses do have their own proprietary scoring and grading system, but its goals might be very different from your own. Even if a score existed, its holdings may overlap with your holdings in another fund, rendering the exercise problematic.

Still, you raise a great question.  Establishing a proper allocation strategy is likely more important than the quality of the fund.

The process of determining proper asset allocation begins with understanding your risk tolerance and risk capacity. Risk tolerance is your ability to cope with short-term fluctuations in the market. If short-term swings in the market make you uncomfortable, then you have a lower tolerance for risk. Risk capacity considers your current financial situation and how much time will elapse before you need the funds.

For example, an individual who can accept a lot of risk and has a long-time horizon before he or she withdraws from the investment could be a good fit for mostly equities (stocks or stock mutual funds).

We still may want to mix fixed-income assets in the portfolio such as bonds or a stable value fund but perhaps only 10% – 20%.

An individual who has a smaller appetite for risk and perhaps a shorter time horizon might be suited for a portfolio with a higher percent of fixed income assets, perhaps 30% – 50%.

The equity portion of your portfolio should include a mix of U.S. large, medium and small companies. Along with that, you could explore some international companies from both developed and emerging markets.

The fixed income side of your portfolio should include a mix of short and medium-term bond funds, cash or a stable value fund and some other fixed income assets such as treasuries or bank loans.

A professional can help you establish a well allocated portfolio aligned with both your risk tolerance and your capacity for risk.  We hope this is helpful and wish you many years of successful investing.

Vanguard/Fidelity

Question: Can I keep my vanguard & fidelity funds if I become a client?

Answer:

Insurance

Question: For people over 65 with medicare, would it be financially wise to buy dental insurance, a dental saving plan, or go without insurance? Basically is dental insurance worth it? What is important items to look for in a good policy? Or is insurance and dental savings plans a rip off? I understand most policies limit the maximum amount paid at 1,000-1,500 per year. I am not sure if most insurances even cover implants or dentures and all the prep work that comes with teeth replacement. That can easily add up to more than 10 – 15 thousand dollars. I would think that 65 years old and above would be the prime candidates for teeth replacements, crowns and other major work at some time in their near future and that is a prime reason for dental insurance.

Answer: 

Thanks for the question! We suggest you first understand your current coverage. Original Medicare with a Medigap supplement doesn’t offer dental coverage. However, some Medicare Advantage plans do. If you don’t have dental coverage or if the coverage is minimal a separate dental policy can make sense. Premiums are generally manageable and coverage can be comprehensive (of course deductibles and copays will apply). For instance, AARP offers a plan through Delta Dental which covers:

• Over 350 procedures
• 3 cleanings per year
• Dental implants

Plans like these come with significant out of pocket expenses but still help blunt the costs of major procedures. Every plan is different so you will need to shop around but in general we believe they make sense.