The Important Stuff YOU Need to Consider About Roth 401(K)s

The Important Stuff YOU Need to Consider About Roth 401(K)s

You probably already know that the Pension Protection Act of 2006 authorized employers to offer their employees a Roth 401(k) option, under Section 402(A) of the Internal Revenue Code. OK, enough technical language – now to my favorite, plain English.

As one would expect, there are those who think the Roth 401(k) is the greatest thing that happened to retirement savings in the 21st century, but there are also those who think otherwise.

Those who don’t like it argue that when people retire, their incomes generally decrease, hence they’re bound to be in lower tax brackets. Therefore, they argue, it is better to delay paying taxes, letting the money compound until retirement when you will pay less in taxes. However, if you really pay close attention (which most people don’t do until they are actually retired), this whole argument sounds crazy. It’s pretty much just a big joke! But to be fair, I feel obligated to state all points of view.

Here’s the thing. From what I have personally witnessed in my consultations with REAL people in this country, some of whom are already retired, although their total incomes usually decrease in retirement, their taxable incomes are not reduced enough to significantly alter their tax brackets. Actually, most of the already-retired who contact our firm do so because they’ve fallen prey to this bogus assertion and now need help so they can spend their retirement money – instead of paying it out in the form of taxes. I discuss this as Mistake #1 in my upcoming, easy-to-read book, 5 Mistakes Your Financial Advisor Is Making. Stay tuned – I’ll tell you how to get your FREE copy in the next couple of days.

Those who champion the Roth 401(k) argue that it’s better to make after-tax contributions so that you get to grow your money and withdraw it tax-free, on or after the date you turn age 59½, provided you’ve had the account for at least 5 years. When you die or become disabled (within the meaning of IRS Code Section 72(m)(7)), distributions are also tax-free. Yes, it sounds a bit technical, but that’s the language our government speaks.

Given our nation’s current fiscal climate, with its unprecedented budget deficits and incredible pressure on Social Security, Medicare, and Medicaid – increasing by the minute, as the baby boom generation nears retirement – tax rates are most likely headed up. Y’know, Uncle Sam must pay his bills, too. This is why I generally advocate not waiting to pay your taxes in the future, because one of the things you cannot lock in, no matter how you might want to, is tax rates. But if you and your advisor truly believe that tax rates will be coming down sometime soon, go ahead and knock yourself out with a traditional 401(k) plan.

You Cannot Convert a Regular 401(k) to a Roth 401(k)

Yes, even if you want to, the law does not allow the conversion of a regular 401(k) to a Roth 401(k). Wonder why? Could it possibly be that Uncle Sam understands very well why I caution people against these products? The majority of Americans – to their own amazement, and contrary to what most of their so-called financial advisors and accountants “promise” – stay in the same tax bracket (or move up to a higher one) during retirement, because their taxable incomes do not decrease enough while simultaneously, their exemptions and deductions are reduced. Interestingly enough, this is the nearly inevitable result of listening to the toxic retirement planning advice they received from the very same “experts” who promised them lower taxes.

Realize I said “taxable” income. Because this is drastically different from total income, which is what your advisor told you would be lower when you retire. And guess when you will have to start withdrawing the money from your traditional 401(k) to pay those deferred taxes? If you guessed as soon as you have few to no deductions and exemptions, we are on the same page.

Another thing, your employer’s matching contributions MUST be made only in a regular 401(k) format. This makes no sense to me, but again, it’s the law. While your money is going into a Roth 401(k), your employer’s match must go into a regular 401(k), which you decided you didn’t like in the first place – that’s why you switched to the Roth!

A Roth 401(k) also requires that once you attain the age of 70½, you begin making minimum withdrawals, just like you would with traditional plans.

What If You Could Enjoy the Benefits of a Roth 401(k) Without All the Strings?

Under existing IRS rules, there is a means by which you can make after-tax contributions to your own account and access it tax-free, including the gains accrued before age 59½ , without being obligated to repay it. And, you do not have to make any minimum withdrawals once you reach age 70½. Since money from the vehicle I am talking about is not considered earned, passive, or portfolio income under the Tax Reform Act of 1986, it does not affect taxation of Social Security benefits in any manner. It also allows you to transfer any remaining funds to your heirs, income-tax free upon death.

I can guess how you must be feeling right now. It’s kind of like that game board that’s covered with red (0r white) and black squares. You can decide to use it to play the game of checkers OR chess – the choice is up to you.

Give us a call at 301.949.4449 or visit www.laserFG.com to schedule your free consultation and let us help you understand ALL of your options.

Hurray, the Recession is Over! But Are Your Investments Recession-Proof?

Hurray, the Recession is Over! But Are Your Investments Recession-Proof

Roughly a year ago, a series of tumultuous events like the collapse of that financial giant, Lehman Brothers – well, maybe not so much – futher decimated the already weak economy, sending the stock market into an official “crash.” Of course, you know the story and are likely dealing with your own bitter memories and doing your best to look ahead.

On Tuesday, September 15, 2009, Federal Reserve Chairman Ben Bernanke, during an appearance at the Brookings Institution said that “from a technical standpoint, the recession is very likely over at this point.” For the purposes of this blog his assertion is, to be blunt, irrelevant. But since he’s the Chairman of the Federal Reserve, I am willing to say that technically he is correct. So, HURRAY!!

On a more serious note, I am still receiving phone calls and emails, and consulting with people who have lost in excess of 50 percent of their nest eggs and home equity, thanks to the recession. Those who are already in retirement or close to it probably feel they will be experiencing the recession for the foreseeable future, regardless of the growth in the Gross Domestic Product of the country as a whole, or what any economist, politician, or journalist may say or think.


If Your Investments Lost Value, You CAN’T Recover

The modest good news is that most investors look forward to making some gains to reshape their depressed portfolios – and it’s about time! Notice, though, that I said “make gains,” not “recover,” like almost everybody else on TV, radio, the Internet, or in the newspaper tends to put it. The plain truth is that regardless of how badly investors would like to “recover,” that will never happen. In investing, you can only GAIN or LOSE. Recovery is not an option – sorry!

Actually, this whole recovery idea is one of the most dangerous myths I see in personal finnancial planning. Let me try to explain my point with this example:

In 2008, the S&P 500 Index lost 38.5 percent. If it were an investment and you had $100,000 invested in it, you would have ended the year with $61,500 – meaning you would have lost $38,500. So far this year – as of September 16, 2009 – the S&P 500 index has gained about 15 percent. So the balance in your account is now up to $70,725, meaning you gained $9,225. My main point is really, really important for you to understand: Not a single dime of the $9,225, or 15 percent gain you've made so far in 2009, is a return of the $38,500 you lost in 2008. Although some – actually the majority – in the financial industry want you to somehow believe that it’s no big deal and you’ll make that money back, or “recover,” that’s just not the case.

Now, let’s compare and contrast that with the simple, proven, and time-tested investing strategy I teach. None of our clients – not a single one of them – lost even a penny in 2008. It’s the same year, in the same economy! In fact, most of them gained about 5 percent.

So, investing the same $100,000 from the previous example, my approach would have caused you to end 2008 with $105,000 – or a 5 percent gain. Not too bad in a "down" economy, is it, particularly when most investors were bleeding serious dollars. Here is the kicker – if the S&P 500 Index holds its current 15 percent gain through the end of this year, this $100,000 account – following my guidance – will earn $15,750 (15 percent of $105,000) for a total 2009 balance of $120,750.

You're smart, so you no doubt caught on that the account did not lose, but also that it picked up a 15 percent gain for 2009, in addition to the 5 percent gain last year.

So, BASICALLY...

Not only did you not lose, but those gains would have been added to your account's balance.

How long do you think it will take you, at the pace of your current strategy, to catch up and overtake investors following the strategy I teach? The truth is no one knows, including myself. But what I do know – FOR SURE – is that your retirement is certain and it's probably smart - no wait, forget probably, it’s simply smart NOT to gamble your retirement assets directly in the stock market.

Recessions will come and go. Isn't it in your best interest to pursue a recession-proof investment strategy?

For your chance to see first-hand how we're different, call us (301.949.4449) or visit our Web site to set up your free consultation today!

Advisors Are NOT Decision Makers – and Vice Versa

Advisors Are NOT Decision Makers – and Vice Versa

As people consult with us daily, we are discovering that, for the most part, they have very little idea about the way their financial products work or fit their financial goals.

Lately, we are seeing an alarming trend: In hindsight, everyone seems to discover they own the wrong product/plan. What is disturbing about this is the fact that in all the cases I have witnessed personally, these unsuspecting investors were offered these supposedly golden products or enrolled in plans by their so-called advisors without having any real understanding of what they were getting into.


I am willing to bet there’s a good chance you have fallen prey to this unnerving phenomenon. Simply ponder these questions about your own retirement plan:

• Who decided which product(s) you should own (beyond any funds you may have personally selected)?
  

• Do you really know why you ended up with that particular product/plan?

• Were you provided with any clear options (again we’re talking about products, not fund selection)?

• How do you know you have the best plan to fit your needs?

They’re Called Advisors, Not Doctors

Plain and simple, a financial advisor is supposed to understand your goals, assess your situation, and – get this – provide you with legally available product options, explaining to you in clear words how each of them work.

Instead, what we discover every day with our clients is that investors are lured into products that often are not in their best interests, and they never even discover this until it’s too late. In most cases we have witnessed, the only logical reason underlying their purchase of a particular product/plan seems to be the interest of these so-called financial advisors’ commissions and/or company profits.

A financial advisor’s role is not the same as a doctor’s. In the case of medicine, situations arise where your physician understands and knows the only course of action and suggests it to you. For instance, when a specific surgical procedure must be performed to correct a health issue, your doctor tells you exactly that: this is your only option, or you will die. But if you didn’t want to live, you probably would not have sought medical treatment in the first place, right?

Having been a financial strategist for many years, and having helped numerous families plan for their retirements, I contend that in almost all instances, there is more than one financial product for a particular scenario, and it is in the clients’ best interest to be informed of these choices. Unless a product is like oxygen – and, honestly, no financial product is – an advisor should never advocate any single product as the solution everyone needs to survive.

Why Did You Choose Your Current Financial Product?

I ask this question all the time, and the most familiar answers I hear are:

• My advisor said it was what I needed.
  

• You mean there’s another option? (In other words, “That was the only product I was offered.”)

The big problem here is that the advisor is owning/making the decision. According to a recent report by The Vanguard Group, 84 percent of its more than 3 million retirement-plan participants did not make any changes to their accounts in 2008. Although various reasons may account for this, you do not have to be a mind reader to know that most of these investors do not even understand which financial products/plans they own – because someone else (i.e., their advisor(s)) made the choice.

Don’t you see, read, or hear it all the time? Some expert has already decided that an IRA, annuity, or some other product is best for you – all you have to do is contact them and sign up? Well, in my view, that’s nonsense! And it explains why the large majority of people experience complete financial crashes during their golden years.

At Laser Financial Group, we always provide our clients all the possible options, based on their specific scenarios, with detailed, year-by-year and side-by-side comparisons, explaining the facts about each of these options. And 100 percent of the time, they tell us what would best meet their needs. From that point forward, they are able to explain to anyone which product/plan they own, how it generally works, as well as why it is best for them. You’d think this makes sense and is a simple enough concept, but when was the last time you were offered such an option?

It’s high time some so-called financial advisors quit dictating to clients which products they should own, instead explaining to them their options and letting them exercise their right to choose what would best serve their needs.
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Find out how we're different from traditional financial advisors. Please call our office at (301) 949-4449 or visit http://www.laserfg.com/ to schedule your free consultation.

Dear Homeowner: Are You Maximizing Your Mortgage Investment?

Dear Homeowner: Are You Maximizing Your Mortgage Investment?

Dear Samuel,

My wife and I are very concerned about the effect of the recession on the value of our home. We are planning on using our home’s equity to support our
retirement income, but our home has dropped in value from about $450,000 to $275,000 presently.

We have been paying $300 per month extra toward our principal, so we owe only about $80,000 more on it. As a personal finance expert, what advice can you offer the average homeowner? What can we be doing to secure our investment in our home without damaging our future retirements?

We would greatly appreciate your response.

Jim and Mary Allison

In the interest of full disclosure, this is a real letter from an actual couple, but I have changed their names before sharing this CRITICAL query and my response with you. The couple has given me their permission to do so.

My Response to Jim & Mary

Hello, Jim and Mary –

Thanks so much for writing and trusting me to offer a response. I’m pretty sure tens of millions of homeowners share the exact same concerns. I am pleased to share my thoughts with you.

Over my years as a financial strategist, I have always maintained and helped my clients understand that home equity is a great way to augment retirement income. But – and this is a BIG BUT – the manner in which this is accomplished is extremely critical. The majority of homeowners, like you, tend to follow conventional wisdom which, sadly, is outdated and wrong.

You see, striving to quickly eliminate your mortgage and building equity IN your home tends NOT to be financially savvy in most instances I have encountered. I understand the rationale that paying off your mortgage quickly might “save” you on interest payments. But consider what you could potentially “earn” by saving those extra dollars in a conservative side fund, instead of paying off your mortgage directly.

There are two intertwined truths in finance called Opportunity Cost and Arbitrage that suggest that there is a cost and benefit to all financial decisions. And whenever the benefit outweighs the cost, that is the more savvy option – because it will improve your net worth.

Over the years, I have recommended that our homeowner clients SEPARATE their home’s equity, to the extent it is financially prudent. The rationale behind my approach is the fact that home equity is not a safe investment when it is left to accumulate idle in a house.

As you mentioned in your letter, you and your wife have watched helplessly as $175,000 (the depreciation in your home’s value from $450,000 to $275,000) of your equity and retirement funding has vanished – never to be restored. I say that because if and when the value of your home recovers, it will be new money that returns, so to speak, as you would have made those gains in addition to the $175,000 lost investment if you had followed the approach I recommend.

On the other hand, say we had determined that your mortgage could be increased to $300,000, without any change in your overall spending outlay. So instead of paying that extra $300 per month toward your principle, you had paid it toward an increased mortgage payment, without your total monthly spending having changed by even a cent. So instead of holding $370,000 of equity (your home’s value of $450,000 minus your $80,000 mortgage) you would have held $150,000 ($450,000 minus a new $300,000 mortgage) inside the brick and mortar of your home thereby clearly reducing your risk exposure.

If that scenario had played out, even after the drop in the value of your home from $450,000 to $275,000, you and your wife would NOT have lost a penny of the $220,000 ($300,000 minus $80,000) that was separated from your house and placed in a conservative side fund – obviously, because it was SEPARATED.

Notice that your home’s value would have plummeted either way – with or without the equity in it. But your retirements would not have been compromised if you had employed the strategy I teach.

It would be a self-defeating strategy to separate your home’s equity – up to a financially sensible level, bearing in mind opportunity cost and arbitrage – and then exposing it to market risk. I must also point out that I recommend a conservative investment strategy for my clients. They do not lose a dime of their investment portfolios’ values when the stock market tumbles, because we simply link their portfolios to the market as opposed to having them invested directly in the market.

I hope this helps you and Mary understand, in a general sense, my recommendation. Unfortunately for the two of you, as I mentioned earlier, we can do nothing to regain your lost investment. We can merely hope to make up some of the loss sooner than later. I would be glad to meet with you to help you assess your situation in detail and make specific recommendations to help you safely, securely – and, quite frankly, sensibly – achieve your dream retirement.

Please call our office at (301) 949-4449 or visit http://www.laserfg.com/ to schedule your free consultation.

Best Regards,

Samuel
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Dear Readers:

This offer is not limited to Jim and Mary. I am extending the same offer to each of you. Isn’t it time you took control over YOUR financial future? Call today to schedule your free consultation.

Sincerely –

Samuel