by Mat Sorensen | Mar 10, 2015 | News
Fidelity Investments, the largest provider of 401(k) plans, recently announced data on their 13 million 401(k) customers accounts that provides an insight into saving for retirement. One of the most interesting items from the report itself was the fact that 401(k) millionaires, those with $1M or more in their 401(k) account, has grown to 72,000. This is twice as many as in 2012 and fives times as many in 2004. While I know many of my readers favor self-directed accounts and “alternative” assets as to their investments, this report offers some good insight into how to save and contribute to your retirement account so that you have funds to invest. Here are some interesting saving and contribution facts that these 401(k) millionaires had in common.
1. They Contribute the Maximum Employee Amount. These investors contribute the maximum employee amount every year and most receive the company maximum matching contribution available. While company plans and employer contributions vary, those who save more end up with more. But it isn’t just the extra money saved that ends up helping you in the long-run it is the investment growth of those additional dollars. I like to think of it this way, the more you can save and put away, the more players you can get on the field to score points. Sometimes, unfortunately, I think too many investors think they can just hit a home-run on an investment and solve all of their retirement problems but the fact of the matter is if you only have one or two players on the field it is hard to score too many runs without swinging for the fences. I can almost hear my little coach telling me, “just a base hit Mat, base hit.”
When it comes to maximizing contributions, if you are self-employed with a solo 401(k) then you can create the most generous employer matching contrinbutions possible and you can contribute far more than the average 401(k) millionaire form the Fidelity Report. According to the Fidelity report, the average total contribution (employee and employer) of a 401(k) millionaire was $35,700. Under a solo 401(k) a self-employer person could actually contribute up to $53,000 total giving them nearly $20,000 more per year to save, invest, and grow.
2. They Save For The Long-Term. I’m sure it is not shocking but these 401(k) millionaires save for the long-term and put money away steadily. According to Jeanne Thompson, VP Fidelity, “They really are heeding the right advice….Starting early and staying for the long term.”
3. They Take Advantage of Catch-Up Contributions. These investors are mostly over the age of 50 and as a result they can and DO take advantage of the ability to invest an additional $6,000 per year as a “catch-up contribution”. Even though these investors are on track financially for retirement, they still know a good deal when they see one and take advantage of the ability to put away up $24,000 a year as their employee contributions (keep in mind, those under 50 can contribute a maximum employee contribution of $18,000/yr.).
Learning how to set money aside so that you have funds to invest is nothing novel and we’ve all understood that the more you save the better off you will be but it is nice to see the data of the 401(k) millionaires backing up these assumptions.
By: Mat Sorensen, Attorney & Author of The Self Directed IRA Handbook
by Mat Sorensen | Mar 3, 2015 | News
When planning your business and tax structure with your lawyer, it is important to understand what is privileged and what is not. Often times, clients divulge information to their lawyer and wonder whether that information is “attorney-client privileged” or not. Attorney-client privilege is an important legal protection offered to persons, companies, and organizations who provide confidential information and who seek counsel from their lawyer or law firm. Under law, an attorney cannot be required to provide attorney-client privileged information to a plaintiff in a law suit (e.g. creditor) or to a government agency (e.g. the IRS) except under limited situations. Here are a couple of common situations where you may lose attorney-client privileged information and some tips to make sure your confidential information provided to your lawyers doesn’t run into the exceptions.
EXCEPTIONS TO THE ATTORNEY CLIENT PRIVILEGE RULE
1. THIRD PARTY NON-LAWYER PRESENT- Was a third party present with your lawyer when the information you want to be privileged was discussed. For example, was your accountant or financial adviser present when discussing information you want to remain confidential and to remain privileged. Keep in mind that if a third party is present in a meeting or on a conference call then that third party may be required to provide information or documents from the meeting and that your accountant, consultant or adviser can’t raise the attorney-client privileged defense for you unless they are actually your attorney. If an third party professional does need to be hired (e.g. an accountant or CPA), that third party can be hired or brought into the matter by the attorney and the privileged may remain in tact. This is known as a “Kovel” hiring of the accountant and stems from a case where a lawyer engaged an accountant for the client and the accountants work therefore was covered under the lawyer’s attorney-client privilege.
TIP: For sensitive matters where you want information to remain confidential and privileged, do not involve outside parties as those outside parties or non-attorney advisers as those parties cannot raise the attorney-client privileged defense.
2. ONLY LEGAL ADVICE IS ATTORNEY-CLIENT PRIVILEGED – Only information exchanged when seeking legal advice is attorney-client privileged. This is especially tricky for companies who have their own “in-house” legal counsel who also offers business advice. Only the information exchanged that pertains to legal advice would be privileged. For example, was an organization chart of the companies holdings “privileged” when provided to the company lawyer also manages those assets for the business? Also, what if that lawyer disseminated that organization chart to accountants, property managers, or other non-lawyers? If they did, then that information is no longer attorney-client privileged.
TIP: If you have sensitive documents or information you want to keep in communication only with your lawyer, ask your attorney to identify the document as “Attorney-Client Privileged” and do not provide it to non-lawyers.
Not all information with your lawyer needs to be attorney-client privileged but keep these tips in mind when communicating highly-sensitive information to your attorney and let your attorney know before you provide the confidential information that you intend it to be privileged so that they can ensure that your information is properly handled and so that non-lawyer third-parties are only involved when the privilege can be maintained.
by Mat Sorensen | Feb 10, 2015 | News
President Obama’s latest budget proposal seeks to address once policy issue: the federal government wants more money. That fact is, American wealth is being concentrated into retirement accounts and the government wants more of it than it already receives. Here’s three proposals from the President’s budget proposal that would weaken the current benefits of saving for retirement.
In an effort to halt so called “Back-Door” Roth IRAs, President Obama’s budget proposal would eliminate the ability to convert “after-tax” dollars in a traditional IRA or employer based plan to Roth. You could still convert “pre-tax” dollars that are in a traditional IRA or employer plan to Roth. For example, a traditional IRA with pre-tax dollars could be converted to a Roth IRA as their is tax due on this conversion and the IRS wants your money. However, many high-income earners who could not contribute to a Roth IRA have instead made “after-tax” contributions to their retirement plan (where they receive no deduction) and they have been able to convert those amounts to Roth dollars with no taxes on the conversion (since the dollars are after-tax) under what has become known as a “Back-Door” Roth IRA. Click here for a prior article I wrote on the “Back-Door” Roth IRA.
Other bad ideas found in the budget include imposing required minimum distributions (RMD) on Roth IRAs. RMDs have never applied to Roth IRAs because taxes have already been paid on the funds but the new proposal would require RMD on Roth IRAs when the account owner reaches 70 1/2 in a manner similar to traditional IRAs.
And finally, the budget proposal would limit the ability to contribute to a retirement account once your retirement account values exceed approximately $3.4M. The account could still grow but no new contributions would be allowed. This would be a first of its kind rule as total account success has not been a restriction in your ability to contribute into the most popular retirement accounts like IRAs and 401(k)s. While most people don’t need to worry about exceeding $3.4M in their retirement account, setting a ceiling on account growth seems to be a dangerous precedent.
Want to know the good news, President Obama has never had a budget approved. Not even when his party controlled both houses of Congress.
by Mat Sorensen | Jan 13, 2015 | News
Starting January 1, 2015, you are only allowed one 60-day rollover for all of your IRAs in a twelve-month period. This change was the result of a Tax Court case reported on my blog last year known as Bobrow. Click here for the details. The important details of the new rule is that you can only take one 60-day rollover, in a 12 month period. The prior practice was that you could take one 60-day rollover per IRA per 12 month period. However, the Bobrow case changed that rule and now you can only take one 60-day rollover for all of your IRAs per 12 month period. Keep in mind that a 60-day rollover is a rollover of IRA funds whereby you receive the money personally from the IRA custodian and then you have 60 days to re-deposit them into the same IRA or into a new IRA to avoid a distribution of the funds. This new rule does not apply to trustee-to-trustee transfers (aka, direct rollovers)whereby one retirement plan custodian (IRA or 401(k)) transfers funds directly to your new custodian. You can do as many direct trustee-to-trustee transfers as you desire and as a result we recommend that clients always use a trustee-to-trustee transfer when rolling over retirement plan funds as you will avoid any potential issues under the new 60-day rollover rules. The IRS has provided a helpful summary of the new rule here. I have prior articles written on the case history of the 60-day rollover subject here.
by Mat Sorensen | Jan 6, 2015 | News
If you have converted a Traditional IRA to a Roth IRA in 2014, you can reverse the conversion by doing what is called a Roth IRA conversion re-characterization. Under a re-characterization, the Roth IRA funds and assets are rolled back into a Traditional IRA and the amounts converted are considered contributed to the traditional IRA and you effectively cancel out the amounts converted. As a result of the re-characterization, the taxes that would have been owed for the Roth IRA conversion are no longer due and the assets and funds re-charaterized go back to a Traditional IRA.
A Roth IRA conversion re-characterization is an excellent strategy in two situations. First, if you do not have the funds to pay the taxes on the conversion. Reversing the re-characterization will remove the tax liability. Problem solved. Second, if the investments in your Roth IRA, following the conversion, did not fare so well and if the account decreased in value you are generally better off re-characterizng the conversion and going back to a traditional IRA and then conducting a new Roth IRA conversions at the lower valuation. If you have completed a Roth IRA conversion re-characterzation, you do have to wait until the next year to convert the same amounts back to Roth as the IRS restricts you from immediately re-converting after a re-characterization.
Here are a few keys facts to keep in mind for Roth IRA conversion re-characterizations.
1. You must coordinate the re-conversion with your IRA custodian as they will need to roll the Roth IRA funds back to a Traditional IRA. Your tax return also needs to properly report the re-conversion so that you don’t end up paying taxes on the 1099-R you will have received for the Roth IRA conversion.
2. You can re-characterize up to October 15th of the year following the year you converted. So if you conducted a Roth IRA conversion in 2014, you have until October 15, 2015 to re-characterizer the conversion. You have until October 15th even if you did not file an extension and even if you have already filed your tax return for the prior year. If you filed a tax return already and claimed the Roth IRA conversion amounts as income, the tax return will need to be amended.
3. Roth 401(k) or other employer in-plan Roth conversions cannot be re-characterized so once those are reported to the IRS you cannot reverse them as the rules applicable to Roth IRA conversion re-characterizations do not apply to 401(k) or other in-plan Roth conversions.
Because of the re-characterization rules, the decision to convert funds to a Roth IRA isn’t as “taxing” as you’d think as you can later have a change of heart if the odds don’t end up in your favor (e.g. lower investment value, or no personal funds to pay taxes on the conversion).
More details and information can be obtained from an informative FAQ page from the IRS here.
By: Mat Sorensen, Attorney and Author of The Self Directed IRA Handbook.
by Mat Sorensen | Dec 23, 2014 | News
As we end 2014, there are three critical items that you must be aware of as these items must be completed by December 31, 2014.
1. Required Minimum Distributions. If you are age 70 1/2 or older and if you have a traditional IRA (or SEP or SIMPLE IRA or 401k), you must take your required minimum distributions (“RMD”) for 2014 by December 31, 2014. While 2014 contributions can be made up until April 15 of the next year, RMD payments must be taken before the end of the year. If you have a Roth IRA, relax, the RMD rules don’t apply to Roth IRAs. Click here for a nice summary of the RMD rules from the IRS.
2. Charitable RMD Distribution Income Exclusion Rule. Congress just passed the tax extenders bill and one of the items extended was the Qualified Charitable Distribution rules. Under this rule, an IRA owner who is 70 1/2 or older can donate up to $100,000 from their IRA to a qualifying charity and such donation from their IRA will count towards their required minimum distribution requirement and will not be included into their gross income. This is a great way to pull money out of your IRA tax-free as the distribution is not included in your gross income. This only applies to those 70 1/2 or older and again it will also satisfy RMD requirements. It’s unfortunate that Congress only recently extended this law as it would have been a great planning tool if we knew it were available in 2014. Regardless, this can be an excellent option for those who are 70 1/2 and who would like to contribute to a charity by year-end. Keep in mind though that you don’t get a charitable deduction for the amount given to charity from the IRA, instead, you are able to exclude up to $100,000 from the IRA distribution on your income (something that would otherwise be taxable). The IRS has more details here. This page explains the 2013 rule but the rule was extended just two weeks ago and it now applies in 2014 as well. Note that it was only extended for 2014 so the rule is not available in 2015 at this time.
3. Roth IRA Conversions.Conversions from Traditional IRAs to Roth IRAs must be completed by December 31, 2014, in order to apply to 2014 taxable income. Keep in mind that when you convert a traditional IRA to a Roth IRA that the amount converted is included as income on your tax return. There are no longer any income restrictions on Roth IRA conversions so everyone qualified regardless of income. Converting to a Roth can be a great strategy if you have a low-income year or if you have losses that can be used to off-set the income from the conversion. It is also a great strategy if you have investments will current low fair market values, which you believe will appreciate over time. Many clients wait until year-end to determine if this is a good year to convert or not. . If you are unsure about whether a Roth conversion makes sense for you, keep in mind that you can re-characterize a Roth conversion back to Traditional IRA before you file your 2014 tax return on April 15, 2015 (including extensions).
By: Mat Sorensen, Attorney and Author of The Self Directed IRA Handbook
