Will it apply to your retirement savings distribution?
If you receive a distribution from your IRA or workplace retirement plan, what will you do with it? You will probably want to arrange an IRA rollover – a common and useful financial move designed to take these invested assets from one retirement account to another, without tax consequences. The I.R.S. may give you just 60 days to do it, however.
The clock starts ticking on the day you receive the distribution. If assets from your employee retirement plan account or your IRA are paid directly to you, you have 60 calendar days to transfer those funds into an IRA or workplace retirement plan. If you fail to do that, the I.R.S. will characterize the entire distribution as taxable income. (It may also tack on a 10% early withdrawal penalty if you take possession of such funds before age 59½.)1
Your goal is to make this indirect rollover by the deadline. It is called an indirect rollover because its mechanics can be a bit involved. If the assets are coming out of an employee retirement plan, your employer may withhold 20% of them in accordance with tax laws. Unfortunately, you do not have the option of depositing only 80% of the distribution into an IRA or another employee retirement plan – you must deposit 100% of it by the deadline. You have to come up with the remaining 20%, yourself, from your own savings. The withheld 20% should be returned to you at tax time if the rollover completes smoothly.2
Can you make multiple IRA rollovers using funds from a single IRA? You can, but the I.R.S. says the rollovers must occur at least 12 months apart. Additionally, the I.R.S. prohibits you from making a rollover out of the “new” IRA that receives the transferred assets for a year following that transfer.1
This 12-month limit does not apply to every kind of retirement plan rollover. Trustee-to-trustee transfers, where the investment company (acting as custodian of your IRA or retirement plan account) simply sends a check for the assets to the brokerage firm that will eventually receive them, are exempt from the 60-day deadline. So are rollovers between workplace retirement plans, IRA-to-plan rollovers, and plan-to-IRA rollovers. If you are converting a traditional IRA to a Roth IRA, the 60-day rule is also irrelevant.1,2
Some retirement savers simply opt for a trustee-to-trustee transfer – a direct rollover – rather than an indirect one. A direct rollover of retirement assets is routine, and it can be coordinated with the help of a financial professional. If you do prefer to perform an indirect rollover on your own, be mindful of the 60-day rule and the potential ramifications of missing the deadline.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.1 - irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions [2/8/17]2 - fool.com/retirement/2017/03/08/what-to-do-with-your-old-401k-when-switching-jobs.aspx [3/8/17]
Where do things proceed from that point?
Every day, people die intestate. In legalese, that means without a will. This opens the door for the courts to decide what happens with their estates.
When no valid will exists, state intestacy laws dictate how assets are distributed. These laws divide an estate evenly (or equitably) among heirs. Any assets held in joint tenancy go to the joint owner. Assets held in a trust transfer to the trust beneficiaries (with spouses getting a share of those assets in some states). Community property goes to a spouse or partner in community property states.1
Simple, right? Unfortunately, the way assets transfer under these laws may not correspond to the wishes of the deceased person. Did the decedent want some of his or her estate to go to a charity or a person close to them? These laws will not allow that. State law will also decide who the executor of the estate is, since the decedent never named one.2
If the deceased person designated beneficiaries for his or her retirement accounts and life insurance policy, those retirement accounts and insurance proceeds should transfer to those beneficiaries without dispute, even when no will exists. When life insurance policies and retirement accounts lack designated beneficiaries, then those assets are lumped into the decedent’s estate and subject to intestacy laws.2
Most people have specific ideas about who should inherit what from their estates. To articulate those ideas, they should write a will – or better yet, they should draft one with the help of an attorney. Anyone who cares about the destiny of his or her wealth should take this basic estate planning step.
For a last will & testament to be valid, it must meet three important tests. It must be created by a person of sound mind. It must express that person’s free will – that is, it cannot be written or drafted under coercion or duress. Lastly, it must be signed and dated in the presence of two or more unrelated people who stand to inherit nothing from that person’s estate.1
Many wills are signed in the presence of notaries; although, a will does not have to be notarized to be legally valid. Some wills are self-proving – they have an attached, notarized affidavit, which acknowledges that all three tests noted in the preceding paragraph have been met. When this affidavit accompanies a will, there is no need to track down the parties who witnessed the signing and dating of the document years before.1
A last will and testament should be formatted and printed using a computer and printer; at the very least, it should be typed. Handwritten wills may not pass muster in some probate courts.1
When an individual dies intestate, the future of his or her estate is largely up to the courts. A basic, valid will stating his or her wishes may prevent that fate.
Citations.1 - legalzoom.com/knowledge/last-will/topic/wills-intestate [3/20/17]2 - money.cnn.com/2016/04/28/pf/dying-without-a-will-prince/ [4/28/16
What are the keys in planning to grow wealthy together?
When you marry or simply share a household with someone, your financial life changes – and your approach to managing your money may change as well. To succeed as a couple, you may also have to succeed financially. The good news is that is usually not so difficult.
At some point, you will have to ask yourselves some money questions – questions that pertain not only to your shared finances, but also to your individual finances. Waiting too long to ask (or answer) those questions might carry an emotional price. In the 2016 TD Bank Love & Money survey of 1,902 consumers who said they were in relationships, 42% of the respondents who described themselves as “unhappy” cited their number one financial error as “waiting too long” to discuss money matters with their significant other.1
First off, how will you make your money grow? Investing is essential. Simply saving money will help you build an emergency fund, but unless you save an extraordinary amount of cash, your uninvested savings will not fund your retirement.
So, what should you invest in? Should you hold any joint investment accounts or some jointly titled assets? One of you may like to assume more risk than the other; spouses often have different individual investment preferences.
How you invest, together or separately, is less important than your commitment to investing. Some couples focus only on avoiding financial risk – to them, maintaining the status quo and not losing any money equals financial success. They could be setting themselves up for financial failure decades from now by rejecting investing and retirement planning.
An ongoing relationship with a financial professional may enhance your knowledge of the ways in which you could build your wealth and arrange to retire confidently.
How much will you spend & save? Budgeting can help you arrive at your answer. A simple budget, an elaborate budget, any attempt at a budget can prove more informative than none at all. A thorough, line-item budget may seem a little over the top, but what you learn from it may be truly eye-opening.
How often will you check up on your financial progress? When finances affect two people rather than one, credit card statements and bank balances become more important. So do IRA balances, insurance premiums, and investment account yields. Looking in on these details once a month (or at least once a quarter) can keep you both informed, so that neither one of you have misconceptions about household finances or assets. Arguments can start when money misconceptions are upended by reality.
What degree of independence do you want to maintain? Do you want to have separate bank accounts? Separate “fun money” accounts? To what extent do you want to comingle your money? Some spouses need individual financial “space” of their own. There is nothing wrong with this, unless a spouse uses such “space” to hide secrets that will eventually shock the other.
Can you be businesslike about your finances? Spouses who are inattentive or nonchalant about financial matters may encounter more financial trouble than they anticipate. So, watch where your money goes, and think about ways to repeatedly pay yourselves first, rather than your creditors. Set shared short-term, medium-term, and long-term objectives, and strive to attain them.
Communication is key to all this. In the TD Bank survey, nearly 80% of the respondents who indicated they talked about money once per week said that they were happy with their relationship. Follow their lead and plan for your progress together.1
Citations.1 - gobankingrates.com/personal-finance/surprising-ways-money-affects-love-life/ [9/26/16]
What do each of these terms really mean?
Investment management can be active or passive. Sometimes, that simple, fundamental choice can make a difference in portfolio performance.
During a particular market climate, one of these two methods may be widely praised, while the other is derided and dismissed. In truth, both approaches have merit, and all investors should understand their principles.
How does passive asset management work? A passive asset management strategy employs investment vehicles mirroring market benchmarks. In their composition, these funds match an index – such as the S&P 500 or the Russell 2000 – component for component.
As a result, the return from a passively managed fund precisely matches the return of the index it replicates. The glass-half-full aspect of this is that the investment will never underperform that benchmark. The glass-half-empty aspect is that it will never outperform it, either.
When you hold a passively managed investment, you always know what you own. In a slumping or sideways market, however, what you happen to own may not be what you would like to own.
Buy-and-hold investing goes hand-in-hand with passive investment management. A lengthy bull market makes a buy-and-hold investor (and a passive asset management approach) look good. With patience, an investor (or asset manager) rides the bull and enjoys the gains.
But, just as there is a potential downside to buy-and-hold investing (you can hold an asset too long), there is also a potential downside to passive investment management (you can be so passive that you fail to react to potential opportunities and changing market climates). That brings us to the respective alternatives to these approaches – market timing and active asset management (which is sometimes called dynamic asset allocation).
Please note that just as buy-and-hold investing does not equal passive asset management, market timing does not equal active asset management. Buy-and-hold investing and market timing are behaviors; passive asset management and active asset management are disciplines. (A portfolio left alone for 10 or 15 years is not one being passively managed.)
Active investment management attempts to beat the benchmarks. It seeks to take advantage of economic trends affecting certain sectors of the market. By overweighting a portfolio in sectors that are performing well and underweighting it in sectors that are performing poorly, the portfolio can theoretically benefit from greater exposure to the “hot” sectors and achieve a better overall return.
Active investment management does involve market timing. You have probably read articles discouraging market timing, but the warnings within those articles are almost always aimed at individual investors – stock pickers, day traders. Investment professionals practicing dynamic asset allocation are not merely picking stocks and making impulsive trades. They rely on highly sophisticated analytics to adjust investment allocations in a portfolio, responding to price movements and seeking to determine macroeconomic and sector-specific trends.
The dilemma with active investment management is that a manager (and portfolio) may have as many subpar years as excellent ones. In 2013, more than 80% of active investment managers outperformed passive investments indexing the S&P 500 (which rose 29.60% that year). In 2011, less than 15% did (the S&P was flat for the year).1,2
The two approaches are not mutually exclusive. In fact, many investment professionals help their clients use passive and active strategies at once. Some types of investments may be better suited to active management than passive management or vice versa. Similarly, when a bull market shifts into a bear market (or vice versa), one approach may suddenly prove more useful than the other, while both approaches are kept in mind for the long run.
Citations.1 - forbes.com/sites/investor/2015/03/30/active-versus-passive-management-which-is-better/ [3/30/15]2 - macrotrends.net/2526/sp-500-historical-annual-returns [2/2/17]
If you plan to hold yours to maturity, the fluctuation in their market values need not be worrisome.
Are tough times ahead for the bond market? Some investors think so. U.S. monetary policy is tightening, with the Federal Reserve planning gradual increases for the key interest rate.
A rising interest rate environment presents a challenge to the bond market, but it does not necessarily imply some kind of doomsday for bondholders. Blanket advice to “get out of bonds” is imprudent, because it really all depends on what you intend to do with the debt investments you hold and how long you intend to hold them.
Rising interest rates affect the market values of bonds. Repeat: the market values. Market values should not be confused with face values.
To illustrate, say you invest $5,000 in a 30-year Treasury with a 1% yield. That means that every year for the next 30 years, that Treasury note will pay out $50 to you.
Then, interest rates on 30-year notes start climbing. Three years later, they reach 2%, and you have a problem if you want to sell your 30-year Treasury. The problem is that no one will buy it for $5,000. Why pay $5,000 for a 30-year Treasury with a 1% yield when you can invest the same $5,000 in a brand new one set up to yield 2%?
Bond yields and bond prices move in opposite directions, and in order for your $5,000 30-year note to yield 2%, its price (read: market value) has to drop to $2,500. The market value of your bond has fallen below its face value, and if you sell it, you will take a loss.1
Rising interest rates do not affect the face values of bonds. So, if you hold onto that 30-year Treasury until its maturity date, you will get your $5,000 principal back at that point, plus $50 per year in interest along the way.
There is a potential downside to holding onto that bond, however, and it may be measured in opportunity cost. Yes, you are avoiding a loss and redeeming your security for its face value. The thing is, you could, potentially, have put your money into another investment with a better yield – a yield that could have kept up with or surpassed the rate of inflation.
This is why some investors favor a laddered bond strategy. They take the interest their bonds pay out and use that money (and other funds) to buy newly issued bonds at higher interest rates, so they can benefit from the upside of a rising interest rate climate. Lower-yielding bonds in their portfolio are gradually replaced by higher-yielding bonds over time. Through this strategy, they can plan to manage interest rate risk and cash flow.
When interest rates fall, the market value of older, higher-yielding bonds rises. Interest rates do not have very far to fall right now, but this is a detail to remember for the future.
A fear of higher interest rates does not necessarily imperil bonds or bond funds. As a recent example, one bond market benchmark – the Vanguard Long-Term Treasury Fund – rose 13% in the 12 months ending in November 2016.2
In the long run, we may see interest rates normalize. Bond investors planning to reinvest their money in newly issued bonds with higher yields can potentially take advantage of such a development.
Regardless of whether interest rates rise, plateau, or fall, remember that their movement does not affect a bond’s total return over its term.
Citations.1 - thebalance.com/the-difference-between-coupon-and-yield-to-maturity-417080 [6/3/16]2 - forbes.com/sites/robertberger/2016/11/30/how-rising-interest-rates-affect-bonds/ [11/30/16]
A plan for sustaining the business you have built after your death.
Business owners are builders. They spend their lives building firms to provide goods and services to their clients, and those firms provide them with a living. But nothing can tear down that lifetime of work faster than the death of a business owner, or the death of a business partner. Often, much of the value of a business dies with the owner.
Small business owners face two major succession questions. First, can the business heirs keep the company afloat when the owner dies, or at least avoid surrendering it at a “fire sale” price?
The executor of a deceased business owner’s estate can elect to continue the company, but must find someone willing to run it. That may not be easy. Some heirs or business partners may want to keep things going; others may want to cash out. This discord can potentially sink a firm, because if the business continues, any partners wanting out will want to be fairly compensated. If sufficient cash isn’t on hand to do that, liquidation may be the only option.
Selling the business means finding a buyer. Any potential buyer will be negotiating with an advantage, for the business will become less valuable with each passing day following the owner’s death.
Now to the second major succession question: how can an owner keep employees confident that the business, and their jobs, will continue after he or she is gone?
Surviving business partners may need to be reassured as well. If one partner dies, the remaining partners may find themselves in business with the deceased partner's heirs, who may have different goals for the company. If the heirs want to sell their inherited ownership interest, is there enough cash on hand to buy it?
These questions can throw the value & continuation of a business into doubt. If left unanswered, they could make creditors more likely to call in loans, and make retaining key employees harder.
Cross-purchase buy-sell agreements are designed to answer these questions. Often funded by life insurance, these agreements are essentially deals struck between owners, partners, or key employees of a business, permitting the sale of their ownership share to another person.1
How do they work? In the classic cross-purchase buyout agreement, each business partner takes out a life insurance policy on the other partners within the company, naming himself or herself as the beneficiary of those policies. If one partner passes away, then one or more beneficiaries can use the life insurance proceeds to buy the deceased partner’s ownership interest. This way, partners or key persons can continue to work and operate the business seamlessly, and the deceased partner’s heirs receive a fair, agreed-upon price for the ownership interest.1
Thanks to the buy-sell agreement, both heirs and partners know that the business is positioned to continue. In addition, greater productivity and loyalty may be seen from any key employees made part of the agreement, who see ownership in their future.
The sale can happen rather quickly; estate issues can be settled more expediently. Heirs will get a fair, pre-determined price for the ownership interest, and won't be selling under duress.
These agreements do have some disadvantages. Participants have to trust and verify that each partner keeps his or her insurance policy in force. This isn't as simple as making sure premiums are paid. Usually the policies are owned personally, not by the firm. If a partner suffers a bankruptcy, federal or state exemptions may not protect all of its cash value from creditors. Sometimes a participant will mistakenly buy an insurance policy on her or his own life and make the other participants beneficiaries; under those conditions, the insurance payout resulting from his or her death will likely be taxed.2,3
As the number of partners involved in a buy-sell agreement increases, the number of policies grows exponentially – as does the cost of the agreement. Two partners? Two policies. Three partners? Six policies. (When three partners are involved in a cross-purchase buyout agreement, Partner A needs to buy coverage for Partner B and Partner C, etc.) Speaking of cost, an older or less healthy partner will pay much more for the agreement than a younger, healthier partner, as life insurance is a necessary component.2,3
Before you make a decision about how you’ll protect the future of your business, it may be wise to speak to a qualified professional who can help you research this option as well as others.
1 - nerdwallet.com/blog/insurance/life-insurance-small-business-partners/ [1/20/16]
2 - insure.com/life-insurance/bankruptcy.html [11/13/15]
3 - insurancenewsnet.com/innarticle/how-to-keep-a-buy-sell-agreement-from-derailing [5/21/15]