What to Discuss When you Meet with an Advisor

It’s been just over a month since I joined the group at Szarka Financial. And, I am glad that I made the move. One of the things that attracted me to the firm was their emphasis on education. Having come from a healthcare background in medical device sales, prior to being an advisor, I know the importance of educating my clients so that we can partner together on reaching their goals. Meeting with a financial advisor can be a key factor in aiding the overall management of your finances and investments. What is expected in that first meeting? What are some of the key topics that will be discussed?
Not unlike when you visit a doctor’s office and they ask you about every disease possible, in order to rule out any issues before making a diagnosis or prescribing medications, the more you can tell your advisor regarding your overall financial “health”, the better they will be able to help you.
Here are some of the topics and associated questions that you will encounter during that first meeting. Gaining a better understanding of a person’s situation provides a solid foundation upon which a comprehensive financial plan can be built:
The first step is no fun, but necessary. You need to know what you spend each month. Don’t estimate it, figure it out. This will determine many things in your financial plan. How can someone know they are saving enough, ready to retire, or building wealth if they don’t know what they spend? No matter how much money you make or have, spending will determine if it’s enough.
What’s Left Over (Also Known as Discretionary Income)
Look at your monthly pay stub and see what you receive after taxes, and other deductions. For salespeople, it’s best to figure out the average since it fluctuates. Now, subtract what you spend in a month and see what is left over. This is your discretionary income and where your investment dollars would come from in the future.
Risk Profile
Do you panic easily when the markets start to get more volatile or do you stay cool as a cucumber, knowing you are in for the long haul? Do you like to be more conservative or more aggressive? Everyone has a different level of comfort when it comes to investing. It’s important to understand what your tolerance for risk really is.
Life, Disability, & Long Term Care Insurance Policies
Do you have any? Is it enough? If you have a family now, you can’t take this for granted.
Pay Stub
It will show you what deductions are coming out and how much is coming in.
Designation of Beneficiaries, Trust and/or Will Documents
Do you have them? Nothing good happens if you pass away without a Will or without keeping your beneficiary designation forms up-to-date.
Emergency Fund
Do you have enough cash available in case of an emergency? What if you lost your job for six months? What if you were disabled and could not work? Would you be able to cover your fixed expenses?
401(k) Plan
Do you receive a match on your 401(k) and how does it work? Most people think this is the only, and best place, to invest for savings. It can be, but only if it is done right, which is not always obvious or easy to determine.
Mortgage and/or Loans
What do you owe on your house? What is the interest rate you are paying? Do you have any other debt? There are a lot of questions and things to think about here. Remember, that working on creating financial goals supported by a strong plan is a process. To be successful, it will take an understanding of where you are today, where you want to be financially (your plan) and how to get there, and most importantly, the discipline to execute.
Sounds like a job, right? It is a job.
Think about it, you are basically running your own corporation whether you like it or not. You have income, expenses, cash flow, assets, and liabilities, just like any corporation. And once you retire, it will be even more important how you manage your corporation, because for most of us our income will be fixed. As financial advisors we take our role very seriously in assisting you set up and supervise your corporation. We look forward to the opportunity to helping you run it!

Don’t Be a Victim of the Looming 401(k) Crisis

There is a slow moving time bomb coming in the world of retirement planning, and it’s important for everyone to understand what’s happening so that they can avoid becoming a victim. The time bomb is that the traditional “3-legged stool” of retirement planning is quickly crumbling away, and it doesn’t currently appear as if anything is coming to replace it.
The 3-legged stool consists of:
(1) Social Security
(2) Defined Benefit Pensions
(3) Personal Savings.

The first leg (Social Security) is still there. Unfortunately, a sort of grand experiment has been going on for the past couple of decades for the second leg of the stool (Defined Benefit pension plans), which have been quickly disappearing to the point where they are pretty much obsolete other than for government workers. The thinking was that they could be replaced by a beefed up third leg of the stool (Personal Savings) in the form of 401(k) plans, but this “401(k) experiment” appears to be failing.
It was never supposed to be this way. The 401(k) was a little known provision added to the Internal Revenue Code around 1980, originally designed to allow executives to defer tax on some of their bonuses until they retired. But once it became clear that this provision could be used as a tax deferral vehicle for the regular wages of any employee, the modern 401(k) as we know it was born.
There was massive growth in the use of 401(k)’s over the ensuing decades, at the same time that employers were turning away from Defined Benefit Plans in record numbers. Fast forward to the situation today, where most workers in the U.S. have no Defined Benefit Pension whatsoever, and will have to rely solely on Social Security for their retirement income… along with whatever they have in their 401(k) or other personal savings.
This has created a tremendous change whereby responsibility for retirement planning has now shifted directly onto the shoulders of workers themselves… and the results don’t look good. Studies show that the average balance in a 401(k) is less than $100,000. But the true situation is actually far worse than that, because the averages are greatly skewed upward by the relatively few workers at the top who have very large balances.
The median balance, (half higher, half lower) even for workers in their late 50s, is less than $20,000.
Even more shocking, fully half of working families have no 401(k) savings at all.
There are many reasons for this. More people are working as independent contractors rather than employees. People are changing jobs more often, and/or feel like they can’t afford to save anything in their 401(k). People put it off, thinking that they’ll just get around to it at some better time in the future. And some employees don’t even have access to a 401(k) at all. For a variety of reasons, there is a massive shift going on where a relatively small number of workers at the top (the “Top 10”) have large balances, while the vast majority of people have far too little in their 401(k)’s.
The result of all this is that if people don’t pay attention to their 401(k) plans, they could be left with little more in retirement than their Social Security Benefit…which on average is about $1,400/month. Does that sound like a great retirement? For a shocking number of people, this is going to be reality for them. Even if they have a 401(k) with a balance of, say, $150,000, that should only be expected to provide an additional $6,000-8,000/yr. of retirement income, if they want it to last their entire lives and keep up with inflation. Especially if they retire with any debt, that is likely to just not be enough. This is the looming 401(k) retirement crisis that the country is facing. How can you avoid becoming a victim?
Here are the steps you should follow:
1. Enroll in your 401(k) ASAP. Ask your employer as soon as you take
a new job, and make sure you start on the very first day of eligibility.
2. If you are self-employed, look at some of the other options that are available to do on your own, such as a SEP-IRA (simplified employee pension) or an Individual 401(k).
3. Make sure you put enough away.For most people that means about 10-15% of their salary, at least. Don’t short change yourself by putting only enough in to get the employer match…you’re only hurting yourself with that strategy.
4. Look at the investment options carefully, and consider choosing some that offer the potential for future growth. Don’t put all your eggs in one basket with company stock or unbalanced fund choices.
5. When you change jobs, don’t ever spend the money you’ve accumulated in your former employer’s 401(k)…consider rolling everything to an IRA so it can keep growing vs. rolling it into your new employer’s 401(k). Follow that procedure with every job you ever take to help you build a nest egg.
6. Review your 401(k) on a regular basis to make sure it’s still doing what it’s supposed to do and balanced appropriately, based on your age and risk tolerance.
7. If you are 5 to 10 years out from retirement, and have not already met with an advisor to review your 401(k) allocations and financial goals, now is the time to do so to help ensure you are on the right track.
It doesn’t look like there’s any going back to the world of Defined Benefit Plans. Like it or not, it’s now your own responsibility to be aware of the changing landscape and that means paying attention to your 401(k). Although your company may provide the 401(k) to you as an employee, ultimately you are responsible, not your employer, to ensure you are saving enough in your plan for retirement. Working with an advisor can help ensure you have set and followed realistic goals. Your retirement lifestyle will probably depend on it!

5 Crucial IRA Tax Planning Strategies

Someone once said “It takes a great deal of boldness and a great deal of caution to make a great fortune and when you have got it, it requires ten times as much wit to keep it.” Although exactly who said it is unclear, the message is definitely clear. Many of you have been building your retirement savings for years, even decades. No matter how much you have saved, you definitely don’t want to lose some of it by making an avoidable mistake.
While the market volatility can be a major threat to some retirement plans, Uncle Sam is an unavoidable reality for most of us. And unless you have a Roth IRA, if you take a withdrawal from a Traditional IRA, or comparable tax-deferred account, you are inevitably going to pay taxes. No way to avoid it, but you may be able to minimize the amount of taxes and/or penalties by paying attention to some key areas.
Here are five pointers that may help you avoid penalties and/or reduce your tax liability.
IRA and Roth IRA Income Limitations
If you make improper contributions to your IRA or Roth IRA, penalties can apply. There are no income limits to contribute to a conventional/traditional IRA, but some of the contributions you make to your IRA, thinking they will reduce your taxable liability, might not be allowed and could be disqualified in the future. Taxes and penalties may be assessed in arrears. Specifically, if you are active in a company-sponsored retirement plan, income limits apply to how much of your contribution will be tax-deductible. The deduction starts to phase out if your Modified Adjusted Gross Income (MAGI) is $98,000 for married/joint filing ($61,000 for single) and is entirely phased out if your MAGI is greater than $118,000 for married/joint ($71,000 for single).
If you are married and are not active in a company-sponsored retirement plan, but your spouse is, then the deduction phases out from $184,000 to $194,000 MAGI for your contribution. The rules above apply separately to your spouse’s potential contribution.
RMD Aggregation
If you don’t take the Required Minimum Distribution (RMD) from your tax-deferred plan(s), such as IRA, 401(k), 403(b), etc., which are required in the year in which you turn age 70 ½, you may have to pay a major penalty. You can defer the first year’s distribution to the second year, but then you have to take two RMDs in the second year. Except for the first year, you have to follow the rules every year to avoid the penalty. And the penalty is a stiff one! It’s 50% of the RMD – and you still have to pay the income tax as well. For example, if the RMD is $2,500 and you are in the 25% marginal federal income tax bracket, the penalty would be $1,250 (paid to the IRS), along with the $625 income tax on the full $2,500, leaving you with $625! You definitely want to avoid this penalty.
Here is one of the more common ways to make a mistake in this area. You remember to take the RMD from your primary IRA, but you forget that you have other IRA accounts. In order to fully satisfy the IRS, you have to withdraw the RMD based on ALL of your tax-deferred accounts, including any annuities that you may own in an IRA. Your total RMD for any given tax year is calculated by taking the current value of all of your tax-deferred accounts as of December 31st of the prior year, and dividing it by the government’s uniform life expectancy table, giving you the minimum amount that must be distributed from your tax-deferred accounts. The penalty applies to the amount that you are short. It’s also important to know that you don’t have to take withdrawals from each separate account. Strategically, it might make sense for you to take the entire RMD from one account, or two accounts; it’s up to you. The IRS doesn’t care where it comes from they just require you to take the total RMD each year. Make sure you follow this requirement and avoid the costly penalty!
Inherited IRAs – Spousal Beneficiary
It is common for a spousal beneficiary to roll an inherited IRA into their existing IRA. That’s okay if the surviving spouse is over 59 ½. However, if the spouse is under 59 ½, it is important for that spouse to keep it separate as an inherited IRA in order to preserve the right to withdraw funds without the 10% early withdrawal penalty, which is waived for this type of account. On the other hand, if the spouse beneficiary is over 59 ½, an inherited IRA can be combined with another IRA.
Another key difference for a spousal beneficiary is that they do not have to immediately begin taking an RMD unless the original owner had reached 70 ½ and had started taking the RMD. If the original owner had started taking an RMD, then the spouse has to continue to take the RMD based on the spouse’s life expectancy after the year in which the original owner died.
Inherited IRAs (and Roth IRAs) – Non-Spousal Beneficiary
Non-spousal beneficiaries of any age who want to “stretch” the IRA withdrawals over their life expectancy must start the RMD in the year following the death of the original owner, regardless of whether that owner had reached age 70 ½ or not. They also want to keep an inherited IRA separate in order to preserve the ability to withdraw funds without the 10% early withdrawal penalty. Once they reach age 59 ½, they can combine it with another IRA, though they may want to keep it separate if they are utilizing the “stretch” option.
Note that Roth IRA owners are not required to take an RMD, but non-spouse beneficiaries are required to take an RMD from an inherited Roth IRA (spouses are exempt from this requirement). If they do not, the 50% penalty will apply, even though withdrawals from any Roth IRA are tax-free.
Inherited IRAs – Wrong Beneficiary
This pointer won’t produce any tax savings, but it may keep a tragedy from occurring. Unfortunately, people don’t always pay enough attention to who they have named as beneficiaries. There are many stories following a divorce, death or remarriage where owners forget to update their beneficiaries.
Beneficiaries should be reviewed after every major life event to ensure that the information is properly updated on the account. A basic will does not apply to any tax-deferred account, unless the individual’s estate is the named beneficiary. And this is typically not a recommended strategy as it robs the potential beneficiaries of the opportunity to “stretch” IRA withdrawals over their lifetime.
As you can see, IRAs can have quite an effect upon an individual’s tax situation. IRA accounts continue to grow in popularity, as more and more businesses move away from providing traditional defined pension plans and workers are expected to take on a more significant role in funding their own retirement. Not surprisingly, the rules and regulations surrounding IRAs are very complex and often confusing. The same can also be said to our Tax Code. Thus, if you are seeking some assistance with gaining more clarity about IRAs and the role they can play within your own retirement planning, give me a call and we can talk about doing so.

Avoid Commonly Made Blunders with your 401k

As we wrap up tax season, what is the most common tax saving tool people can use? What are the most common mistakes people make with their 401k? What are other typical mistakes? What else can 401ks be used for? Watch Szarka Financial’s Senior Financial Planner Alex Menassa, CFP®, ChFC®, discuss these issues with Fox 8 News Anchors Stefani Schaefer and Gabe Spiegel.


It’s Not too Late to Make a Contribution to Your IRA

April 15th falls on a Saturday, what is the deadline this year for filing our tax returns? It’s not too late to make contributions on IRAs, correct? There are two types of IRAs? Which is better? Watch Szarka Financial’s Senior Financial Advisor Rick Martin, CFP®, discuss these issues with Fox 8 News Anchors Roosevelt Leftwich and Autumn Ziemba.


Don’t Let Your Inherited IRA Be a Tax Disaster

With so many people having IRAs as part of their retirement, what happens when they pass away? What are some of the pitfalls? There was a recent court case involving an inherited IRA. What happened? What lessons can we learn? Watch Szarka Financial’s Senior Financial Advisor Alex Menassa, MT, CPA discuss these issues with Fox 8 News Anchor Roosevelt Leftwich.

Roth IRA: The Great Retirement Diversifier

I cannot stress enough the importance of socking away as much money as you can for retirement as early in your working years as possible. If your employer offers a sponsored retirement plan, at the very least, you should be contributing enough to receive any match that the company offers.

These types of accounts can offer a powerful tax benefit during your working years, since they are tax-deferred.

Yet often overlooked is the impact income tax has on your retirement nest egg. Deferring taxes is beneficial, but you should also look at ways to allow for tax-free income during your retirement as well.

Roth IRAs offer the opportunity for post-tax savings. With a Roth IRA, your contributions are made after tax, which means that although you don’t get an initial tax deduction, earnings on your investments grow tax-free and can be withdrawn tax-free during retirement.

Another big advantage of a Roth is that, unlike 401(k)s and Traditional IRAs, a Roth is not subject to minimum distributions at age 70½. And with many of us living longer, this is an excellent way to be able to continue taking advantage of tax-free growth well into your golden years.

Roth IRAs can also be an excellent savings vehicle for younger people who want to lock in their tax rate, while they are early in their careers and in a lower tax bracket. Although it’s difficult to forecast what tax rates will likely be in the future, it’s not hard to imagine that taxes may go up. So aim to stash away the maximum the IRS allows per year, which is currently $5,500, and for those 50 years old or older, try to add to that the additional $1,000 per year you are allowed.

Not surprisingly, because of the huge tax benefits that Roth IRAs provide there are a fair number of rules that must be followed. For instance, you are not eligible to contribute to a Roth IRA if your adjusted gross income is over $196,000 as a joint tax filer or $133,000 as a single filer.

Roth IRAs can be very helpful for individuals who do not have the opportunity to participate in an employer sponsored retirement plan (such as freelancers, entrepreneurs and 1099 employees).It is also helpful for those who have fully contributed to their employer-matched program and want to continue saving. But, keep in mind that it is wise to take advantage of any matching dollars from an employer sponsored program first, before contributing to a Roth IRA.

If you do have an employer-sponsored retirement plan, check with the plan administrator to learn if a Roth 401k/403b option might be available. If this is the case, you can allocate a percentage of your wages to a bucket that is tax-deferred and a percentage to a bucket that is taxed immediately but will grow tax free and be withdrawn tax free. Later, when it is time to retire, your 401k/403b can be rolled over into an IRA and your Roth 401k/403b can be rolled into a Roth IRA.

Although Roth IRAs can be a good method for achieving tax diversification, there are other options as well, once you hit your contribution limits. There are a number of tax management techniques, in addition to traditional employer sponsored or brokerage retirement accounts that individuals or families with complex planning needs may want to consider. Working with a professional, who can discuss with you your specific situation and what range of options may be available, is always a good idea.

One of the things that I emphasize with my clients is that the measure of success of any financial plan is not just how much income you generate, but more importantly how much of that income you are able to keep, after taxes, in retirement.

Feel free to contact our office if you have any questions or if you would like to discuss how a Roth IRA may help you achieve your financial and retirement goals.

Retirement: Will You have Enough Money?

One of the things that I hear most often when having my first consultation meeting with a new client is their fear of running out of money. In fact, this is the number one concern, even more so since the Great Recession, per Gallup’s April 2016 Economy and Personal Finance survey.

Here is one example of the many conversations that I have had regarding potential threats to my client’s financial success. Recently, a retired couple shared the fact that they are facing an issue, which could derail their “Plan A” – dementia. Their concern is that potential escalating healthcare costs for the spouse who has received an early diagnosis may end up depleting the sizable nest egg they had painstakingly built over their working years, leaving the remaining spouse with very little. How quickly the funds are depleted depends on how fast the disease progresses, and how long the affected individual lives with the disease.

It’s very difficult to be completely prepared for this type of situation. However, there are options that may help to reduce the financial and emotional pain associated with the high cost of extended care for a family member suffering from a disabling disease.

The total cost of healthcare is rising, faster than inflation, and it does not appear that this trend will be reversed anytime soon. This is precisely why it’s so important to discuss healthcare-related situations, and why it is also critical that when helping new clients prepare a plan, we not only address their financial goals, but also their deepest concerns. One of the key aspects of my commitment as a financial advisor is to help provide clients peace of mind as part of the planning process.

Estate planning is not easy. It isn’t just about having a will and naming beneficiaries on your IRA and 401(k). There are other considerations. Unfortunately, we don’t know our future and it could be complex. Some pre-planning in this area can be helpful vs. waiting until the situation occurs, especially when it comes to helping make sure that you don’t deplete your entire nest egg.

Each person presents a different challenge, has a different set of goals and a different set of assets to help support those goals. They may have different health issues or different ideas when it comes to the transfer of wealth to the next generation or they may not even have another generation to pass their wealth on to. I always start off planning for the ideal situation, “Plan A” if you will. But life has many twists and turns, so it is critical that a plan anticipates some changes.

You may never be able to be totally prepared, mentally and financially, for every possible change that you might face over the (hopefully) many years of retirement, but it is valuable to have previously discussed how you might handle some of these scenarios.

One of the ways that we help our clients address these challenges is through educational workshops.

For example, last Fall, I invited estate planning attorney Albert Hehr from Meyers, Roman, Friedberg & Lewis to my 2016 Economic Update. During those sessions, Al reviewed all of the basic estate planning documents in detail, including why each one was needed and the ramifications for not having them. As part of that discussion, he specifically highlighted the dramatic financial impact that an extended illness can have on a couple’s financial status. He explained that while it can wipe out the financial assets of a single person, it can be extremely disastrous for a couple. It’s not uncommon for a healthy caregiving spouse, who did everything they could to care for their partner, to not only end up emotionally and physically exhausted, but to also end up financially ruined because they depleted their entire retirement savings.

Al and I have met with several of my clients regarding the importance of having proper and current estate planning documents in place well before a serious illness, divorce, or death of a loved one takes place. The true value of proper estate planning, is that it anticipates many situations, including those mentioned above, and outlines steps to take should one of them occur.

It is important not to put off sitting down with a financial advisor who can help create a plan that addresses your financial goals. As an expert, they can incorporate investment strategies that help ensure you and your family have enough money to support your long-term financial goals, thereby increasing your probability of success.

My mission as an advisor, is to help reduce or eliminate surprises and the concern with running out of money. If you need a plan, would like a second opinion or just have questions, don’t hesitate to contact me. I’m here to help.

Inherited IRA: Don’t Let it Become a Tax Disaster

These days people are concentrating more and more of their assets in their IRAs. In fact, sooner or later most people will ultimately wind up having almost all their investment assets tied up in IRAs.

Since we all know about the two certain things in life (death and taxes), it’s becoming increasingly important to beware of the rules regarding inherited IRAs.

Ignorance of these rules can lead to tax disasters, as was evidenced in a recently published tax court
case that reveals important lessons for all of us in this complex area. Don’t let this happen to you!

Let’s go through some of the events in this case and see what lessons we can learn. The basic facts of the case are pretty simple: Thomas Ozimkoski changed his will a few months before his death to leave the bulk of his property to his wife, Suzanne.

Unfortunately, Susan was his second wife and she did not get along with his son, Thomas Jr., who chose to contest the will in probate court. Even worse, even though Thomas updated his will, he never bothered to update his IRA beneficiary form – in fact it appears that he never filled one out in the first place. As we’re about to see, this led to all sorts of problems.

Lesson #1: Always Fill Out Your IRA Beneficiary Form (and keep it updated)
If Thomas had named Suzanne on his IRA beneficiary form, that money would have passed directly to her and would have totally bypassed his probate estate. Since he never filled out his form, the money instead had to go through probate, where it was subject to Thomas Jr.’s will contest action. Money that has to go through probate is subject to all sorts of problems such as creditor claims, statutory delays, etc. In contrast, IRA assets that have a clearly designated beneficiary on the form will totally avoid probate in the first place. So Thomas’ IRA money would never have been subject to the will contest if he had just filled out that form. Big mistake on his part!

Lesson #2: Inherited IRA beneficiaries have special tax advantages, but ONLY if they are named on the form
As it turns out, Suzanne wound up settling the probate action with her stepson by agreeing to pay him $110,000 from the IRA money. Unfortunately for her, this wound up costing her much more than just $110,000. Rather than leaving the money in the inherited IRA, Suzanne incorrectly rolled that money into her own IRA. Unfortunately, since she was under 59-1/2, this now meant that any distribution taken out of the IRA was not only subject to income tax, but also an additional 10% premature distribution penalty.

If Thomas had named Suzanne as beneficiary on his IRA form, she would have been eligible for much more favorable tax treatment on that money. She could have left it in the inherited IRA, rather than rolling it to an IRA in her own name. If she had done that, she could have spread the distributions over her entire life expectancy, greatly minimizing the tax impact of the distributions. Even better, she would have been eligible to take withdrawals for the rest of her life with no penalty, regardless of her age. That’s because there is an exception to the 10% penalty for money taken out of inherited IRAs…as long as there was a beneficiary named on the form. But since Thomas never filled out his form, Suzanne was out of luck.

So what should you do to make sure your own family never has to face a tax disaster like this? Follow some simple rules.

5 Simple Rules to Avoid a Tax Disaster

1) Name a beneficiary for ALL your IRAs.
2) Name an alternate, in case the first one dies before you.
3) Never name an estate as the beneficiary.
4) Make sure your IRA custodian has a copy of the beneficiary form.
5) Keep the beneficiary form updated as your circumstances change.

As you can see, inherited IRAs are no simple matter. Make sure you know the rules, and in case you feel like you could use some assistance, seek qualified counsel to help chart your course. Don’t let your family go through a tax disaster regarding your inherited IRA!

Can I retire when I want to and still maintain my current lifestyle?

Is it possible for people to retire before 62, even if they don’t have a pension? Can I still maintain my current lifestyle? Everyone always says they don’t want to spend down the principle, so how can you realistically do that without running out of money? What about working part-time? Can that be a viable option? Watch Szarka Financial’s Senior Financial Planner Chuck Conrad, JD, discuss these issues with Fox 8 News Anchor Roosevelt Leftwich.