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April 29, 2006
Financial Advisor Symposium: Choosing Which Retirement Account to Tap First
Choosing Which Retirement Account to Tap First
2nd Annual Financial Advisor Symposium - Las Vegas, NV
Saturday, April 28, 2006
David Carter, President, Carter Asset Management, Inc.
There is NO one formula that fits everyone's solution.
Some Deciding Factors in Choosing Which To Tap First
Qualified accounts and tax sheltered annuities will be taxed as ordinary income
Dividends and long term capital gains are taxed at 15%
Tax on social security benefit
Roth IRA money is not taxable
Is client over 70 1/2 and into required minimum distributions
Is client under 591/2 and taking 72(t) distributions
Clients desire to reduce income for their decedents
Clients desire to leave an estate for charity or heirs
Some people are really resistant to taking RMD's but if you look at the tables, the amounts are really very low that you are required to withdraw
Fredrick Adkins, CEO, Arkansas Financial Group
What's deducted?
What's taxed?
How is it taxed?
The problem with tax deferred accounts is they convert long term capital gains and dividends to ordinary income that could be taxed as high as 35% in the top tax bracket. Variable annuities do the same thing. Tax deferral is a "sucker bet"
Asset classes that were shunned in the accumulation phase are now favored in the distribution phase.
Peter Lynch, years ago, got a lot of press for suggesting that you should never own bonds in an investment portfolio. When you got to distribution, you just took capital gains and lived on those. Anyone who followed that advice was devastated in 2000 - 2002.
If you put qualified versus non-qualified on a pie chart and equity versus fixed income on another chart, the closer those two charts match up, the easier distributions are. Ideally you would prefer equities in the non-qualified and fixed income to match up to the qualified.
Bond interest is tax neutral - it is taxed the same whether it comes form qualified or non-qualified accounts. (True of Snider Method income as well.) That is not true with equities. Rule of thumb is to take fixed income assets first and move towards equity.
Gregory Sullivan, President, Sullivan, Bruyette, Speros & Blayney, Inc.
There is a world of difference between a plan that assumes linear returns, in other wrods, just takes the average return and running it out to some estiamted longevity number. In the scenario Greg showed, using the average return, the client could live to 95 and still have 1.2M left.
But if you run a Monte Carlo simulation, which takes into account volatility, or non-linear returns, there is a very real possibility that same client could run out of money, even while achieving the average assumed in the linear. As I demonstrate in all my speeches and information sessions, this is the hidden cost of risk.
If you simply look at taxes, you may get the wrong answer. It is a broader question than tax. Letting tax rule the decision making could run the client out of money.
If you have a $1M IRA and a $1M taxable account, you cannot have the advisor withdraw the fees for both from the IRA. IF the fee was $10K per, and you withdrew $20K from the IRA, $10K of it would be considered a withdrawal. In the other hand, you could take all $20K from the taxable to pay fees on both. It goes one way but not the other.
Interesting side note, all three speakers were adamantly opposed to the use of variable annuities.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
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Kim Snider is an author, speaker and host of Financial Success Coaching, Saturdays at noon, on KRLD Newsradio 1080, Dallas - Fort Worth. This blog is primarily devoted to empowering individual investors with information to help them be good stewards of their money. Above all, it is about achieving true financial success. Kim's book, How To Be the Family CFO: Four Simple Steps to Put Your Financial House in Order is in bookstores now. Order yours from Amazon or other fine booksellers today.
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