Word on the Street – October 1st-5th

Word on the Street – October 1st – 5th

A brief conversation with our CIO, Blake Street, CFA, CFP®, on what’s going on in the world today.

We constantly want to deliver more content to our clients and followers on current events, and how we are viewing them from an investment or planning angle.

“Word on the Street” will be a series where I sit down with our Chief Investment Officer, Blake Street, CFA, CFP® to pick his brain on what’s going on in the news and what that means for you.

Here is the conversation I had with him on Friday, October 5th discussing the last couple weeks. Enjoy.

Alright, Blake. Let’s start with the new US trade deal that people are calling NAFTA 2.0. What’s your take and how will this new deal impact investors?

BS: NAFTA 2.0 or more accurately titled the U.S. Mexico Canada Agreement (USMCA) in my opinion is largely underwhelming. At its core, it should bring some manufacturing jobs back to the U.S. from Mexico, but I also expect this to result in increased cost to the end consumer. Considering the United States spends $500 billion a year on autos, cost increases will be noticed.

The reason I’m underwhelmed is the negotiation process wasn’t without collateral damage in trade relations and the ultimate outcomes are incremental at best. Essentially, Canada and Mexico agreed that 75% of parts for cars built for export would be made in North America. This is up from the original agreement of 62.5% under NAFTA. They also agreed that 45% of cars would be built by workers making more than $16 an hour by 2023, this was ultimately targeted at Mexico and should result in rising costs for domestic and imported production. Mexico also agreed to improve labor conditions but enforcement remains vague.

Canada agreed to increase import quotas for U.S. dairy into their market. I’ve seen estimates that this could result in $50-$100 million in activity for American dairy farmers. Not sure this moves the needle, especially in the face of what appears to be a $100-$400 million decline in Chinese imports of American dairy in the coming years.

Additionally, USMCA hasn’t officially been ratified yet. It has only been approved for a vote. If the midterm elections put more Democrats in Congress, then they have the opportunity to deny President Trump the victory of its passing.

We are entering the last quarter of the first year operating under tax reform. Do you think that it has been good or bad for investors?

B.S.: It’s hard to argue that is has been anything but great for investors. Three straight quarters of near-record earnings and US markets are oscillating around record highs. Taxpayers have yet to officially file under the new tax reform, so they have yet to even feel the full benefits.

It will be interesting to see how equity markets react as we get into 2019. The initial thrust of the tax cuts on earnings will wane over time, and it will be interesting to compare year-over-year numbers to post-tax cut figures.

Is there anything people might be surprised about as they go to file?

B.S.: The biggest surprise to most will be the balance between an enhanced and expanded standard deduction, lower marginal rates, and aggressively capped state and local tax deductions. In addition, I expect the 20% pass-through deduction to surprise a lot of folks who don’t know how it works, in both a good and bad way.

How do you feel about Elon Musk and the SEC?

B.S.: He got off way too easy. He should have been stripped of his role as director and CEO in addition to losing his chairman position. His $20 million personal and $20 million corporate fines are a drop in the bucket compared to the market cap of Tesla and the potential money that was lost or made based on his manipulative behavior.

Leaking a takeover bid or the idea of taking a company private should force a stock price to the assumed target price. Any rational CEO would know this ahead of time. He coerced unknowing investors to buy into Tesla based on this information and blew out short positions which seemed to be his intention.

The amount of talk around marijuana stock is at a high again. How should investors approach it, if at all?

B.S.: Personally, it is not a sector I am interested in investing in for myself or for clients as it is still illegal at the federal level. Recent buzz escalated when Tilray, a Canadian pot producer, got approval for a clinical trial to use marijuana in pill form to treat seizures. They had about 10 million in sales last year, and the market cap soared to 15 billion, which is, frankly, absurd. A good piece of that market cap has been given back.

Should it ever become legal at the federal level, I expect a massive influx from titans of industry in alcohol, tobacco, and pharmaceuticals. Production will drive down cost quickly. If we were to invest, we would focus more on the picks and shovels, distribution, and manufacturing perspective. A diversified approach will likely pay as picking the winners of such a rapidly developing space may prove to be very difficult.

What do you find most interesting in the market right now?

B.S.: Emerging Markets.

Interesting response…why?

B.S.: They started the year at low relative valuations even after a monster 2017. As of the end of September, they were at a 20% drawdown from the year’s high. I continue to believe they will be the best place to be over the next 5-10 years for fundamental and demographic reasons. Dollar strength has caused a lot of pain in emerging market currency denominated holdings and the sell-off in emerging market stocks has reached seemingly oversold levels. The pain might not be fully over yet, so a disciplined approach to buying into recent weakness is needed.

The 10 year Treasury closed Friday at 3.23. What are some of your thoughts as rates rise?

B.S.: I believe we’re now 8 Fed Rate hikes in. The consensus seems to be that we are due for 3-4 more. It seems that the market is not fighting back and pushing yields down. It will continue to pay to be nimble, keep durations short, and invest in fixed income asset classes with lower rate sensitivity and look for opportunities abroad.

Do you see any opportunities or concerns with rates increasing?

B.S.: Rising rates have resulted in a strong dollar which puts pressure on emerging market debt causing yield spreads to widen. This has created possible valuation pockets within emerging market debt, and this opportunity should not be entered into lightly.

Concerns: If inflation and yields continue to rise, investors who are accustomed to long-term, stable outcomes will be surprised to find out how volatile bonds can be in a rising rate environment. Going back to 1976, bonds on average have only had 3 negative years. Count 2018 as the fourth. Would a fifth materially change investors perspectives on what bonds mean to portfolios? Or will investors continue to understand bonds importance in a well-diversified portfolio? This creates opportunity and concern.

Any closing remarks?

B.S.: Loss aversion is one of the most basic human tendencies I can think of. In a year where virtually every asset class other than US stocks is in the red, I can see a lot of potentially bad behavior starting to fester. It is important now more than ever that you don’t chase the hot dot. Stick to your plan, stick to your process, even if that means deferring to your advisor.


WSWA Team Compressed-19-squareJoe Occhipinti
Marketing Manager
Warren Street Wealth Advisors

Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. 

 

Rate Watch 2018 – August

Rate Watch 2018 – August – SCE Grandfathered Pension

August’s rate is typically used for Edison’s official grandfathered pension plan interest rate. Where did it land, and how does that impact your pension?

Welcome to another edition of Rate Watch as we track the interest rate that is vital to the grandfathered pension at Southern California Edison.

The most important month of the year for grandfathered pension holders is upon us. August is typically used to set the grandfathered pension interest rate for the following plan year. Let’s take a look at where the rate it at:

These are not current plan rates for Southern California Edison’s pension plan, they are minimum present value third segment rates from the IRS. Official plan rates are derived from the minimum present value segment rates table (https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates). Plan rate changes are made by Southern California Edison on an annual basis.

August came in at 4.46 and 0.10 higher than the current plan rate. Very simply, this means that your lump sum payout value will be higher with the 2018 plan value as opposed to the 2019 value.

Again, simply put, if you are grandfathered and thinking about retiring soon, then it might be in your best interest to retire and take the 2018 value to get a higher lump sum payout.

Since the difference in potential rates is small, the change in value is probably not great enough to heavily influence a decision to retire now or continue working, but it is something that should be capitalized on if retirement is on the horizon.

If you are unsure on how to request your paperwork or the timing to make sure you receive the 2018 pension rate, then contact us for a free retirement consultation, and we can show you how you can retire with confidence.


WSWA Team Compressed-19-squareJoe Occhipinti
Wealth Advisor
Warren Street Wealth Advisors

 

 


Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. 
Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. 

 

The IRA and the 401(k)

The IRA and the 401(k)

Comparing their features, merits, and demerits. 

How do you save for retirement? Two options probably come to mind right away: the IRA and the 401(k). Both offer you relatively easy ways to build a retirement fund. Here is a look at the features, merits, and demerits of each account, starting with what they have in common.

Taxes are deferred on money held within IRAs and 401(k)s. That opens the door for tax-free compounding of those invested dollars – a major plus for any retirement saver. (1)

IRAs and 401(k)s also offer you another big tax break. It varies depending on whether the account is traditional or Roth in nature. When you have a traditional IRA or 401(k), your account contributions are tax deductible, but when you eventually withdraw the money for retirement, it will be taxed as regular income. When you have a Roth IRA or 401(k), your account contributions are not tax deductible, but if you follow Internal Revenue Service rules, your withdrawals from the account in retirement are tax-free. (1)  

Generally, the I.R.S. penalizes withdrawals from these accounts before age 59½. Distributions from traditional IRAs and 401(k)s prior to that age usually trigger a 10% federal tax penalty, on top of income tax on the withdrawn amount. Roth IRAs and Roth 401(k)s allow you to withdraw a sum equivalent to your account contributions at any time without taxes or penalties, but early distributions of the account earnings are taxable and may also be hit with the 10% early withdrawal penalty.1  

You must make annual withdrawals from 401(k)s and traditional IRAs after age 70½. Annual withdrawals from a Roth IRA are not required during the owner’s lifetime, only after his or her death. Even Roth 401(k)s require annual withdrawals after age 70½. (2)

Now, on to the major differences.

Annual contribution limits for IRAs and 401(k)s differ greatly. You may direct up to $18,500 into a 401(k) in 2018; $24,500, if you are 50 or older. In contrast, the maximum 2018 IRA contribution is $5,500; $6,500, if you are 50 or older. (1)

Your employer may provide you with matching 401(k) contributions. This is free money coming your way. The match is usually partial, but certainly, nothing to disregard – it might be a portion of the dollars you contribute up to 6% of your annual salary, for example. Do these employer contributions count toward your personal yearly 401(k) contribution limit? No, they do not. Contribute enough to get the match if your company offers you one. (1)

An IRA permits a wide variety of investments, in contrast to a 401(k). The typical 401(k) offers only about 20 investment options, and you have no control over what investments are chosen. With an IRA, you have a vast range of potential investment choices. (1,3)

You can contribute to a 401(k) no matter how much you earn. Your income may limit your eligibility to contribute to a Roth IRA; at certain income levels, you may be prohibited from contributing the full amount, or any amount. (1)

If you leave your job, you cannot take your 401(k) with you. It stays in the hands of the retirement plan administrator that your employer has selected. The money remains invested, but you may have less control over it than you once did. You do have choices: you can withdraw the money from the old 401(k), which will likely result in a tax penalty; you can leave it where it is; you can possibly transfer it to a 401(k) at your new job; or, you can roll it over into an IRA. (4,5)

You cannot control 401(k) fees. Some 401(k)s have high annual account and administrative fees that effectively eat into their annual investment returns. The plan administrator sets such costs. The annual fees on your IRA may not nearly be so expensive. (1)

All this said, contributing to an IRA or a 401(k) is an excellent idea. In fact, many pre-retirees contribute to both 401(k)s and IRAs at once. Today, investing in these accounts seems all but necessary to pursue retirement savings and income goals.


J Rucci

Justin D. Rucci, CFP®
Wealth Advisor
Warren Street Wealth Advisors

 

 

 

Justin D. Rucci is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

This material was prepared by Marketing Pro, Inc. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of the content, those securities held may change over time and trades may be contrary to outdated posts.

Citations.

1 – nerdwallet.com/article/ira-vs-401k-retirement-accounts [4/30/18]
2 – irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions [5/30/18]
3 – tinyurl.com/y77cjtfz [10/31/17]
4 – finance.zacks.com/tax-penalty-moving-401k-ira-3585.html [9/6/18]
5 – cnbc.com/2018/04/26/what-to-do-with-your-401k-when-you-change-jobs.html [4/26/18]

Rate Watch 2018 – July

Rate Watch 2018 – July

We are only a couple month away from the August segment rate announcement. Where could rates land for SCE grandfathered pension holders as we head into the fall?

Welcome to another edition of Rate Watch as we track the interest rate that is vital to the grandfathered pension at Southern California Edison. If you’ve missed any of our previous articles, you can find them here:

Rate Watch 2018 – May & June
Rate Watch 2018 – April
Rate Watch 2018 – March
Rate Watch 2018 – February

June’s posting puts us 2 months away from August’s rate which is typically used by Southern California Edison for the grandfathered pension plan. If you are eyeballing retirement soon, then it is essential to understand where the rate is now and where it could be going. Here is the latest:

chart

*These are not current plan rates for Southern California Edison’s pension plan, they are minimum present value third segment rates from the IRS. Official plan rates are derived from the minimum present value segment rates table (https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates) . Plan rate changes are made by Southern California Edison on an annual basis.

July at 4.60 puts us nearly 25 points above the current plan rate and would drive your current lump sum value down if you took your pension in 2019.

Nominally, nothing has really changed month-to-month, but there has also not been much going on that would drastically press the rates higher over the time period. The most important thing to note would be inflation slowly on the rise as we continue to be in an environment of historically low rates.

For those in the grandfathered pension plan and who believe they are on the brink of retirement, it is more important now than ever to begin putting a plan in place and seeing what your retirement looks like. Knowing how your assets weigh against your liabilities, how much you might need every year in retirement, and if you have the assets to accomplish everything you want are important answers to have before you have your final day of work.

If the official rate was announced today, then it may make sense to take your pension in the current plan year due to the fact that as rates increase, lump sum values decrease.

If you are just unsure of what your retirement looks like, then feel free to contact us for a free phone call or meeting. We have helped 100’s of SCE employees retire and numerous grandfathered pension holders weigh their options out to give themselves the best possible outcome and start to retirement.


WSWA Team Compressed-19-squareJoe Occhipinti
Wealth Advisor
Warren Street Wealth Advisors

 

 


Warren Street Wealth Advisors, a Registered Investment Advisor. Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. 
Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. 

 

Periodic Table of Investing

Periodic Table of Investing

Dust off your memories of high school chemistry and think of your investment returns and your investment risks as two separate and distinct members of the periodic table. Certain elements (in this case, securities) are prone to interact when mixed, while others may remain neutral. Each element (security) will always have its own separate and unique profile and characteristics.

Starting with carbon, one of the world’s most important elements, I’d equate carbon to U.S. stocks. Regardless of age, every investor we work with has likely benefited from or utilized this element and will continue to do so in some capacity going forward.

Argon, the world’s least reactive element, tends to be more akin to Treasury Bonds or cash, not responding negatively to volatility much, if at all.

I’m far from the first person to think of investments in this way, in-fact there is deep history in what many refer to as the “Callan Chart” or “Periodic Table of Returns”. Below you’ll see a large majority of the world’s major asset classes and their returns relative to zero:

Callan from Zero

https://www.callan.com/periodic-table/

The most striking thing from this chart is that after a disastrous 2008 for everything except U.S. Bonds (argon), the only asset class that is yet to have a negative year is Large Cap ($10B+) U.S. Stocks (starred).

Winners and Losers

SPY vs ACWI vs EEM

Charlie Bilello via Twitter

This freedom from negative returns and the compounding of large year-to-year gains has led to outsized outperformance from Large U.S. stocks. Over the last 10 years, Large U.S. stocks have produced cumulative total returns of 158%. Developed Foreign Country stocks have produced 19% and Emerging Markets only 16%.

Two takeaways from this are: the power of compounding positive returns but even more important is the force of losses and the time it takes to make them up. In addition, one recurring theme of study and practice in investing is that asset prices move in cycles. While U.S. outperformance seems like an unbreakable cycle, it’s just a matter of time.

Trading Places

Take a look below at how U.S. and international stock market leadership has traded off over time. Most recently international stocks outperformed from 2003-2009, and the U.S. finds itself on its longest stretch of outperformance since 1979.
Performance Leadership

We have been incrementally positioning our clients’ portfolios for this eventual inflection since 2015. Last year we looked right, this year thus far we look wrong. Personally, I just consider myself patient as I wait for a multi-year trend to unfold.

Whether it’s high prices and valuation concerns or much of the low hanging fruit in our U.S. economic recovery is out of the way, we have a firm conviction in our posture of reducing U.S. stock market exposure. Having said that, we do not have a proverbial crystal ball, therefore we diversify and avoid throwing all of our eggs into the international basket.

Don’t Give up on Bonds

In addition, we haven’t given up on bonds, which have been tough to own this year, with U.S. Bonds down on average -1.62%.

 

Callan Periodic Table

https://www.callan.com/periodic-table/

 

It’s important to keep in mind how bonds have performed during down years for the stock market, something that is potentially in the cards this far into an extended bull market.

bonds vs stocks

One does not need to own the entire U.S. bond market via an index fund or otherwise. We currently prefer shorter term bonds, typically corporate bonds, and even in some cases inflation protected bonds. With a recent uptick in short-term government bonds, they aren’t nearly as painful to hold as in years past when yields hovered near zero. The 2-year treasury currently yields 2.829%, at the time of writing this article.

Late Cycle Playbook

With a backdrop of rising inflation globally, rising rates here in the U.S., accommodative monetary policy globally, and stretched valuations in U.S. equity markets, we continue to prefer assets that tend to outperform late in the economic cycle and when the factors above are present.

These assets include:

  • International and Emerging Market stocks
  • Industrials, Metals, Energy
  • Shorter Term Bonds, TIPS

Signing Off

While we realize this year has been far less exciting than the last, we remain firm in our convictions on how we want to combine elements from the “Periodic Table of Returns” moving forward. We stand at the ready to buy into recent market weakness and will not capitulate to chasing what has done well. We appreciate your continued trust and patience while we navigate through what’s been an unstable first half of 2018. Don’t hesitate to contact our office should you have any questions or concerns about how we are approaching your investments.

Respectfully yours,

Blake Street, CFA, CFP®


Blake StreetBlake Street, CFA, CFP®
Chief Investment Officer
Founding Partner
Warren Street Wealth Advisors

Blake Street is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

Rate Watch 2018 – May & June

Rate Watch 2018 – May & June

Heading into the summer, what do segment rates look like and how could that impact grandfathered pension holders?

Welcome to another edition of Rate Watch as we track the interest rate that is vital to the grandfathered pension at Southern California Edison. If you’ve missed any of our previous articles, you can find them here:

Rate Watch 2018 – April
Rate Watch 2018 – March
Rate Watch 2018 – February
Rate Watch 2018 – January

The IRS posting in June will give us the segment rate for May 2018, which puts us at only a couple readings away from the official rate announcement for the grandfathered pension in the fall. Let’s take a look at where rates are at currently:

*These are not current plan rates for Southern California Edison’s pension plan, they are minimum present value third segment rates from the IRS. Official plan rates are derived from the minimum present value segment rates table (https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates) . Plan rate changes are made by Southern California Edison on an annual basis.

*These are not current plan rates for Southern California Edison’s pension plan, they are minimum present value third segment rates from the IRS. Official plan rates are derived from the minimum present value segment rates table (https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates) . Plan rate changes are made by Southern California Edison on an annual basis.

You may have noticed that we skipped April , but the reading from March to April was actually flat at 4.43. At that time, we still consider it early to make a decision based off of rates, but we have seen a larger move from April to May.

May’s number of 4.58, 3 months away from the official SCE rate announcement, begins to move the conversation towards retirement in the current plan year. A nearly quarter percent increase paints a much stronger picture for grandfathered pension holders to retire in the current year versus 2019 granted that they are retirement ready.

Interest rate increases were driven by a strong 10 year Treasury rate and inflation slowly on the rise. Coupled with the Fed continuing to monitor the economy, small increases in the rate across the summer are plausible as we head towards the fall.

As always, if the official plan rate for Southern California Edison grandfathered pension holders increases, then the value of their pensions decrease. It is imperative to weigh the current year plan value versus the following year plan value when it comes to your retirement. While your pension value shouldn’t be the only variable when it comes to deciding if you’re ready for retirement, it is one that should be taken into account and can make a difference.

Are you worried about your retirement plans or concerned with how to handle your pension or 401(k)? Maybe you’re just unsure on how the transition to retirement works. We’ve helped countless Southern California Edison employees plan for retirement, and we can help you plan too.

Contact us for a free retirement planning session or portfolio analysis. Our free session over the phone or at our office gives you the opportunity to get your retirement questions answered and learn how we help our clients reach their retirement goals.


WSWA Team Compressed-19-squareJoe Occhipinti
Wealth Advisor
Warren Street Wealth Advisors

 

 


Joe Occhipinti is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio.Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

 

72(t) Distributions

72t Distributions

Sometimes you can take penalty-free early withdrawals from retirement accounts.

Do you need to access your retirement money early? Maybe you just want to retire before you turn 60 and plan a lifelong income stream from the money you have saved and invested. You may be surprised to know that the Internal Revenue Service allows you a way to do this, provided you do it carefully.

Usually, anyone who takes money out of an IRA or a retirement plan prior to age 59½ faces a 10% early withdrawal penalty on the distribution. That isn’t always the case, however. You may be able to avoid the requisite penalty by taking distributions compliant with Internal Revenue Code Section 72(t)(2).(1)

While any money you take out of the plan will amount to taxable income, you can position yourself to avoid that extra 10% tax hit by breaking that early IRA or retirement plan distribution down into a series of substantially equal periodic payments (SEPPs). These periodic withdrawals must occur at least once a year, and they must continue for at least 5 full years or until you turn 59½, whichever period is longer. (Optionally, you can make SEPP withdrawals every six months or on a quarterly or monthly basis.)(1,2)

How do you figure out the SEPPs? They must be calculated before you can take them, using one of three I.R.S. methods. Some people assume they can just divide the balance of their IRA or 401(k) by five and withdraw that amount per year – but that is not the way to determine them.(2)

You should calculate your potential SEPPs by each of the three methods. When the math is complete, you can schedule your SEPPs in the way that makes the most sense for you.

The Required Minimum Distribution (RMD) method calculates the SEPP amount by dividing your IRA or retirement plan balance at the end of the previous year by the life expectancy factor from the I.R.S. Single Life Expectancy Table, the Joint Life and Last Survivor Expectancy Table, or the Uniform Lifetime Table.(1,2)

The Fixed Amortization method amortizes your retirement account balance into SEPPs based on your life expectancy. A variation on this, the Fixed Annuitization method, calculates SEPPs using your current age and the mortality table in Appendix B of Rev. Ruling 2002-62.(1,2)

If you use the Fixed Amortization or Fixed Annuitization method, you are also required to use a reasonable interest rate in calculating the withdrawals. That interest rate can’t exceed more than 120% of the federal midterm rate announced periodically by the I.R.S.(1,3)

A lot to absorb? It certainly is. The financial professional you know can help you figure all this out, and online calculators also come in handy (Bankrate.com has a good one).

There are some common blunders that can wreck a 72(t) distribution. You should be aware of them if you want to schedule SEPPs.

If you are taking SEPPs from a qualified workplace retirement plan instead of an IRA, you must separate from service (that is, quit working for that employer) before you take them. If you are 51 when you quit and start taking SEPPs from your retirement plan, and you change your mind at 53 and decide you want to keep working, you still have this retirement account that you are obligated to draw down through age 56 – not a good scenario.(1)  

Once you start taking SEPPs, you are locked into them for five consecutive years or until you reach age 59½. If you break that commitment or deviate from the SEPP schedule or calculation method you have set, a 10% early withdrawal penalty could apply to all the SEPPs you have already made, with interest. (Some individuals can claim exceptions to this penalty under I.R.S. rules.)(3,4)

The I.R.S. does permit you to make a one-time change to your distribution method without penalty: if you start with the Fixed Amortization or Fixed Annuitization method, you can opt to switch to the RMD method. You can’t switch out of the RMD method to either the Fixed Amortization or Fixed Annuitization method, however.(2)

If you want or need to take 72(t) distributions, ask for help. A financial professional can help you plan to do it right.


J Rucci

Justin D. Rucci, CFP®
Wealth Advisor
Warren Street Wealth Advisors

 

 

 

Justin D. Rucci is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

This material was prepared by Marketing Pro, Inc. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio.Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

Citations.

1 – irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments [12/19/17]
2 – fool.com/retirement/2017/05/19/use-your-retirement-savings-early-with-substantial.aspx [5/19/17]
3 – thebalance.com/how-to-use-72-t-payments-for-early-ira-withdrawals-2388257 [9/20/17]
4 – military.com/money/retirement/second-retirement/early-retirement-options.html [5/7/18]

Practice with Genene Dunn: Trust Basics

Hunsberger Dunn LLP

 

 

Warren Street Sits Down with Partner Genene Dunn 

At Warren Street, we want to ensure we are continuing our education to give our clients a financial edge. This applies to all aspects of their overall financial picture.

We recently had the opportunity to sit down with one of the partners of the law firm Hunsberger Dunn, LLP, Genene Dunn. During our conversation, we had the chance to talk with her about estate planning, and specifically, building a trust.

Here are some of the issues we discussed, our key takeaways, and some of the nuances we learned regarding trusts and avoiding the probate process.

Who needs a trust and what does it do?

A trust’s primary objective is to avoid probate for the client. Period.

The threshold for probate is $150,000 of real assets, which are defined as physical assets that have value due to their substance. Real assets can be things such as: precious metals, commodities, real estate, land, machinery, or oil, so estate with $150,000 in real assets or more without a trust is subject to probate.

Genene gave the example of $500,000 in real assets with no trust. In this instance, you can expect to pay approximately $26,000 in fees.

Going through probate, both the lawyer and the personal representative (administrator), the person named by the court to handle the estate, are paid according to the fee schedule below. This is why probate can be so expensive.

Chart

Not only is probate an expensive process, but it is lengthy as well. The probate system in Orange County is significantly backed up, it could take up to a year to complete the process.

If you have real assets in excess of $150,000, it might be time to start thinking about building your own trust and avoiding the probate process all together.

How do I handle creditors when the trustee has passed?

If the deceased person had debt in their names, then these become debts of the trust.  They do not become debts of the beneficiaries.

When handling credit card collections, the collectors have 4 months after the announcement of the death of the trustee to file for a claim for their debt. An announcement of death can be placed in the local newspaper of the trustee. If the credit card companies do not file their claims through the appropriate process within this 4-month window, their claim becomes void and does not need to be paid by the trust.

If there is real property inside the trust, such as real estate, Genene suggested to continue paying the bills that “keep the lights on”, such as utilities and house maintenance services (pool cleaning, gardening, etc.). The reason for this is that the property may eventually be sold and you want it to remain presentable to a prospective buyers.

What about my 401(k) or other outside accounts?

Genene will sometimes gets asked about placing a 401(k) or retirement account inside a trust. This is something that is probably not recommended as these types of accounts have listed beneficiaries. Probate can be avoided if the beneficiaries are named and appropriate forms are completed.

On the other hand, non-retirement or brokerage accounts can be placed inside the trust to then be distributed according to the wishes of the grantor, the person who established the trust.

Another interesting topic was Transfer on Death (TOD) bank accounts. If a TOD is in place, then you can present your bank branch with a Death Certificate, which typically can take 10-12 days to process, before being allowed access to funds. However, if they accounts are held in trust, there would be no delay since a spouse is typically the co-trustee and would be able to act on the account immediately upon death. If there is not a Transfer on Death established or a trust account, then the assets would be subject to probate.

Special Needs Beneficiaries

One of the most interesting things we learned from our conversation was with regard to children or beneficiaries that have special needs. Some of these people receive assistance from the government for their condition, and they can become disqualified from that assistance if they have an interest in the assets of a trust.

It is imperative if you have someone in your life with special needs whom you want to ensure receives assets from your estate, that a special needs trust is established and that it is set up correctly to avoid disqualifying them from government assistance in the future.


 

As we had mentioned earlier, the main objective of establishing a trust is to avoid probate and the wasted time and expense associated with it. A trust usually runs between $2,000-$3,000 depending on the complexity, but the amount of time and money saved by going through the process can be 8-10x the cost of the trust itself. Not to mention not having to waste time in an Orange County probate system that is already significantly backed up.

If you are concerned about your current estate planning situation, including your current assets, trusts or other aspects of your plan, please feel free to contact us to discuss.


Joe OcchipintiJoe Occhipinti
Wealth Advisor
Warren Street Wealth Advisors

 

 

 

 

Joe Occhipinti is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

Warren Street Wealth Advisors and its representatives are not attorneys and all information herein should be verified via qualified legal opinion. 

Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio.Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

 

The Solo 401k

The Solo 401k

A retirement savings vehicle designed for the smallest businesses.

A solo 401(k) lets a self-employed individual set up a 401(k) plan combined with a profit-sharing plan. You can create one of these if you work for yourself or for you and your spouse.(1)

Reduce your tax bill while you ramp up your retirement savings. Imagine nearly tripling your retirement savings potential. With a solo 401(k), that is a possibility. Here is how it works:

*As an employee, you can defer up to $18,500 of your compensation into a solo 401(k). The yearly limit is $24,500 if you are 50 or older, for catch-up contributions are allowed for these plans.(1)

*As an employer, you can have your business make a tax-deductible, profit-sharing contribution of up to 25% of your compensation as defined by the plan. If your business isn’t incorporated, the annual employer contribution limit is 20% of your net earnings rather than 25%. If you are a self-employed individual, you must calculate the maximum amount of elective deferrals and non-elective contributions you can make using the methods in Internal Revenue Service Publication 560.(1,2)

*Total employer & employee contributions to a solo 401(k) are capped at $55,000 for 2018.(1)

Are you married? Add your spouse to the mix. If your spouse is a full-time employee of your business, then he or she can also make an employee contribution to the plan in 2018, and you can make another profit-sharing contribution on your spouse’s behalf. (For this to happen, your spouse must have net self-employment income from the business.)(2,3)

The profit-sharing contributions made by your business are tax-deductible. Annual contributions to a solo 401(k) are wholly discretionary. You determine how much goes in (or doesn’t) per year.(2,4)

You can even create a Roth component in your solo 401(k). You can direct up to $5,500 annually (or $6,500 annually, if you are 50 or older) into the Roth component of the plan. You cannot make employer contributions to the Roth component.(3)

Rollovers into the plan are sometimes permitted. Certain plan providers even allow hardship withdrawals (loans) from these plans prior to age 59½.(5)

There are some demerits to the solo 401(k). As you are setting up and administering a 401(k) plan for your business, you have to see that it stays current with ERISA and IRC regulations. Obviously, it is much easier to oversee a solo 401(k) plan than a 401(k) program for a company with 15 or 20 full-time employees, but you still have some plan administration on your plate. You may not want that, and if so, a solo 401(k) may have less merit than a SEP or traditional profit-sharing plan. The plan administration duties are relatively light, however. There are no compliance testing requirements, and you will only need to file a Form 5500 annually with the I.R.S. once the assets in your solo 401(k) exceed $250,000.(4)

If you want to hire more employees, your solo 401(k) will turn into a standard 401(k) plan per the Internal Revenue Code. The good news is that you can present your new hires with an established 401(k) plan.(2,3)

On the whole, solo 401(k)s give SBOs increased retirement savings potential. If that is what you need, then take a good look at this option. These plans are very easy to create, their annual contribution limits far surpass those of IRAs and stand-alone 401(k)s, and some custodians for solo 401(k)s even give you “checkbook control” – they let you serve as trustee for your plan and permit you to invest the funds across a variety of different asset classes.(5)


J Rucci

Justin D. Rucci, CFP®
Wealth Advisor
Warren Street Wealth Advisors

 

 

 

Justin D. Rucci is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

This material was prepared by Marketing Pro, Inc. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio.Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

Citations.

1 – irs.gov/retirement-plans/one-participant-401k-plans [10/25/17]
2 – mysolo401k.net/solo-401k/solo-401k-contribution-limits-and-types/ [2/13/18]
3 – doughroller.net/retirement-planning/solo-401k-best-retirement-plan-self-employed/ [5/21/17]
4 – tdameritrade.com/retirement-planning/small-business/individual-401k.page [2/13/18]
5 – thecollegeinvestor.com/18174/comparing-the-most-popular-solo-401k-options/ [12/11/17]