Who Cares If Stretch IRAs Are Eliminated?

Posted on August 28, 2013 by admin

Only wealthy people benefit from the “loophole” anyways. Retirement plans were never intended to be an estate planning tool. It won’t impact me. I don’t care. These are some of the comments in the press right now regarding proposed legislation to end the ability of heirs to take inherited IRAs out over their life expectancies (referred to as “stretch IRAs”).

You should care. My experience is the less wealthy actually benefit as much or more than the truly wealthy from stretch IRAs. For example, lets call my client Mike. Mike’s father left him and his sister each half of his IRA at death. Neither Mike nor his sister would be considered even close to wealthy. Fortunately for Mike and his sister, they now use their required minimum distributions from their stretch IRAs to help pay their mortgages on humble homes. Had they been forced under the proposed legislation to withdraw all stretch IRA funds within five years of their father’s death, I’m sorry to say they probably would have nothing remaining to help them survive in the future. This is at least partially due to the behavioral finance implications of the tax-deferred nature of the stretch IRA. It provides a barrier to the instant gratification impulse of most people to consume the funds immediately. If they know they can let the stretch IRA grow tax-deferred but take a minimum amount each year, the long-term incentive is enough to overcome the short-term urge.

Why shouldn’t retirement plans be an estate planning tool? Is it better for the government to force citizens to cash in stretch IRAs or allow them to grow tax-deferred? I vote for saving incentives not consumption requirements. If the stretch IRA owner were forced to liquidate the account under the proposed legislation, they could still invest the after-tax amount. However, due to human nature this generally does not happen. They spend it on unnecessary stuff!

What can you do to help protect the stretch IRA? Contact your Representative and Senators and let them know you prefer saving incentives over forced consumption. In the interim, you should check your retirement plan beneficiaries and make certain your intentions are documented correctly. Other than that, we’ll all have to wait and see.

Do All CFPs Have a Fiduciary Duty to You?

Posted on November 30, 2012 by admin

NAPFA member Tim Decker recently authored an article explaining that many CFPs are salesmen and not always working in the best interests of those they serve. This spurred my thinking about the question and the how you see my industry.

With all the credentials out there, it can become confusing as what each one means and offers. Many stakeholders in the profession may actually benefit from the confusion. The CFP credential does not imply the advisor has a fiduciary duty to you. A fiduciary duty requires an advisor to act solely in the best interest of the client at all times. All Registered Investment Advisors (RIA) are held to this fiduciary standard. However, you could have a CFP that is a broker which is different from a RIA and not held to a fiduciary standard. Confusing? Yes.

Broker-dealers are required to disclose that their “interests may not always be the same as yours.” The broker has a duty to their home office but not to you. They are held to what is called a standard of suitability. The SEC’s website defines it this way, “In making this assessment, your broker must consider your income and net worth, investment objectives, risk tolerance, and other security holdings.” Notice your best interest is missing?

Ok – are you bored yet? I am. Bottom line is RIAs have a legally defined duty to act in your best interest and broker-dealers do not. Easiest way to figure it out is to ask your advisor how they are compensated. Generally, commissions = broker-dealer and no fiduciary duty and assets under management fees = RIA with fiduciary duty.

Making the Most of an Initial (Usually Free) Meeting

Posted on November 5, 2012 by admin

I just read a Wall Street Journal article by Aparna Narayanan titled “Meeting With a Financial Adviser? Read This First.”

This article is a good outline of making the most of an first meeting. However, to save you time you will want to weed out those advisors who clearly do not meet your needs. To do this, you will need to clearly define what you are looking for in a planner. A short list of some services to consider are as follows:

Do you want comprehensive planning or only segmented help on one or two issues?
Are you looking for an ongoing relationship or a just a few meetings?
Do you want only financial planning advice or are you looking for investment management?
Is tax planning important to you?
Do you need an estate plan as part of the planning process?
How much time are you willing to invest in your planning?

If you go into the process with a clear idea of what you want, you will save yourself tons of time. Don’t be afraid to tell the planner what you are looking for on the front end even before scheduling an first meeting. You can accomplish this by calling or emailing them with a list of your needs. Even if they aren’t a fit, they may know of a planner that is perfect for you.