Should I convert my Traditional IRA to a Roth IRA?

Picture Courtesy of U.S. News

This is a common question we face as financial planners. Popularity doesn’t necessarily make something a good financial decision for your personal situation. There are a few important factors to consider when determining if a Roth Conversion is for you.
1) What is your current tax bracket?
A big consideration of whether or not to convert your Traditional IRA to a Roth Ira should be dependent on your current tax circumstances. With clients having widely varying effective tax rates, it’s important to know your current tax rate and your potential tax rate should you decide to convert your IRA. All conversion proceeds from your IRA will be considered taxable dollars. When you contributed to your 401k, IRA or other qualified plan, you were given a tax deduction for your contribution. So, you never paid taxes on the money you invested. Now as you move funds out of your traditional IRA you will begin to pay taxes. If you have a tax rate of 15%, then maybe the conversion could be beneficial to you. If you have a tax rate of 25%, then maybe it won’t be. The best advice is for you to gain an understanding of the tax consequences pertinent to you.
2) What is your future tax bracket going to be?
This is much more difficult to determine. However, most people will find themselves in a lower tax bracket when they retire than their current tax bracket. This is the primary reason a person would consider not converting the Traditional IRA to a Roth IRA. If you have to pay more money today than you would pay in the future, why would you want to pay the extra tax? In the words of one of my clients, “Who said, yes I’d like to pay more taxes please? Nobody Ever!” Her words, not mine.
3) What is the growth difference between my traditional IRA and potential Roth IRA after taxes?
Now that we know your current tax bracket and your potential future tax bracket, we can begin to make calculations that will determine the potential value of both decisions for the future and for today. Here is a sample scenario for you:
Kate (65) has $300,000 in her Traditional IRA which she rolled over from her former employer’s 401K plan. Kate lives a fairly simple life, has no debt and she anticipates being able to live off her social security and supplement income from her IRA as she needs it. We’ll assume she needs $20,000 of extra income every year from her IRA. This extra income is to ensure Kate can do the special things she like to do like traveling, attending trade shows, and spoiling her grandchildren.
In our current scenario, Kate is mostly in the 15% tax bracket. She is earning a return of about 6.5% on her investments and has already begun withdrawing the $20,000 from her IRA.
The results:
If Kate were to convert her entire IRA today, then she would find herself in the 33% tax bracket paying almost $90,000 in taxes to the IRS. Since Kate is only withdrawing $20,000 per year from her Traditional IRA, it probably doesn’t make sense for Kate to convert this IRA at this time. The future compounding growth of her Traditional IRA is worth more than taking the tax hit today for the potential tax savings tomorrow. Maybe the conversion makes sense if Kate had 30 years to allow her money to grow, but for today’s illustration, she’s better off leaving the money in her account.
Is the Roth Conversion a financial strategy you’ve been considering? If so, let’s talk.

Jose Cuevas
Wisdom Investments
jose@wisdominvestments.com

Three ways to lower your taxable estate

Three ways to lower your taxable estate:

The financial planning cycle is an all-encompassing process that includes Investment planning, Insurance Planning, Tax Planning and Estate Planning among other areas. In one form or another your investment planning affects your estate planning which affects your tax planning which affects your insurance planning.  Clients tend to think about these areas separately. Clients tend to think in terms of going to their Lawyer for their estate planning, their financial planner for their investment planning, their CPA for their tax planning and their insurance person for their insurance.  A good financial planner will be able to direct clients to the professional who makes the most sense for their situation, but a financial planner can be viewed as the Quarterback for this process.  Financial advisors who provide comprehensive financial planning services need to identify areas of a client’s financial picture that require more attention and in-depth analysis.  Such is the case for clients looking to lower their taxable estate. These clients will certainly need the help of the financial planner, the insurance sales-woman, the CPA and the Attorney at all once.  Knowing which professional to employ could have a significant affect on your assets.  Without further ado, here are three ways you can lower your taxable estate:

Gifting Money to your Children and Grandchildren:

Current tax laws allow you to give away $14,000 per year to anyone you would like. However, most people aren’t interested in giving their money away to just anyone. A majority of clients will leverage the tax code to gift money to their children and grandchildren. Whether through cash or investment vehicles such as 529 plans, a parent can gift money to as many people as they would like for as many years as they would like. If your adult child is married, you can double the $14,000 and give $14,000 per year tax free to your children.  If both Mom and Dad are giving money away, you can double that number again to $56,000 if giving to both the Adult child and the spouse.  $56,000 might not be a large enough amount of money on it’s own to make a difference, but over a ten year period of time, that is $560,000.  If you have another married child, over a ten year period of time you and your spouse can give away over $1,000,000. 

Upfront gifting to a 529 plan:

529 plans offer a special feature that allow you to gift 5 years of assets all at once. Using the numbers from above for planning for one child’s education, you can upfront gift up to $140,000 for a married couple.  For a single individual, again the gift amount is $14,000 per year multiplied by five and you get a $70,000 upfront gift to your child’s 529 account.  Assuming you and your spouse have three grandchildren you’d like to help pay for college, that’s $420,000 you can eliminate from your estate in one year.  Now we are talking significant assets being eliminated from your taxable estate. The cherry on top for this option is you are able to deduct the contributions to the 529 plan from your state taxes. With a tax rate of 5% in Illinois, contributions to a 529 plan could be a considerable deduction to consider. There are some caveats if you pass away before the 5 year period is over. We recommend you work with us and your CPA to understand the full ramifications of this option.

Establishing an Irrevocable Life Insurance Trust:

Establishing an Irrevocable Life Insurance Trust (ILIT) will require the help of an Estate Planning Attorney.  An ILIT can be used to purchase a life insurance policy or transfer the ownership of an existing policy to the ILIT. The first word of this product/strategy is Irrevocable. That’s an important word.  When you transfer assets into an ILIT, you lose control of managing those assets and making changes to the assets.  By assigning the assets to the ILIT, you are saying “This money no longer belongs to me”.  ILIT’s allow you to pass a significant sum of money to the next generation and avoid estate taxes.  After the life insurance is purchased or transferred, the trust becomes the beneficiary of the policy.  Upon your death, the life insurance proceeds are paid out and held in trust for the trustees of the trust.  For more information, we recommend you talk with us an estate planning attorney.

There are many other ways financial professionals work to lower your estate tax liability. These are just three ideas to help you on your journey.  For more ways to lower your estate tax liability, please call us at 847-290-0753.  You may email me at jose@wisdominvestments.com. 

Jose Cuevas
Vice President
Wisdom Investments
jose@wisdominvestments.com
http://www.wisdominvestments.com
847-290-0753

What exactly does financial planning entail?

 

For many, the idea of financial planning is simply investing.  While investing is a large part of financial planning, it is just one of the many services we provide to help our clients.  Financial planning can best be described as an all encompassing approach to managing your finances.  While many advisors call themselves financial planners, many are not.  This is one of the reasons why some people believe financial planning is only about investing.

For us, we take a comprehensive approach to financial planning. That means we look at your investments, debt, taxes, insurance, wills, trusts, & physical assets to determine your likelihood to attain your goals and to determine what your future cash flows could look like. We serve our clients as their life advisor, with a belief that financial planning is an ongoing process in which we help and coach clients to reach their personal financial objectives, including, financial independence, estate preservation, and a legacy of wealth, significance, and values.

The financial planning process itself involves multiple steps. First we gather all of the pertinent information to see your entire financial picture. We then draft a financial plan.  Our financial plan will tell us how your investments should be allocated and what types of investments are best for you. The plan will also address your current insurance needs. Do you need long term care? Do you have enough life insurance? Next, we’ll address your estate planning needs and help you find an attorney you can work with whom you’ll trust. We then look at your taxes to ensure you are not paying Uncle Sam more money than is necessary. During this time, we’ll also address any other goals you might have in mind.

The next step is ongoing portfolio management. We work with well known companies like Fidelity, VanGuard & Dimensional funds to help you manage your assets. Constructing your portfolio is just the first part of the process. We must continuously analyze your portfolio to ensure you are positioned appropriately for current market conditions as well as ensure you are invested according to your current risk tolerance.  Portfolio rebalancing is crucial to ensuring your investment allocation is appropriate.

From there we’ll meet with you periodically to review your investment performance and monitor your financial plan. As humans, we typically have at least 2 life events per year that could affect our financial plan.  Think about your last year.  Did you start a new job? Get promoted? Experience family loss? Have a baby? Buy a home? Get Married? Get Divorced?  Have a family member get sick? Send a kid to college? These are all examples of life events that would arouse a need for change with your financial plan.  Once we’ve met to determine what changes have happened in the last year, we update your plan to outline the necessary changes to stay on course.

A little bit about Wisdom Investments: We have a FIDUCIARY responsibility to act in the best interests of our clients. What matters most to us during the financial planning process is that we focus on what matters most to you. We help you align your desires with your goals to accomplish your financial objectives and stay true to your values. You can expect our highest level of commitment to this approach as when it comes to your money there is nothing more important than your goals and your values.

Do you know someone who needs our services? Please email us!

We provide financial planning & investment management advice for a fee.  We use the most technologically advanced financial planning software available.  We use Fidelity as your custodian to hold your assets. Wisdom Investments is a privately owned, independent financial planning company. We are not a broker. We are not compensated by third party companies to provide Investment advice. We have been serving Arlington Heights and the Northwest suburbs since 1999. We have a reputation built on helping successful individuals achieve their financial planning goals. In addition to providing Comprehensive Financial Planning advice, we provide a full range of services including, but not limited to, Retirement Planning, Investment Planning, College Planning, Estate Planning, Insurance Planning, and Tax Planning. Our Founder and President, Bill Kmiecik leads the organization with more than 30 years of financial services experience. Mr. Kmiecik is a resident of Arlington Heights and belongs to several organizations, some of which include, The American Institute of Certified Public Accountants, The Illinois CPA Society, The Arlington Heights Historical Society, The Arlington Heights Chamber of Commerce (member of Financial Review Committee), Rotary Club of Arlington Heights (Past President).

We would love the opportunity to show you how we are different than most financial companies. In this business, trust is important.  Trust is not automatically given. Trust is earned.  Come see why clients have been working with Wisdom Investments since 1999.

Blessings,

Jose Cuevas
847-290-0753

Jose Cuevas                    VP Financial Planning Wisdom Investments

 

 

 

 

Three things you can do today to save money

If you’re like most American families, you are always on the lookout for a deal or ways you can save money.  Today I’d like to share three quick an easy ways you can save some of your hard-earned money.

1) Appeal your property tax assessment:

Last week I received my new assessed value for my home.  The value of my home for property tax purposes was increased by 23%!!! You can imagine the sticker shock I felt as I reviewed that bill.  In a perfect world if I were to sell my house today, MAYBE I would get what the county assessors have declared, but it’s doubtful. So, I could accept what Cook County says about the value of my home or I can take a couple of minutes and do some research to find homes in my neighborhood that have recently sold for less than what the County is saying my home is worth.  If you are time strapped there are companies who will do the 10 minutes of work for you.  If you live in Cook County like I do, the times vary to file your appeal. Click here to see your appeal timeline. I’m sorry Schaumburg Township, it appears your time has already passed. The rest of you, your time is running out. So, get busy.  Here is a link to the property search on the cook county assessor’s website.

2)  Refinance Your Home:

With interest rates still hovering at record lows, you could refinance your home to take advantage of cheaper borrowing costs. Last year, I took the time to refinance my home from a 30 year mortgage down to a 15 year mortgage. I’m not saving money right away.  As a matter of fact, I’m paying about $150 more per month than I was on my 30 year mortgage. That small increase on today’s mortgage is going to save me approximately, $175,000 in interest I would have paid the bank. Refinancing to a 15 year mortgage is not the only option you have.  You can use 10, 15, 20, 25, and 30 year options to refinance your home at the best rate possible and term for your situation.  It is important to talk to a qualified professional before refinancing. A contact I’ve come to trust over the years is Bianca Stone with Guaranteed Rate mortgage. High Five Financial does not receive compensation of any kind from Bianca Stone or Guaranteed Rate Mortgage company. However, I do know her to be a trustworthy person. There are other professionals you can speak with as well. If you would like more names, please contact me.

3)  Start a systematic savings program

This tip is literally “Saving” money.  Many people receive their work paycheck, they saved something to their 401k and then they spend the rest of their money on bills, living and luxury. Saving money into your 401k or retirement plan is a great thing. And, it’s not the only place you need to save. There are many places you can save outside of your 401k like savings accounts, money markets, and mutual funds. Contact us to learn more. The trick to having a good savings program is deciding in advance what you would like to save from paycheck to paycheck.  Sometimes $50 is all you can afford.  Other times you can save an entire paycheck.  Obviously the more money you choose to save the better off you’ll be. However, every little bit you are able to sock away will make your financial situation that much better. Many companies make it very easy for you to set up a systematic savings program. Somes companies don’t make it easy as it’s not their primary business objective. Find the person and company you are comfortable working with to help you achieve your savings goals.

There you have it. Three quick and easy ways you can save money today. I hope you found this helpful.  If you would like to receive more tips, sign up for our blog. If you have a question about a financial issue, contact me at 847-628-9777.

Many Blessings,

Jose Cuevas
President & CEO
High Five Financial