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Category Archives: Investment

Financial Planning With Long-Term Care Insurance and Revocable Trusts

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People are living longer than ever before. That is why long-term care costs have become a very important part of financial planning. All of these costs should be taken into account before any gifts are made. A common way of addressing long-term care costs is through a LTC insurance policy. The purchase of a long-term policy, however, is not the end of the planning required for clients approaching retirement.

Steps need to be taken to see that the long-term care coverage will be available when it is needed. The problem is that over a third of LTC policies lapse before their owners ever use them. Women over 65 have a 38% probability of lapse, while the probability for men in the same age group is 32%. What’s even more surprising about these lapses is they’re not all caused by inability to afford the premium. A significant amount of lapses occur because of cognitive decline.

Policies that lapse are often policies that were needed by the affected individuals, so it’s important for advisors to ensure that there’s a plan in place to deal with cognitive decline. Not only should financial planning include a durable power of attorney authorizing the agent to handle financial matters if the client cannot do so, but the planner needs to make sure that the agent is also aware of when to step in and what actions to take. Among the actions for the agent to take may be paying the premium for the long-term care insurance.




Revocable Trusts




Another way to protect an aging person is by means of a revocable trust. While revocable trusts have traditionally been viewed as a way to avoid probate costs, they can also be used to provide protection from elder financial abuse, identity theft, and different risks of aging, including the risk of cognitive decline. A trustee may be given responsibility for continuing the long-term care insurance as well as making other payments for the aging client. .In addition, when a revocable trust is created to protect an aging person, the advisor should ensure that the attorney drafting the revocable trust includes a trust protector. A trust protector is appointed by the revocable trust to monitor the accounting of the trust and to see that there is no misbehavior by the trustee. The trust protector may be given the power to fire and replace the trustee of the revocable trust. By adding a trust protector, an advisor can help protect clients from a trustee behaving irresponsibly.

Roth Conversions : Do They Offer Protection from Higher Tax Rates?

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Roth conversions are a common topic of conversation between financial advisors and clients who have IRAs. One of the goals of optimizing tax planning is to pay taxes whenever rates are lower. However, just as it isn’t always easy to predict when to buy low or sell high, choosing the ideal time to convert to a Roth IRA can be a challenge.


The reason is most clients can’t accurately predict their tax bracket during retirement. While people often end up in a lower tax bracket after retiring, that shift isn’t guaranteed. When doing a Roth conversion from a traditional IRA, taxes are paid before they’re legally required.. Since advisors are generally in the practice of deferring taxes, any action that means paying taxes early is not something they want to do.


Estimating the future tax rate of a client can be an uphill battle.  As a result, it’s generally worthwhile for advisors to focus their attention and client conversations on a few other reasons. Let’s take a look at some of these reasons.


Diversifying Tax Risk


Diversification isn’t a principle that only applies to investing. It also plays an important role in tax planning. An optimal strategy is to have a mix of funds that are tax-free, tax-deferred, and taxable, and within the taxable accounts to have some funds invested to generate ordinary income and others that will produce capital gains. The role a Roth conversion plays in tax-risk diversification is filling up the tax-free basket as a hedge against potentially costly future tax increases.


This also brings up an important point to communicate with clients, which is that this conversion isn’t an all-or-nothing choice. Instead, the best option may be to do a partial conversion or systematic partial Roth conversions over multiple years to keep income in a lower bracket while still converting something on an annual basis. This will make Roth funds more valuable in the event tax rates do increase.


Eliminating Required Minimum Distributions


Roth IRAs are not subject to lifetime required minimum distributions (RMDs). After the tax is paid during conversion, Roth funds normally become tax-free. This is true even for beneficiaries (although beneficiaries are subject to RMDs). Since many clients want full control over their retirement distributions, converting to eliminate required minimum distributions can be a compelling option for clients.


Insurance Against Higher Tax Rates


Another tax benefit of a Roth conversion is being able to insure against higher tax rates in the future. Although those rates are unknown, this conversion can provide clients with a great sense of certainty during retirement. Because there is an opportunity cost associated with this conversion, it’s important for advisors to help clients choose the optimal time to take this action.


The IRS Now Allows After-tax 401(k) rollover to Roth IRA

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It’s been standard practice for quite some time now for employees to contribute to their traditional 401(k) plans with after-tax deposits. But because the newer Roth 401(k) has quickly gained a lot of popularity, many employees will be happy to learn that a ruling by the IRS makes it easier than ever to opt for an after-tax 401(k) rollover to a Roth IRA. While this is something that financial advisors should communicate with all of their clients, it’s especially important news for any employee who can’t contribute to a Roth IRA on an annual basis because of their income.


The Rules of 401(k) Contributions


The IRS has rules about the limits for what employees can contribute to their 401(k). As of 2015, the current limit is $18,000. The one addition to that rule is if someone is over the age of 50, they can make an additional catch-up contribution of up to $6,000 more. Two notable elements of these contributions is they’re not counted as income and any gains from them are tax-deferred.


Although a Roth 401(k) has the same limits, what makes it different is that contributions are counted as income. However, the gains are tax-free. Where the recent IRS ruling has a big impact is on employees who work in a company that offers a traditional 401(k) with an after-tax option. Currently, 42% of companies provide that option.


With the after-tax option, the IRS sets a much higher annual limit of $53,000. And now that the IRS has ruled in favor of the after-tax 401(k) rollover to Roth IRA, it’s possible for employees to roll those larger contributions into their Roth IRA upon leaving a company or retiring.


The Recent Ruling Streamlines Rollovers and Benefits Many Employees


The main reason that this issue got to the point where the IRS decided to make an official ruling on it is because so many people have rolled their after-tax contributions into a Roth IRA. While this practice has been quite common in recent years, the unclear nature of the previous IRS guidelines meant that people generally ended up being taxed at some point during the rollover.


Thanks to the new ruling, any employee interested in making this rollover will benefit. This update will be especially beneficial for earners who can’t make contributions to a Roth. With this update, it will now be possible for them to get into a Roth IRA without worrying about incurring out-of-pocket costs.


While the IRS has taken a big step to make the rollover process transparent and easier to follow, anyone planning to do so will still benefit from speaking with a certified financial planner and understanding the full implications of their plan.