Russell Bailyn -

I found a study in the most recent edition of planadviser magazine which suggests that families will start consolidating their investment accounts with one adviser in the next few years. The primary explanations they give are: 1- to improve retirement income planning (converting assets into a stream of income) and 2 - asset decumulation (giving your money away). The study divides up the population between three segments and explains why each has a unique set of retirement planning requirements.*

•The first segment, which consumes the large majority of people, consists of households with less than $200,000 invested. This demographic will focus on protecting assets and will need an adviser to help release the equity in their home and investigate a variety of ways to produce income.

•The second segment has $200,000 - $2,000,000 invested. These people will not focus so much on protection of assets, rather finding ways to maximize the income which can be derived from these assets.

•The final segment, consisting of people with over $2 million in assets, are looking for full retirement programs which help them disperse assets to preserve a certain lifestyle and legacy. This segment will have the broadest need for financial planning and wealth management services.

So, I gave this a bit of thought and came up with the following: there aren’t too many good reasons for keeping assets divided between advisers. In fact, I think most people fall into this situation either by accident or through sheer laziness. Have you ever tried to do a 401k rollover? It’s a bit of a pain between the withdrawal paperwork, new account application, risk tolerance questionnaires, etc. Some people leave their money with a former employer’s retirement plan simply because it avoids the headache of transferring funds. What they may not be realizing is that, upon approaching retirement, the desire to consolidate accounts will come creeping back so that the account holder can better view and understand their complete financial picture.

That desire might come at the point when they discover that one investment account has averaged a 15% annual return while another has returned 5%. The client might start thinking about all the possible factors which affect performance. Why did one account return so much more than the others? The funny part is that the performance disparities probably have nothing to do with the investment manager’s ability to outperform the markets. It’s more likely the result of good asset allocation, low expenses, or some combination of the two. Regardless, the solution is often to engage the adviser or investment company which has provided for the greatest total return and consolidate your accounts with them.

The study ends with a little note which is quite comforting to me. It suggests that smaller, more independent firms should end up at an advantage in the adviser consolidation process because independent firms tend to utilize the widest variety of investment products and companies while adding value in the form of financial planning services. Hey, that sounds surprisingly like my own firm! The study does follow a very logical path. I hope they follow up with fund flow data in the next several years.

Russell Bailyn
--
Wealth Management
Premier Financial Advisors
14 E. 60 St. #402
New York, NY 10022
(212)752-4343 *31

*Study: “Winning the Battle for Retirement Assets: Wealth Management or Product Pitch Polemics?” by Matt Schott, research director at TowerGroup, a financial services research and advisory firm.

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: NASD & SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 10:01 AM | Permalink | Comments ( 2 ) | TrackBacks ( 0 )

“Roth” is a provision which allows distributions from qualified plans to be withdrawn free of income tax forever. What you sacrifice with a Roth plan is the ability to take a tax deduction in the amount of your contribution. However, you gain the comfort of knowing that money won’t be subject to tax ever again. Take the following example: you’re a teacher who earns $100,000 per year. With a traditional 403b, a salary deferral of $15,000 would result in taxable income of $85,000. The $15,000 contribution would grow on a tax-deferred basis. At age 59 ½, you’d be able to withdraw money from the plan without penalty. When you eventually decide to retire and take distributions from your account, they would be taxed at your income bracket for that year. The big question is whether marginal tax brackets will be higher or lower when you retire than they are today. The answer to that is obviously a pure guess. However, for the purposes of financial planning, we generally assume our personal tax brackets will be lower during retirement because, well, you're retired!

If you had contributed $15,000 into a Roth 403b instead, your taxes for that year would be based on the full $100,000--no tax deduction is taken. However, you wouldn’t owe any tax on your withdrawals. You pass up the current year tax deduction for the benefit of withdrawing the money later on in life free of income tax.

So which one is better? Personally, I don’t fully embrace Roth plans because I don’t trust Congress or the IRS to leave the tax code or legislation alone long enough for me to appreciate the benefits. I’d be cautious about passing up a tax deduction now because thirty years from now I’ll have a lower taxable income. Just think about where tax brackets were 30 years ago, in 1977. The highest marginal tax bracket was 70%. Would a Roth have been better back then? The argument would have been exactly the same. Do we take a tax benefit today to reduce the amount of our earnings taxed at 70%, or do we wait until we're 59.5 and see how things look then? Nobody knows. I like to keep the equation simple and take a tax deduction when and if one is available.

The theoretical answer to “which one is better” is that it depends on your personality. If one person invested in a pre-tax 403b, and the other in a Roth 403b, they would both end up with the exact same amount of money in the end, assuming they stayed in the same tax bracket. In life, people generally earn more money as they increase in age and then earn less (enter a lower tax bracket) when they retire. This isn’t the case for everybody, but for the overwhelming majority. If you fall into this scenario, a traditional 403b will probably offer better tax protection for you.

Another factor is the performance of the market. If you knew the market was going to average a 20% annual return for 10 years, you’d want to be in a Roth because paying income tax on all that growth is going to sting. If the market was going to average a 2% annual return, it would be better to take the tax deduction and avoid the Roth since you aren’t really going to have such a huge tax problem anyway.

Roth fans generally do point out one factor which gives them an edge. Regular IRA accounts require you to take distributions starting at age 70 ½. With a Roth 403b, you can roll your money into a Roth IRA and keep the money growing tax-free until death. If you are wealthy enough to not need the distributions and are looking for a tax shelter, a Roth product might add some value to your portfolio.

Most importantly, Roth 403b accounts are still not an option at most organizations that offer traditional 403bs. The reason is that it costs money to make an option like this available and companies don’t want to offer it until they are sure the tax code will continue to support it. The provisions which allow Roth 403b plans to exist were technically supposed to expire in 2010. The Pension Protection Act extended them indefinitely. I think we'll continue to see a pattern of tax-friendly government while the problems regarding Social Security and pensions seem to get worse, not better.

I hope this article is helpful and not confusing. Understanding 403b’s is challenging even for financial professionals because of how new and constantly changing the rules about them are. Please feel free to e-mail me about your situation or for any other advice.

Russell Bailyn
--
Wealth Management
Premier Financial Advisors
14 E. 60th St. #402
New York, NY 10022
(212)752-4343 *31

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: NASD & SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 12:55 PM | Permalink | Comments ( 6 ) | TrackBacks ( 0 )

Although several savings vehicles exist to fund a college education, 529 plans may be one of the best. 529 plans combine the advantages of other college savings vehicles but avoid some of the common drawbacks. The primary advantage is that earnings within the account are tax-exempt when used for qualified higher education expenses. This may be even more beneficial than a traditional IRA or 401k where the money is tax-deferred, but is still taxed as income when distributions are taken. The essence is- if you are going to pay for higher education expenses at some point, you might want to consider a 529 plan as a funding option.

Coverdell Education Savings Accounts actually offer the same tax exemption, but the annual contribution limits are lower ($2,000 for 2006 & 2007) and high-earners will probably get phased out (joint phaseout $190-220,000 for 2006 & 2007, $95-110,000 if single). The other important difference which is often overlooked is that a well funded 529 plan may be less restrictive for a child’s ability to get financial aid including scholarships, grants, and student loans. This is because the account must be registered to the person funding the account rather than to the beneficiary--the person receiving the education. This is a crucial difference from UGMA/UTMA accounts and trusts in which the account is registered to the child and often may adversely affect financial aid packages. Note that the account is still an asset of the “account owner” which could theoretically have an affect on financial aid as well, but not to the extent of assets held in the name of the child.

Many states also allow for a state income tax deduction based on the size of your contribution. New York, for example, allows a married couple to contribute up to 10,000 tax-deductible dollars to a 529 plan each year ($5,000 if single). You’ll want to check your individual state’s rules regarding 529 plan contributions. In New York, all contributions to a 529 plan must be made by the account owner. In some states, there isn’t any state income tax, so the deduction becomes irrelevant. These are some of the things to consider when selecting a plan.

529 plans are convenient in that there are no income limits which restrict who can contribute to the plan. The limits are on the amounts which can be contributed, and vary depending on which state you are talking about. A grandparent who earns $500,000/year, if they are the account owner, may still be able to contribute regularly to the plan. The account owner retains control over the investments and, if necessary, can change the beneficiary to somebody else within their family. While I tend to refer to the beneficiary as the “child” it could be somebody much older who is pursuing higher education. Again, many rules governing 529 plans are specific to the state which you are dealing in. You’ll want to research your own state’s plan and then consider what the benefits and/or drawbacks may be to using another states plan.

If you want to determine whether or not a 529 plan is the best college funding option for your children or grandchildren, please feel free to contact me.

Russell Bailyn
--
Wealth Management
Premier Financial Advisors
14 E. 60th Street, #402
New York, NY 10022
212-752-4343 *31

*As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. In addition, there are no guarantees regarding the performance of the underlying investments. The tax implications of a 529 plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: NASD & SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 11:09 AM | Permalink | Comments ( 2 ) | TrackBacks ( 0 )