Should you rollover a 401(K) plan into an IRA and should you rollover old 401(K) s into your new employer’s 401(k) plan?

Should you rollover a 401(K) plan into an IRA and should you rollover old 401(K) s into your new employer’s 401(k) plan?

Many people have 401(k) plan accounts from previous employers and they are not sure whether they should roll these funds over to their new employer’s 401(k) plan or to rollover these funds to an IRA account. When trying to decide which option to choose, I recommend looking at the quality of the investments that are held within your new employer’s 401(k) plan and the fees associated with the plan.

Generally, if the employee works for a very large company, they will probably have a good selection of investments available. However, if the employee has left a big company and is now working for a small company, they may be better off leaving their 401(k) plan assets within the former employer’s 401(K) plan.  

Small companies often charge their employees for record-keeping expenses in addition to mutual fund management fees. Small company plans may also not qualify for institutional pricing on the mutual funds held in the plan. Also, on some plans, the employees may pay sales charges on purchases as well.

Assuming that the current plan has good investment choices and reasonable fees, it is often easier to have one custodian holding all of the former retirement assets from previous employers. It can make asset allocation easier as well. However, some people do not want to roll the funds together because they are worried about the viability of the custodians after the 2008 credit crisis and may want to keep the assets separated for that reason. This is a personal decision.

In addition, the employee may not have enough money in the new plan to qualify for the maximum loan amount. By consolidating the previous 401(k) balances into the plan, they may be able to take advantage of the maximum loan amount of 50% of the account value (up to $50,000).

Employees must use caution when a broker recommends that they roll over their 401(k) assets into an IRA. Their incentive may only be to free up the assets to invest. Again, if the employee is with a large employer plan, it probably has institutional pricing and the funds inside the plan have probably been vetted by an investment committee. Moving the money to the IRA may result in higher fees and less desirable investments that may not necessarily be in the employee’s best interest.

The bulk of my practice is working with clients on either an hourly fee basis or through advisory fees. While I still maintain an insurance license, I rarely use it any longer after 30 years of being in this business.

If you have additional questions, please feel free to call my office at 201-843-0044. Also, check out our website at:

www.wattersfinancial.com

Timothy Watters, CFP

Beware Cybercrime

Over the last few years, we have seen a dramatic rise in fraudulent email requests to take funds out of our client’s accounts.

This type of fraud used to be easy to pick out. However, the thieves have grown more sophisticated over the last few years.  We have taken several steps to protect our clients:

1.   We always call clients when we receive an email request for funds. A few months back, our firm received an email request from a client requesting over $28,000 to be sent to her sister. Once we called the client, we learned she has no sister!

2.   We do not send out funds to third parties. We wire funds directly into our client’s checking account.

3.   In addition, we have photos of all of our clients on file. This way, if someone shows up saying they are our client and the staff person has never met the client, they have an easy way to prove identity. One client had someone who impersonated them at a bank branch take out a large withdrawal. You never can be too careful.

4.   We purchased Cybercrime Insurance to protect clients from hacking into our computers and to protect against fraudulent theft of assets as well.

It is critically important to be careful with passwords.  It is a wise thing to update and your email passwords periodically and to make sure that all of your passwords are robust. It's also important to make sure that your computer has a firewall and you use virus scan software and you are up to date on all of the patches from your operating system as well.

Even with those precautions, you can still fall victim to identity theft. Be careful to not open suspicious emails from someone who would not normally email you. Also, do not click on links in emails unless you are sure of the source.

Myths in Financial Planning

There are many myths in Financial Planning.

My personal favorite is the myth that the Last Will and Testament overrides your beneficiary assignments. 

Often a client will go to the effort of meeting with an attorney and drawing up a perfectly adequate Last Will and Testament only to have it undermined completely by the beneficiary assignments in their retirement accounts, annuities and life insurance policies. 

This can be a real problem if there is a special needs beneficiary in the family. Beneficiary assignments should be discussed (and amended if necessary) with your attorney. 

My second favorite myth is that there is no need to plan for long-term care because it will all just work out fine. I have been approached many times by families in desperation after they realize that a loved one is going to spend down all of their assets. There is not much they can do about it at that point in time. Whether the client decides that Long Term Care Insurance is part of the solution or not, they should have a concrete plan of action. They should have a family meeting where these issues are discussed. The decision to purchase Long-Term Care Insurance is a family decision based on the client’s financial assets and health and their viewpoint. I often create a Retirement Scenario Report looking at how long the assets will last with or without Long-Term Care Insurance to help clients decide if they can afford to self-insure or they need the coverage. The important thing is that people need to think it through and make an informed decision.

Finally, the third myth is that you can continue to save very little AND still have enough to live comfortably in retirement. This is one of the things YOU have direct control over. My goal for all of my clients is to save 15% each year.

If you have additional questions, please feel free to call my cell phone at 201-650-0753. Also, check out our website at:

www.wattersfinancial.com

Timothy Watters, CFP

Should a Millennial Rent or Buy?

               What to Consider when Buying a Home.
For millennials, the decision of whether to buy has never been harder. Many millennials are in a financially weak position because of the aftermath of the Credit Crisis and student loan debt.
In the last 30 years, I have seen many young couples grapple with this decision. Having children forces them to think about education. If they live in the city, they may want to consider staying in the city and finding a good private preschool and elementary school. Unless they make a substantial income, private school may be too expensive. If they move out to the suburbs, they can buy a home, pay property taxes and send their child/children to public school. Property taxes are deductible. Private school tuition is not deductible. One of the negatives of choosing a private school education is that parents are often not able to afford to contribute to college funding as well.
Here are some guidelines that I recommend couples think about when deciding whether to buy a home:

·      It's important especially now to make sure that you can afford both the down payment on the home as well as keeping an emergency fund of 3 to 6 months’ worth of bills.

·      It is important to understand the PITI rule. Now banks will not allow you to spend more than 28% of your gross income on principal, interest, taxes and insurance.

·      Credit ratings are an important factor to consider also. According to JP Morgan Investment Management, banks require a credit rating of 743 or higher to get a home loan.

·      It is important to have a long time horizon when buying your first home. The home has to appreciate 10% just to break even overtime. You need to pay the realtor 4.5% to 6% to sell the home. You also have transaction costs to buy the home and transaction costs to get out of the home as well as moving costs.

These are a few suggestions. If you are considering buying a home and have questions, please call my office at 201-843-0044 and we can discuss it.

Saving Money Is One Of The Hardest Things To Do !

Saving money is one of the hardest things to do for most people. I find automatic savings programs are a great way to help people to reach their savings goals and make managing their cash flow less chaotic as well.. 

The first step is to look at your current cash flow numbers to see where the money is going. I often recommend that married couples divide up their expenses between essential and discretionary expenses and then rank the discretionary expenses one to three in terms of importance. If the item is a two or a three in terms of personal importance to the couple, it's up for grabs to be redirected toward additional savings.

I also think it's important to have savings goals for short-term savings and the long-term. I recommend my clients establish several online savings accounts and start automatic saving towards specific goals. For example, they may put aside money on a monthly basis for an emergency fund, vacations or holiday gifting. The beautiful thing about an automatic savings programs is that it dials down the anxiety that comes with managing your money. For example, when Christmas and Hanukkah are around the corner, having a specific holiday gifting account already set up can provide peace of mind. This type of automatic savings program also has the potential to lower credit card debt by removing the dependency on short term debt to satisfy fluctuating cash flow expenses.

The next step is to set a longer term savings goal. Our savings goal our clients is to save 15% per year. This money should be first directed towards your 401(k) or 403(b) plan (especially if there is a matching contribution). Other worthy savings options include funding an IRA or paying extra principal on a mortgage as well. Switching from a 30 year mortgage to a 15 year mortgage can also be quite desirable because you get a lower interest rate on a 15 year mortgage than a 30 year mortgage as well.

Saving for education is also important but, this should be ON TOP of your savings goals since it will not help you to save for your own retirement.


If you have additional questions about financial planning, please feel free to call my office at (201) 843-0044. My staff would be happy to help with any setting up a free introductory phone call if you would like to talk about your financial planning needs.  

Avoid Financial Blunders as You Get Closer to Sending Your Child to College

Every parent feels nothing but guilt as they get closer to sending their children to college and it's that guilt that causes people to make a financial blunders.  I am sure you have heard the old saying, you can always borrow money to go to college but you can never borrow money to retire.

Here are a few of the big mistakes that I have seen:

·       Not having a family mission statement on how much money each member of the family needs to pay for college is a big mistake. Everyone should know how much the parents are willing to pay and how much the children are expected to pay.

·       Stopping saving for retirement while your children are in school. Not funding the 401(k) plan because your children are going to college will hurt you because you lose out on the time value of money and you'll probably miss out on employer match as well.

·       Taking out student loans without having a frank discussion of how much you can afford to repay. I have seen many clients who took out large student loans and then had a financial downturn and could not make payments on them. It is amazing to see how quickly the principal balloons when you are in forbearance on a student loan.

Student loans are shared concern for both parents and students and shouldn't be entered into lightly. I often show people what the cost will be per month and overtime for student loan so they can see the true impact it will have. If the cost is too high, they should think of commuting for at least part of their time while in school.

All students should work summers and the family needs to decide what percentage of the money goes to college funding. My favorite plan is to put all of those earnings into an online savings account and to use the money in the last year of their schooling. It is a source of pride and gives them bragging rights to later say, “I saved $____ for my own education”.

If you have additional questions, please feel free to call my cell phone at 201-650-0753. Also, check out our website at:

www.wattersfinancial.com

Timothy Watters, CFP

Saving For Your Child’s College Education

Saving For Your Child’s College Education

All parents struggle to find the funds to send their children to college. Clients often ask us for help on this topic. For this blog entry, we thought it might be helpful to go back to basics with an Overview of 529 Plans, Coverdell Education Savings Accounts, and Custodial Accounts.

As you begin your search for tax-efficient strategies to pay for college costs, keep in mind that 529 plans, Coverdell Education Savings Accounts, and UGMA/UTMA accounts each offer unique benefits. It's critical that you understand all of them before making a final decision.

Section 529 college savings plans are named after the section of IRS code that created them. They are college- or state-sponsored, tax-advantaged plans that allow individuals to invest in portfolios of stocks, bonds, and cash equivalents. Contribution limits for 529 plans vary from state to state. Distributions made to pay qualified education expenses are tax free. Prepaid tuition plans also fall under Section 529, but for the purposes of this article, the phrase 529 plan refers only to a college savings plan.
Coverdell Education Savings Accounts (formerly known as Education IRAs) allow tax-free earnings on nondeductible contributions of up to $2,000 per year, per student. Coverdell Education Savings Accounts can generally hold a variety of investments. They can only be established for a child younger than 18, and the money must be distributed for educational costs before the beneficiary turns 30. Income limits apply: Single filers with modified adjusted gross incomes (MAGI) of more than $110,000 and joint filers with MAGI in excess of $220,000 are not eligible. Qualified withdrawals may be used to fund a primary, secondary, or college education.

An UGMA/UTMA custodial account allows you to establish a savings or investment account in a child's name, with one adult named as custodian. Each parent can contribute up to $14,000 in 2016 without triggering mandatory filing of IRS Gift Tax Form 706 and possible payment of gift taxes. With an UGMA/UTMA account, the first $1,050 per year of unearned income is tax free. For children under 19 (and for children under 24 who are full-time students and whose earned income does not exceed half of the annual expenses for their support), the next $1,050 is taxed at the child's rate. Beyond $2,100, the income is taxed at the parent's or child's rate, whichever is higher.

If you have any questions on this or with your own planning situation, please feel free to call us at 201-843-0044.

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