What's the best question you asked your CFP / Investment Advisor

[pb4uski]

We went looking for a financial advisor in February, 2009, but in Orange County the ones we contacted were all predicting imminent double digit inflation and suggesting gold (seriously! Not an exaggeration!) ...

That is actually a bit scary... and some people probably actually fall for that crap. Snake oil salesmen methinks.

 

[bobandsherry]

You've got "7 figures available", so you'd qualify for free Flagship Services at Vanguard. Info at this link: https://investor.vanguard.com/what-we-offer/personal-services/flagship-and-flagship-select-services

We have some accounts at Fidelity, heard good things there. Talking to someone there is on my list as well. I'll have to research Vanguard to see if any advanatage of one over the other.

 

[bobandsherry]

Maybe you need a CPA instead. You've apparently done well to get where you are without a CFP, but now your concern seems more tax-related.

I had input in the past that CFP, with right credentials, would be better than CPA. Hence why I'm on my current quest. I had thought CPA as well, but advice received was that CPA wouldn't provide as much well rounded advice I guess maybe I should have asked if you had to do it all over again, what would you have done differently. Thanks

 

[samclem]

I had input in the past that CFP, with right credentials, would be better than CPA. Hence why I'm on my current quest. I had thought CPA as well, but advice received was that CPA wouldn't provide as much well rounded advice I guess maybe I should have asked if you had to do it all over again, what would you have done differently. Thanks

The advantages of the CPA (with PFA designation) are:
-- He/she is not going to try to sell you a particular investment
-- They will almost surely bill by the hour rather than using AUM or being on commission
-- They will act in a fiduciary capacity
-- They will be experts in taxation law, and there will be a meaningful credential to prove it

You might be able to find some of that with a FA, or maybe even all of it, but it will be a lengthy search. If you needed handholding in picking assets, then maybe a FA would be better, but it doesn't sound like this is the case.

 

[CaliforniaMan]

You are retiring early 50s, the financial planner is still working. So who is better at managing money? The only question you should ask is why are they still working.

Seriously, unless you have complicated tax issues, in which case you would need a tax attorney and not a CFP, what would you expect to get from them that you cannot do for yourself, other than big fees of course.

 

[bobandsherry]

Before this thread hits a hundred posts, you will have enough good advice to stay with DIY. For example, having access to stable value fund is not something to give up unless you are forced to.

You need a good plan, but can get that without paying monthly fees to a salesman.

If I can get enough knowledge from DIY I'm all for it. I believe I'm pretty well versed in finance, having my education in Accounting and Finance. I've been working for a large financial company for almost my entire careeer. I started doing my own taxes years ago after I found an error in the tax return that my preparer did.

I think my primary concerns are:
1. Is rollover of 401K to IRA a good decision
2. Should I set up my IRA then with RMD and if so how do I do this correctly
3. How should I structure this investments to provide the best benefits for medical coverage (e.g. subsidy)
4. Any ideas that I haven't thought of to invest the funds (mix of tax free and taxable investments) for now and the future.

I've found lots of great info here with lots of great users. Several months to go and hoping to pull it all together. What I guess the biggest unknown is knowing what I don't know or even considered.

 

[bobandsherry]

You are retiring early 50s, the financial planner is still working. So who is better at managing money? The only question you should ask is why are they still working.

Seriously, unless you have complicated tax issues, in which case you would need a tax attorney and not a CFP, what would you expect to get from them that you cannot do for yourself, other than big fees of course.

Honestly, that logic has prevented me from hiring anyone in the past to manage my funds. I've found though that some people have the means to quit and just enjoy their job so they keep working. I know of a friend of mine who continued to work well into his 70's although he had well in excess of $25MM. His "work" mainly consisted of being on the Board of a couple companies, but he also did consulting. When I asked him why he continued to work, he said he still found it enjoyable, he did it on his own terms and was giving a substantial portion of his wealth to charities he felt worthy. So with that I learned that not everyone enjoys total retirement and can get bored, so a financial planner may be doing well himself. Now I'd love for a planer to show me his net worth, that would probably be something that motivated me to choose them then

 

[bobandsherry]

The advantages of the CPA (with PFA designation) are:
-- He/she is not going to try to sell you a particular investment
-- They will almost surely bill by the hour rather than using AUM or being on commission
-- They will act in a fiduciary capacity
-- They will be experts in taxation law, and there will be a meaningful credential to prove it

You might be able to find some of that with a FA, or maybe even all of it, but it will be a lengthy search. If you needed handholding in picking assets, then maybe a FA would be better, but it doesn't sound like this is the case.

Thanks, I'll expand my interviews to include a few CPA's.

 

[nwsteve]

I think my primary concerns are:
1. Is rollover of 401K to IRA a good decision
2. Should I set up my IRA then with RMD and if so how do I do this correctly

s other mentioned, you will not have to deal with RMD until 70.5. I may be misreading your post, but amounts in your 401k, will also require RMD withdrawals.
Deciding to convert your 401k to IRA should be driven by your investment options in the 401k and what fees your 401k admin is taking from your portfolio. It may take some digging to find out your admin fees and remember these are in addition to any operating expenses of your investments. I would also verify that any admin fees previously paid by your employer will still be paid once you are retired. Others have mentioned how a bit of effort can give you a well diversified, low cost portfolios. All the major investment houses (Fidelity, Vanguard, Schwab,etc) will compute and manage your RMDs any funds you have with them once they are required.
Nwsteve

 

[bobandsherry]

s other mentioned, you will not have to deal with RMD until 70.5. I may be misreading your post, but amounts in your 401k, will also require RMD withdrawals.
Deciding to convert your 401k to IRA should be driven by your investment options in the 401k and what fees your 401k admin is taking from your portfolio. It may take some digging to find out your admin fees and remember these are in addition to any operating expenses of your investments. I would also verify that any admin fees previously paid by your employer will still be paid once you are retired. Others have mentioned how a bit of effort can give you a well diversified, low cost portfolios. All the major investment houses (Fidelity, Vanguard, Schwab,etc) will compute and manage your RMDs any funds you have with them once they are required.
Nwsteve

I understand that you don't have to take RMD until 70+, however with the "rule of 55", if you quit or leave your job at 55 or older you can take you 401K and convert it and set-up the IRA with RMD. Once you set up the RMD you have to draw until 59.5 or 5 years, which ever is later.

My retirement funds and investment portfolio are about equal in size I'm thinking it may be advantageous to setup an RMD off of 401K converted to IRA and draw something now when I'd be in lower tax bracket. I'd then blend my spend from the RMD and post tax investments. I am also figuring there is advantage in that I can also keep my taxable investments available if something came up that I needed a large amount quickly in an emergency. I'd then avoid penalty if I had to tap the 401K/IRA.

In rough numbers, I'm figuring to 'spend' $80K/year, and looking to take half from pre-tax and half from after tax investments. I'd have a very low taxable income now. If I took all $80K/year now from investments I'd then have to draw $80K/year (adjusted for inflation) later from pre-tax and end up, most likely, in a higher effective tax bracket.

Perhaps I'm wrong in my assessment and why I'm doing my due diligence now.

 

[gretah]

I was about to hire a Charted Financial Consultant who had chatted me up impressively via phone.

Then I called to ask if she would do some vetting of a couple of companies I was considering for investments. She said no - the company only put together plans for stocks, bonds, and bank products to produce at least 6% over 20 years.

I can do that myself. And get a better return that's low risk.

I'd love to find someone who would do research / vetting for me at an hourly rate. Any ideas?


Another way I've checked out CFCs / CFPs is to ask how much of their clients' portfolios are socially responsible. Most ask me what socially responsible means.

"Click" goes my phone.

I've been considering using just a new tax law firm and skipping the CFCs / CFPs. It's interesting to read that others are already doing this.

 

[Car-Guy]

How much for the snake oil ?

+1

You are retiring early 50s, the financial planner is still working. So who is better at managing money? The only question you should ask is why are they still working.

+1


Also, you might ask if they knew or if they ever received any financial planning training from Bernie Madoff or Alan Stanford. If so, run away.

 

[LOL!]

We have some accounts at Fidelity, heard good things there. Talking to someone there is on my list as well. I'll have to research Vanguard to see if any advanatage of one over the other.

I have accounts at Fidelity among other places, but I would never ever ever use any of the people at Fidelity to give me advice. Sure, some of them may be OK, but then one reads a real horror story such as
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=178197
where the Fidelity advice certainly cost someone probably 6-figures in extra taxes.

 

[jazz4cash]

I understand that you don't have to take RMD until 70+, however with the "rule of 55", if you quit or leave your job at 55 or older you can take you 401K and convert it and set-up the IRA with RMD. Once you set up the RMD you have to draw until 59.5 or 5 years, which ever is later.

I think you are mixing some concepts that you should really get a handle on before you move forward....

The term RMD has nothing to do with the "rule of 55". The rule of 55 allows withdrawals from 401k under certain situations (as you describe), but it applies only to 401k, not to IRA. So, if you do a 401k to IRA rollover, you would no longer be able to use the "rule of 55". I do not think there are any restrictions on the amount or timing of distributions from a 401k using the rule of 55 exception.

You can get early distributions from an IRA without penalty under a 72t plan (also known as SEPP- Series of Equal Payments Plan). The SEPP is the one that requires you to draw for the longer of 5 yrs or age 59.5. There are limitations on the amount you can distribute from your IRA using SEPP.

I think I generally follow your desire to have access to both taxable and tax deferred savings, but as another poster suggested make sure you are not losing any benefits (such as the rule of 55 and/or access to a Stable Value Fund) if you do an IRA rollover. I am in a similar situation, myself.

 

[skibum]

The opportunity in the tax code available to those retiring in the year they turn 55, or older, is the ability to withdraw funds from the 401k of that company without penalty. I would consider this the "55 rule" you refer to, a critical component of my ER plans. Most 401K plans have this option as allowed in the tax code, you should confirm. The penalty free withdrawal WILL NOT be available if the proceeds are rolled over into an IRA, and do not apply to 401k funds from any prior employer. It may desirable to roll other 401k or IRA proceeds into the 401k plan from your final employer to access these funds at will. Another option to avoid early withdrawal penalties is under the 72t plan, which involves an RMD type calculation, and requires min 5 years of withdrawals. The penalty free 401k withdrawal provides much more flexibility and is an excellent option for ER. There is rarely any incentive for financial advisers to recommend this approach, most prefer to roll proceeds into and IRA they can manage for a fee.

Being ER'd with minimal regular income and the ability to draw on both taxable and tax deferred income provides some excellent tax savings opportunities. Sadly, there are few incentives or knowledgeable financial advisers to help with this. Typically, the optimal strategy is to convert tIRA to Roth IRA up to the top of the 15% tax bracket each year, or withdraw from tIRA/401k to this limit, or harvest capital gains. Another income ceiling to obtain ACA tax credits is typically slightly less than the top of the 15% bracket, (referred to as the ACA Cliff at 400% of the poverty level) and can provide additional tax savings.

After working for decades and paying taxes on steady income, it's difficult to grasp the tax saving opportunities in ER. There are many knowledgeable folks and posts here on the ER forum for these strategies. Perhaps some have found financial advisers or CPAs who can provide guidance like this for maximizing wealth in ER, I have not. I've spent the last year educating myself in preparation for ER. I encourage you to understand these strategies, and be sure any CFP or adviser would acknowledge (hopefully recommend) keeping 401k for penalty free access from 55- 59.5 (assuming the plan is not terrible), and provide Roth conversion projections similar to i-orp to minimize taxes and optimize wealth. The Boglehead post below opened my eyes to the new financial frontier of ER. Second link from Kitces illustrates the zero percent tax on qualified dividends and long term capital gains in the 15% bracket.

After you understand these concepts, the same strategies apply for the MAGI ceiling to receive ACA tax credits. If you find a professional who understands and will help execute these strategies for a reasonable cost, consider it. Otherwise, save the $15k annual cost and many thousands more in tax savings.

https://www.bogleheads.org/forum/viewtopic.php?t=87471

https://www.kitces.com/blog/underst...st-capital-gains-for-a-free-step-up-in-basis/

 

[bobandsherry]

I think you are mixing some concepts that you should really get a handle on before you move forward....

The term RMD has nothing to do with the "rule of 55". The rule of 55 allows withdrawals from 401k under certain situations (as you describe), but it applies only to 401k, not to IRA. So, if you do a 401k to IRA rollover, you would no longer be able to use the "rule of 55". I do not think there are any restrictions on the amount or timing of distributions from a 401k using the rule of 55 exception.

You can get early distributions from an IRA without penalty under a 72t plan (also known as SEPP- Series of Equal Payments Plan). The SEPP is the one that requires you to draw for the longer of 5 yrs or age 59.5. There are limitations on the amount you can distribute from your IRA using SEPP.

I think I generally follow your desire to have access to both taxable and tax deferred savings, but as another poster suggested make sure you are not losing any benefits (such as the rule of 55 and/or access to a Stable Value Fund) if you do an IRA rollover. I am in a similar situation, myself.

Yep, my bad it's SEPP under the 72t plan. So it's conversion of 401K to IRA that provides this ability.

Thanks

 

[bobandsherry]

The opportunity in the tax code available to those retiring in the year they turn 55, or older, is the ability to withdraw funds from the 401k of that company without penalty. I would consider this the "55 rule" you refer to, a critical component of my ER plans. Most 401K plans have this option as allowed in the tax code, you should confirm. The penalty free withdrawal WILL NOT be available if the proceeds are rolled over into an IRA, and do not apply to 401k funds from any prior employer. It may desirable to roll other 401k or IRA proceeds into the 401k plan from your final employer to access these funds at will. Another option to avoid early withdrawal penalties is under the 72t plan, which involves an RMD type calculation, and requires min 5 years of withdrawals. The penalty free 401k withdrawal provides much more flexibility and is an excellent option for ER. There is rarely any incentive for financial advisers to recommend this approach, most prefer to roll proceeds into and IRA they can manage for a fee.

Being ER'd with minimal regular income and the ability to draw on both taxable and tax deferred income provides some excellent tax savings opportunities. Sadly, there are few incentives or knowledgeable financial advisers to help with this. Typically, the optimal strategy is to convert tIRA to Roth IRA up to the top of the 15% tax bracket each year, or withdraw from tIRA/401k to this limit, or harvest capital gains. Another income ceiling to obtain ACA tax credits is typically slightly less than the top of the 15% bracket, (referred to as the ACA Cliff at 400% of the poverty level) and can provide additional tax savings.

After working for decades and paying taxes on steady income, it's difficult to grasp the tax saving opportunities in ER. There are many knowledgeable folks and posts here on the ER forum for these strategies. Perhaps some have found financial advisers or CPAs who can provide guidance like this for maximizing wealth in ER, I have not. I've spent the last year educating myself in preparation for ER. I encourage you to understand these strategies, and be sure any CFP or adviser would acknowledge (hopefully recommend) keeping 401k for penalty free access from 55- 59.5 (assuming the plan is not terrible), and provide Roth conversion projections similar to i-orp to minimize taxes and optimize wealth. The Boglehead post below opened my eyes to the new financial frontier of ER. Second link from Kitces illustrates the zero percent tax on qualified dividends and long term capital gains in the 15% bracket.

After you understand these concepts, the same strategies apply for the MAGI ceiling to receive ACA tax credits. If you find a professional who understands and will help execute these strategies for a reasonable cost, consider it. Otherwise, save the $15k annual cost and many thousands more in tax savings.

https://www.bogleheads.org/forum/viewtopic.php?t=87471

https://www.kitces.com/blog/underst...st-capital-gains-for-a-free-step-up-in-basis/

Thanks, this is exactly the strategy I was referring to. Walking this tightrope to get it done right, minimize costs and any penalties for incorrectly setting up this account, and all while keeping more $$ in my pocket is one of my goals. If CFP that I interview can't or won't address this it will be a quick interview with them. I'll check out the links as well.

 

[jazz4cash]

Yep, my bad it's SEPP under the 72t plan. So it's conversion of 401K to IRA that provides this ability.

Thanks

No!!!!

It's conversion of 401k to IRA that prevents this ability.

 

[robertf57]

No!!!!

It's conversion of 401k to IRA that prevents this ability.

Seems a bit of confusion remains:

1) IF THE PLAN ALLOWS, you can withdraw from the 401K of the employer you left at age 55. Carefully review the plan and talk to administrator if you plan on doing this! Not all plans have the same provisions.

2) You can SEPP (or 72t) out of an IRA as previously described.

First step is to review the 401k plan and speak with the administrator to understand the options in the plan. I concur with most everyone here that a CFP is generally unnecessary and adds costs.

 

[pb4uski]

If I can get enough knowledge from DIY I'm all for it. I believe I'm pretty well versed in finance, having my education in Accounting and Finance. I've been working for a large financial company for almost my entire careeer. I started doing my own taxes years ago after I found an error in the tax return that my preparer did.

I think my primary concerns are:
1. Is rollover of 401K to IRA a good decision
2. Should I set up my IRA then with RMD and if so how do I do this correctly
3. How should I structure this investments to provide the best benefits for medical coverage (e.g. subsidy)
4. Any ideas that I haven't thought of to invest the funds (mix of tax free and taxable investments) for now and the future.

I've found lots of great info here with lots of great users. Several months to go and hoping to pull it all together. What I guess the biggest unknown is knowing what I don't know or even considered.

Given your background you are a great candidate to read, learn, ask questions and DIY.

Unless you have sufficient taxable assets to cover your expenses from when you retire at 55 until you are 59 1/2 then the 401k is valuable as you can use it for penalty free withdrawals if you leave after you are 55. As robert suggests, you need to find out the details of what your 401k plan allows... some only allow one withdrawal a year, etc. Also, if your 401k has a stable value fund that pays a good interest rate then it would be valuable as SV funds are not available in an IRA. The other often mentioned reason to keep a 401k is that they are better insulated from creditors than an IRA depending on what state you live in but I don't find that reason particularly compelling as I have a large umbrella insurance policy.

Please refrain from using the term RMD as you are using it... you're just adding confusion. RMD (required minimum distributions) are where you are required to make certain withdrawals after you are 70 1/2. I think when you mention RMD you are really talking about SEPP (substantially equal periodic payments). While SEPPs are useful if you need them, they are complicated and restrictive so I would avoid them unless you have no other choice.

I found that the value of the health insurance subsidy was not compelling compared to the value of lower taxes by doing Roth conversions. Google "tax torpedo" in the google search box at the top of the page. I can convert about $60k a year and pay 8% now vs 25% if I didn't do any conversions so I save about $10k a year in taxes. The value of the subsidy if I did no Roth converisons is only about $5k a year... so I'm better off forgoing the subsidies. However, YMMV depending on your circumstances.

If you browse around you will find that other members have posted some of their details and asked for input and suggestions.

 

[samclem]

What many of us could use is some software that lets us optimize the very things discussed here:
- Roth conversions
- Spending order from each pot
-ACA subsidies
- SS claiming decisions

i-orp does some of it, but the individual aspects of each situation require a more detailed set of inputs, akin to the tax software many of is use. There's money to be made in a product like this, I think. I'd buy an add-on module for Taxcut that did this stuff.

 

[bobandsherry]

No!!!!

It's conversion of 401k to IRA that prevents this ability.

Hmmmm... My plan allows me to take my 401k balance with me. They provide option to transfer account to another investment or account. Given that I would think that I can then establish IRA with 72t, providing my IRA administrator provided that service. Is there something else I should verify first? Like I said earlier, not knowing what I don't know is the biggest unknown. Thanks!

 

[bobandsherry]

Seems a bit of confusion remains:

1) IF THE PLAN ALLOWS, you can withdraw from the 401K of the employer you left at age 55. Carefully review the plan and talk to administrator if you plan on doing this! Not all plans have the same provisions.

2) You can SEPP (or 72t) out of an IRA as previously described.

^^^^^ this is what I want to do and my company allows me either leave funds or one time transfer to another administrator.

I concur with most everyone here that a CFP is generally unnecessary and adds costs.

appreciate everyone's input.

 

[jazz4cash]

Hmmmm... My plan allows me to take my 401k balance with me. They provide option to transfer account to another investment or account. Given that I would think that I can then establish IRA with 72t, providing my IRA administrator provided that service. Is there something else I should verify first? Like I said earlier, not knowing what I don't know is the biggest unknown. Thanks!

I think the number one thing is to understand how much you need from the 401k funds. If the amount and timing of your needs are consistent with the limitations of a 72t plan, that could be a reasonable option. The age 55 exception does not limit you in terms of amount or timing as long as you meet the separation from employer guidelines.

As suggested by other posters, I was also under the belief that not all 401k plans have the Age 55 Exception but I have been unable to document whether it is optional for the Plan Administrator to offer it as a feature of the Plan. In fact, everything I have found implies that it IS a feature of 401k's in general.

Early 401k Distribution Options Including 72(t) - 401khelpcenter.com

You should really try to get your hands on a copy of your 401k Summary Plan Description (SPD) and familiarize yourself with the details of your plan. It should confirm if your plan offers the Age 55 Exception. Unfortunately, many of us have found that our Plan Administrators are not always up to speed on the nuances of the plan so it's up to us as DIY'ers to make it our business to understand our details.

An excellent resource for you would be 72t on the Net | SEPP, 72t, and 72q Distributions | IRC Section 72(t). They have a calculator that lets you quickly determine how much you can withdraw using 72t guidelines.

Regards

 

[RetireAge50]

I don't know...I usually try not to talk to myself.