A Missed Savings Opportunity

By now, most people know they need to have money saved for emergencies. It is important to have three to six months of expenses in case something happens. Your emergency fund is a short-term goal. People also know that they need to be saving for retirement. Most understand that Social Security just won’t cover the expenses. For people 50 and under, retirement is usually a long-term goal.

What about intermediate-term goals? An intermediate-term goal could be a new car, a house, or a wonderful vacation. It could be anywhere from 2 years to 10 years down the road.  How do you save for this?

A simple way to save for intermediate-term goals is through a monthly investment into a mutual fund. Anytime you have a little extra money lying around, put it into that fund. There is no IRS penalty for taking this money out, but there could be capital gains taxes. But the important thing is you have access to money when you need it! It can also be a backup to your emergency fund!  Keep in mind that mutual funds are not guaranteed and may have a sales charge. You can lose your money, so it is important to pick a fund that meets your needs.

A few summers ago, both air conditioners in my office quit working. I own my own office building, so this was my problem. I am the landlord! Since I live and work in Las Vegas, this problem was a BIG problem. These were old units and it just didn’t make sense to repair them, so I replaced them at a cost of $11,000. This was $11,000 I wasn’t expecting to spend. I paid for the new air conditioners out of my emergency fund, but that left the emergency fund uncomfortably low. So I took $11,000 out of my intermediate-term fund and replenished my emergency fund.

The next big purchase I made was a sports car. It was time for my midlife crisis and I wanted something fun to drive. This is where my intermediate term fund came in. In my case, it didn’t pay for the whole car, but I was able to pay it completely off within one year. If I didn’t have that intermediate term fund, I would have car payments for years.

What kind of 2 to 10 year goals do you have? Do you want to travel somewhere? Buy a car? Remodel your house? Ask us how we can help you fund an intermediate term goal.

2014 Last Chance Financial Planning Checklist!

Take 3 minutes and review 8 key items

The end of the year is an ideal time to examine your financial health and update your financial plans. This is a list of important things to review that might make a difference in your year-end review and plans for next year.

Three minutes is all it takes to make sure you are on the right track. Call us if you have any questions.

Click here for the list.

Dealing with the Death of a Loved One

Dealing with the death of a loved one can be very difficult, both emotionally and organizationally. One of the first things you need to do is consult with an attorney. Dealing with all the IRAs, accounts, and government agencies can wait a bit.

We have created these three checklists to help you in your time of need.

Surviving Spouse's Checklist
Inheritor's Checklist
Executor's Checklist

If you have questions, please don't hesitate to contact our office.

Inheriting Money

Inheriting unexpected sums of money can be helpful in tight situations, beneficial to retirement portfolios, and even allow charitable giving. Unfortunately, though, too many people are short sighted and spend the money frivolously, extinguishing the gift within a year or two.

When my clients inherit money, I coach them to keep the person who left the money in mind as they choose how to use it. The gift probably came from a loved one who worked hard to save the money—we should spend it in a way that honors that person. Sometimes people heed this advice; sometimes they don’t.
I had a client leave $200,000 to her two twenty-something year old granddaughters. We discussed how Grandma saved the money throughout her life and how their decisions about how to use it should honor her memory. Both girls seemed to understand the idea.

Granddaughter A looked at the money as an opportunity. A single mother limited with only a high school education, she chose to use some of the money for tuition to become a dental hygienist. Would Grandma approve of this? Oh, yes.

Granddaughter B also saw the money as an opportunity. She was starting a new job and wanted a new car. Would Grandma approve? Maybe... but then the car needed new chrome wheels... and then she took a trip to Mexico... and her boyfriend needed some money. Pretty soon, it was all gone. Would Grandma approve? No.

Inheriting money can be a blessing. If the inheritor is mature enough to spend the money wisely, it can be a huge benefit. If the inheritor is a spendthrift, the money can be gone in a short period of time with little to show for it... and little to remember the person who toiled to give the gift. Choose to honor those who care enough to share their life's earnings with you.

How involved in your finances are you...really?

How much do you know about your finances? Does your spouse handle everything while you stick your head in the sand? Or, is it the opposite, where you handle everything and your spouse doesn’t know what's going on? Maybe both of you collaborate on the plan and details?

In my highly unscientific study of clients, this is about what I see:
Husband does it all: 50%
Wife does it all: 20%
Both work together: 30%

This estimate suggests one spouse has all the household finance knowledge in about 70% of cases. This isn’t good news. Why? Because in 99.9% of households, one spouse pre-deceases the other. If the one who knows the details goes first, the remaining spouse could be in for a huge challenge.

Some time ago, a couple came into my office and told me the husband was diagnosed with terminal cancer. He had a few years to live. This couple was in the first group—the husband handled everything. Even though this was horrible news, we took advantage of his remaining time and made sure she was up-to-date on their investment, bills, and income details. When he passed away, one thing she didn’t have to worry about was the financial side of the household.

Most of the time, unfortunately, the uninformed spouse doesn’t get the opportunity that this couple received. The surviving spouse may be dependent on a child or friend to help them understand.

So, how do you get more informed about your household finances? Ask questions. Get involved. Help pay bills. Attend meetings with your financial advisor. Ask questions of your financial advisor.

What if your spouse isn’t interested in your household finances? Get organized now! Call our office for a copy of our organizer brochure to guide you through listing all the information your spouse may need to deal with. Also, bring your spouse to meetings with your financial advisor and make sure your spouse is comfortable with your advisor.
I remember another couple where the husband handled most household financial duties. Unfortunately, he passed away leaving the duties to her. She didn’t attend many of the portfolio review meetings so didn’t feel as comfortable with us as her husband had. I watched her move all of their money into high-commission products sold to her by the son of a friend. It was an unfortunate situation.

I learned something from that second couple. Ever since then, I try hard to meet with both spouses. It is very important for both spouses to have a basic understanding of their accounts, planning processes, and reasoning behind the personal choices affecting savings. Call us today to make an appointment for you and your spouse, or to order our organizer to help put your finances in order.

Backdoor Roth IRAs: Potential Way for High Income Earners to Participate!

The traditional contribution ("front door") for Roth IRAs is currently not available for higher income earners. Married couples earning $191,000 or more and singles earning $129,000 or more in 2014 are still barred from contributing directly to Roth IRAs.

In 2010, Congress changed the rules and since then anyone can convert a traditional IRA to a Roth IRA. However, higher income earners are still ineligible to contribute to a Roth IRA.

A Backdoor Roth IRA is a strategy for some higher income earners to participate in Roth IRAs.  It is a way for higher income earners to put money into a traditional IRA and then roll that into a Roth IRA, getting all the benefits.  While this strategy sounds simple, there are several rules that you must know and follow to make sure you do not incur unintended tax consequences.  This is where working with a knowledgeable financial or tax professional can provide some great guidance and value.
One of the primary benefits of a Roth IRA is that any money contributed grows tax-free and is withdrawn without any further income taxation. In addition, unlike a traditional IRA, Roth IRAs have no required lifetime minimum distributions. Another benefit of a Roth IRA is it can be passed on to your heirs income tax free. This allows your funds to grow and compound tax free over many years.

How Does the Backdoor
Roth IRA Conversion Work?

The backdoor Roth conversion consists of two simple steps:
  1. You make a nondeductible contribution to your traditional IRA.
  2. Within a couple of days you convert this IRA into a Roth IRA (potentially paying little to no taxes on the conversion).

There's one big caveat: This strategy works best tax-wise for people who don't already have money in traditional IRAs. That's because in conversions, earnings and previously untaxed contributions in traditional IRAs are taxed—and that tax is figured based on all your traditional IRAs, even ones you aren't converting (Please read the section on the Pro Rata Rule).

For an investor who doesn't already hold any traditional IRAs, creating one and then quickly converting it into a Roth IRA will incur little or no tax, because after a short holding period there's likely to be little or no appreciation or interest earned in the account.  However, if you already have money in traditional deductible IRAs, you could face a far higher tax bill on the conversion (again, this is covered later in the section on the Pro Rata Rule).
If you choose to, you can contribute to a non-deductible IRA for 2014 (the maximum is $5,500 or $6,500 for those age 50 or older). Remember, you must contribute to your IRAs prior to the April 15 2015 tax deadline. This non-deductible IRA can then be used for your backdoor Roth IRA conversion (please call us prior to doing so because the rules for Roth conversions can be complicated).

Example of a Backdoor Roth IRA

Bill's Backdoor Roth IRA Conversion without Additional IRAs
Contribution to
Non- deductible traditional IRA
Convert to Roth IRA
Income Subject to Taxation

Bill, a high income earner decides on January 2nd to put $5,500 into a traditional IRA for himself and another $5,500 into a traditional IRA for his wife Mary. Bill's income is too high to be able to deduct these contributions from his taxes. So the next day, he converts the traditional IRAs to Roth IRAs completely tax-free. His income is too high for him to make a direct contribution into a Roth IRA, but there’s no income limit on conversions! Since Bill and Mary couldn’t deduct the contribution anyway, they might as well get the advantage of never paying taxes on that money again available through the Roth IRA.

Beware of the Pro Rata Rule for Roth Conversions

What is the Pro Rata rule for Roth conversions?

The Pro Rata rule for Roth conversions states that if you have any other deductible IRAs (i.e. a previous 401k that you’ve rolled over), the conversion of any contributions becomes a taxable event that you’ll need to pay taxes on upfront.

The Pro Rata rule for Roth conversions determines whether or not your conversion will be taxable! For taxation purposes, the IRS will look at your entire IRA holdings (even if they are in different accounts), not just the traditional IRA you are converting to a Roth IRA, and will determine what your tax bill will be based upon a ratio of IRA assets that have already been taxed to those IRA assets in total.

The IRS determines the tax on this conversion based on the value of all of your IRA assets. For example Jane, a high income earner, already has $94,500 in an IRA account, all of which has never been taxed. She decides on January 2nd to put $5,500 into a new traditional IRA. The next day she converts the new traditional non-deductible IRA to a Roth IRA. Jane’s income is too high for her to make a direct contribution into a Roth IRA, but there’s no income limit on conversions. Unlike Bill she has $94,500 in other IRAs (previously non-taxed), so her total IRA assets are now $100,000. When she converts $5,500 to a Roth IRA, the IRS pro-rates her tax basis on the previous taxation of her total IRA assets, therefore making this conversion 94.5% taxable ($94,500/100,000 = 94.5%).

Jane's Backdoor Roth IRA Conversion
Balance in All IRAs
Contribution to Non-deductible traditional IRA
Convert to Roth IRA
Income Subject to Taxation


So if you plan on using this backdoor IRA strategy, you want to be clear as to whether or not you have any other IRAs. As you can see, this can be a confusing area and this is where we can help.  If you are a high income earner we would be happy to review your situation to determine if this strategy is in your best interest.

Also, please remember that your spouse’s IRA is separate from yours.

Benefits of a Roth IRA

There are numerous benefits to converting to a Roth IRA. Please remember, it is important to review all of your retirement accounts before converting to a Roth IRA. Some benefits of a Roth IRA include;
  • Required minimum distributions are not obligatory until the participant’s death.
  • Withdrawals are tax free.
  • They pass onto your heirs income tax-free.
  • You can compound your investments in a tax-free fashion.

Am I a Candidate for a
Backdoor Roth IRA?

Backdoor Roth IRAs can be appropriate for investors who:

·         Only have retirement account through their jobs (i.e. 401k's) and want to increase their retirement savings in tax-advantaged accounts, but whose income is too high to qualify for standard Roth IRA contributions; and

·         Have the time and ability to wait for five years or until they are 59 ½ to avoid the 10% penalty on early withdrawals. (If you open and make contributions to a Roth IRA in the standard manner, i.e. not through conversion, you are not subject to this rule).

A Backdoor Roth IRA is probably not recommended if you:

·           Are over the age of 70½  and can no longer contribute to a traditional IRA.

·           Don’t want to contribute more than the maximum retirement limit through your workplace retirement account.

·           Already have money in a traditional IRA and because of the Pro Rata rule may end up in a non-tax advantageous position when converting to a Backdoor Roth IRA.

·           Plan or expect to withdraw the funds in the Roth IRA within the first five years of opening it. A Backdoor Roth is considered a conversion and not a contribution. Therefore, the funds will incur a 10% penalty if withdrawn within five years unless you are age 59 ½ or older.

·           Are in a high tax bracket now and expect to be in a lower tax bracket in the future.

·           Plan to relocate to a lower- or no- income tax state.

Converting to a Roth IRA also comes with another very unique advantage.  The IRS allows you a one-time opportunity to recharacterize or "undo" this conversion by October 15th of the following tax year. IRS publication 590 states that, "a recharacterization allows you to ‘undo’ or ‘reverse’ a rollover or conversion to a Roth IRA. To recharacterize, you generally instruct the trustee of the financial institution holding your Roth IRA to transfer the amount back to a traditional IRA (in a trustee-to-trustee or within the same trustee). If you do this by the due date for your tax return (including extensions), you can treat the contribution as made to the traditional IRA for that year (effectively ignoring the Roth IRA contribution)".  In the case of a Backdoor Roth IRA, you probably won’t think about recharacterizing. However, if you want to explore this option, we are here to help assist you, because like many of the other rules involved this can be complicated.


While Backdoor Roth IRAs can be beneficial to many investors, they aren’t for everyone. They come with their limitations and complications. There are precautions that need to be taken to reap the full benefits of any financial decision. This is an area where a highly informed financial advisor can help you make an educated and calculated decision. You should always consult with your financial advisor and tax professional to help avoid tax ramifications.