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How To Select A Financial Advisor: The Least You Should Know (Part 19 In eBook Series)

How To Select A Financial Advisor: The Least You Should Know (Part 19 In eBook Series)

Chapter 19: Retirement Accounts

Most of the information in this book regarding diversification, fees, and working with a fiduciary can be applied to retirement accounts, such as 401(k)s, 403(b)s and IRAs. The following brief discussion identifies a few other things to keep in mind.

For many, retirement accounts represent a very large portion of their investment portfolio. Deferred taxation, as well as generous company- matching opportunities through which to acquire company stock, make vehicles such as 401(k)s very attractive.
There are, however, many rules governing retirement accounts that you and your financial advisor should be aware of. For instance, the rules regarding required minimum distributions (RMDs):

1. What if your spouse passes away and you inherit their 401(k)?

You could elect to take the cash—the least attractive option because the entire amount is taxed immediately as ordinary income. Moreover, if you are under 59½, the distribution will be subject to a 10% penalty for premature withdrawal.

2. If the surviving spouse continues working, the rule requiring that RMDs begin at 70½ does not apply.

3. The age of both the deceased spouse as well as the surviving spouse will determine additional options that are available. For example, if the deceased spouse was under age 70½, and the surviving spouse is under age 59½, the surviving spouse is not required to take the RMDs until such time that the deceased spouse would have been required to take them. Also, when the surviving spouse reaches age 59½, the funds can be rolled over into his or her IRA.

4. Knowing your options is critical to good decision-making. You may even find it advantageous to disclaim the inherited account, opting to establish a bypass trust to receive the assets.
IRAs are sometimes used to purchase certain investment products such as variable annuities (VAs). In my opinion, the only reason to sell someone a VA in their IRA is to earn a hefty commission, often 5% or more. The VA already provides tax deferral, why put it in a tax-deferred account such as an IRA? Undoubtedly, you are already paying for the tax deferral feature when you purchase a variable annuity. Moreover, one of the few attractive features of a variable annuity is that—unlike IRAs—you are not required to take distributions at age 70½. VAs typically do not require distributions until much later—age 85 or 90, for instance. This allows your money to continue to earn tax-deferred income much longer. Purchasing a VA in your IRA destroys this benefit.

As always, periodically check your named beneficiaries for accuracy and identify all fees imposed upon plan participants. Obviously, the rate of withdrawal is critical. Generally, four percent is an acceptable level, but it depends on the circumstances. Depleting your balance too soon can be devastating. Consider the exhibit on the next page.
In the final section of the book, I offer specific steps that you as an investor can take immediately to gain better control over your financial future—whether you are selecting a financial advisor for the first time, working with your current financial advisor, or seeking a new advisor.

Have a question? Contact Ed Mahaffy.

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Ed Mahaffy

Our first priority is helping you take care of yourself and your family. We want to learn more about your personal situation, identify your dreams and goals, and understand your tolerance for risk. Long-term relationships that encourage open and honest communication have been the cornerstone of my foundation of success.

Our approach is cost-effective and tax-efficient. As an independent investment advisor, we can offer you a personalized financial strategy, not a generic investment program. Your individual portfolio will be based on your unique situation, your values, your preferences and your goals. It will be designed to account for change, in the markets and in your circumstances.

As your professional partner, we’ll work hard to earn your trust and confidence, and provide the advice and service you deserve. Send me a note regarding any questions you may have about any particular investment concepts or products. We’ll get back to you quickly with a thoughtful answer.

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You can reach me directly at or call 501.603.0406

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