Winer Wealth Advisor

The Dangers of FREE, One-Size-Fits-All Financial Advice: Why It Could End Up Costing You More Than You Think!

2011-09-26T12:30:00.000-07:00

Every so often, I run across people who wonder why anyone would ever pay money to a financial advisor when there is so much financial advice available in books, magazines, on TV and radio, and on the internet for FREE. While there are many reasons, the most important are accuracy, customization and accountability.

There is so much financial information available on the internet, television and radio as well as in books and magazines that it's nearly impossible to determine what's accurate and appropriate for your individual needs and objectives. What's right for your next door neighbor, Dave Ramsey or Jim Cramer may not be right for you. Making financial decisions based on bad or outdated information or following advice that's inappropriate for your individual needs and objectives could be detrimental to your financial well being.

When an individual provides financial advice on TV, radio or in books, the fact that he or she is on television or in print implies that he or she is knowledgeable, credible and knows what's best for you. But more often than not, the advice promoted in the media is self-serving and solely intended to promote advisors, fund managers and financial institutions. When a mutual fund manager appears on TV, he's there to promote his fund and the securities in his portfolio, NOT to make YOU money. And when you buy shares of stocks he recommends and owns in his portfolio, you help propel shares of those stocks and his mutual fund higher. But if any of the stocks he recommends do poorly, you have no recourse and no one to blame but yourself. Some of the financial advisors who appeared regularly as experts on CNBC, CNN and Fox Business News have served (or are now serving) time in prison for illegal or unethical business practices.

How a Good Financial Advisor Can Help You

A good financial advisor can help you sift through the good, bad, timely and outdated financial advice from all sources, help you determine what's viable and appropriate and make recommendations to meet your individual needs and objectives. Equally important, if your financial advisor is a Registered Investment Advisor, he has a legal, fiduciary responsibility to place your interests ahead of his own, act in your best interest at all times and disclose any and all potential conflicts of interest before making any recommendations. He is also liable for the advice he provides, and that is important.

The Queen of FREE Financial Advice

Suze Orman is arguably the best known provider of FREE financial advice - - through her television and radio shows as well as appearances on CNBC, The Today Show, the national news, Oprah and other television shows. However, it's no accident that the "free" financial advice she provides has made Suze Orman millions through sales of her books, CDs and DVDs as well as the fees she receives for public appearances. She is especially popular with women.

Occasionally, I run into problems when the financial advice I'm providing conflicts with Suze's. In such instances, I am almost always fighting a losing battle because Suze is on TV, radio and in bookstores. As a result, people naturally assume that she is the financial expert and that her advice is always right. Unfortunately, that is NOT the case. The advice she offers in her books and television appearances is generic, one-size-fits-all advice (for which she has no liability) that may or may not be appropriate for your individual circumstances, needs or objectives. And if it's not, following her advice could have adverse, costly financial consequences.

Missing Information You Might Need to Know

In all the years I've been listening to Suze Orman or reading her books like The Road to Wealth (I like to know what she's telling her followers), I've never heard her tell individuals who own company stock in their retirement plans about the little-known strategy to convert their distributions from short to long-term gains--providing a huge tax savings. It's called NUA (net unrealized appreciation). If you own company stock in your retirement plan, working with an advisor who knows about NUA could save you anywhere from a few thousand to millions of dollars in taxes.

I've also never heard Suze Orman advise IRA owners about the dangers of naming a living trust as an IRA beneficiary or a non-spouse trying to do an inherited IRA rollover. That's because these issues are not as applicable to the general public, are too complex for her books and television appearances and most likely beyond her scope of knowledge. And while that may not be an issue for the majority of her followers, if you are someone who could benefit from working with an advisor who understands these complex planning issues and knows strategies to meet your individual needs, following generic, one-size-fits-all advice could cost you a fortune in missed opportunities or excess, unnecessary taxes.

In 2005, I was mentioned in the Wall Street Journal for having identified an oversight by two CPAs and saving the beneficiaries of an inherited IRA more than $700,000 in taxes. Their mistake was not taking advantage of a little-known tax deduction that's available on distributions from inherited IRAs that were subject to estate taxes. Once again, this little-known tax deduction (which saved these individuals $700,000 in taxes) is not something you'll find mentioned in any of Suze Orman's books, radio or TV appearances.

Suze Thinks Variable Annuities Are Always Bad. Suze Is Wrong.

For as long as I can remember, Suze Orman has told her followers that variable annuities are always bad because of their high fees and to avoid them at all costs (pun intended). Because she consistently fails to mention, analyze and evaluate the living benefits and death benefits available in most fixed and variable annuities and consider how they might benefit individuals in certain situations, she had done her followers a great disservice.

Two years ago, I recommended a variable annuity to an elderly client specifically because of its annually increasing death benefit. No matter how well or poorly the investments inside the annuity performed, my client's death benefit was guaranteed to increase by 7% every year for 10 years. Because she had no need for the money and was primarily concerned about guaranteeing a death benefit for her children, she loved the idea of investing in this particular annuity. And while I don't normally recommend annuities, in this case, it was the right investment for my client's individual objectives and risk tolerance. Had my client been a follower of Suze Orman, she would probably have resisted my recommendation and perhaps missed out on the benefits of investing in a financial product that offered exactly was she wanted and needed.

Annuity death benefits can also be beneficial in instances where the owner of an annuity dies while his or her account value is less than the value of their initial investment, perhaps during a bear market. In such instances, their beneficiary will receive a lump sum death benefit equal to at least what was initially invested (and sometimes more, if the death benefit was subject to an annual increase like my client's annuity). This potential benefit is always overlooked by Suze Orman and Dave Ramsey when they get on their soap boxes and go on their tirades against variable annuities.

Oops!! The Dangers of Following One-Size-Fits-All Advice Exposed

In the following video from CNBC, the dangers of following FREE, generic, one-size-fits-all financial advice are exposed when, after telling viewers how bad variable annuities are without exception, Suze Orman is confronted by a widow who received a $70,000 greater death benefit solely because her financial advisor advised her late husband to purchase a variable annuity.

In spite of the fact that it was almost as if she was set up by the producers at CNBC, I can't help but be impressed by Suze Orman's calm, cool reply. In the face of what can only be described as a public embarrassment, she states assertively: "When that happens, when there is a death benefit like that, in that case it makes sense" ... even though I just told you and everyone on national television that variable annuities are always bad and that their death benefit is expensive and unimportant.

Always remember that the individuals who provide financial advice on TV, radio or in books are not subject to any rules or regulations. First and foremost, they are entertainers who can say whatever they want without oversight by FINRA, the SEC or any other regulatory agency and without recourse. They know nothing about your individual financial situation, goals, risk tolerance or time horizon. And if their advice causes you to lose money or miss out on an opportunity to utilize a financial product or strategy better suited to your needs and objectives, you have no recourse. No matter where you get your FREE financial advice, you will always find a disclaimer that advises you to consult with your financial advisor before doing anything. And that is exactly what you should do.

The Federal Debt Ceiling: What Is It and Why Should You Care?

2011-07-27T13:32:00.000-07:00

Do you remember the good ol’ days?

Yes, we’re talking about the four-year period between 1998 and 2001 when the U.S. government pocketed a budget surplus of $559 billion, according to the Congressional Budget Office. By contrast, in the four years between 2007 and 2010, our government racked up a budget deficit of $3.3 trillion. That’s no misprint – it’s trillions of dollars!

The multi-trillion dollar deficits we’ve incurred in the last few years have maxed out the government’s credit limit.

Just like you and I have a limit on our credit cards, the government, by law, has a maximum amount it can borrow. This maximum amount it can borrow is called the debt ceiling.

The U.S. is one of the few countries where the government imposes a debt ceiling. As a result, if we continue to have annual budget deficits, then every few years, Congress will have to authorize an increase in the debt ceiling so the government can pay its ongoing bills. As you can imagine, this is not a vote Congress likes to make.

Currently, the government says we will hit our debt ceiling on August 2. If Congress does not act by then to raise it, some of the country’s bills may go unpaid.

If the government doesn’t pay its bills on time, it would be considered a “default.” And, just like humans, if the government stiffs its creditors, it will face consequences. Those consequences could include a reduction in the country’s credit rating and chaos in the financial markets.

This year, the vote to raise the debt ceiling became especially contentious partly because of the Tea Party’s influence. Some Tea Party politicians and others are trying to rein in government spending and, according to the New York Times, are using the debt ceiling issue as a way to make their stand.

As the debt ceiling drama plays out, there’s only one way to ensure we don’t have to worry about this issue again – start running budget surpluses and then return the excess tax money to the public!

All the political posturing and uncertainty over whether the debt ceiling will be raised, as well as the potential consequences of not raising it by August 2nd are having an adverse affect on the financial markets. If you would like to keep a close eye on what's happening in the financial markets, visit our Technical Market Commentary Blog.

Sources:

http://www.cbo.gov/ftpdocs/120xx/doc12039/HistoricalTables%5B1%5D.pdf

http://topics.nytimes.com/topics/reference/timestopics/subjects/n/national_debt_us/index.html

PEAK

Education Alert: California State hikes tuition by another 12%!

2011-07-13T08:33:00.000-07:00

The following article is a good reminder of why funding your children and grandchildren's education should be an important part of your overall financial plan...

California State hikes tuition by another 12% - Jul. 12, 2011

Ways to Tax Diversify Your Retirement Savings

2011-07-05T12:12:00.000-07:00

When you think about diversification, you probably focus on your mix of asset classes (i.e. stocks, bonds cash, real estate, etc.) and securities. But what you may be overlooking is the role taxes play in your diversification picture. And it's a pretty big one!

Tax diversification means investing for greater tax efficiency. By investing strategically in accounts with different tax treatments (i.e. tax-free, tax-deductible/ tax-deferred and taxable), you can minimize your tax obligations, keep more of your hard-earned money and build greater multigenerational wealth.

Investing with an eye on taxes is especially important today, considering the uncertainties we face regarding future tax rates. This article will show you ways to effectively incorporate tax diversification into your retirement and estate planning.

Pay the piper now, enjoy tax-free income later

Imagine: After years of working to save and invest, you finally have the opportunity to enjoy your money or put it to good use, and perhaps not even have to pay taxes on the income! Those could all be your options if you effectively utilize investments that allow you to take tax-free income, including:

Roth individual retirement accounts (IRAs)
Roth 401(k)s
Roth 403(b)s
Municipal bonds (in most cases)
Cash-value life insurance

The Roth IRA opportunity

If you're among those eligible to invest in Roth IRA accounts, here's how they work: You make contributions with after-tax dollars and the Roth IRA account can grow free from current taxation. In time, you can withdraw your money tax-free, as long as you meet certain conditions.

If you expect to be in a higher income tax bracket in retirement, investing in a Roth account may be a smart strategy. You won't get a tax break today, but you'll be able to withdraw money tax-free later on—when you may be in a higher tax bracket.

Roth IRAs also offer flexibility for legacy planning purposes. Unlike traditional IRAs and all other qualified plans, including Roth 401(k) and Roth 403(b) plans, Roth IRAs have no lifetime required minimum distributions (RMDs). That means you won't have to start withdrawing money when you reach age 70½. Instead, you can keep your money in the account for as long as you want. This feature opens up some powerful legacy planning opportunities. For example: Through a Roth IRA, you can transfer assets to your heirs income tax-free. Beginning in the year following your death, your non-spouse beneficiaries must take at least an annual tax-free RMD from the inherited Roth IRA based on their own life expectancy. The money that remains in the Roth IRA will continue to grow tax-free.

Here’s another benefit to the Roth IRA; As long as you have earned income, you can contribute to the Roth as long as you like — even after you've turned age 70½. This is not an option with traditional IRAs.

As I alluded to earlier, there are restrictions on who can invest in a Roth IRA. If your modified adjusted gross income (MAGI) is $122,000 or more (single filers), or $179,000 or more (joint filers), you can't contribute to a Roth IRA. You also can't contribute to a Roth IRA if you are married filing separately, lived with your spouse at any time during the year and had MAGI of $10,000 or more.

There are no income restrictions on contributing to a Roth 401(k) or a Roth 403(b), but your employer must offer the plan. If your plan allows, you may be able to rollover your vested elective deferrals in your 401(k) or 403(b) plan into a designated Roth account within the same plan.

The Roth IRA conversion is now available to everyone

Since 2010, anyone can convert to a Roth IRA, regardless of income or tax-filing status. Prior to 2010, anyone with a MAGI greater than $100,000 and married people filing separately were not allowed to convert.

With a Roth IRA conversion, you can take a different retirement account, such as a traditional IRA, and convert it to a Roth IRA. You will generally need to pay income tax on the pretax amount you convert. Once the tax is paid, your future distributions are tax-free, provided you meet certain requirements.

A Roth IRA conversion isn't appropriate for everyone, but our firm can help you determine whether or not this opportunity makes sense for you.

Municipal bonds: Tax-free income isn't limited to retirement accounts

Municipal bonds and municipal bond funds also offer a way to earn federally tax-free income. Similar to Treasury, corporate and other "traditional" bonds, municipal bonds and municipal bond funds make regular income distributions. But unlike the traditional options, income from tax-free municipal bonds is free from federal, and in some cases state, income tax. Also, interest on certain private activity bonds may be subject to alternative minimum tax (AMT). While interest from a municipal bond is usually tax free, it is important to note that if a sale of a municipal bond results in a capital gain, capital gains taxes will apply. This is different from a Roth IRA, which exempts all types of income from tax as long as certain conditions are met.

The higher your income-tax bracket, the more attractive tax-free municipal bonds may be for the income-oriented portion of your investment portfolio. But in certain situations, other alternatives may be a better fit. Also, note that some newer municipal bonds are designed to produce taxable interest, so be sure to understand how a particular bond works prior to investing.

Financial problems in many state and local governments and the likelihood of rising interest rates are causing us concerns about municipal bonds. We are encouraging our clients to avoid overweighting municipal bonds in their portfolios and to diversify among other tax-favored investment vehicles including...

Cash-value life insurance

As you look at your retirement strategy, whether or not you have a life insurance need, using cash-value life insurance can help you balance your financial plan. It is one of relatively few retirement savings vehicles that can provide you with a potential source of tax-free supplemental retirement income. If structured properly, a cash-value life insurance policy allows you the flexibility to take money as needed through withdrawals and loans, making access to accumulated cash value income tax-free. Keep in mind, however, that loans and withdrawals may permanently reduce the policy’s cash values and death benefit. In addition, with life insurance that’s properly acquired, the death benefit passes directly to your heirs income tax-free, avoiding the potentially costly and time consuming delays associated with probate. With proper planning some or all of the value of your life insurance policy can be excluded from your estate for estate tax purposes.

In addition to providing tax-free income, cash-value life insurance can also be an excellent retirement and wealth accumulation vehicle, with alternatives for both conservative and growth-oriented investors. Conservative investors generally prefer whole life insurance which builds cash value through the distribution of dividends at a guaranteed minimum rate and has limited growth potential. Investors seeking greater growth and higher rates of return generally prefer variable universal life (VUL) insurance which combines all of the features of cash-value life insurance with a wide selection of mutual funds (professionally managed portfolios of stocks, bonds, futures and commodities). With VUL, your growth potential can be unlimited and tax-free!

Because VUL provides many of the same benefits as a Roth IRA, it is a great investment alternative for high income or high net-worth individuals who do not qualify to contribute to a Roth IRA. And unlike the Roth, there is no limitation on contributions to a VUL policy. For that and many other reasons, we believe that VUL is ideally suited for the tax-free component of most investment portfolios, especially for high net-worth investors. However, proper risk management of the investments is critical and professional management is recommended.

We can help you determine which investments and strategies would be most appropriate and effective for your tax diversification needs and objectives.

How to leverage tax-deductible and tax-deferred options to lift today's tax burden

Stashing your money in tax-deductible and tax-deferred accounts can potentially provide two huge advantages:

It can reduce your taxable income and, therefore, how much you have to pay to the government; and
It can help accelerate the growth of your investment because of the compounding potential on the untaxed accumulating balance.

Tax-deductible and tax-deferred opportunities include:

Traditional 401(k)s
Traditional IRAs
Pension plans

Tax-deferred opportunities include:

Annuities
Cash-value life insurance policies

Traditional IRAs, 401(k)s and pension plans

In most cases, these options allow you to contribute pretax dollars and grow your balance tax-deferred until you start tapping your account. Depending on your income level and participation in an employer-sponsored retirement plan, your contribution to a traditional IRA may not be tax-deductible. Pension plans are funded by your employer, so your employer receives the deduction for the contribution, but the contributions grow tax-deferred.

Withdrawals taken prior to reaching age 59½ may result in a 10% IRS early withdrawal penalty. Special rules apply for distributions from qualified plans to persons separating from service after reaching age 55. Once you withdraw your money, it generally will be taxed as ordinary income. The exception: Any after-taxed contributions made to a traditional IRA or 401(k) will not be taxed again, although the account's earnings will be.

Tax-deductible and tax-deferred accounts help you avoid taxes now. If you expect your tax bracket in retirement to be lower than it is today, you'll likely benefit from tax-deductible and tax-deferred accounts because they make it possible for you to cut your taxes during your higher-income years. But there are many variables to consider. For example, your income in retirement may be higher than you anticipate tax rates may change or you may inherit money or life insurance proceeds. This is why it can be helpful to spread your money across various types of tax-advantaged accounts.

Annuities

The nice thing about annuities is they can provide growth and a guaranteed source of income. Fixed annuities provide guaranteed or indexed rates of interest while variable annuities offer unlimited growth potential in exchange for your investment being subject to market risk. While annuities held outside of a qualified retirement plan are not tax-deductible, they are tax-deferred; so their earnings can accumulate and compound untouched by federal, state or local income taxes until you begin making withdrawals, which is usually after retirement. Even though IRAs and other retirement plans are already tax-deferred, it may make sense to hold annuities in these plans based on features like death-benefit guarantees, annual step-ups and guaranteed lifetime income benefits. Those benefits and guarantees can be especially important to conservative investors who, without the combination of growth potential and guarantees annuities provide, would likely park their retirement savings in safe, low-yielding investments, put themselves in danger of underperforming inflation and risk outliving their retirement savings. Annuities that are not in IRAs also offer flexible withdrawal options and are not subject to RMD rules during life.

Disclosures: Annuities are long-term investment vehicles designed to help you through each stage of retirement —from accumulating your nest egg, to providing income in retirement, to leaving any remaining wealth to your heirs.

Annuity guarantees are based on the continued claims paying ability of the issuing company and do not apply to the performance of variable annuity subaccounts, which will vary with market conditions. In return for the benefits they provide, annuities carry a mortality and expense fee and subaccount management fees. Other fees may include optional rider fees, surrender charges and an annual contract charge.

Withdrawals that do not qualify for a waiver may be subject to a withdrawal charge. Withdrawals are subject to income taxes and withdrawals before age 59-1/2 may incur an IRS 10% early withdrawal penalty.

Cash-value life insurance revisited

As mentioned previously, a cash-value life insurance policy can potentially offer investment growth, a tax-free source of income in retirement and tax benefits while you save. With a cash-value life insurance policy, your earnings grow tax-deferred and without contribution limits based on your income. This can help you potentially build cash value more quickly. Even if you don’t need the insurance protection, a cash-value life insurance policy can be a good investment choice—especially if you don't qualify for other tax-advantaged savings options like a Roth IRA or company retirement plan.

Using cash-value life insurance as a retirement, tax-saving and wealth-transfer vehicle is extremely complex, as there are a lot of moving parts and variables to consider. But it can also be extremely beneficial, especially for high net-worth individuals and families. When properly incorporated into your retirement and estate plans, the innovative and effective use of cash-value life insurance could potentially save you a fortune in taxes during and after your life and create millions of dollars in tax-free multigenerational wealth.

Remember Uncle Sam: Taxable accounts play an important role, too

Compared with the tax savings offered by tax-deductible, tax-deferred and tax-free accounts, taxable accounts may not seem attractive. Nevertheless, taxable accounts can be a key part of a well-rounded mix, typically providing more flexibility in terms of the liquidity they offer to cover daily and short-term future expenses.

A few of the most frequently held investments in the taxable realm include:

Checking and savings accounts
Mutual funds
Stocks and bonds
Bank CDs

Let's say you're facing a large one-time expense, such as a vacation, a child's wedding or a major home repair. Instead of tapping your tax-deferred accounts, which could subject you to a large tax bill and potential tax penalties, you can use the money in your taxable accounts to cover the expense. Then your tax-deferred accounts can continue to grow undisturbed.

Diversify for long-term tax efficiency

Taxes could be one of your largest annual expenses in retirement. But by diversifying into multiple tax vehicles during your working years, you can promote greater tax efficiency in your later years. You'll maintain more control over how and when you are taxed while taking full advantage of market conditions, innovative investment vehicles and strategies and current tax legislation.

Clearly, tax diversification should be a key component of your financial foundation. But you will quickly find that it's a complex, dynamic and challenging undertaking. By strategically considering tax-free, tax-deductible/tax-deferred and taxable accounts, you'll have the flexibility to choose the most appropriate solution to address your individual needs and objectives.

If you would like help developing and implementing an effective tax-diversification strategy and coordinating it with your investment, insurance, tax, retirement and estate planning, please call us at (818) 673-1695. We would be happy to help you.

Disclosures: Accessing life insurance policy cash value through loans and surrenders may cause a permanent reduction of policy cash values and death benefit and negate any guarantees against lapse. The amount that can be borrowed or surrendered will be affected by the surrender charges applicable to the policy. Loans may be subject to interest charges. Although loans are generally not taxable, there may be tax consequences if the policy lapses or is surrendered with a loan (even as part of a 1035 exchange). It is possible that the amount of taxable income generated at the lapse or surrender of a policy with a loan may exceed the actual amount of cash received. Surrenders are generally taxable to the extent they exceed basis in the policy. If the policy is a modified endowment contract (MEC), pre-death distributions, including loans from the policy, are taxed on an income-first basis, and there may also be a 10% federal income tax penalty for taxable distributions prior to age 59½.

Before you purchase, be sure to ask your financial advisor about the life insurance policy’s features, benefits, risks and fees, and whether the life insurance is appropriate for you, based upon your financial situation and objectives.

Welcome to the Winer Wealth Advisor Blog

2011-06-28T06:35:00.001-07:00

The Demographics are changing.
We are approaching unprecedented times.
Are you prepared?

The demographics in our country are changing. Due to the aging of the “Baby Boomers,” there will soon be more demand on resources than can be supported by those remaining in the work force. The biggest casualties will likely be Social Security and Medicare. Do you know how this will affect your plans for retirement? It’s critical that you know.

Have you ever questioned the philosophy most CPAs and financial advisors profess—that you will be in a lower tax bracket when you retire? Could the opposite be true? Is it possible that you’re not employing the most effective, tax-efficient strategies or investment vehicles for your retirement savings?

Over the coming weeks and months, I will provide you useful, timely ideas and information to help you build, protect and preserve your wealth, minimize taxes and maximize your financial resources. I’ll show you innovative and effective ways to:

Plan for the changing demographics.
Incorporate certainty and guarantees into your retirement and wealth transfer planning
Rescue you from the ticking time-bomb of IRA’s, 401K’s & deferred annuities
Increase the safety & return on your assets, reducing risk
Create guaranteed sources of income you cannot outlive
Utilize provisions in the tax code to stretch the benefits from your IRA to provide a lifetime of income for yourself, your spouse and your children
Avoid critical, costly retirement mistakes
Minimize income and estate taxes
Use strategic leverage to increase the magnitude and longevity of your wealth
Implement little-known strategies to grow your wealth and generate retirement income tax-free
Fully enjoy your wealth and leave meaningful legacies for your heirs and favorite charities
Plan and protect against the rising costs of long-term care

I look forward to sharing these ideas and information with you. I hope you will find them useful and that they will help provide you life-long financial security and peace of mind. If you have questions about anything in this blog or other financial issues, feel free to contact me through my website at www.winerwealth.com or by calling (818) 673-1695.

Sincerely, Rich Winer