retirement accounts

“Fiduciaries” and You
By Greg Leibman, Office Manager

You may have seen headlines in recent weeks about new financial regulations from the Department of Labor regarding retirement accounts.

Some parties affected by the rules are having a pretty sour reaction, but we are looking upon these changes a little more favorably—and believe they have been a long time coming.

A little background: our business is mostly managed on an advisory basis where we make investment decisions on clients’ behalf. That carries with it a fiduciary obligation to disclose and avoid possible conflicts of interest and to put clients’ interests ahead of our own. That’s what being a fiduciary is, upholding that standard.

We prefer this model for many reasons, not least because it aligns our goals with yours: growing your bucket is good for you and us.

So what’s new, now? The latest Department of Labor rule expands this fiduciary duty to almost everyone who services any retirement accounts, whether or not they meet the definition of an “investment advisor.” Now brokerage agents who sell on commission and have no ongoing obligations to clients now also must act in clients’ best interests any time they are dealing with retirement money.

You might be surprised to learn that some financial professionals were not required to act in their clients’ best interest before now. Obviously, fraud is fraud; agents were never legally allowed to lie about what they were selling.

But until now, in one-time brokerage relationships, there was nothing stopping agents from steering clients towards higher-commission products based solely on the peddler’s own benefit.

Owning stocks in individual companies is different than owning packaged investment products. Having equity ownership in companies we’re familiar with gives us transparency in our holdings and avoids adding a (usually hidden!) layer of “middleman” fees to investment product sponsors. That’s our preference, when it’s appropriate by client and situation.

The rules are in place to try and prevent agents from selling complex products with high commissions that are inappropriate for the client. Of course, regulations do have costs. Over the past 20 years, the amount of paperwork required to open accounts and do our jobs has more than doubled. Does practicing within the regulations take time and money? Yes. Will it always stop crooks? No.

But the spirit of the rules… Well, we do happen to believe that when you’re better off, we’re better off. So your best interest has to stay in the center.

Clients, if you have an advisory account with us, and are wondering what impact the new rules will have, the answer is: very little. This rule will bring more change in the world of commission-based agents, which is not what we are to our advisory clients.

When you do have any questions, we are always happy to talk.

Stock investing includes risks, including fluctuating prices and loss of principal. 

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Fiduciaries and You – 228Main.com Presents: The Best of Leibman Financial Services

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Your Money’s Career

Your money can work as long as you do—and beyond! But only if we put it to work.

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An Offer You Can’t Refuse
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When you save money in an IRA, you get a benefit in the form of a tax deduction that reduces your liability come tax time. Unfortunately, all good things must come to an end, and these taxes are merely deferred: when you take distributions from your IRA, it gets taxed as income.

To make sure that the IRS gets its share, IRA owners are required to take out a percentage of their account value each year starting at age 72. This “required minimum distribution” (RMD) starts out around 4% and slowly grows with age according to life expectancy tables.

Beneficiary IRAs are also subject to RMDs, regardless of age. (The IRS has a vested interest in seeing that they are drained. They designed IRAs to help taxpayers fund retirement, not to sock away generational wealth with impunity.)

There has been some confusion about RMD rules in recent years because of multiple rule changes, including the requirement being waived altogether for 2020. There are no signs that Congress intends to waive RMDs for a second year, so anyone who is 72 or older by the end of 2021 will need to take out an RMD by December 31.*

No matter when your birthday is, you get complete discretion on when to take out your RMD. Some prefer to put it off as long as possible to keep the money at work in the market; some would just as soon have it in their pockets at the start of the year. It is up to you.

One notable exception for IRA holders: Roth IRAs do not have any mandatory RMDs. A Roth is funded with after-tax money, so the IRS has no interest in how you take money out or leave it in. If you are still saving up and counting down days until retirement, this is one advantage of a Roth that you should take into consideration.

Clients, if you want to talk about your RMD, please call or email us.

*Those turning 72 this year get a one-time extension and can put off their very first RMD until Tax Day next year, though we generally do not recommend this: these folks will still need to take 2022’s RMD out by the end of next year, so doubling up on distributions will create a lumpy tax bill.

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A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Rule Change: IRA Required Distributions

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Legislation intended to ameliorate the effects of the COVID-19 pandemic changed the rules on IRA required minimum distributions.

The SECURE Act passed in December 2019 changed the beginning date for required distributions to the year after you turn 72. This applies to people who turn 70 and a half after last December 31st. Otherwise the old rule applies.

However, the CARES act signed in March wipes out any required minimum distribution for 2020. IRA owners may still take distributions at their option, but the Required Minimum Distribution does not apply. Taken together, these laws give IRA owners new flexibility.

Your personal situation may be affected by these changes. Your cash flow strategy, Roth conversion strategy, or tax strategy may need additional thought. Or you may want to revisit your retirement account investment strategy. Retirement accounts may be a significant portion of invested assets.

Bottom line: clients, if you would like to talk about how these changes affect you, please call or email us.