Monday, December 9, 2013

Making life simpler in a complex financial world

If you are past the age of 70, you need to be familiar with the phrase “required minimum distributions.” What it means is that people over the age of 70 1/2 must withdraw a specified percentage of money out of their qualified investments, which, of course, refers to IRA, 401(k) and 403(b) accounts.

Qualified dollars are those monies that have been growing tax-deferred since the day of their deposit. Over a period of time, that could add up to a significant pile of cash. But when you reach 70 1/2, the free ride is over and Uncle Sam mandates that you must begin pulling the money out and start paying income tax on it.

Naturally, the rules are overly complex. But the penalty for non-compliance is as easy to understand as it is hard to take: A hefty 50 percent! Because of this severe penalty, my firm and other financial firms throughout the nation go to great lengths to make certain our clients are in compliance.

Overall, the tax code seems like it’s becoming more complex each and every year. In addition to the required minimum distributions, the Affordable Care Act will soon be adding more complexity to the tax code.

It’s not just the tax code that’s becoming increasingly complex. The entire world of investing seems to be getting more complicated with each passing year.

Meanwhile, regardless of age, investors are receiving multiple mailings and disclosures on virtually every investment in their portfolio. Clearly, we’ve gone from a society seeking information to a society with an overload of information. I think it’s safe to say that trying to keep on top of all the necessary tax and investment data is a real challenge.

So, let’s talk about simplification. First off, I think it’s an admirable goal, and as year-end approaches along with all its attendant statements, now is an opportune time to start simplifying your life for 2014.

By simplifying, I don’t mean to reduce or eliminate your investment diversification. For example, if you have ten IRA’s with ten different investment firms, you’re receiving ten reports and paying ten administrative fees. If you’re over 70 1/2, that’s an awful lot of calculating that needs to be done in order to make certain you’re in compliance with Uncle Sam.

A reasonable goal in 2014, then, would be to simplify. In all likelihood, you could consolidate those ten IRA’s into one or two. Your custodial fees would very likely be reduced, maybe even eliminated.

With the proper custodian, you can continue to diversify among several asset classes and, more important, dramatically reduce the volume of reports and tax forms in the years ahead.

My experience is that, once clients get deeper and deeper into their retirement years, they like simplified reports and minimal paperwork. A number of our clients actually have their mandatory distributions set up to be automatic each and every year.

That’s another smart way of keeping their investment world as simple as possible without sacrificing the integrity of their investment objectives. And that’s an objective for which we all should strive.

Will you be able to simplify and consolidate your financial world in 2014? I certainly hope so. But if you’re really serious about it, the time to start planning is now.

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