Pawleys Financial Vault

Several years ago, a client approached us and asked for help. She was worried that if something happened to her it would be difficult for her family to organize her affairs and close her estate. To further complicate her situation, she had only one child who lived out of state. In response to her needs, we created the Financial VaultTM, a comprehensive review and electronic archival of her complete financial and legal picture. We captured all of her sources of income, expenses, assets, liabilities, legal documents and other important information. Not only does the service provide peace of mind resulting from getting financially organized, but also from the fact that we have a complete duplicate inventory that is stored in secure, encrypted files. If home damage occurs from flood or fire, we have a complete record of everything.

So how does the Financial VaultTM process work in detail? The first step involves completing a full personal profit and loss statement (budget). We capture all sources of income such as earned income, pensions, social security, and rental income. We also capture expenses, including all monthly bills, insurance, real estate taxes, and any other costs. For items that occur semi-annually or annually, we adjust those amounts to a pro-rated monthly figure so we have a comprehensive budget that includes those one-off items. We collect and scan copies of all paper accounts for income and expenses, and inventory any online account information. The next step involves compiling a personal balance sheet (net worth statement) that captures all assets and liabilities. Assets include cash and investments, real estate, business interests, and personal property. Liabilities include any debts, outstanding loans or mortgages. Again, we complete a full snapshot and calculate personal net worth, in addition to taking inventory of all paper and online accounts. As part of the service, we also provide an overview that shows the asset allocation of all investment accounts. This ensures that the client is on track to meet their financial goals based on their situation and prevailing economic and market conditions. Basic asset titling is one of the most important aspects of estate planning, so we review how each account and real estate deed is titled in addition to making sure beneficiaries are current. Generally, we recommend using TOD (Transfer on Death) and POD (Payable on Death) features on investment and bank accounts. To complete the Financial VaultTM, we conduct a full inventory of important legal documents, and will refer clients to their attorney if needed. These documents normally include a Will, Living Will, Health Proxy, Trust Agreement and Power of Attorney. We list any important contacts and, if desired, last wishes information and letters.

Several clients have taken advantage of the Financial VaultTM. This year, we have added a new feature where, in addition to the personal p&l, balance sheet, asset allocation and legal inventory, clients receive two flash drives with encrypted copies of all the files and documents we have scanned. So now you have three protected sources – any paper files you have at home, the secure Financial VaultTM with Pawleys Investment Advisors that houses duplicate digital copies, and your own electronic safe. Please e-mail us today at to learn more. It’s time to fill your Financial VaultTM and give yourself peace of mind!

Company Stock in Your 401(k)

Why should you distribute shares of company stock from your 401(k) instead of rolling them into an IRA?  Many people are fortunate to own shares of company stock in their employer-sponsored retirement plans, including 401(k)’s.  Often, these shares have been acquired over many years, and constitute a substantial portion of the overall retirement account balance.  Many financial professionals will encourage employees to roll over company shares into an IRA, either during their working years as an in-service distribution, or after retirement.  You also have the option of distributing the shares out of your plan.  A good advisor will explain the tax implications related to company stock and work with your CPA to calculate how much you stand to gain or lose.  You should also review this option any time you change employers during your career, as the potential savings can be significant over the years!

Let’s say you have $300,000 worth of company stock in your 401(k) with an original cost, or basis, of $100,000.  The gain in value is referred to as net unrealized appreciation – $200,000 in this example.  If you roll the shares into an IRA, when you later sell them and take cash as a distribution it will be taxed as ordinary income.  If you distribute the shares from your 401(k) and continue to hold them, the NUA will not be taxed until you sell the shares, and will be taxed as a long-term capital gain.  In our example, let’s assume you are in the 28% tax bracket.  The potential tax on the $200,000 NUA if you roll the shares into an IRA is 28% of $200,000, or $56,000.  If you distribute the shares and hold them, the tax on the $200,000 NUA once you sell the shares is subject to the long-term capital gain rate of 15%, or $30,000.  In this example, we have created a savings of $26,000!  Once you roll company shares into an IRA there is no way to reverse it, and you lose the opportunity to utilize the NUA strategy.

The potential savings can be significant, especially if you have a substantial NUA and are in a very high tax bracket.  Although you are immediately taxed on the amount of the basis on the shares received, the deferred savings can be well worth it.  Any gain above and beyond the NUA amount will be treated as short-term or long-term depending on how long you hold the shares after the distribution.  Everyone’s situation is different and the tax code is always subject to change, so be sure to consult with your CPA.  As always, feel free to contact us with any questions!

© 2016 Pawleys Investment Advisors, LLC. All rights reserved.


Beware Rollovers!

Imagine this – after years of working for the same company, you have finally reached the time to retire.  You have worked hard to build your nest egg, and move your 401(k) balance to an IRA at an insurance company.  After a few years of mediocre performance in an annuity, you decide to move the IRA to one of the big, chain brokerage firms to be managed.  Suddenly,  you realize your new financial advisor neglected to ask one small question, and all of sudden the entire balance of your $1 million IRA becomes taxable.  Keep reading, because this happens too often.  Although asset management is my main “wheelhouse” skill, I maintain the College for Financial Planning CRPC designation (Chartered Retirement Planning Counselor).  This is the most important training I receive every two years.  The Department of Labor and the Internal Revenue Service have detailed, ever-changing, and yes, onerous, rules that must be followed regarding retirement plans and IRA’s.  When the rules are broken, there are stiff penalties and fines.  So what happened to your IRA?

In 2014, the IRS changed the rules which permit IRA rollovers.  In the past, the rule permitted one rollover per account.  Now, the IRS limits everyone to one rollover per year regardless of how many accounts you have.  Earlier in the year, you moved a different IRA from your local bank to one of the discount brokerage firms.  The bank mailed the check to you, and in turn you wrote a check to your new brokerage firm to be deposited into your new IRA.  Since your new advisor at the big chain failed to ask if you had rolled over any other accounts earlier in the year, your $1 million IRA no longer exists, and you now owe tax on $1 million.  Adding insult to injury, there may be penalties depending on your age.  There is no fix.  If you try to move the money into an IRA anyway, they will still get you (see below).  If your new advisor knew what he was doing, he could have avoided the situation by completing the transfer from the annuity company as a direct trustee-trustee transfer.  But in his excitement, he did not.  Many do-it-yourself investors who are unaware of the rules have fallen into the same trap.

Let’s no sugar-coat it, this is from the IRS website:

Tax consequences of the one-rollover-per-year limit

Beginning in 2015, if you receive a distribution from an IRA of previously untaxed amounts:

  • you must include the amounts in gross income if you made an IRA-to-IRA rollover in the preceding 12 months, and
  • you may be subject to the 10% early withdrawal tax on the amounts you include in gross income.

Additionally, if you pay the distributed amounts into another (or the same) IRA, the amounts may be:

At Pawleys Investment Advisors, we do not advocate rollovers, and encourage all clients to move assets as a direct “trustee-to-trustee” transfer.  As an example, if I moved my old IRA from the bank to my Charles Schwab IRA, I would ask the bank to make the check payable as follows: “Charles Schwab for benefit of Kathryn Schwartz IRA.”  I would also ask them to mail the check directly to Schwab.  Depending on the financial institution you may be required to obtain a Signature Guarantee, but it is worth the extra time and effort.  See the full rules below, and e-mail us with any questions!  Also, be sure you have a really great CPA to help you navigate these issues.

© 2015-2016 Pawleys Investment Advisors, LLC. All rights reserved.