Your Questions Answered – Health Savings Accounts and Powers of Attorney

Q. Jeff, I want to ask your opinion regarding Health Savings Accounts. On April 1st, the company I work for is changing our current Blue Cross health insurance to Guardian Insurance set up as a HRA. I am single and currently have a $500 deductible. Under the HRA, the deductible will be $2,000. Currently, the premium is split 50/50 between employer and employee. I pay $205.00 per month. Under the HRA it will still be split 50/50, but the employer is going to fund each employee's Personal Medical Fund up to $900. As I understand it, my responsibility will be $1,100 of deductible before any insurance coverage kicks in. We have not been given any rates for the HRA insurance, but I imagine it will be lower than the monthly $205.00. I am trying to decide if this is a "good" thing to change to or if I should obtain an individual policy of my own. I contacted my insurance agent and was quoted a price of $213.20 per month for similar insurance ($500 deductible). I assume a portion of the amounts I pay in to the "fund" would be tax deductible, but I am still not sure that a HRA is the right thing for me to do. A. A lot will depend on your health status and how much you use your insurance. If you’re healthy and don't take many medications, then the HRA could benefit you because the amount the company contributes to your account is yours and can grow from year to year. On the other hand, if there’s a good chance of using your coverage, then the HRA might be more expensive because the amount of deductible you’ll have to pay, although it sounds like the company is paying $900 toward your $1,100 deductible. Private insurance most likely will not cover any existing conditions and it’s very likely that you will see those premiums rise at a faster rate then those of the HRA/HAS. The days of company paid health plans are quickly coming to an end and employees will have to bear much more of the cost. This may help the overall situation in the long run because people may not seek medical care as often if they have to cover a portion of the cost. Companies are being forced to explore these alternatives to remain competitive in today’s global environment. Q. I was reading your estate planning article about a power of attorney (POA). I thought your spouse automatically had POA. Do I need to state that I want my husband to have POA? Can you name a secondary POA? We travel a lot and if something would happen to us both, I would want one of my children to have POA. I have just moved to Florida from up north, is my will still legal here? A. First, just because you are married does not mean that your spouse automatically serves as your POA. There are also two kinds of Powers of Attorney—one for assets and one for healthcare. A spouse CAN make medical decisions for you, but if you have a checking account or own property in your name only, there's nothing your spouse can do to touch it before or after you become incapacitated. Your spouse (or anyone else you desire) would need to be named as your Power of Attorney. And you can have multiple people mentioned who would serve in succession. For instance, your husband can be named as your primary attorney-in-fact, your child as secondary, etc. If your husband were unable or unwilling to serve as your attorney-in-fact when you became incapacitated, your child would then be able to. Your Will should still be legal even though it was written prior to moving to FL. Florida does have certain homestead exemption laws that your previous state may not have had. So even though your existing will is valid, it may be worth having a FL attorney review it and your situation to make sure there aren't any changes that could benefit you. I love to answer readers’ questions. Submit your question at www.guardingyourwealth.com/askjeff.htm. I’m in the enviable position of not having to garner new clients and I’d be glad to give you my unbiased opinion. Read answers to questions other readers have asked on the Q&A page at www.guardingyourwealth.com. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie serves clients nationwide using a proprietary money management system he's personally developed.

Where Do Investor’s Turn for Justice?

Who’s watching out for your interests, as an investor? If a car maker produces faulty brakes or a toy turns out to be a choking hazard, there are government agencies and commissions to protect the consumer. But when investors need justice, where do they turn? The answer may surprise you. There is recourse for investors who have been subject to outright fraud. What about investors who lose much of their life’s savings because of their advisor’s inaction? Here’s a true-life example. ‘Bob’ retires in 2000 and entrusts an advisor with his $750,000 retirement nest egg. The advisor assures Bob that he will watch and take action when needed. Three years later, Bob’s account is only worth $350,000 because his advisor failed to act. What recourse does Bob have? It used to be that investors could turn to the courts. Not any more. In 1987, the Supreme Court ruled that investors can be required to waive their right to sue in court in order to open a brokerage account. Many of the arbitration judges are industry insiders and even though 55% of the rulings have been in favor of investors, the awards are usually just a fraction of the actual loss. No wonder Wall Street firms prefer arbitration! Not all advisors operate under the same oversight or standards. Stockbrokers are federally regulated by the SEC and NASD while insurance agents are regulated by their state insurance commission. When it comes to making investment recommendations, both of these advisors operate under the ‘suitability standard’. This basically means that advice they offer has to be suitable for the investor. Unfortunately, this definition is a very broad one, and as long as they get you to sign the right paperwork, it doesn’t matter if the investment is really suitable for you or not. They’re off the hook. Bob (like all investors) signed paperwork not realizing that he was virtually relieving the advisor of any responsibility for his actions. Registered Investment Advisors (like myself) are regulated by the SEC or the states depending on how much money they manage. Regardless, we operate under a much higher standard, called ‘fiduciary responsibility’. We are legally bound to do what is in your best interest, even if it’s not in our own. There is a move to make all financial advisors subject to the fiduciary standard, but Wall Street firms are fighting it tooth and nail. Here is what you must do to protect your money. First and foremost, choose an advisor with fiduciary responsibility. If an advisor gets paid by commission or the investment is an insurance based product, that advisor is NOT held to the fiduciary standard. Second, don’t ever rush to make an investment decision. No matter what your advisor may tell you, there’s NO need to make a decision that day. That’s just a sales tactic to pressure you to act before you change your mind or go choose another advisor! Don’t feel pressured even when you have a deadline such as rolling over a retirement account. You can temporarily park your funds in an IRA money market account and take your time making the decision that’s best for you. Third, NEVER sign anything you haven’t read and understood. Forcing nervous investors to quickly sign confusing paperwork is what gets advisors off the hook for their actions. Take your unsigned paperwork with you and read it carefully. Take it to someone who has nothing to gain, such as an attorney or a Certified Financial Planner you pay by the hour. If you’re investing your life’s savings, isn’t it worth taking the time and small expense to make sure you’re doing the right thing? The bottom line? Investor beware. The responsibility of looking out for your interests lies on your shoulders. If you’d like a little help with that job, send me an email. But always be skeptical. Do your own research. I’m happy to help as I can. Email me at jeff@guardingyourwealth.com. I’m in the enviable position of not having to garner new clients and I’d be glad to give you my unbiased opinion. Read answers to questions other readers have asked on the Q&A page at www.guardingyourwealth.com. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie serves clients nationwide using a proprietary money management system he's personally developed.

Seniors Targets of Financial Charlatans

Seniors in your community may be targets of financial charlatans. I’ve received a number of disturbing reports recently from seniors about the abusive tactics of some advisors. Their actions are not only unethical, but they border on the criminal. You must be aware of these despicable tactics so you and your nest egg are protected. A charlatan is defined as one who attracts customers with deceptive tricks. They look for easy marks and quick profit. Equity Indexed Annuities have a high commission and a sales pitch that is enticing to risk-averse seniors, so they are often used by these shady advisors. Even though I am against Equity Indexed Annuities, I do not believe that everyone who sells them is a charlatan. Many advisors are trying to offer an investment that they believe is in their client’s best interest. There are a large number of advisors, though, who are unscrupulously taking advantage of their client’s trust. Warning 1: Any advisor who recommends 100% of your investable assets be placed in ANY investment or investment category is looking after their own interests, not yours. Beware of following any of their recommendations. For example, John (not his real name) is 80 years old and lives in a retirement community in south Texas. There are over 2,000 other retirees in his community and 5 similar communities next to it. Since seniors and retirees are the ones with money to invest, these communities are heavily targeted by advisors in search of a commission. These advisors start by offering free pizza and a seminar at the local community center. Who doesn’t like free food, especially when you’re living on a fixed income? Lots of folks enjoy the food and listen to the pitch. In John’s community, these charlatans then started going door-to-door pushing an investment they portray as a way to avoid income tax, avoid probate, and earn a safe, risk-free return. John, like his neighbors, was skeptical at first. It sounded too good to be true. The advisors were relentless. They kept showing up at his house, calling him on the phone and wooing him with the wonderful benefits he would enjoy. In the end, they convinced him he needed to invest ALL of his money into an annuity contract lasting 10 years. He sold stock he’d held for decades and invested that so he would pay less income tax. These charlatans used John’s fear of paying taxes and losing money in the market to trick him into a decision that he already regrets. They seemed so genuine. The more they talked the more confused John became. Surely any second thoughts he was having were just his fault. Warning 2: Never sign any paperwork without first reading it and taking the time to fully understand everything it says. If you are confused, seek a second opinion. John signed their paperwork—and wasn’t even aware of what he was signing. They didn’t give him time to read it and, not being a sophisticated investor, he wouldn’t have understood it if he had. The papers he signed are designed to protect the advisor from legal liability for their actions. Those papers place all the responsibility on the investor and are like a get-out-of-jail-free card for the advisor. The consequences of John’s decision are painful and difficult. By selling stocks he’d owned for years, he will now end up paying capital gains taxes he otherwise wouldn’t have had to. He is currently in the lowest tax bracket anyway. In the long run, he will end up paying more in taxes with the annuity, not less! Now John has very little access to his money. Even if he dies, it is likely his heirs will have to pay significant surrender penalties to get money out of the annuity. If John needs or wants his money several years down the road, there is a good chance he will get back less than he invested because of these penalties. This unethical behavior would not be tolerated by the SEC. But Equity Indexed Annuities aren’t regulated by the federal government. That lack of oversight opens the door for financial charlatans to take advantage of unsuspecting seniors. If you suspect you or someone you care about is being a target of such schemes, please contact me for free, unbiased advice on what you can do at jeff@guardingyourwealth.com. Mr. Voudrie is a Certified Financial Planner, nationally syndicated columnist and President of Legacy Planning Group, Inc. in Johnson City, TN. He can be reached toll-free at 1-877-827-1463.

Your Questions Answered - Can You Stretch a 401(k)?

A reader recently asked if his 401(k) could be rolled over, by his beneficiary, to a 'stretch' IRA after his death. Read on to discover an answer that will protect your beneficiaries from tens of thousands of dollars in unnecessary taxes and keep your gift to them alive for generations to come. Whether or not your beneficiary can rollover your 401(k) at your death (and subsequently stretch it) depends on who your beneficiary is and the terms associated with your company plan. Basically, you usually can’t stretch a 401(k) account directly, but if that money is rolled into an IRA, you can. This is a situation where the details matter. Let's assume for the sake of illustration that you have a wife and 3 children. If your spouse is the beneficiary, she can roll the money from your 401(k) to her own IRA. Assuming that she has named the 3 children as beneficiaries of her IRA, they would have the ability to stretch it at her death. (‘Stretching’ an IRA refers to the ability for a beneficiary to take distributions based on their life expectancy instead of all at once.) Ideally, she would divide the money into 3 IRAs and name one child as the beneficiary for each one. That allows each child to stretch the IRA over their life expectancy. If the 3 children are the beneficiaries of 1 IRA then it would be stretched based on the oldest beneficiary’s life expectancy. On the other hand, if your children are the beneficiaries of your 401(k) plan they may or may not be able to stretch it. Let me explain. The tax laws allow for beneficiaries to stretch out distributions, but most company retirement plans do not permit it. The reason is simple--the stretch can take place over decades. If the company allowed that, then they would be responsible for all the administration. There isn't any benefit to the company to do so while it exposes them to potential liability. Instead, most company plans will cash out the beneficiaries at the death of the employee. At best, the beneficiaries may be able to stretch it out over 5 years. Realize what this means. Let's say you have $600,000 in your 401(k). If your wife is the beneficiary, she can roll it to her own IRA and then when she dies, the children can stretch it. If a child is in their 50’s, that means that taxes can continue to be deferred (except for the annual required distribution) for almost 30 years. $200,000 can literally grow to millions of dollars over 30 years. If those children were the beneficiaries of your 401(k) instead and were cashed out at your death, they would not have the ability to roll that money to an IRA. They would have to pay taxes on all of that money in the year it was distributed. In our example, each of your three children would have to claim $200,000 in ordinary income that year! This would bump each child’s tax bracket and could result in 35% of it being lost in taxes. That’s a tax bill of $70,000 each, or a total of $210,000 in taxes on your $600,000 nest egg. Even if you have your wife as the primary beneficiary of your 401(k) and your children as the contingent beneficiaries, you are opening up the possibility of the children not being able to stretch distributions. If your wife passes away before you, or you both die in an accident, the 401(k) money would go to the children and most likely be distributed immediately. There really aren't any benefits to keeping your retirement money in a 401(k) after you retire, but several big disadvantages. All of this is easily avoided by simply rolling that money to your own IRA. Your investment options will be much greater, and so will your flexibility and control. I love to personally answer readers’ questions. If you’d like free, unbiased advice send your questions to jeff@guardingyourwealth.com. Read answers to questions other readers have asked on the Q&A page at www.guardingyourwealth.com. Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached toll-free at 1-877-827-1463 or at jeff@guardingyourwealth.com. [For more Free Financial Advice and information about 'stretch' IRA's read ‘How To Stretch Your IRA - Tax Free’ and ‘Q&A: Stretching An IRA’ in our Article Repository at http://www.guardingyourwealth.com/]

Knowing When You’re Financially Vulnerable

It’s hunting season out there, and unfortunately, you’re the target! The financial services industry is on the hunt for your account and they know when you are most likely to take their bait. Knowing when you are most vulnerable is the first step in keeping you and your nest egg from being snared. First, you are vulnerable to financial advisors when you retire and get the biggest check of your life. Suddenly you’re faced with the most important financial decision of your life. The security of your golden years will be determined by your choice of advisor and investment. Advisors know how emotionally difficult this time in your life can be. They also know it’s a chance to get their hands on $250,000, $500,000, $1 million or more. Commission-based advisors, depending on the investments they recommend, can ‘earn’ between $25,000 and $50,000 by simply convincing you to invest $500,000. Now you know why they are so serious about their hunting! Advisors are taught the two ways to motivate investors to take action are fear and greed. For those nearing or in retirement, fear is used. They try to convince you that unless you buy their hot new product, you could lose tens or hundreds of thousands of dollars and you won’t have enough income to make it through your golden years. Retirees feel surrounded by countless advisors, each wanting to bag your hard-earned savings. Many retirees think the advisors they talk to have the retiree’s best interest at heart. They don’t realize the tremendous, hidden conflicts of interest in the advisors’ recommendations. In all of the confusion, it’s easy for an investor to be overwhelmed and make a choice they will live to regret. I don’t want this to happen to you! The number one mistake retirees make is buying a high-commission annuity product. You don’t see the commission, what you do face are years and years of surrender penalties that can result in you getting back less than you invested. The advisor makes money regardless of whether you do and you are left holding the bag. And forget about service after the sale—the advisor will have moved on to bag the next trophy. Secondly, you’re most vulnerable when those long surrender charges or back-end loads expire. That’s when your money is once again up for grabs. Here come the hunters again. They won’t help you mange your money but they are meticulous about keeping track of when it is up for grabs. Advisors will bait you by explaining how their investment is better than your existing one--but it is all just an attempt to get the sale. If your existing penalty-free investment isn’t meeting your needs, why step back into the frying pan by allowing yourself to be talked into moving money to a different high-commission annuity product? Don’t take their bait. Third, you are vulnerable any time your money can be easily transferred to a new investment. The commission advisors make by taking clients from other advisors is second only to the money they make bagging a retirement distribution. They are trained to make your existing investments look bad so they can motivate you to make a change. This is why advisors sell products like annuities where they, in effect, get paid 7-10 years worth of commission up-front. They have the option of only receiving 1% per year (then the client doesn’t have any surrender penalties), but what happens if another advisor steals you away? Instead, they take the 6%-10% up-front commission option. That way, they aren’t financially at risk if you choose another advisor. Any time an advisor is recommending an investment with a surrender penalty, they are looking after their interests, not yours. Commission-based advisors get paid to bag new money or reinvest old money. Their working hours are spent uncovering the three times you are financially most vulnerable. Don’t be taken in by slick seminars and fear tactics. If you’re in or near retirement, have money coming due, surrender penalties ending, or you have investments that can be moved without fees, be aware. The hunters are lurking. Don’t become their prey. I love to answer reader’s questions. If you’d like free, unbiased advice send your questions to jeff@guardingyourwealth.com. Read answers to questions other readers have asked on the Q&A page at www.guardingyourwealth.com. Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached toll-free at 1-877-827-1463 or at jeff@guardingyourwealth.com.