Investing Archives - Legacy Wealth Advisors

Why Roth IRAs Are Awesome Investment Vehicles

A Roth IRA is an unassuming powerhouse that brings a lot to the investment table.

With tax-advantaged growth, they may play an essential role in developing a well-rounded retirement income strategy. But what else makes these accounts so special?

Below we’re reviewing the basics of Roth IRAs and how you can make the most of them throughout your lifetime.

What’s a Roth IRA?

With a traditional IRA, the money you contribute is tax-deductible (unless you earn above the IRS thresholds or are covered by a workplace retirement plan), making it effective for reducing your annual taxable income. Plus, the funds in the account grow tax-deferred. However, your withdrawals in retirement are subject to ordinary income tax.

A Roth IRA works the opposite way.

You contribute to a Roth IRA with after-tax dollars, which won’t lower your taxable income. The advantage of a Roth IRA is that money in the account grows tax-free, and eligible withdrawals are also tax-free.

With a Roth IRA, you choose to pay taxes now to avoid paying them later. This is a significant benefit to those who expect to move into a higher tax bracket later in life.

Tax-Free Distribution Requirements

To avoid penalties when taking distributions, the account must be open for at least five years, and you must be 59.5 or older. You could face tax penalties if you don’t meet either of these requirements.

However, there are a few exemptions. You can withdraw from your Roth IRA penalty-free if you:

¹

Have a qualifying disability
Use the withdrawals to pay for qualifying higher ed costs
Are purchasing your first home
Use the withdrawals to pay for medical expenses that exceed 7.5% of your AGI

4 Big Reasons Why Roth IRAs Are Useful

Here are a few reasons why Roth IRAs may make an effective addition to your retirement income lineup.

Reason #1: You Can Withdraw Contributions At Any Time

With most retirement savings accounts, you can’t touch the funds without penalty unless you meet the age requirements.

What’s special about a Roth IRA is that you can withdraw the contributions you’ve made to the account at any point. Note that you cannot touch the earnings without incurring a tax penalty. This makes it especially important to track how much you contribute to your Roth IRA yearly.

Reason #2: Distributions in Retirement Are Tax-Free

Tax planning is critical for retirees, and amplifying your tax-free retirement income bucket gives you more freedom and flexibility in retirement. If you have a higher-income year, maybe with more realized gains or the sale of a home, drawing from that tax-free bucket supplements your income while keeping taxes at bay.

Remember, creating a tax-efficient plan for your retirement income helps extend the life of your investments.

Reason #3: Roth IRAs Don’t Have RMDs

Roth IRAs are the only type of retirement account that doesn’t have required minimum distributions (RMDs).

For traditional IRAs and 401(k)s, the IRS determines a set amount that account holders must withdraw each year—the formula considers the account balance and life expectancy. Depending on your birth year, your RMDs may begin the year you turn 73 or 75.

Since the funds in these accounts are tax-deferred, RMDs are subject to ordinary income tax. But with a Roth IRA, you don’t have to worry about RMDs—you can withdraw your funds in retirement when you need to.

Reason #4: They Make a Great Addition to Your Estate Plan

If you’re looking for a tax-efficient way to pass money to your loved ones, look no further than a Roth IRA.

Distributions from an inherited Roth IRA remain tax-free, and spouse beneficiaries can hold onto the account for as long as they like. If a non-spouse beneficiary inherits the account, they will need to withdraw all funds from the account within 10 years unless they are:

Disabled or chronically ill
Under the age of 18
Less than 10 years younger than the original account owner

But, Not Everyone Can Directly Contribute to a Roth IRA

For 2024, the total contribution limits for all of your Traditional IRAs and Roth IRAs are $7,000 per person, or $8,000 per person over the age of 50.

Roth IRAs do have income limits. If your modified adjusted gross income falls within the income phase-out range, you’re eligible to contribute a lesser amount. If you earn above the phase-out ceiling limit, you are not eligible to contribute at all.

For 2024, the phase-out ranges are:

Single taxpayers and heads of household: $146,000 to $160,999
Married, filing jointly: $230,000 to $239,999
Married, filing separately (if you lived with your spouse at anytime during the year):
$0 to $9,999

How to Bypass Roth IRA Income Limits

There are ways for high earners to bypass Roth IRA income limits.

A backdoor Roth IRA and mega backdoor Roth IRA involve contributing to a traditional IRA or 401(k) before converting the funds into a Roth account. These can be fairly complex and may increase your tax liability in the year you make the conversion, so consult with a tax professional and financial advisor first.

Another option is to do an in-service rollover from your 401(k) to a Roth IRA. Not all plan providers allow in-service rollovers, however. Consult with your HR department or plan sponsor to determine if this is a viable option.

Make Your Roth IRA Work For You

Roth IRAs are effective tools for building wealth and growing your tax-free retirement income bucket.

In most cases, it makes sense to contribute to a Roth account when you’re in a lower income tax bracket than you anticipate being in during retirement. Or, if you believe taxes overall will increase by the time you retire, paying them sooner rather than later makes a lot of sense.

As you continue saving for retirement, don’t hesitate to reach out to our team. We’re here to help address all areas of your wealth, including your retirement savings strategies.

^Sources:

¹^{Publication 590-B (2023), Distributions from Individual Retirement Arrangements (IRAs)}

Disclaimer:

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted.

All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

July 1, 2022/0 Comments/by Greg Carrico

Investing

Are Bonds Still Good Investments?

High inflation impacts all areas of life, from filling up at the pump to grabbing groceries from the store. Inflation is at 8.5% over the past 12 months, the highest level in over 40 years. While higher prices are an immediate sign of the times, inflation also impacts your purchasing power and investments.

Given the current economic situation, does it still make sense to invest in fixed-income vehicles like bonds? Many people use fixed-income securities to provide lower risk, but are they too conservative for the current market?

Let’s see.

What’s a Bond?

A bond is a debt security. When you purchase a bond, you give the company or government you bought it from a loan. In return, they commit to paying back the loan with interest—sounds a lot like an IOU. The institutions use the money to fund various projects.

Bonds are a type of fixed income because, in most cases, the issuer pays the investor a set interest rate over a predetermined period. However, this is not always the case, as some bonds offer variable rates. In that case, the interest rate you receive will vary.

Many people think about bonds as a “safer” investment than stocks for several strong reasons.

Their value doesn’t fluctuate as much as stocks.
Bonds offer guaranteed returns (subject to the financial health of the issuing company or institution).
Investing in them brings diversification to your portfolio

Why Is Inflation Impacting Bonds?

Fixed-income securities like bonds can play an essential role in an investor’s portfolio because they provide a reliable and stable income stream. That reliability, however, also makes them prone to losing their purchasing power with accelerating inflation.

Here’s an example:

Inflation is rising, but interest rates remain the same. If you have a five-year bond that pays out $100 in interest every month, the amount of money you receive doesn’t change. But the value of that $100 continues to decrease over time because of inflation.

The rate of interest typically remains the same on most bonds until they mature. The longer the bond takes to mature, the more future purchasing power you’re losing in a high-inflation environment.

Think of it this way: Bonds and interest rates have an inverse relationship: bond prices go down when interest rates go up, and vice versa.

Common Types of Bonds

Not all bonds are created equal. Some common types include U.S. Treasury bonds, savings bonds, I bonds, municipal bonds, and corporate bonds.

U.S. Treasury Bonds

U.S. Treasury bonds are backed by the federal government. They tend to be the safest types of bonds because they have the full faith and credit of the government behind them, but they often offer the lowest returns.

Savings Bonds & I Bonds

Many professionals are considering I bonds as a good tool for hedging inflation. I bonds are adjusted for inflation every six months and offer two types of payments: a fixed payment for 30 years and a variable payment adjusted for inflation.

I bonds have become increasingly popular with the current inflation acceleration. Over $11 billion in I bonds has been sold over the past six months, compared to around $1.2 billion in 2020 and 2021 over the same period.¹

Municipal Bonds

Municipal bonds, also known as “munis,” are issued by local government entities like the state, city, or county. The money raised by munis typically goes back into the community, like paving roads, building schools, or other projects that may benefit the public.

A significant benefit of municipal bonds is that they are typically exempt from federal income tax. Depending on your location, they may be exempt from state or local taxes as well.

Corporate Bonds

Just as you can buy stock in companies, you can also purchase corporate bonds. Unlike stocks, these bonds do not give you equity in the company. So the company’s profitability has no bearing on how much your bond earns in interest.

The upside? When the company’s performance is poor, and stock prices drop, your rates won’t be impacted.

The downside? When things are going well, and stock prices soar, you won’t benefit from the upswing.

Corporate bonds make up a significant portion of the bond market, but they tend to be the riskiest type of bonds. For example, if a company goes under, it may default on its bonds.

Can Bonds Bring Value to Your Portfolio in 2022?

Stocks and bonds tend to react differently to market conditions. In general, bonds can act as a buffer against volatility in stocks. They help create a diversified portfolio, which is imperative for long-term financial success.

Even amidst rising inflation, bonds can help mitigate risk, especially for those nearing retirement. They add stability to your portfolio and offer a regular stream of income.

3 Bond Strategies to Consider

Here are three bond strategies to consider as you consider incorporating bonds into your portfolio.

Buy Individual Bonds

You can build the fixed-income portion of your portfolio one piece at a time, buying each bond individually.

Invest in Bond Funds (ETFs)

Think of bond funds as the fixed-income version of stock mutual funds. Bond funds, or Bond ETFs, are a pooled investment vehicle that invests in various issuers, including U.S. Treasury bonds, corporate bonds, and munis.

Build a Bond Ladder

A bond ladder strategy consists of multiple bonds that mature at regularly spaced intervals. As one bond reaches maturity, the investments roll over. This strategy creates equally spaced maturities and can help investors with the goal to attain higher average yields.

Are Bonds Right For You?

With today’s high inflation and low-interest rates, many investors question whether bonds are still the right move to add more stability to their portfolios. The answer depends on your unique circumstances, including timeline toward retirement, tolerance for risk, long-term goals, and more.

At Legacy Wealth Advisors, we help clients develop tailored portfolio strategies to help weather the market volatility and hedge inflation. Feel free to reach out to our team to learn more about what we can do for you.

Sources:

1What Are I Bonds? Everything You Need to Know to Earn Nearly 10% Interest

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted.

All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

June 1, 2022/0 Comments/by Greg Carrico

Investing

How (And Why) To Keep Investing During Turbulent Markets

Investors are facing several concerns right now, and many have impacted the markets—geopolitical unrest, record-high inflation, supply chain issues, and the continuing complications with Covid-19 variants, ebbs, and flows.

When market volatility arises, it may go against your gut to stay invested. Why keep your money in something that’s losing?

But the truth is, the majority of investors can actually benefit from keeping their money in the markets during a downturn—at least when you analyze the history. According to Investopedia, since its inception in 1957 through 2021, the S&P 500 has returned an average of 10.5%!

Below we’ve identified a few reasons why we believe it’s essential to think long-term and how to manage your portfolio during market downturns responsibly.

The Importance of Long-Term Investing

Investing is about playing the long game. The more time your money spends invested, the more likely you will earn interest and grow your net worth.

Unfortunately, times of market volatility or downturn can make it challenging to stay focused on the long-term benefits. When you see your portfolio’s value take a nosedive, human nature takes over, and many investors’ immediate instinct is to pull out and stop the bleeding.

But even though downturns may hurt at the moment, the sting is only temporary because markets trend up over the long run.

Take the S&P 500 as an example. Since 2000, we’ve seen times of severe market volatility—the dot com bubble burst in 2001, the housing market crisis in 2008, and, most recently, the onset of Covid-19 in 2020.

From February 19, 2020, to March 23, 2020, the S&P 500 declined by about 34%. But, as hindsight has shown us, it bounced back almost as quickly as it dropped.

In fact, if you invested $100 in the S&P in 2000, it would be worth about $483 today. Markets drop in reaction to what’s happening globally, but the long-term data shows that the value continues to grow.

How to Manage Market Turbulence

Market turbulence can actually be a solid opportunity for investors. When the market goes down, prices drop, allowing savvy investors to buy shares “on-sale” and grow their portfolios.

Of course, for those looking to sell, the drop in prices isn’t ideal, and the first whisper of doubt (or downturn) may make investors nervous. At this moment, some investors decide to sell and walk away, even if that means taking a massive loss, not only in current gains and taxes but also in future growth.

Understanding Future Growth

Getting out of the market during a downturn may make you feel better, knowing the value of your portfolio won’t sink any lower. The problem is that you’ve now prevented your portfolio from taking advantage of potential future growth.

A market impact study by JPMorgan crystalizes this idea. Their team compared an initial $10,000 investment return over 20 years. Investors that stayed in the market the entire time saw a 6.06% return. But those who took money out of the market and missed its 10 best-performing days only saw a 2.44% return.

This research also highlighted that the market’s best days closely follow the worst ones, so pulling all of your money (or even some of it) out of the markets on its worst days could be missing out on its best just a day or so later.

How Long Market Downturns Tend To Last

Plus, bear markets are typically shorter than bull markets. On average, a bear market lasts a little over 9.5 months, whereas a bull market runs for over 2.5 years!

Remember, historically, market downturns end eventually. If you let your money ride it out, you’ll likely see prices start to rise again.

For those nearing retirement, we understand that you may not have time on your side to ride out a market downturn. If that’s the case, we recommend working with an advisor to address your immediate income needs and discuss your options.

Understanding Your Biases

There are few things more personal than your money. After working hard to build a nest egg over the last several decades, it can be tough to watch the numbers sink during a market downturn. Times of turbulence can be scary, and they leave investors wondering if they should pull out quickly or try to weather the storm.

The problem is, it’s nearly impossible to make unbiased decisions regarding your own money. Whether you realize it or not, your judgment can be skewed by what you’re reading online, hearing from friends or family, and watching on the news. Instead of focusing on long-term growth, these influences may have you shaken up over short-term downturns.

The good news is that working with an advisor can be an effective way to remove emotion from the decision-making process. An advisor acts as your sounding board to help you better understand your biases. Knowing what triggers you or why you feel a certain way about your money is an essential first step in overcoming them.

A financial advisor can help you drown out the noise while putting the focus back on your long-term plan. During times of market volatility, they will work with you to minimize risk in your portfolio and take advantage of opportunities during market dips.

At Legacy Wealth Advisors, we don’t make decisions based on gut feelings or trending news. We take an evidence-based approach to managing your investments, meaning our choices are based on data, historical precedent, and expertise. Our software also provides real-time projections, which can give a more accurate assessment of your portfolio’s long-term value and how it translates to income in retirement.

Investing with Legacy Wealth Advisors

When the markets start turning, investors may become fearful and rash. Before making any significant moves to your portfolio, we urge you to get in touch with our team.

We’d be happy to discuss your long-term goals and tolerance for risk, as these should be the primary influences on your portfolio.

May 5, 2022/0 Comments/by Greg Carrico

Investing, Retirement

Should An Annuity Ever Have A Place In Your Retirement Plan?

As you continue building your retirement income strategy, you’ve likely come across annuities.

A neighbor may have recommended them, or maybe an insurance agent sent a letter advertising their offerings, or perhaps you saw a too-good-to-be-true ad on TV. So what exactly are annuities?

Annuities are financial products that can provide guaranteed income in retirement, but there’s more to them than meets the eye.

If you’re considering adding an annuity to your retirement plan, here are a few considerations to make first.

What Is an Annuity?

Simply, annuities are insurance products.

Purchasing an annuity creates a contract between you and an insurance company. You agree to pay a specific amount to the company, and they guarantee a set amount back in return.

When purchasing an annuity, you can make a lump-sum payment to the insurance company or make payments over time. Similarly, you can either receive a lump sum payment from the insurance company or a series of regular payments. You can also choose to receive money immediately or later, depending on how your annuity is established.

The idea of an annuity is to provide retirees with a fixed stream of income. It’s an alluring offer—steady income in a world where turbulent markets, low-interest rates, and high inflation seem to be the mainstay. But annuities are complex vehicles with a significant amount of fine print—let’s get reading.

Types of Annuities

There are three common types of annuities for individuals to choose from:

Fixed annuity
Variable annuity
Indexed annuity

Fixed Annuity

If you purchased a fixed annuity, the insurance company offers you a minimum rate of interest on the annuity and a predetermined amount of recurring payments. State insurance commissioners oversee and regulate fixed annuities.

Variable Annuity

There’s more flexibility in a variable annuity, as the company you purchase it from will allow you to direct your payments to different investment vehicles. The most common option is a mutual fund.

Because there’s flexibility in where you invest your money, your payout, too, will vary. It will depend on how much money you put in, your rate of return on the investments, and any associated expenses. The SEC regulates this type of annuity.

Indexed Annuity

An indexed annuity acts almost like a hybrid between fixed and variable, meaning it combines common features of insurance products and securities.

The idea is that the insurance company you purchase your annuity from will provide you payouts with a return based on the stock market index, like the S&P 500. In a fixed index annuity, you remain protected from market volatility while still benefiting from market upswings.

Just like fixed annuities, state insurance commissioners regulate indexed annuities.

Pros of Annuities

People choose to purchase annuities primarily for these three reasons:

Regular payments over time
Death benefits
Tax-deferred growth

Let’s take a closer look at each potential benefit.

Regular Payments Over Time

Perhaps the most consistent fear about retirement is running out of money.

It’s challenging to structure a retirement income and spending plan that will sustain you for the rest of your life, and a guaranteed income stream can be a great comfort in that department.

When you purchase an annuity, your provider establishes a set schedule of payments to be made over a specific period. Doing so creates long-term, stable income that helps bring peace of mind to individuals and couples during retirement.

The payout period may be over the remaining lifetime of the annuity holder or even over the lifetime of their spouse, or other designated beneficiary, meaning that annuities could also be part of your estate plan.

Death Benefits

Should you die before you begin receiving payments, your beneficiary will still be able to benefit from monthly payouts from your annuity.

Tax-Deferred Growth

Any growth due to returns earned from your annuity isn’t taxed until you begin receiving payments. This perk allows you to save money over time without paying taxes on the growth until you make withdrawals.

Cons of Annuities

While guaranteed income in retirement is appealing, there are some significant considerations to make before purchasing an annuity.

A few common concerns include:

Fees and commissions
Lack of liquidity
Conservative returns

Fees and Commissions

Annuities come with a cost—often a high cost.

And for some, the cost of added fees and commissions makes them a less-than-desirable retirement income option. You can expect different annuity types to come with different price tags.

The more complex, the more expensive the product is likely to be.

Lack of Liquidity

Once you’ve put your money into an annuitized contract, you’ve made a long-term commitment that can be very difficult and costly (if even possible) to get out of.

For younger couples who have their peak earning years still ahead, it may not make financial sense to tie up so much of their money in this long-term financial product, especially if they have short-term goals like buying a home or paying for a child’s education.

Conservative Returns

Again, an annuity offers steady, guaranteed income. With that said, it’s a conservative investment option. This can make it appealing for those approaching retirement who don’t have time on their side to ride out potential market volatility. But for a younger couple, these more minimal returns would almost surely be an unnecessarily conservative option.

Legacy Wealth And Annuities

Financial advisors tend to have mixed reactions to annuities.

Our Legacy Wealth advisors understand that they can be a good fit for some, but their cost is often a significant deterrent. We tend to see annuities oversold by other advisors, even when a better-suited option may be available for their clients.

If you’re considering purchasing an annuity, it’s a big financial decision that you shouldn’t take lightly. Our team would be happy to help you take a closer look at the benefits and considerations of annuities, just reach out to schedule a time to talk.

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted.

All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

March 3, 2022/0 Comments/by Greg Carrico

Investing

Time or Money Weighted: Is There A Better Strategy To Measure Your Portfolio Performance?

While investing doesn’t offer guarantees, you want to make sure the strategy you’ve built puts you on a path toward your goals.

How can you do that?

Determine your investment rate of return. Sure there are averages and estimations you can look at, but what do your numbers say? There are two ways to measure this performance stat: time and money-weighted calculations.

Time is money, or is it?

What’s A Time-Weighted Rate of Return?

Before we dive into these two classifications, it’s important to remember that numbers are malleable, meaning that they can change based on the conditions surrounding them. You’ll notice that you can measure rates of return in different ways, but it is important that you understand your investment strategy and how it’s working for you.

Let’s start with time-weighted returns, or what you can think of as big picture returns.

Time-weighted rates of return are a common indicator used to measure the performance of larger market indices like the S&P 500, mutual funds, or fund manager performance. It’s also a common way you’ll see your returns communicated, like in a brokerage account.

With a time-weighted return, you look at the return of the initial investment over a select period. For example, investing $1,000 in the S&P 500 for a year. Your statement might indicate the change in the asset’s price or the price and the income and dividends.

A time-weighted approach breaks the portfolio into time “snapshots” and evaluates its performance over that period to illustrate the broader trend.

While a time-weighted return looks at investment performances, this method doesn’t include cash flow factors like contributions, withdrawals, or any cash movement in and out of the portfolio.

Why would this strategy discount this seemingly crucial element?

Cash flow is unpredictable, and the outcomes are dependent upon each individual investor. A fund manager, for example, can’t always control the cash flow of the fund, investors do, so their performance is measured without that uncontrollable factor.

Time-weighted returns are used to evaluate the performance of particular investments over time.

What’s A Money-Weighted Rate of Return?

Money (or dollar) weighted rate of return often paints a much more vivid performance picture for individual investors because it does consider how cash flow, like contributions and withdrawals to the portfolio, impacts the performance.

On top of that, it also considers the size and timing of the contributions. If you contributed a lump sum of $10,000 to your 401(k), your portfolio would feel the impact.

While the calculations get a bit in the weeds, the main thing you should know is that the portfolio’s performance is given more weight when there is more money in the account.

Since cash flow is an essential element in money-weighted calculations, let’s break it down a bit further into inflows and outflows from your portfolio.

Cashflow into the portfolio

Contributions
Dividends or interest received
Proceeds from the sale

Cashflow out of the portfolio

Reinvested dividends or interest
The price paid for an investment
Withdrawals or cash removed.

If there are no cash flows in or out of the portfolio, both a time-weighted and money-weighted calculation should have the same conclusion.

Why Money-Weighted Works For Individual Investors

Both time and money-weighted rates of return offer investors a glimpse of how their investments are doing. While different, they both provide helpful information.

However, if you’re looking for the most descriptive rate of return that accounts for your cash flow habits, stick with money-weighted. Since it includes your cash flows in and out of the portfolio, you see how your investment choices impact your portfolio performance.

Accounting for investment behaviors is critical because so much about investing is understanding the non-financial elements that drive your portfolio: risk tolerance and capacity, time horizon, goals, and more.

Time-weighted is a valuable metric, but it can be too high to portray the performance of many individual portfolios accurately. Just because it isn’t as effective on an individual basis, time-weighted returns are an excellent way to see the bigger picture of your investments.

There is no standard for calculating your investment returns. Each company and advisor will have its own process and system for tracking those numbers. It’s important to know how your advisor and investment accounts calculate this figure, as they may be different. For example, many 401(k)s use money-weighted returns, and many advisors use time-weighted returns. So you can’t really compare apples to oranges.

Instead of comparing, be sure you understand precisely how your returns are calculated and what that means for your investments moving forward.

Find Confidence In Your Investment Strategy

You should understand how your investments work.

Reading and fully comprehending your rates of return is a great place to start. Now that you have a better idea of how your portfolio’s performance is measured, you’ll find more confidence as you track your progress and invest in your future.

Ready to read your returns like a pro? Get in touch with our team to review them today. We’d love to hear from you and help you find clarity and confidence in your investment plan.

Disclosure:

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

October 1, 2021/by Greg Carrico

Investing

Is Dollar-Cost Averaging Worth It? Pros and Cons of The Famous Investment Strategy

Investors are often looking for ways to maximize the wealth-building process. On paper, investing may look simple: buy low and sell high, but markets don’t operate in one dimension.

Markets can be volatile, and that volatility means investors may benefit from a strategy for building and sustaining long-term returns. One approach to accomplish this goal is dollar-cost averaging (DCA).

What is dollar-cost averaging, and does it live up to the hype?

What Is Dollar-Cost Averaging? (Plus an Example In The Wild)

Dollar-cost averaging is an investment strategy that calls for fixed investments of equal portions at regular intervals regardless of market activity. Perhaps the simplest example of this strategy is payroll deferrals for your 401(k).

Say you elect 15% of your paycheck to your 401k. You invest that 15% whether the market is high or low, whether the stock prices are up or down. Regular investments bring consistency month to month.

Many investors also use this method for regular contributions to an IRA or brokerage account—investing $583.33 a month in a Roth IRA will bring you within a few cents of maxing out a $7,000 annual contribution limit, for example.

But dollar-cost averaging can be used for non-recurring investments as well, which is where investors have different decisions to make.

Let’s look at an example of dollar-cost averaging to better understand what it would look like in real life.

Ben has $3,000 to invest and has decided on an investment vehicle. He decides to invest $500 a month for six months.

Date	Amount invested	Cost per share	Shares purchased
July 1	$500	$15	33.33
August 1	$500	$14	35.71
September 1	$500	$17	29.41
October 1	$500	$10	50
November 1	$500	$13	38.46
December 1	$500	$16	31.25

But it could just as easily have gone the other way. If the cost of the shares steadily increased over six months instead of fluctuating, Ben would end up with fewer shares than if he had invested the lump sum upfront. If Ben invested a total of $3,000 at $15 a share, he would own 200 shares. With the dollar cost averaging method, he would own 218.16 shares at an average price of $14.16 per share. In this case, dollar-cost averaging worked well for Ben!

4 Compelling Reasons for Dollar Cost Averaging

Dollar-cost averaging can bring a fixed consistency to your portfolio. It’s a strategy that can mitigate some of the market’s volatility and accommodate several types of risk tolerance.

1. Helps Investors Avoid Market Timing

Timing the market can be a slippery slope, like tackling a black diamond run the first time you put on skis. There’s a possibility you could come out unscathed, but you may also sustain some injuries (whether physical or psychological). Dollar-cost averaging allows investors to make regular contributions without undue concern about pricing fluctuations.

2. Limits Emotion-Driven Investment Decisions

It’s important (yet challenging) to avoid the “if only” feeling regarding the market. There will always be opportunities, some you may miss, and some you may capitalize on. DCA helps regulate those emotional decisions.

It can also help ward against impulsive decisions to buy up all of a stock at a low price, get out of the market when investments fall, or sell off more than you planned at market highs.

Money will always have an emotional component. But investment decisions should be made with data, research, and educated insights.

3. Ensures Consistent, Long-Term Investing

To find success in nearly any endeavor—career, sports, relationships, health, etc.—it’s important to have consistency. Long-term investing is built on consistency. Take retirement as an example. You invest about 40 years for retirement. That takes a lot of discipline and consistency to reach your ideal retirement number.

Additionally, your investments have time to compound. Investing $1,000 every month for a year is different than one lump sum of $12,000. Every month, the $1,000 has the opportunity to compound and rise in value.

4. Risk Management Strategy

Since you’re not trying to time the market, dollar-cost averaging is a practical risk management tool. You offset risk by purchasing shares at fluctuating prices instead of risking the first share price you see.

Dollar-Cost Averaging Has Limits, Let’s Look

No investment strategy works all the time, and no one investment strategy makes sense to blanket your entire portfolio. It’s prudent to understand each strategy’s merits and limitations to make an informed decision on what’s best for you.

One positive element of dollar-cost averaging is that investors can bring more automation to their strategy, but sometimes it benefits people to take a more active role.

Think about it like cruise control in a car. The cruise is perfect for a wide-open road, a full tank of gas, and several miles left in your trip. It’s not so hot in congested traffic and varying terrain.

The same idea is true for investing. Oftentimes, long-term investing benefits from a uniform, steady approach, but long-term investing isn’t like an empty open road; there are bumps, curves, and different opportunities along the way.

1. You Could End Up With Fewer, More Expensive Shares

One risk of dollar-cost averaging is the possibility of buying fewer shares at a higher price. Let’s bring Ben back. If the dollar cost average over six months ended up being $16, he would have 187.5 shares instead of 200 if he did a lump sum at $15 a share.

A 2012 Vanguard study found that, given historical data, investing in a lump-sum is more lucrative than dollar-cost averaging 66% of the time. The study also found that the longer the investment time frame, the greater chance that a lump-sum method produced higher returns.

The study considered different asset allocations, markets (US, UK, and Australia), and time-frames. So if you find yourself with a large chunk of change, investing all of it outright could be the more beneficial move.

Lump-sum investing, however, was found to be less advantageous in down markets than dollar-cost averaging, which points to the strategy’s inherent risk management component. And in the end, lump-sum investing beat out dollar-cost averaging by 2.3% over a ten-year period—a relatively modest win.

2. Beware of Trading and Transaction Fees

Dollar-cost averaging becomes a lot more expensive depending on the fee structure from your financial custodian. You may have to pay separate transaction fees. Imagine having to pay that fee one time as opposed to six.

3. Your Lump Sum Could Be Stuck Waiting With Low-Interest Rates

So you can invest $5,000, but you want to spread the investment over several months. Where are you going to store the remainder? It may be in cash or equivalents, making significantly lower returns. A lump sum opens up the full amount to compounding effects and the potential for more significant growth over time.

4. It’s Not A Replacement for All Risk Management

Dollar-cost averaging isn’t a magic fix for risk. There will always be volatility and market swings; just because you ease your money into it doesn’t make it immune. You still have to do the work to make good/sound investments.

The Key To Smart Investment Decisions? Create A Tailored and Flexible Strategy

You want to build an investment strategy that carries you to and through retirement. Is dollar-cost averaging the answer?

Sometimes.

It can be a great strategy to include, but there are times where it falls short, and you should consider other methods. The most important thing is that you create a plan aligned with your risk preferences and time horizon, as well as your goals and vision for the future.

Ready to take your investments to the next level? Our team at Legacy Wealth Advisors is here to help you create a long-term investment strategy that moves you toward your goals. Get in touch with us today.

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted.

All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

July 16, 2021/by Greg Carrico

Investing

The Top Taxes On Investments And How To Reduce Your Bill

Investing isn’t all a swirl of accumulation and compounding securities, there’s another area that’s just as prevalent, and if not properly planned for, can cost you big—taxes.

Your investments could be taxed in a myriad of ways depending on the asset itself, any produced income, your buying/selling habits, and how long you hold each investment.

Let’s take a closer look at the most common types of taxes you’ll encounter in your investments, and how to strategically lower your bill.

Income Producing Investments

Investing is a great way to keep your money working for you. It’s also important for long-term wealth accumulation, but the financial payouts of investing aren’t only reserved for the future.

Some investments produce income like dividends or interest, both of which will be taxed.

How is interest taxed?

Interest, in general, is taxed as ordinary income. Some interest may be exempt from federal tax like municipal bonds (could still be subject to state tax) or exempt-interest mutual funds. Work with your financial advisor to better understand the type of investments, and the subsequent tax treatments, you have in your portfolio.

How are dividends taxed?

Most dividends are taxable the year received. Many investors schedule their dividends to automatically reinvest in the fund, so are those still considered income? Yes. Any dividend, whether you take it as cash or reinvest it, must be reported as income to the IRS. Your custodian will send you a 1099-DIV that will clearly outline your produced income for the year.

There are two general types of dividends, each with different tax consequences.

Unqualified dividends (taxed as ordinary income)
Qualified dividends (taxed at capital gains rate)

Tips to lower your tax bill for income-producing investments

If you have income-producing investments, it’s critical to build a plan that keeps the tax consequences in mind. Below are a few ideas to help you prepare.

Invest in funds that pay qualified dividends to take advantage of the lower capital gains tax rate.
Hold your investments longer. Sometimes the longer you hold a security, the lower your tax liability.
Put income-producing assets in tax-sheltered investment accounts like a 401(k) or traditional IRA. This way, you won’t have to pay taxes on the money until distribution in retirement.
Prepare for your tax bill with a healthy cash reserve—this is true across the board. You always want to have a solid cash buffer to protect you.

Capital Gains and Losses

Many investors are familiar with capital gains tax. If you’ve ever sold a security for a profit, you’ve been exposed to capital gains tax.

Capital gains tax applies to “capital assets” like stocks, bonds, and real estate. The tax is paid when the owner realizes the gain and sells the asset. The IRS taxes capital gains in two ways:

Short-term capital gains
Long-term capital gains

How are short-term capital gains taxed?

If you hold an asset for a year or less, then sell the asset for a profit, that’s considered a short-term capital gain. Short-term capital gains tax is often synonymous with your ordinary-income tax rate, making it far less favorable than its long-term counterpart.

How are long-term capital gains taxed?

Any asset held over one year is treated as long-term capital gains. The tax rate range is either 0%, 15%, or 20% depending on your income. Most investors fall into the 15-20% category.

Collective assets such as art, rare coins, and stamps carry a different capital gains treatment, which can be as high as 28%.

Other tax consequences

If your investment income and modified adjusted gross income surpass certain levels, you could be on the hook for an additional 3.8% net investment income tax (NIIT). For 2024, those filing single or head of household can’t exceed $200,000, and that increases to $250,000 for those married filing jointly.

While NIIT doesn’t include your wages, it does consider your capital gains, dividends, interest, and rental income.

How to lower your capital gains tax liability

No matter how carefully you plan, you’ll have to pay capital gains tax at some point. But there are ways to strategically lower your tax bill.

Employ tax-loss harvesting when appropriate. This strategy allows you to offset capital gains with capital losses and/or deduct up to $3,000 of ordinary income. If your losses exceed the $3,000 ordinary income limit, you can carry the remaining balance forward and apply it to the next tax year.
Hold your assets long-term. Hanging onto your investments for just over a year can drastically reduce your tax bill. If you’re in the 37% tax bracket, for example, a long-term capital gains rate of 20% lowers your liability significantly.
Build a strategic plan for rebalancing your portfolio. Every portfolio requires regular maintenance and staying on top of that can give your taxes some breathing room.

Mutual Fund Taxes

You might be wondering, what makes mutual funds different from any other investment. Won’t you incur capital gains at the sale the same way you would with an ETF or other security? Unfortunately, the answer is no.

Taxes on mutual funds can get a little bit in the weeds, but in general, you could be responsible for the following while you still own the fund:

Dividends
Interest
Capital gains

It’s possible (and prevalent) for mutual funds to produce interest, dividends, and capital gains within the fund. The worst part? You don’t have control over when the capital gains will hit. This leaves many investors blindsided by huge tax blows. We think there is a better way to invest.

Many investors benefit from investing in ETFs as opposed to mutual funds.

Why can ETFs be more cost-effective?

First, they may have a lower minimum, opening up investment opportunities to a wider range of investors.
ETFs only require one transaction to buy and sell, which can reduce brokerage and commission costs.
Investors have more control over when capital gains are triggered, unlike with mutual funds.
Many passively managed ETFs see lower overall investment costs.

We’ve seen so many people find greater confidence when investing in a low-cost, passively managed way. Do you know how your funds are managed? Let’s talk about it together.

Workplace Retirement Plan

For many, workplace contributions like in a 401(k) are made pre-tax. Funds grow in the account tax-free (making it a good place for income-producing investments as you wouldn’t have to pay taxes while housed in the account). You’ll be taxed at distribution.

Distributions are considered ordinary income, which could produce several other tax consequences in retirement like an increased tax on Social Security benefits and Medicare premiums.

It’s important to have tax-diversity in your retirement plan a.k.a building a mix of pre-tax, post-tax, and taxable accounts. Having all of your assets tied into one type of account (notably pre-tax ones) doesn’t give you as much flexibility later on. It’s all about striking the right balance for you.

Sale on Your Home

You often have to pay capital gains on the sale of your house (if you earn a profit). The IRS does grant exclusions that can be really beneficial. If qualified, those who file single can deduct $250,000 of the gain and married filing jointly can exclude $500,000 of that gain.

To qualify for the exclusion, you must have used the home as your primary residence for at least 2 years in the 5 years before the sale. So if you’re selling in 2024, you must have used the home as your primary residence for at least two years between 2019-present.

Say you and your spouse bought your house on Lake Fenton for $300,000 and sold it for $1 million. Filing your taxes jointly could shave $500,000 off your capital gains requirement, but in this scenario, you could still be on the hook for $200,000 in capital gains (the rate determined by your income and filing status).

Take Your Investment Strategy To The Next Level

As you can see, investments aren’t one-dimensional. Several layers work together, and it’s critical to be intentional about each step.

We love working with families to build a comprehensive investment plan that combines high-level factors like risk preferences, time horizon, and goals and granular factors like allocations and tax-efficiency.

If you’d like to talk more about an investment strategy that meets your needs, give us a call to get started with our team.

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted.

All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

March 15, 2021/by Greg Carrico

Investing, Retirement

WHAT ARE THE BEST RETIREMENT ACCOUNTS FOR YOU?

Note from the author: All contribution limits have been updated to reflect 2022 limits.

You know that you have to save for retirement, but where do you put all of your hard-earned money? While there are many retirement savings vehicles out there, making the most of the right ones can set you up for a safe and happy retirement.

What accounts are available, and which ones are best for you? Let’s take a look and find out.

Individual Retirement Accounts

IRAs are among the most popular savings vehicles around. With flexible investment options, greater control over fees, and generous contribution limits, IRAs can help you save a significant amount in taxes each year.

IRAs come in all shapes and sizes, and you can likely find one that will suit your needs. The two most popular ones we will look at today are:

Traditional IRA
Roth IRA

Both accounts allow you to save up to $6,000 in 2022, with an additional $1,000 in catch-up contributions for those over 50. (These limits are put in place by the IRS, and can be found listed here.) These accounts also offer increased flexibility and control over the investments you choose. The critical difference between these two? Taxes. Let’s see how taxes function in these accounts, and how it could serve your retirement plan.

Traditional IRA

Traditional IRAs are tax-deductible retirement accounts. Investors contribute pre-tax dollars, enjoy tax-deferred growth, and only pay taxes when they withdraw funds in retirement. This contribution tactic lowers your annual taxable income, which could improve your tax bracket and overall tax bill come April.

Traditional IRAs do have required minimum distributions (RMDs), which, thanks to the SECURE Act, pushed the starting age to 72. RMDs mark the time when you have to start taking regular withdrawals from your account. But the CARES Act suspended RMDs for 2020, meaning that retirees don’t have to begin withdrawals for another year.

What’s the catch? The IRS puts a limit on the amount you can deduct if you or your spouse is enrolled in a workplace retirement plan or if your income surpasses a certain amount. If a workplace plan doesn’t cover you, you can always deduct your full contribution up to the annual limit. But if you are covered elsewhere, that’s where the rules start to change.

Let’s say that you are married filing jointly. In this case, the IRS gives you two options.

If you have coverage under another workplace plan and you make over $109,000, you can only take a partial deduction. If you make over $129,000, you can’t take a deduction at all.
If your spouse has coverage under another plan and you don’t, your partial deduction starts once you make over $204,000 and stops if you make over $214,000.

The limits on your deductions don’t impact the amount you can contribute. Instead, it just changes the tax-benefits you can take part in. Proper tax planning is crucial to a solid retirement plan, which makes the accounts you choose to contribute to so important.

Follow the link here to find the full lists of IRS limitations on Traditional IRA deductions for 2021 and 2022.

Roth IRA

A Roth IRA is a particular account that has gained popularity in recent years. Unlike a traditional IRA where contributions are tax-deductible, Roth contributions are never tax-deductible. Instead, you fund the account with after-tax dollars, the account grows tax-free, and qualified distributions are tax-free in retirement.

Qualified distributions stipulate that the account is at least 5 years old, and you are at least 59 ½ when you begin withdrawing money from it. There are some exceptions, like if you have a disability or are using the funds for qualified expenses like first-time homebuyers ($10,000 limit).

This saving strategy can boost your retirement income plan by assuming a more substantial tax burden now and mitigating that responsibility in retirement. Your income will likely increase the longer you are in the workforce, meaning if you contribute to a Roth early on in your career, you will be in a lower tax bracket than you would be in retirement.

Sound too good to be true? The thing about Roth IRAs is that they have income limits for contributions. Where traditional IRAs have income limits for deductions, Roths have limits for contributions. For 2022, if you file as single and make over $144,000, or married filing jointly and make over $214,000, you can’t contribute directly to a Roth IRA.

For those whose adjusted gross income (AGI) exceeds these limits, you can look into a Roth conversion, a strategy that takes assets from a traditional IRA and moves them into a Roth account. There are significant tax considerations when making this decision, so be sure to seek advice from your financial advisor.

Workplace Retirement Account: 401k

Most workplaces have long replaced their defined-benefit programs (pensions) for a less expensive alternative: defined-contribution plans like a 401k. A 401k allows employees to make salary deductions and funnel those savings into an investment account owned by the employer.

In 2022, you can contribute up to $20,500 with an additional $6,500 for those over 50. As you can see, these limits are much higher than an IRA, allowing for more retirement savings year to year. But even though you can contribute more, what you contribute to is usually much more limited. Since your employer sponsors 401k plans, the investment options are more limited, and you have less control over where you can invest your money.

Like a traditional IRA, your contributions to a 401k are made with pre-tax dollars and taxed upon distribution in retirement. 401ks are also subject to RMDs when the account owner turns 72, making tax planning a crucial part of this plan.

While a majority of the savings burden falls on employees, with a 401k, employers can also contribute to their employees’ savings journeys with an employer match. A match program usually results in a dollar for dollar match up to a certain percentage, anywhere 3-6% is typical.

But these programs often state that the match will only happen if the employee is contributing that same or higher percentage. So if your company has a dollar for dollar match up to 6%, you should add at least 6% of your salary, so you don’t leave money on the table. There is a combined contribution limit of $61,000 (of $64,500 if 50 or older) in 2022.

Health Savings Account (HSA)

An HSA is an incredible investment tool available to those enrolled in a high deductible health plan. This account helps people save for healthcare costs, and with healthcare being a primary concern for retirees, this is an excellent account to add to your savings plan.

HSAs offer three fundamental tax advantages:

Contributions are pre-tax.
All gains grow tax-free.
Qualified distributions for healthcare purposes remain tax-free.

Your HSA balance can roll over year to year, making it a fantastic investment opportunity. In 2022, you can contribute up to $3,650 for self-only coverage and $7,300 for family coverage. Our team would love to talk with you more about how an HSA could benefit your retirement plan.

Branch out of retirement-specific accounts

Several reliable investment options aren’t retirement-focused. One channel we recommend considering is an exchange-traded fund (ETF). ETFs are a low-cost, high-value investment vehicle that provides diverse market exposure.

ETFs, give investors increased flexibility as trading occurs while the market is open, diversify portfolios, can help keep investment costs low, and can be tax-efficient. By investing in avenues outside traditional retirement accounts and workplace plans, you can continue to build wealth and become more financially secure.

Active wealth building will give you the tools and resources to reach your goals. It also brings freedom and flexibility into your plan, giving you the tools to use your wealth in a way that enhances your life.

Which plans are right for you?

Investing in the right places can make a significant impact on your retirement income. While there are many elements to consider when investing for retirement, here are some to keep in mind:

The time horizon for each account.
The investment options available.
Your risk tolerance and management.
Account fees.
Tax considerations.
General retirement income plan.

Here at Legacy Wealth Advisors, we love helping clients invest in the appropriate vehicles for their investment needs. Investing for retirement isn’t one-size-fits-all, and our customized approach will help you reach your unique goals and dreams for retirement.

Ready to refine your retirement plan? Schedule a 15-minute call with our team today.

September 15, 2020/0 Comments/by Greg Carrico

Investing

The Mutual Fund Fees You Need To Know Before Investing

Mutual funds are a popular investment vehicle. They offer investors a simplified approach to diversification by giving them access to a wealth of diversified stocks and other securities through a mutual fund share(s). As opposed to purchasing individual stocks and securities, a mutual fund is an amalgamation of diversified asset classes managed by a professional financial company.

While popular, mutual funds have received their fair share of critique from investors and money managers alike who experience sometimes exorbitant fees. Every investment will cost you something, but mutual funds have a complex array of fees that when not chosen carefully can have a significant impact on your overall returns.

Today, we wanted to bring you a post that provides an overview of the fees you should be aware of before investing in mutual funds. Keep in mind that this is an overview and for detailed advice based on your situation, set up a time to talk with us.

It’s all about the load

Before investing in a mutual fund, it is important to understand the fees that will be taken out of your investments as it will have a significant impact on your total net return. One of those fees is a load.

A load is a set of fees taken out of your investments that go toward paying commissions for those managing the fund like an advisor or broker.

When we talk about fees for mutual funds, most are taken as a percentage of either your investment or overall return as opposed to being out-of-pocket. Think about it as a portion of what you buy and sell over the course of the fund.

Mutual fund loads are not created equal. There are several types of loads that each impact your returns in different ways. Let’s take a closer look.

Front-load. A front-load requires payment at the point of purchasing a fund. This load takes a percentage of the investment upfront. If, for example, you invest $2,000 with a 4% front load, the load totals $80 which brings your initial investment down from $2,000 to $1,920.
Back-load. A back-load is the opposite of a front-load and takes a percentage when you sell the fund.
Level load. This type of load doesn’t take a percentage at either the purchase or sale, rather the fees are taken out of the fund on a regularly scheduled basis. Most level load fees fall at about 1%.
No load. Some brokers won’t charge a load fee which is excellent news for your potential returns.

Most front-load and back-load fees are around 5% and can be as high as 8.5%. Let’s look at an example. If you invest $10,000 in a mutual fund with a 7% front-load, the load total would be $700. This then leaves you with a starting investment of $9,300.

Knowing how load fees operate in your mutual fund can help you make smarter investment choices, ones that will help you reach your goals. How will you know the type of load your mutual fund uses? You will need to look for the type of fund class you purchase.

Fund classes

There are a few types of fund classes available. The type you choose often reflects the kind of load you can expect. Below is a breakdown of the classes and the loads they represent.

A: front-load
B: back-load
C: constant/level load

Understanding Expense Ratios

Expense ratios are fees that cover the operating costs of running the mutual fund including management and operation fees. These fees keep the lights on, so to speak. As with load fees, expense ratios aren’t billed directly to the investor, rather they are taken from the investments themselves. Expense ratios deduct from your earnings in order to cover expenses.

Expense ratios vary significantly depending on the mutual fund. The fees can range anywhere from 0-5%. As with all fees, the lower the fee the better it will be for your investments. As you wade through mutual fund providers be on the lookout for those lower fees because they are out there. Remember, since these fees come directly from your earnings, the lower the fee the better the return.

Expense ratios will vary depending on the type of category your fund falls under. For example, large-cap stock funds may have a different expense ratio than foreign stock funds or bond funds would. Be sure you understand how the expense ratio functions before investing.

It is also important to know that actively managed funds are often more expensive than passively managed or index funds and often don’t perform better than their less expensive counterparts.

Transaction fees can really cost you

Transaction costs are charges that occur when your investment professional buys and sells assets within the mutual fund. These are the costs of trading securities within the fund and they can add up quite quickly. Although they are often one-time charges, they are done each and every time the manager buys or sells a share, which can significantly cut into your net return.

What are 12b-1 fees?

12b-1 fees are another lesser-known fee in mutual funds used for marketing. This fee is used to promote the mutual fund and is a commission-based fee that can climb upwards of 1%. This fee, like the others, is deducted from your overall return.

Redemption fees

Yes, believe it or not, there are more fees to understand. Redemption fees are charged to investors when they sell a share.

The fee for selling depends on how long you have held the share. Each fund has its own scale and percentage but the redemption period can be anywhere from 30 days to 1 year or more. Be sure that you know what those costs are and what percentage of your earnings would be eaten up in fees.

It is important to note that redemption fees can’t exceed 2% as designed by the SEC.

Mutual funds aren’t all that tax-efficient

On top of the laundry list of fees associated with running and maintaining a mutual fund, many advisors don’t find them to be very tax-efficient investments. Alongside the steep fees, funds that are actively managed often trigger more tax due to the more regular buying, selling, and trading of assets including capital gains tax (short and long term), and income tax from dividends and interest.

Exchange-traded funds (ETFs), on the other hand, are often more tax-efficient. ETFs are also more transparent and have higher liquidity.

Talk with your advisor

As an investor, it is important that you are able to create an investment strategy tailored to your goals, risk tolerance, and investment timeline. In order to make the most of your investment, you will need to keep your costs as low as possible.

Mutual funds are littered with fees, many of which the lay investor doesn’t understand or see coming. Our advice? Before investing in a mutual fund, do your homework. All mutual funds have a prospectus available. Read it carefully. This document contains information regarding all of the fees that you can expect to incur when using that particular vehicle.

Here at Legacy Wealth, we want to help you build your wealth in a low-cost, tax-efficient manner. There are many avenues to do that and we would love to speak with you and learn more about how we can help you reach your investment goals. Schedule a 15-minute call with us today.

May 15, 2020/0 Comments/by Greg Carrico

Investing, Retirement, Taxes

How Inherited IRAs Have Changed Due To The SECURE Act

Once lauded as a method for leaving sizable and flexible income to beneficiaries, inherited IRAs have become increasingly more complex after the passing of the SECURE Act. While the bill has implemented many important changes for retirees extending their lifetime savings, this change with inherited IRAs have left many people scrambling to update their estate plans.

Our goal is to help you craft a meaningful and fulfilling legacy and one way to do that is through your estate plan. If you were relying on an inherited IRA as a big portion of your estate planning strategy, let’s take a closer look at how the rules have changed and other methods to consider.

The new outlook for Inherited IRAs

Prior to the SECURE Act, a beneficiary of an inherited IRA could stretch distributions over the course of their lifetime. This “stretch” provision was particularly helpful with a highly-funded IRA as it allowed the beneficiary to control their tax bill while also accumulating additional funds in the account throughout their lifetime.

But the “stretch” provision has since been eliminated. The SECURE Act stipulates that beneficiaries must withdraw all of the funds in their inherited IRA by the 10th year after the account owner’s death. There is not a set distribution schedule. You can withdraw the money as often or as little as you like so long as the account is empty within 10 years.

This rule applies to inherited accounts whose account owner passed away after December 31, 2019. For inherited accounts before this date, the “stretch” provision can still be used.

Eliminating the “stretch” can present some important tax consequences especially for beneficiaries in their prime earning years.

With a sizeable inheritance, the tax requirements will now vary drastically if you were able to stretch distributions across your lifetime as opposed to only having a decade to withdraw all of the funds. Since distributions are taxed as ordinary income, it could bump some people into higher tax brackets, increasing their taxable income even more.

If inherited IRAs are a significant portion of your estate plan, be sure to set up a time to talk with your financial advisor and estate planning attorney, as they will be able to help you navigate your unique situation.

Exceptions to the 10-year rule

As with every rule, there are always numerous exceptions. The 10-year rule is no different as there are a few exceptions. If you are a

Spouse. Spouses can treat inherited IRAs as their own and do not have to adhere to the 10-year distribution rule. For a traditional IRA, distributions must begin at 72, but a Roth IRA doesn’t carry this same restriction, giving you more options.
Minor. For minor children who inherit an IRA, distributions will need to be made but those distributions are based on a life expectancy. It is important to note that this exception only applies until you reach your “age of majority” which for most states is 18, at which point you will have 10 years to empty the account.
A person with a disability. The “stretch” provision will apply to you over your lifetime
A person with a chronic illness. You are also able to make use of the “stretch” provision
A person not more than 10 years younger than the account owner. You may also stretch your distributions over the course of your lifetime.

Unique rules for spouses

Selecting the right beneficiaries is an important part of your estate planning journey. When you select beneficiaries for your specific accounts it is important to know how that selection will impact them. Inherited IRAs have a few characteristics that are important to know for different types of beneficiaries.

When a spouse is the sole beneficiary of an inherited IRA, they are able to take over the account with greater ease and simplicity. In essence, the IRS views this account as belonging to the spouse the whole time. The surviving spouse is able to do this by designating themselves the owner of the inherited account, roll over the funds from the inherited IRA to a pre-existing IRA, or set up a new IRA entirely.

Spouses have the most flexibility in handling an inherited IRA, but things get a little bit more complex for non-spouses or spouses who aren’t the sole beneficiary.

Non-spouse beneficiaries

For all other beneficiaries, including spouses who aren’t the sole beneficiary, the IRS stipulates that you must transfer your assets into a new, specifically designated inherited IRA. You are unable to make additional contributions to this type of IRA, only distributions.

What about a Roth?

If you are the beneficiary of a Roth IRA, you are able to withdraw contributions tax-free. The tax benefits of Roth IRAs still apply to beneficiaries as long as the account has been open for at least 5 years before the account owner passed away. If the account is younger than 5 years, all distributions will be taxed as ordinary income.

Legacy Wealth can help

Estate planning is an important, emotional, and complex process. Our team at Legacy Wealth is passionate about helping you and your family create an estate plan that is true to who you are but more importantly helps you live your legacy each and every day.

Inheritances are a wonderful opportunity to continue a legacy and we want to help you make the most of that. If you would like to talk more about how an inherited IRA could impact your estate plan, schedule a 15-minute call with us. We can’t wait to serve you.

May 1, 2020/0 Comments/by Greg Carrico