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IRS Proposes New RMD Life Expectancy Tables To Begin In 2021

November 13, 2019 07:31 am 6 Comments CATEGORY: Retirement Planning

After several years of speculation and more than a year since the President issued an Executive Order on “Strengthening Retirement Security in America”, the IRS has released its proposal to update the life expectancy tables used to calculate the annual Required Minimum Distributions (RMDs) from all sorts of tax-preferenced accounts, including IRAs and 401(k)s, for both lifetime account owners and their (stretch) beneficiaries. Most notably, this is the first time the tables have been updated since 2002, despite the fact that life expectancy has increased more than 2% (or 1.6 years) for all Americans, and more than 8% for Americans who have reached the age of 65!

Central to the proposal (which must still go through the formal approval process and thus might not “go live” until sometime next year, though the proposed changes wouldn’t take effect until 2021 anyway) are updates to the RMD factors used to calculate required minimum distributions themselves in each of the three different life expectancy tables, including the Uniform Lifetime Table (for retirement account owners to calculate their RMDs during their lives), the Joint Life And Last Survivor Expectancy Table (used by account owners who have named a spousal beneficiary who is more than 10 years younger), and the Single Life Expectancy Table (which is used by beneficiaries of inherited retirement accounts to calculate their so-called “stretch” distributions).

However, while lowering RMDs across the board will result in some increased tax deferral benefits, the changes likely won’t have as much of an impact for retirement account owners and beneficiaries as was likely hoped for. Specifically, according to data provided by the IRS, of the Americans who are required to take distributions from retirement accounts, only roughly 20% are taking no more than the minimum required. Which means that the remaining 80% are taking more than the required minimum, thus making any decreases in RMDs a moot point.

The question then becomes, will lowering RMDs for those 20% (who likely already have enough wealth to meet their retirement needs in the first place) have a material impact on their account balances as they age? For account owners and beneficiaries who have been extremely fortunate with their returns over the years and have much-larger-than-typical account balances, perhaps. However, when considering someone with an IRA valued at $1 million, the first year RMD would only decrease by roughly $2,100, and only a portion of that amount would have been due as taxes; the value of deferring that tax liability is only the growth potential on those taxes… which are hardly amounts that could significantly alter someone’s overall financial picture later in life (especially for already-affluent retirees), even when considering that the RMD factors continue to increase through the years.

And that lack of impact stretches even to those who have much longer life expectancies, such as younger individuals who have inherited a retirement account and use the Single Life Expectancy Table. A 40-year-old, for example, would see only a tenth of a percentage point decrease in the required distribution amount in the first year, which won’t be a very material difference, even for those who rely on that extra income from an inherited retirement account.

Notably, though, individuals taking RMDs will need to consider the transition to the new life expectancy tables if/when they take effect in 2021. Which, for lifetime RMDs for existing retirement account owners, is fairly straightforward – to simply use the new table in 2021 – though those who defer their first age 70 ½ RMD from 2020 into 2021 must still use the ‘old’ tables for the 2020 RMD. In the case of beneficiaries of inherited retirement accounts looking to stretch, the transition process is a bit more confusing, as such beneficiaries cannot simply use the new life expectancy tables going forward at their current age. Instead, they must retroactively determine what their ‘original’ stretch period would have been in the past under the new tables, and then adjust forward to where that distribution schedule would be today (by subtracting 1 for each subsequent year since the year after the original account owner’s death).

Ultimately, the key point is that, while updates to the life expectancy tables have been a long time coming (especially since other tables – like those used by the IRS to analyze life insurance contracts – have already been updated to reflect longer lifespans years ago), the proposed changes simply won’t make much of a difference for the vast majority of retirement account holders and beneficiaries. Still, for those who take ‘only’ the minimum required by the IRS, the decreases might not provide that much of a benefit, but at least it does help to defer some taxes, which is hardly ever bad news.

#FASuccess Ep 150: Getting Unstuck And Re-Aligning Fees To Build The Solo Advisory Firm You Want, With Tanya Nichols

November 12, 2019 07:20 am 4 Comments CATEGORY: Financial Advisor Success Podcast

Financial Advisor Success Podcast Episode 150 With Tanya Nichols

Welcome back to the 150th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Tanya Nichols. Tanya is the founder of Align Financial, a hybrid advisory firm near Duluth, Minnesota that oversees nearly $50 million of assets for 80 client households.

What's unique about Tanya, though, is the way she took a leap last year to start her own independent advisory firm after nearly 20 years of working in a larger firm environment, not because of the opportunity for more money or independence, but simply because she found a community of others with a similar growth mindset that would support her in the journey.

In this episode, we talk in depth about Tanya's journey through the advisor industry. From why she left the wirehouse environment to join a smaller independent firm as their succession plan, only to have the plan fail a few years later, to the moment of realization she had that she needed to go in another direction that led her to both leave the firm and become a solo advisor and also divorce her husband all in the span of two weeks. And how she set her current goal to double her revenue to $1 million by age 40 while working only 30 hours a week and laughing more with her kids along the way.

We also talk about how Tanya has completely restructured what she does in her advisory firm itself. From implementing a firm-wide realignment of fees to ensure she was getting paid what she's worth by every client, even if it meant a nearly 50% increase on some clients who've been working with her for over a decade. The meeting surge approach that she uses to schedule all of her client meetings for the year in just two two-month clusters, in the fall and the spring. How she refined her financial planning process leveraging MoneyGuidePro to do the analysis but summarizing it all in a one-page financial plan of observations. And why she starts off every prospect and client meeting with the simple question, "What has your attention right now?"

And be certain to listen to the end, where Tanya shares why she refocused her business on the alignment of our life and money, thus the Align Financial name, how a redesign of her website has generated more inbound inquiries from prospects who say that her website speaks to them, and how ultimately, the biggest surprise of her advisory career is that she never actually thought she'd be running a firm on her own until she got to the point in her career where she could actually give herself permission to do so.

Cultivating Followership To Become A More Effective Advisory Firm Leader

November 11, 2019 07:06 am 0 Comments CATEGORY: Practice Management

Being a “great follower” usually isn’t thought of as an aspirational role, and in fact, being labeled a follower typically carries a negative connotation. Yet, the reality is that no organization can be effective without people to execute a leader’s vision. And good followers, especially those who are able to ‘manage up’, are actually what makes it possible for their bosses to develop good leadership practices in the first place.

In the “followership” model developed by Dr. Robert Kelley, the “effective follower” is an intelligent, motivated, and self-reliant individual who is driven by a desire to support a vision or cause that they understand objectively and believe in. And while they may not be interested in actually being a leader, it is their role as a complement to the leader that makes good leadership even possible. Because while the leader is responsible for setting the vision and communicating that vision to his followers, the effective follower is actually the one that takes responsibility for understanding the vision, coordinating with teammates, troubleshooting the process, and capably managing the tasks required to bring the vision and end goals to fruition.

Dr. Kelley’s followership model relies on a two-dimensional spectrum to classify different follower types. On one spectrum lies a follower’s inclination to think independently and critically – is the person able to solve problems on their own, or do they simply operate rotely, coming to a standstill when they are faced with a novel problem? On the other end of the spectrum, the engagement level of the follower is assessed – is the person actively engaged in the work, making proactive choices and paying attention to what’s happening in their environment? Or are they passively waiting for cues from others, telling them what to do next? The “effective follower” is high on both spectrums – they are actively engaged, and display highly independent, critical thinking skills. Whereas “Sheep Followers” are low on both spectrums, “Yes People” are actively engaged but with a proclivity for dependent, uncritical thinking. “Alienated Followers”, meanwhile, are very capable of being independent, critical thinkers, but are not actively engaged in their work, and “Survivors” can go either way on both spectrums – they adapt their behavior in a manner so as to simply ‘survive’ in their jobs.

This concept of followership aptly applies to many financial advisor-employees who may not be immediately interested in running or starting a firm of their own, because it is primarily the process of financial planning that many advisors love – not the management of an organization. And the most effective advisor-employees will often be the ones who recognize that the work they do and love actually supports the broader goals and vision set forth by their firm’s leadership, and who are motivated to help their firms reach those specific goals.

Thus, it behooves the financial advisors who represent the leadership of their firms to support their advisor-employees into “effective followership” roles. A task that can be accomplished by simply having honest discussions with employees, consciously supporting their advisors by providing them with positive guidance or the tools needed to do their jobs well, or by actively designing more formal training programs helping employees understand the different styles of followership. Importantly, leaders who tend to focus on transformational growth, who are empathetic and emotionally intelligent, and who know how to reward employees who contribute to supporting the firm’s vision are those who are most effective at cultivating good followership practices in their employees.

Ultimately, the key point is that good leaders and good followers depend on each other; neither is more important than the other in achieving the firm’s vision. Moreover, firm owners can support their advisor-employees with the principles of followership by clarifying the synergistic roles of leaders and followers, facilitating open discussions and frank conversation about the firm’s vision and goals, and offering guidance and mentorship to employees who may be interested in eventually becoming leaders themselves.

Weekend Reading for Financial Planners (Nov 9-10)

November 8, 2019 02:53 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big industry news that the SEC is looking at finally updating the advertising rules for RIAs after nearly 60 years, which would include allowing advisory firms the ability to use testimonials and endorsements from clients, and even highlight third-party ratings about their work with clients (while still limiting how firms tout their investment performance in particular).

Also in the news this week was an announcement by Schwab at their IMPACT conference that the firm is looking to expand its banking and lending services for advisors on their platform, the rollout of Morningstar's new Analyst Ratings for funds (that are resulting in a substantial number of downgrades for funds, especially in their higher-cost share classes), and an indication that the SEC is gearing up to crack down on hybrid broker-dealers using affiliated money market sweep programs without properly disclosing the conflict to their RIA clients.

We also have several retirement related articles this week, from the IRS' announcement that it is gearing up to roll out new life expectancy tables that will reduce RMD obligations beginning in 2021 (though the actual RMD factors may only be reduced by about 0.21%), a look at the "9 types of retirees" and their psychographic tendencies, how some firms are experimenting with virtual reality to literally help clients better visualize their future retirement (to help them change their behavior to save more), how to help clients have a more financially successful retirement not just by helping them plan for retiree health care costs but actually getting healthier to reduce those costs, and an interesting look at how the discussion of income inequality is raising questions about the nature of retirement and why "the rich" don't just retire once they have "enough" in the first place?

We wrap up with three interesting articles, all around the theme of how we work most productively and what it takes to incentivize us to do so: the first looks at a recent study that finds while we tend to believe financial incentives will motivate others, when we consider our own motivations we usually don't think it will have as much impact (raising questions of whether we overestimate the role financial incentives really play); the second explores the recent decision of Microsoft in Japan to test out a 4-day workweek (which at least temporarily resulted in a whopping 40% increase in productivity after a 5-week experiment); and the last looks at a company that is trying out (just) 5-hour work days for their knowledge workers, on the theory that if employees can really get concentrated deep work done from 8AM to 1PM, they'll accomplish as much as a full work day anyway... and be happier and better rested with all the time they have left over.

Enjoy the 'light' reading!

Kitces & Carl Ep 20: Is A Fiduciary Requirement Necessary When Acting In Clients’ Best Interests Is Good Business Anyway?

November 7, 2019 07:05 am 2 Comments CATEGORY: Kitces & Carl Podcast

Over the past several years, the big focus in the financial advice industry has been around the various iterations of a fiduciary standard. From the DoL fiduciary rule, to the SEC’s Regulation Best Interest, to efforts by individual states to pass legislation, there has been plenty of debate over the best (and most practical) way to ensure that all financial advisors do what’s in the best interest of their clients. However, lost in all the sturm und drang over these regulatory and legislative undertakings is the question: Do we even really need a fiduciary rule in the first place?

After all, compliance with existing regulations is expensive and time consuming enough as it is, and a higher fiduciary standard may only amplify that. And even if you try to legislate morality within the professions, won’t there be those who figure out a way to break the rules, anyway? Not to mention that acting in a client’s best interest is arguably just “good business” anyway?

In our 20th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss why a fiduciary rule is necessary even though acting in your client’s best interests is already “good business” in the long run, how real financial advisors are at a competitive disadvantage against those who really are just out to make the next buck as quickly as possible, and how advisors have a duty to spread the word about what it means to be a fiduciary.

As a starting point, it’s important to recognize that serving clients well isn’t just about being able to look at yourself in the mirror… it is also, in a very real sense, in your own best interest as a business owner… at least if you want your clients (and the friends and family that they might refer to you) to keep paying for your services for several decades to come. In other words, an advisor can either build a sustainable business based on trust, or a business that’s dependent on finding the next person to fool in the short term with a quick sale before moving on to the next.

However, the reality is that all real financial advisors have had the experience of meeting with a prospective client who has been on the receiving end of an unscrupulous “advisor” who has already extracted as much as they legally could from that client and moved on. And the unfortunate fact is that it’s often more profitable (and maybe even easier) to scare someone into buying a high-commission “can’t-lose” product than it is to convince them to pay an ongoing fee for an admittedly intangible service.

And that’s really the crux of why a blanket fiduciary rule is necessary. Even in today’s environment where consumers are better educated and it’s much easier for someone to ‘do their due diligence’, the bar is still so low that, not only can anyone call themselves an “advisor”, but they can still extract nearly 10% of the wealth of every person they meet by selling a low-quality high-cost product, with little worry about any legal recourse… since the bar to prove their sale was “unsuitable” is so low and easily cleared.

Ultimately, the key point is to understand that, while real financial advisors remain at a competitive disadvantage to salespeople who can legally take a large chunk of someone’s net worth by selling them flawed and expensive products as quickly as possible and moving on to the next, there is at least an ongoing effort by regulatory bodies and state legislative bodies to make it more difficult for that sort of maleficence to occur in the first place. But it’s not just up to the regulators to change the industry (and the public’s perception of it). Responsibility for affecting change also falls on the shoulders of real financial advisors, who (as part of their sacred duty to help the clients manage, grow, and protect their life’s savings) have to help foster awareness both within and outside of the industry around what it means to truly be an advisor.

Splitting An IRA With Ongoing 72(t) Distributions In Divorce

November 6, 2019 07:04 am 1 Comment CATEGORY: Retirement Planning

Although the aggregate divorce rate amongst Americans has fallen in recent decades, there has also been a concurrent (and dramatic) increase in the number of divorces for couples over age 50. The rise of the so-called “grey divorce” has created a number of uncommon and complex issues that financial advisors are helping their clients navigate, such as splitting what can oftentimes be substantial assets, including retirement accounts. Splitting an IRA, for instance, is generally pretty straightforward, but the matter becomes far more complicated for accounts that have ongoing 72(t) distributions.

As a starting point, it’s important to understand what a 72(t) distribution is in the first place. Although IRA accounts are intended to provide retirement funds for the owner, there can be emergent situations in one’s life for which an individual might not have the necessary cash on hand. Understanding that, Congress provided for a handful of exceptions that allow an individual to access the funds in their IRA accounts prior to age 59 ½ without triggering the dreaded 10% early withdrawal penalty. One of these exceptions includes the option to elect taking "substantially equal periodic payments" from the IRA, also known as 72(t) payments.

Although there are a few IRS-approved methods to calculate the exact amount of those substantially equal periodic payments, the key component is that the individual must continue to take those distributions “without modification” for the longer of five years, or until age 59 ½. Modifications can include (among other things) changing the amount of the periodic withdrawals (other than as allowed via the RMD method), taking an additional distribution on top of the 72(t) payments, changing the balance on the IRA account via roll-ins or rollovers out of assets, or making a non-taxable transfer of a portion of the account balance. And it’s that “non-taxable transfer” rule that can cause so much confusion for divorcing couples who need to split an IRA that is subject to 72(t) distributions.

Under normal circumstances, splitting an IRA that is not subject to a 72(t) distribution schedule between a divorcing couple is simply a matter of the custodian transferring the funds specified by the divorce decree from the current owner to a (new) IRA account in the name of the ex-spouse. However, since dividing an IRA pursuant to a divorce decree is, in fact, a non-taxable transfer, it seems possible that the IRS would deem that transfer to be a “modification” for IRAs subject to 72(t) payments, thus triggering the 10% penalty… plus interest!

Fortunately, though, over the years, the IRS has issued several Private Letter Rulings (PLRs) addressing this very conundrum. These PLRs have been rather accommodating to both ex-spouses. Transferor ex-spouses have been given the option to decrease future 72(t) distributions proportionally to the amount that was transferred out of the account. Meanwhile, transferee ex-spouses have not been required to continue to take 72(t) distributions, though they have been allowed to choose to do so if desired!

Ultimately, the key point is that, while divorce is a stressful event that often creates unforeseen financial hurdles for advisors and their clients to navigate the best they can (and sometimes without any formal guidance from the IRS on unclear taxation rules), there has at least been consistency (albeit on a case-by-case basis) in the rulings around the treatment of transferring the balance of an IRA that’s subject to 72(t) payments in a divorce.