Entrust New Direction Blog

We are hearing from numerous retirement investors who directed their Qualified Plans to purchase a wide variety of non-traditional investments, but are meeting resistance in converting those assets to a Roth IRA. These Qualified Plans run the gamut of available types, from defined contribution plans such as 401k plans, to profit-sharing plans, to money purchase plans, to defined benefit plans. Many of these plans have accumulated significant assets, including real estate. In order to take advantage of the 2010 Roth conversion opportunity,  these assets must be distributed from the plan to a Roth.

Entrust New Direction focuses on this particular process. Recently, many individuals have come to us because they want to move assets out of company plans and into IRAs as they reach retirement age. Unlike most IRA providers, we are happy to help get those assets moved.

With the 2010 changes, more individuals are looking to move their assets to a Roth IRA, thus locking in the tax rates at the current (some say low) tax rates, while at the same time getting tax-free income for the future. If you find yourself wanting to convert non-traditional plan assets to a Roth in 2010 and lock in the current tax rates, we can help!

The conversion process:

•  Open a new Self Directed Roth IRA with Entrust
  
•  Determine the value of the asset(s) and initiate a direct rollover from the old plan to the new Roth
•  Include the value of the asset(s) rolled on their individual tax return either in 2010 OR ½ in 2011 and ½ in 2012. (You will receive a 1099R with the value listed)
•  The asset(s) would then be owned by the Roth IRA and would be tax-free from that point forward.

A Self-Directed Roth IRA is only different from any other Roth in that it can hold a much wider variety of assets.

Consult with your tax advisor for what the tax implications are and ask your plan administrator what your options are for moving assets out. If either of your experts or you have any questions, we would be happy to share the rules and details. Call us today to get the process started.

Some brokers argue that 401(k) holders need all the help they can get.  It's true that some people with 401(k) accounts have little knowledge of finances and little interest in stocks, bonds and mutual funds.  But this regulation was like the fox guarding the hen house. 

It's possible that the advisers would direct the 401(k) holder independent of the possible commissions earned by the adviser, but an independent adviser is more likely to provide independent advice.

Phyllis C. Borzi, assistant secretary of the Department of Labor's Employee Benefits Security Administration, said, "Today's workers will benefit from quality investment advice - advice that is both affordable and unbiased."

Maybe if this sort of common sense continues, there will be a provision allowing more choice among retirement investment providers.  Sure, the 401(k) is the best option for the company, but what if they're no longer matching?  In my opinion, the employee should have more choice.  Likely if the average 401(k) holder knew that had choices, they would be motivated to educate themselves so they wouldn't need any adviser, independent or affiliated.

Photo courtesy of skedonk

The Employee Benefits Research Institutes's 2009 Retirement Confidence Survey could be called the 2009 Retirement Crippling Fear Survey.  Those surveyed who voiced confidence in a comfortable retirement dropped to 13%, the lowest in 16 years of surveys.  72% of people plan to work after retirement, which is essentially not retiring.  32% think Social Security will save them.

Scary.

We don't need a survey to tell us that the stock market, along with the value of most Americans' 401(k)s, has dropped like the New Year's Eve ball in Times Square. We know this.  We also know that many employers are no longer matching 401(k) funds, further devaluing a 401(k) and demotivating the 401(k) holder.  We can safely assume that the federal government is not prepared to support us in retirement.  None of this is new information, but nothing seems to change.

Entrust New Direction, of course, has a horse in the retirement investment race.  We want more people to open self-directed IRAs for many reasons, obvious and not.  But if millions of Americans are not financially ready for retirement, all the rest of us will be adversely affected as well, whether by higher taxes or stress on the public safety net or some as-yet-unknown factor.   So it's in your best interest and mine that as many Americans as possible are financially comfortable in retirement. 

Now to motivate these millions of un-confident eventual retirees.  Is fear the best motivator?  This is, of course, a nebulous question. 

If the fear is immediately apparent (a drooling bear moving rapidly toward you), it's the best motivator.  But how many of us think about retirement savings while working full-time or overtime, raising a family, practicing hobbies, enjoying friends - basically, while living a full life?  If the fear of a destitute retirement doesn't spur you every day/week/month to save and plan, then it's not the best motivator.

Most people fear the unknown.  EBRI reports that 44% don't know how much they'll need for retirement.  Not very confident numbers.  The numbers indicate, however, that ignorance may not be bliss.  If we Americans don't know how much to save and we don't have confidence in the amount we're saving, we must not fear the unknown, or we must not be adequately motivated by that fear.

We may be motivated by a different kind of fear.  From a different point of view, the unknown may be contributing to our collective dilemma.  Most people don't know about self-directed retirement accounts, and many of those who do know about it think they won't be able to successfully grow their retirement account on their own.  They may not know what to invest in, or how to do so.

We talked about the fear of retiring without sufficient funds.  This is a distant fear, certainly not viceral, not real to most of us.  What is real to most of us is the fear of losing our money.  What is real is watching the numbers fall every quarter, knowing that money you earned and saved is now gone, due to some individual or some company's bad decisions or bad luck.

But, as we've heard over and over during this recession, people with 401(k)s don't look at their statement.  They're too scared to see more losses.  But if they're not looking at their statements, they won't close their 401(k) and start investing in a Roth, they won't even shift to a safer less-volatile sanctioned and commissioned investment. They're paralyzed.

Many financial "experts" talk about waiting out the storm.  They say that the stock market will come back within a decade or two.  Maybe so.  No one really knows.  Even if the stock market does come back, there is no guarantee we won't go through a similar recession again. 

If you're reading this, you likely already hold a self-directed IRA or you are considering one.  Maybe you were able to shake off the retirement paralysis, look at your statement, and do something to change the status quo.  Good for you. 

Now for your sake and mine, spread the word.  Tell your story, I'll tell mine, and maybe together we can shake enough Americans out of their retirement investment paralysis so they can start controlling their own destiny. Maybe together we can inspire people to look at their 401(k) statements and stop the bleeding.

Nebula photo courtesy of koolkao. 

Bear photo courtesy of 顔なし.

The small benefit to being unemployed, the green fields after the flood, so-to-speak, is that your retirement account can become a self-directed IRA, exploding your investment options wide open. This is also a small benefit to a job in which your employer does not offer a retirement plan - retirement plan freedom.

If you're fortunate enough to have a job right now, and that job offers a retirement plan, you may feel that you have little control over how you can invest your retirement money. You're probably right. You probably only have the option of investing in stocks through your employer's chosen fund(s). But, you may be saying to yourself, at least I can choose between aggressive and conservative stock market investing.

Maybe not.

The Wall Street Journal reports that the Pension Protection Act of 2006 allows employers to automaticaly enroll you in their 401(k) plan and automatically set you to the default investment option.

That's right. Not only can your employer decide that it's best for you to be in their 401(k) plan, but they can also decide how you should invest within your limited options.

Maybe you don't know anyone in your HR department. This should change. Try to discover which nice HR person has some control over your retirement plan and invite them to lunch.

Explain to them that there is a retirement plan option out there called a self-directed IRA, which allows freedom-loving Americans to invest however they choose, almost.

You can sell it to them as a way to differentiate themselves from competitors. New potential hires frequently ask in an interview, "Do you have a 401(k) plan?" Now, HR can answer, not only do we have a 401(k), we have a self-directed retirement plan, and you can choose to invest in real estate, gold, private stock OR public stocks and bonds and mutual funds."

You could tell them that allowing self-direction as a retirement option will improve morale, retain employees and help the general economy. These benfits may not be directly measurable, but they're real.

Many companies are no longer matching funds in their 401(k) plan. Even the organization formerly known as the American Association of Retired People, AARP, is no longer matching employee retirement contributions. Tell HR, if they're not matching, the least they can do is give employees freedom to invest.

If your HR person doesn't see the light, and especially if they're not matching your contributions, you can always open a self-directed IRA. If you want to stop contributing to your handcuffed 401(k), you can open a Traditional or Roth IRA. If you want to keep contributing to your 401(k), you could open a self-directed Roth as well.

With the Roth, your contribution is not tax-deductible, but the earnings are tax-free when you're ready to retire. And if you can wait until 2010 to open a Roth, you can derive many benefits.

Worse case, you got to know your HR person better. Best case, you're the hero of your company because you freed the jailed retirement plans.

photo courtesy of h.koppdelaney