How fee-based financial planners differ from fee-based ones
Dear Liz: What is the difference between a fee-only financial planner and a fee-only financial planner? I have had a few free meetings with a paid financial planner, regarding retirement planning and income generating strategy. I’m 61 and currently have $ 325,000 in a Traditional IRA and 401 (k) from a previous employer, with both accounts invested in 70% stocks. The planner suggests that I put the entire $ 325,000 in a fixed indexed annuity, which he says is risk-free. Is it a good idea?
Reply: A “paying” person typically accepts commissions or other incentives for selling certain investments in addition to charging a fee. “Fee-only” advisors only accept money from their clients.
Another important word that begins with f: fiduciary. Fiduciary Advisors are committed to putting your interests above theirs. A fiduciary advisor, for example, would generally not recommend putting all of your money in one investment, as having all of your eggs in one basket is rarely in your best interest.
However, most advisors are not trustees and can recommend underperforming or expensive products to you when better options are available because those less expensive options pay them more. Indexed annuities can pay high commissions to the people who sell them, for example, and this can be a powerful incentive for your advisor to ignore their potential drawbacks.
Indexed annuities are sold as a way to profit from a portion of the rise in the stock market without the risk of loss if the market falls. But these annuities are complex, and insurers can usually change the rules that govern your returns. In addition, you may have to pay a redemption fee if you need to withdraw your money.
The Securities and Exchange Commission has issued investor alerts on indexed annuities. These alerts urge potential investors to thoroughly investigate how contracts are structured, how returns are calculated, and how calculations may change before investing. Anyone considering an indexed annuity would be wise to pass the purchase through to a fee-based fiduciary financial planner only to see if it really makes sense for their situation.
By the way, there is no such thing as risk free investing. Every investment comes with some kind of risk, and a fiduciary advisor will take the time to explain them to you so that you can make an informed judgment.
Gift tax vs inheritance tax
Dear Liz: A reader recently asked about pass on an inheritance of $ 500,000 to their children. You mentioned the possibility of renouncing or refusing the inheritance so that it goes to their children. You wrote: “If you decide not to give up and later give the entire $ 500,000 to your children, you won’t have to pay gift tax until you donate a lot.” more. In addition, the gifts are tax-free for the recipients. Are you perhaps mixing gift and inheritance? From what I understand, gifting your children is limited to something like $ 15,000 per parent per child. Unless you have a large family, this will not represent $ 500,000 in tax-free donations.
Reply: A lot of people don’t know how donation taxes work. The gift and inheritance tax systems are intertwined, creating even more confusion.
There is no limit to the amount you can give in your lifetime – you can give as much money as you want to as many people as you want. However, if you give more than $ 15,000 to a beneficiary in a given year, you must file an income tax return. This does not mean that you owe taxes on donations.
Amounts over $ 15,000 count toward your lifetime inheritance and gift tax exemption, which currently stands at $ 11.7 million per person. So if you give someone $ 20,000, the extra $ 5,000 will be deducted from your lifetime exemption of $ 11.7 million. It is only after you exhaust this lifetime exemption that you will owe donation taxes.
Ex and social security benefits
Dear Liz: I collect Social Security. My recently divorced girlfriend receives social security from her ex-husband who is still living. If we were to get married, would either of us lose some or all of our Social Security benefits? It sounds like a simple and straightforward question, but every Social Security representative I speak with on the phone or in person gives me a different answer. My girlfriend didn’t work long enough to earn her own Social Security benefits. She has been married for over 30 years and is over 60.
Reply: Your girlfriend would lose her divorced spouse’s benefits if she remarries, but then she could eligible for spousal benefits based on your income. Your benefits would not be affected. A Social Security representative should be able to calculate how much their benefit would change.
Liz Weston, Certified Financial Planner, is a Personal Finance Columnist for NerdWallet. Questions can be sent to him at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.