A believer in continuing professional development, Eric Dostal obtained the CERTIFIED FINANCIAL PLANNER™ Professional (CFP®) designation, and graduated with a JD from St. John’s University School of Law. Eric recognizes the challenges investors face when planning their retirement and therefore he helps clients retire when and how they would like. Eric focuses primarily on providing affluent and high net worth individuals with expert, comprehensive and impartial financial planning advice to help those individuals achieve their unique life goals.
After joining Sontag Advisory in 2013, Eric has worked extensively with clients over the past 4+ years to create and implement their unique financial plans. Eric has demonstrated a high degree of skill developing and overseeing the investment, insurance, retirement, tax and estate planning strategies of his clients.
Eric currently lives in Merrick, New York with his wife Jamie and daughter Madeline. When not in the office, you can often find him spending time with family and friends. He also recharges by sitting down with a good book and honing his culinary skills.
JD, St. John's University School of Law
B.A. - History, SUNY Geneseo
It is easy to get caught up in the daily media coverage about rising interest rates and bond returns and forget why you own bonds to begin with. Fixed income serves two equally important roles in a portfolio: 1) to provide return, and 2) to manage portfolio risk. With rates as low as they are, the expectations for short term future total-returns from fixed income are quite low. However, this is not a good reason to shift assets away from bonds and into riskier assets because it ignores the risk management and diversification benefits of bonds.
A portfolio holding a mix of high quality and diversified bonds plays a critical role in managing portfolio risk, regardless of the prospects of future returns. Predictions of interest rate movements are no better than stock market predictions. Investor's should implement a consistent, diversified, long-term allocation that can weather different types of interest rate environments and conforms to your ability and willingness to take on investment risk. If interest rates rise quickly, the value of a high quality bond portfolio will decline. However, monies are continually reinvested at the new, higher rates as coupons are paid and short-dated bonds mature. As a result of this, history has had very few multi-year holding periods of high quality bonds with negative total returns. Even during a historical period of skyrocketing rates, high quality bonds have still been far less risky than stocks.
The allocation of your portfolio will depend on your investment time horizon, financial goals, ability to take on risk, and willingness to take on risk. There is no one size fits all portfolio allocation. However, all but the most aggressively allocated portfolios have a place for a bond allocation.
The thing you are going to need to pay attention to is the “Kiddie Tax." The net unearned income, (income earned from something like a required minimum distribution), of a child under the age of 19, or age 24 if a full-time student, is taxed at the parent’s marginal rate. Net unearned income does not include: 1) the standard deduction of $1,050 (2016); and 2) the next $1,050 (2016) of income which is taxed at the child’s marginal rate (typically 10%). This means the Kiddie Tax applies if a child’s unearned income in a tax year is greater than $2,100.
Given the market value of the inherited 401(k) of ~$25,000 and your daughter’s age, the required minimum distribution from the account should be around $350. As outlined above, you could withdraw up to the standard deduction amount of $1,050 without paying income tax and another $1,050 while typically paying a 10% tax rate. Anything above $2,100 would be taxed at your marginal rate, the highest rate applied to the last dollar you earned.
Unfortunately, to be able to contribute to a Roth IRA an individual needs to have earned income during the year. Earned income refers to income derived from things like wages, salaries, tips and other taxable employee pay. Income derived from retirement accounts does not count. As such, your daughter would be ineligible to contribute to a Roth IRA unless she has another source of income.
Your best bet is likely to leave the funds in the former 401(k) and withdraw only the required minimum distributions each year. This will allow the 401(k) to continue to grow tax deferred. You can then place the distributions into a UGMA/UTMA account for your daughter’s benefit or use them to pay for some of her expenses.
Your ability to transfer the annuity to an IRA will depend on if your annuity is qualified or nonqualified. A qualified annuity is one which you purchased with pre-tax dollars and is generally held inside of a retirement savings vehicle, like an IRA. A nonqualified annuity is one purchased with after tax dollars and is held outside of a retirement account. You can surrender and roll over a qualified annuity to an IRA. You cannot surrender and rollover a nonqualified annuity to an IRA. If you surrender a nonqualified annuity, any investment gain, the market value of the annuity over what you paid for it, will be taxed as ordinary income in the year of surrender.
As you point out in your last paragraph, annuities tend to be extremely expensive. Additionally, owning annuities inside of tax advantage accounts, like IRAs, renders their tax deferred nature meaningless. Most, if not all, individuals should never own annuities in retirement accounts.
One important point to keep in mind is the terms of your annuity contract, specifically how long payments from the annuity are guaranteed once you annuitize the product. Even though it may appear that the cash value of the annuity will dissipate after 13-15 years, the insurance company that sold you the annuity may be required to make payments to you for the rest of your life. These payments, however, will likely not adjust for inflation as you age, making the payment relatively meaningless over time.
One thing you may want to discuss with your accountant is the Sec. 1202: Small Business Stock Gain Exclusion. This provision allows for the possible exclusion of up to 100% of the gain realized on the sale or exchange of qualified small business stock (QSBS), acquired after September 2010 and held for at least 5 years. Stock can qualify as QSBS if it is a domestic C Corp with total gross assets of $50 million or less, where at least 80% of the value of corporate assets are used in the “active conduct” of a qualified business. An individual can exclude up to $10 million or 10x the taxpayer’s total adjusted basis, whichever is greater. There are many technical requirements tied to the provision, but if you qualify, it can significantly reduce your tax liability.
Generally, you are required to report any debt that has been discharged as ordinary income. This type of income is called cancelation of debt “COD” income.
Now, section 108 of the Internal Revenue Code deals with the concept of cancelation of debt income. Specifically, subsection f deals with Student Loan forgiveness. This subsection creates a special carve out for COD income which has been discharged because an individual has worked for an certain period of time in a certain profession. This correlate’s to the Department of Education’s Public Service Loan Forgiveness “PSLF” program. Under the PSLF program, an individual who is employed full-time in a “public service organization” including a private, not-for-profit organization that provides public health services (including nurses, nurse practitioners, nurses in a clinical setting, and full-time professionals engaged in health care practitioner occupations and health care support occupations), i.e. a hospital, can apply for student loan discharge after making 120 qualifying payments. This discharge would not be classified as COD income and would not result in a substantial tax bill.
There are many technical requirements related to the PSLF program and you can find more information about it here. It is important to note that the actual mechanics of the program have not been tested as the first forgiveness of loan balances will not occur until October 2017.
Also, it may be that your current salaries are artificially depressed during your Residency. If your incomes rise dramatically in the next 4-5 years your required payments under the IBR plan would also rise. This could mean that you will end up paying off more of your student loan debt than the calculator may indicate.