Senior Wealth Manager
A Senior Wealth Manager at Watts Capital in New York City, David advises and coaches business owners and professionals on personal financial planning matters as they make progress towards their goals and dreams. Prior to joining Watts Capital Partners, David was a Vice President in the Fixed Income Division at Barclays Capital.
David received a BS from the University of California, Berkeley and holds the Certified College Financial Consultant (CCFC), Certified Divorce Financial Analyst (CDFA®), Chartered Financial Analyst (CFA), Behavioral Financial Advisor™ and Certified Financial Planner (CFP®) designations. David received the IMCA Alternative Investments Certificate and completed the Certified Investment Management Analyst (CIMA) certificate program from The Wharton School at the University of Pennsylvania. He also is the Editor and Writer at Planning to Wealth, which provides financial planning tips, wealth management guidance, and sometimes travel hacks for your next vacation.
David enjoys traveling, reading, Brazilian Jiu-jitsu, yoga and snowboarding.
BS, Business Administration, University of California, Berkeley
Assets Under Management:
Rolling your 401K into an IRA won’t be taxable. Once you’ve done the IRA rollover, distributions are taxable at ordinary income rates. If you’re under 59.5, there will be a 10% penalty on most distributions. The 10% penalty won’t apply if you meet an IRA distribution exception like distributions for qualified education costs, a first-time home purchase, or for health care premiums made during a period of unemployment.
There are a few other rollover issues to consider as well:
Asset protection. Depending on the state you live in, once your funds are in an IRA, there is might be less asset protection from a judgment resulting from a lawsuit.
Required Minimum Distributions (RMDs). If you are above 70.5 and still working, you might be giving up the ability to rollover your existing 401K into your new 401K (if the plan allows it) and delay paying the taxable RMDs until you are not working.
Invest choice and fees. While rolling the 401K to the IRA will increase the number of investment choices available to you, before you do the rollover you might want to compare the administrative costs and investment fees of your current 401K to the all-in costs of what you’ll be paying once the funds are in an IRA.
Roth IRAs. Once you have rollover IRA money, you’ll lose the ability to do a “backdoor Roth,” wherein you would make a non-deductible contribution to an IRA and then convert the funds to a Roth IRA, pay the tax on the conversion, and then get the benefit of not paying tax on any of the gains going forward. On the other hand, you can do a Roth conversion on some or part of the IRA, where you would convert money from the rollover IRA to a Roth IRA, pay the taxes, and then get the benefit of not paying tax on any of those gains going forward. The Roth conversion is something you may consider if you expect your tax rate to go up in the future, or you could do the conversion in years you’re in a lower tax bracket if you have year-to-year swings in income.
Other responses have clearly addressed the details of doing a 1031 exchange, but another option you might want to consider is rolling the capital gains on your rental property into an Opportunity Zone investment and the principal portion of the sale into the new primary residence.
The Tax Cuts and Jobs Act of December 2017 created the Opportunity Zone program, and people reinvesting their capital gains into a qualified opportunity zone fund (QOF) can potentially get significant tax benefits. You’d have to invest the capital gain of your rental property within 180 of the sale though, and the investment would have to be in one of the 8700 eligible opportunity zones nationwide.
If you roll the capital gain into a opportunity zone investment, you can take advantage of three potential tax benefits: 1) deferral of the capital gain until 2026; 2) a reduction of the capital gain by 10% or 15% if you hold onto the new investment for 5 or 7 years, respectively; and 3) elimination of future capital gains on the investment if you hold on to it for 10 years.
Unlike a 1031 exchange, you don’t have to invest the basis portion of your rental sale to get the tax benefits, so you can free up the non capital gain portion of the sale for your new home purchase. However, you do have to have cash available when the capital gains taxes are due in 2026.
New regulations from the IRS on QOF investments are being released regularly, so please consult a tax professional if you’re considering this option.
How much you should have stashed away: While 2 to 6 months of expenses is a good rule of thumb for the size of your emergency fund, it’s highly dependent on your circumstances. For example, if you and your wife have predictable, stable income in high-demand professions, two or three months might be fine for you. On the other hand, if you are in a highly cyclical, commission-based business and it would take a long time to find a new job in your industry if you were laid off, then 6 months might be more appropriate.
Factoring in children down the road: For now, I think you should consider just the two of you when thinking about the size of your emergency fund, but consider increasing the size of the emergency fund once you know you are having your first child. For example, if you currently don’t have consumer debt or a mortgage, then 3 months could work now, but once you have kids and a mortgage, 6 months is probably more appropriate.
Keep in mind opportunity costs: It’s a delicate balance: you’ll be more protected and probably sleep easier with a larger emergency fund, but that should be weighed against the opportunity cost of a large portion of your money earning low interest rates. For every $100,000 earning the 1% or so in your emergency fund, you’ll have an opportunity cost of about $500 a month over the long term versus a diversified market portfolio.
What kind of account you should have: In choosing the right account for your emergency fund, you might want to monitor various bank savings rates, money market fund yields and short-term CD rates to maximize the yield you’re getting. Also, it’s probably best to avoid using your Roth IRA as an emergency fund since you’ll want to preserve the valuable tax-exemption of these assets.
Also, you might want to keep in mind the two goals of the emergency fund: defense and offense. The fund is not only about preventing you from taking on debt, selling investments in a down market, or avoiding an early retirement fund distribution if you had a career or medical emergency, the emergency fund also allows you to take advantage of opportunities. When you have an appropriate emergency fund, this would afford you to opportunity to follow your passion and start a new business, or take a job that’s a better fit in another city.
Good luck to you, please feel free to reach out with any additional questions!