Founding Partner, Retirement Plan Consultant
Douglas Heagren has been an Investment Advisor Representative since 2006. In 2011, he joined LPL Financial in order to have the flexibility to advise clients with independence from the demands and biases of captive financial advice services companies.
Douglas’s practice is based on a desire to provide education to clients and to help business owners, employees and professionals define present and future goals, maximize control over cash flow, minimize taxes, build and protect wealth efficiently and aim to achieve financial independence. The education and advice that Douglas brings to financial planning with clients goes beyond the solely academic understanding possessed and shared by many in the financial industry, using real-world experience in order to better understand client challenges, goals and the emotions that can impact decision-making and communications.
Douglas lost his father suddenly and unexpectedly in 2000. Over the next five years while the estate was in probate, Douglas directly faced many challenges as executor, including: probate fees, estate taxes, attorney fees, business continuity and business and estate debts. This resulted in a heavy emotional and financial toll on family members and business. However, this also provided extensive real-life education on many estate and financial details and through this experience it became a personal mission to help others avoid similar challenges through adequate personal and business financial and estate planning. Douglas is uniquely positioned in sharing these personal experiences to understand the potential impact of gaps in proper planning, and the emotional and financial challenges that families face when going through the estate settlement process. Because of this, Douglas offers unique perspective and educates clients proactively to enhance their financial and estate planning while understanding the emotional and financial challenges they may be faced with during these complex times.
In addition to understanding the necessity of estate planning in financial wellness, Douglas helps clients in all stages of their wealth building and also specializes in focusing on retirement income and wealth distribution. Douglas hands-on experience aligns well with financial planning for other owners of closely-held businesses and he consults on retirement plans, benefits, accumulation of wealth and liquidity within and outside businesses, protection and legacy planning. By working closely with business owners, Douglas can also provide education and guidance to employees looking to maximize their financial achievement, both within and outside of their employer-sponsored retirement plans.
When not working closely with clients, Douglas spends time with his wife, Dawn, and two children, Katherine and Oliver. Douglas has a Single-Engine, Fixed Wing pilot certification and enjoys taking to the skies, fishing, hunting, playing tennis, golf and broomball and cheering on Ohio State Buckeyes sports.
BA, Economics, Denison University
Assets Under Management:
Does any of the $18,000 need to be used for another car? If not, then you should look at keeping enough of it in cash to cover 3-6 months of expenses and emergencies. After that, analyze what got you in debt in the first place. If cash flow is a continual issue, keep all in cash until you fix that. Otherwise paying down the debt will only lead to the same issue in the future. If the debt was due to immediate and unexpected NEEDS (such as health events), then the cash reserves should help reduce the future impact of such events and you can feel comfortable using the surplus to pay off the debts starting with the $6300, then the $7000. Caveat: if the $4300 0% interest is promotional and temporary (for xx months from a purchase of (usually) a retail item,) you should pay that off first since in those tpyes of lending the fine print usually states that failure to pay off by the term deadline results in the new interest rate being retroactively applied to the entire balance you originally had. It's often overlooked and the "trickery" often burns many who use these types of financing, often to financially disastrous results, so get it taken care of.
It can help your score. Besides late payments, the ratio of used credit to available credit has heavy weighting on credit score. This includes both overall used/available as well as used/available per each creditor. So if you reduce your overall debt ratio on cards and add an installment loan instead of variable debt you may see moderate to significant improvement over the next few months. Please note that there may be other variables not disclosed that could affect this.
I personally went through this when my father died (five years of probate) and also with clients. The account is locked because it is in the name of someone who is no longer living. Powers of Attorney end at death because they only apply to your authorization to execute on behalf of a living person.
You need to establish an estate account and move the assets there. To do this you will need a copy of the will, an original death certificate and to establish an estate tax ID (EIN number) that you will need to secure with the IRS for reporting and eventually filing the estate return(s). You can get your EIN directly here: https://www.irs.gov/businesses/small-businesses-self-employed/deceased-taxpayers-filing-the-estate-income-tax-return-form-1041 or a CPA or estate attorney can also assist.
Once you have the EIN, contact the brokerage for instructions on opening the estate account(s) and moving the assets there. They will likely require all three documents confirming the death, your appointment as executor and the tax ID required to report. Once open, they will likely have an easy process for moving the assets into this account, whereas you will be able to transact as necessary.
My condolences to you. Good luck!
This one isn't a simple "black and white" answer. The first question is whether or not you can actually establish a Solo 401k. All 401k plans are "owned and managed" by a company with the individual as participant. For a Solo 401k this is basically one and the same and the company can be either you under an individual sole proprietorship or as an LLC filing under the same status, ultimately resulting in the production of a Schedule C for your annual return or as an LLC or corporation filing a Chapter S or Chapter C return. In order to do any of these options you must essentially have income or revenue outside of your current employer resulting in income reported through 1099 or business revenue reported through the Schedule C or business returns as noted above. If you do not have any "income" outside of what you receive as W-2 income from your employer, then a Solo 401k is not an option for you.
If you cannot qualify to open a Solo 401k then you still have the option of funding an IRA, either a Traditional or Roth or both up to $5500 per year with an additional $1000 catch-up if you are 50 or older and assuming you have earned income in the year of $5500 or greater. Tax-deductibility of a Traditional contribution or the ability to fund a Roth is subject to a) if you have another employer-sponsored retirement plan through work, which you may, and b) income limits and those details can be answered separately if this is something you are interested in.
Therefore, to answer your question I'll assume then that you do have income or revenue that would qualify for you to establish a Solo 401k. If so, you have several options for funding that can affect your question on withdrawals. Without assuming any other details or current employer plan details you can contribute into a Solo 401k as both employee and employer. The employer portion can be up to 25% of earned reported W-2 income from the entity sponsoring the plan (your S or C corp) or 20% of your Schedule C reported income if filed as a sole-proprietor. In addition, you can contribute up to $18,000 (+$6000 if 50+ = $24,000) or reported income, whichever is less, annually as the employee. For example, if you are over 50 and reported $40,000 in schedule C income you could save $8000 (20%) as employer and $24,000 ($18,000+$6000) as employee that year for a total annual contribution of $32,000. And, assuming that you did not face limitations per above, you can still contribute to a Traditional or Roth IRA of $6000 more. Also, while the IRS prohibits rolling a Roth IRA into a 401k, you could roll the Traditional IRA contributions into the Solo 401k as well for a total annual contribution of $38,000 in this example. Another option is that while the "employer" contribution is always tax-deferred, the employee portion can be contributed as either a pre-tax contribution or a Roth contribution, which is important because this can have a big effect on the answer to your question. By the way, not to make it more complex, but this also assumes one more significant caveat: that including any contributions you make as employee to all retirement plans and any matching you receive from any employer from all retirement savings plans (including your proposed Solo 401k) your total contribution does not exceed $54,000 in 2017 as this is the most the IRS will permit. Note: your pension contributions are separate from this limit. Finally, all assumptions are based off of you earning less than the IRS annual compensation limit in 2017 of $265,000. Any income above this is not permitted to be included in your calculations.
Now to your question. What are the advantages and disadvantages? The main question is taxes. If you are considering rolling the funds as a lump sum at retirement into an IRA then there is no advantage or disadvantage and because it is a Solo 401k there really is little need to do so other than to eliminate the additional cost you would be paying annually for required 401k recordkeeping (another consideration when looking to set one up in the first place.) If you are considering a lump sum distribution out of a tax-qualified account to a taxable account then it will depend if you have saved in a tax-deducted "traditional" pre-tax 401k or you have used the Roth as an option. If everything you have saved is "Traditional" then you would pay tax on the entire amount of saved funds based on the amount you have distributed. It's treated like a paycheck - if you withdrawal $100,000 you will pay tax at the level of your income of all sources combined, inclusive of the distribution, any pension income, Social Security, any other earned income, any other retirement plan distributions, dividends or interest. That could result in a heavy tax bill which would significantly reduce your after-tax remaining asset total. We refer to this as your "tax liability" on the balance sheet when we plan for clients' retirement income. If you don't need the funds all at once then distributing it over time may result in lower taxes. The next issue is once you have distributed it then you would continue to pay taxes indefinitely on any income or gains the proceeds earn in a personal taxable account, a very inefficient way to hold these assets if you do not need them for some time. Another option to then consider would be a Roth conversion, which would result in a taxable distribution but put the money into a Roth (income limits do not apply in conversions) and no taxes would be assessed in the future as long as you hold the funds inside of a Roth account for a minimum of 5 years after the conversion.
If you decide to use the Roth option for saving your employee deferrals in the Solo 401k then your options are easier and your potential tax burden lessened. You could certainly take a full tax-free distribution of the Roth proceeds but then if you moved them into a taxable account the annual taxation on the assets would make the taxable account a much less efficient option for future growth than just keeping the funds in the Roth to begin with. Therefore, leaving the funds in the Roth 401k or rolling them to a Roth IRA would be much more ideal in many situations then a distribution that would eliminate the tax benefits of the Roth.
One final consideration is legacy. If you plan to leave any funds from the Solo 401k to heirs then it may actually make sense to try and get the money out of the traditional tax-deferred holdings while living, or plan a charitable giving strategy to reduce the tax burden to heirs. Assets in the Roth are tax-free to heirs and therefore the Roth benefits do not change. However, assets moved out of a tax-deferred traditional retirement account into a taxable account may possibly be more tax inefficient to you while living but upon death the tax basis of any holdings steps up to the date of death value and may result in a significant elimination of potential embedded capital gains that could potentially be worth thousands of dollars in tax relief.
Therefore, in summary, this is not a simple question and depending on many details and complexities in the tax code you may not even have the option to do this at all. Iif you do, the decision to lump sum is dependent on a lot of personal variables that would need to be considered. At a basic level it would seem that in many cases it would be much more disadvantageous to do an outright taxable distribution, but not in all cases, and where you save the money, when you need it, your tax bracket and your legacy are just a few of the variables in making your decision.
Assuming you have posted the question exactly as they have instructed you and there is no confusion then this is a serious red flag. The custodian is merely who holds the assets "for the benefit of" someone else. It's that someone else that should be your beneficiary, not the custodian in any way. Your brokerage in no way should be the beneficiary. This would make them then recipients and heirs to your assets. The beneficiary could be spouse, family, friends, a charity or a trust you have created whom you wish to be the heirs to the funds. For example, if I was leaving funds to my wife as primary and my children as secondary, in the absence of a trust, I would designate the beneficiaries as such with no mention of the custodian. You can, through your estate planning, set up that you wish a certain custodian to remain a custodian or trustee, but this would never be listed on the beneficiary form of an account under the custodian.
Ask more questions and make sure you are clear that this was their intent. If it was, consider moving to a reputable firm immediately and consider reporting it as this violates many laws and industry regulations.