Johns Island Financial Advisor Archives

Roth IRA vs Traditional IRA

June 29, 2015 by Justin M. Follmer, MBA, CFP®, AIF®

The Roth IRA vs Traditional IRA debate is still one that confuses most investors. And now that employer retirement plans are starting to offer Roth 401ks in addition to Traditional 401ks, it’s obvious that without a resource to guide you in the right direction, you may end up paying more taxes than desirable or making a decision that doesn’t fit your long-term financial plan.

You’ve heard me mention this before – rules of thumb apply to no one – and it’s true here as well. There’s no set rule that says everyone should contribute to a Roth IRA, despite what mainstream financial media may say. And just because it’s “new” and “trendy,” doesn’t mean it’s the best tool for your long-term financial goals.

What is a Roth IRA?

A Roth IRA is an individual retirement account that allows your contributions to grow tax-free and after age 59.5, tax-free when withdrawn. The kicker? You can’t deduct the contributions on your tax return.

What is a Traditional IRA?

A Traditional IRA is an individual retirement account that allows your contributions to grow tax-deferred and upon attainment of age 59.5, taxable when withdrawn. The difference? You CAN deduct the contributions on your tax return – given specific limitations.

Perhaps you missed the definition, so let me highlight the important parts:

Tax-free; tax-deferred: tax-free means it grows each year and can be withdrawn free of taxes; tax deferred means it doesn’t get taxed until withdrawn.

Can deduct; can’t deduct: under a Traditional IRA, your taxable income is decreased (can deduct) by the amount of your contribution (subject to phase-out rules defined below), under a Roth IRA, your taxable income doesn’t change (can’t deduct) by the amount of your contributions.

What about the 401(k) side of the debate?

The traditional 401k versus Roth 401k is the same concept as the IRA, except for contribution limits being greater and an employer match thrown into the mix. Keep in mind, an employer must place matching contributions into the traditional side even if you only contribute to the Roth account.

You keep referring to a “debate,” what do you mean?

In financial planning, there are a lot of variables that must be assumed. Growth rates, contribution rates, inflation rates, tax rates, among others. This last variable, tax rates, is where the heart of the Roth IRA vs Traditional IRA debate is. The question is, does it make better financial sense to pay taxes now (i.e. fund the Roth side) or pay taxes in retirement (fund the traditional side) during which it’s assumed your earned income will be less?

While I would love to give you a one sentence answer to the debate, I can’t, and no one else can either. It’s different for each person. Simple math can help shed light on the debate, but we have to make an educated guess on where tax rates will be in retirement. And trying to guess what our representatives in Washington DC are going to do tomorrow, let alone 30 years from now, is quite a challenge.

Regardless of where you are in your earnings years, perhaps just starting out, mid-career or cramming for retirement, we are of the belief that a sound financial plan can help solve the Roth IRA vs Traditional IRA debate as it pertains to your specific situation. We’ll work with you and your accounting professional to come up with the ideal solution to helping you accomplish your financial goals and then give you actionable steps to take to implement these solutions.

Image credit: WAMY

The Importance of Saving

June 24, 2015 by Justin M. Follmer, MBA, CFP®, AIF®

Never underestimate the importance of saving, because it results in future spending. Setting aside just a little at a time can have a big impact on your future financial situation. Keep in mind, slow and steady wins the race. We want to see you succeed in all your financial endeavors, including the most simple. Contact us today and let us help you start saving for the future!

Creating a Successful Financial Plan

June 17, 2015 by Justin M. Follmer, MBA, CFP®, AIF®

The first step to creating a successful financial plan is always the hardest, so give yourself a high five for doing what some people can’t. You’ve identified an area in your life where you could save money and diverted those savings towards another goal. But cutting back your lattes only gets you so far. Now’s the time to take further action and develop a sound financial plan with the help of our Charleston Financial Planner. We’ll help you analyze your entire financial picture and give you further ideas that may save you more money than the cost of a daily coffee. We’re excited to see what you’ve already done and believe that we can help you in creating a successful financial plan. Let’s chat today.

Automatic Investing

June 8, 2015 by Justin M. Follmer, MBA, CFP®, AIF®

We believe that one of the best ways to take advantage of the rise and fall of the stock market is through automatic investing. Automatic investing is exactly as it sounds. You determine a set amount of money you can afford and allow it to automatically invest into a mutual fund or mix of funds on a set schedule each month. We call this Dollar Cost Averaging, or DCA for short and is the very principle by which you invest into your employer’s retirement plan. Using a DCA strategy, you’ll likely achieve the average price of the security over a period of time. Because it is impossible to accurately predict the direction of the markets we usually advise our clients to avoid trying to time the market.

Here’s how to set it up:

Link your bank account to your investment account.
Choose an amount of money to invest.
Choose which funds to invest in.
Choose a time period.
Set up the automatic instructions with your investment advisor.

If you have a long-term time horizon, you’ll want to think of the market in this manner: it’s on sale. This means you want the market to drop in value while you’re buying. It’s a pretty simple concept but yet we often get too lost in the misguidance of measuring short-term gains at the expense of the long-term strategy. The longer you set your focus, we believe the better you’ll feel about your investment strategy. Automatic Investing takes the guesswork out of deciding when to jump into the market. Over time, the markets will hopefully move higher, but while you’re contributing, you want to act selfish and hope you’re buying low so that someday, you can sell high.

There are dozens of decisions involved when choosing an investment strategy. Don’t go at it alone. We’ll help you back test your strategy and offer some suggestions on how you can improve it. We help our clients analyze their investment options and risk tolerance and then build an investment strategy that fits their lifestyle and wherever it may lead them. We want to be your financial partner. Get in touch with a Charleston Financial Advisor today!

Why do I Need a Financial Advisor?

May 1, 2015 by Justin M. Follmer, MBA, CFP®, AIF®

It’s a common question we get asked a lot. ‘Why do I need a financial advisor?’ And it certainly isn’t a question without merit. Our industry has had a few bad apples that have made national news since the 2009 Financial Crisis. With household names as Madoff, Sanford, and Parrish, among others, we too can understand why you would hesitate to trust another person with your money.

**3 Reasons why we believe you need a financial advisor.**

Reason One: You don’t know what you don’t know, until you know it.

There are a lot of mistakes we all make with how we manage our daily wallets and these financial mistakes usually aren’t made on purpose. I commonly say, “you don’t know what you don’t know until you know it.” Why do I need a financial advisor? A Financial Advisor can help you learn new methods of the financial world that you haven’t learned yet. You go about your day with a common goal to earn more, spend less, and make life better for your family and others that you love. But there may be financial concepts that you just don’t know because life is an educational journey; one in which you are constantly learning. A Johns Island Financial Advisor can be your financial educator to help teach you how to manage your money with your long-term, best interests in mind. It’s really easy to get lost in the tiny transactions of life and lose the big picture of how your daily habits add up and affect your much larger financial goals. With a financial advisor by your side, you have a resource you can use to help you make more informed financial decisions.

Reason Two: Advice on Managing Investment Allocations and Risk Tolerance, Specific to You.

If you’re like most people, you’ve been told that your biggest assets are your home and your retirement plan (401k, 403b, etc.) at work. While these are big and important, we believe your biggest asset is your future earnings potential. This assets is like the hammer of your financial tool box; it’ll likely be the most used component in your financial projects. How you allocate your earnings, meaning where and how much you spend, how you choose to invest in a particular security, mutual fund, ETF, stock, bond, etc. has a dramatic effect on the possible outcomes of your financial life. Why do I need a financial advisor? A financial advisor can help show you the long-term effects of your financial choices through the development of a financial plan and investment strategy that’s appropriate for your tolerance for risk. The investment advisory world is highly technical, complicated, and involves great risk, up to and including the loss of 100% of your hard-earned money. We believe you shouldn’t leave the results to chance and should develop your own plan. Over the years, many people have tried to simplify it through crafty rules of thumb, but the reality is that financial advice is only good for one person at a time; it has to be tailored directly to you and your specific situation.

Reason Three: Your Time is a Precious Resource.

A long time ago, someone decided that there would be 24 hours each day. And it’s time you start believing that your time, just like your money, is a precious resource. You only have a limited amount of it. The financial world is full of IRS rules, financial data, expense ratios, risk, and numerous other often confusing and complicated concepts…and the worst part, they are constantly changing. It’s a full-time job just keeping up with it all! As your wealth grows, your life doesn’t get simpler like most people think, it gets more complex. Why do I need a financial advisor? A Financial Advisor has the tools and methods available to help you manage your financial life and limit the amount of time you spend on it. A small investment into a fee based financial advisor cost could save you a lot of time that could be spent doing activities that you actually enjoy. Afterall, we believe true wealth are the memories we build with the people that we love.

We work with our clients to define their long-term financial goals and then build action-based savings and investment strategies to help them accomplish those goals. Our financial planning process has helped others and we believe we can help you too. We have a fiduciary duty to our clients. This means we must do what is in your best interests, regardless of our own interests.

image credit: crdotx