Ask the Adviser: Investing for Retirement
Last month, we piloted a new type of podcast in which we directed your questions about money to one of the financial advisory firms we endorse. Based on the strongly positive response we received from listeners, we are going to make this a regular recurring feature.
In this week's podcast, Chris speaks with Bill Cole, Mike Preston and John Llodra: partners at the other firm we endorse.
A disproportionate percentage of the questions our readers have submitted are about retirement. So this podcast focuses exclusively on that topic, addressing such issues as:
- If much of my retirement capital is within an employer-sponsored plan, what are my options?
- What are the risks of keeping my money in a retirement plan for years to come?
- Even though I'm not retired yet, should I cash out of my 401k/IRA?
- If I withdraw early to invest in other assets, what sort of hit will I take? Are there ways to avoid early withdrawal penalties?
- If I'm over 59 1/12, how should I determine my schedule for making withdrawals?
- How can I hold precious metals in my retirement account?
- What is a non-traditional IRA and what investments can I hold in it? How do I go about opening one?
- What exactly are annuities? Do they make sense any more as a retirement vehicle?
As with last time, there wasn't enough time to make it through all of the prepared questions. We will address the remaining ones in a future podcast.
After last month's podcast with Bob Fitzwilson, we received a large number of comments from readers relieved to hear the perspective of an experienced adviser whose investing outlook is aligned with the Crash Course framework.
So if after listening to this podcast, you find yourself interested in connecting with Bill, Mike, John and the rest of their team to learn more about their advisory services, please use the form here to do so.
Transparency note: As a result of our public endorsement, Peak Prosperity has a commercial relationship with this firm. The details of this relationship are clearly presented in writing during the referral process -- but the punchline is, our relationship does NOT result in any increased fees to those who become clients.
It should go without saying: this discussion should not be construed as individual financial advice by those listening to it. The content should be taken as informational and educational in nature only. Investment advice must be tailored to your specific personal situation (which Chris and his guests are obviously unaware of) and should be obtained directly from a financial advisor you trust. Before acting on any of the statements made in this podcast, we advise you do just that.
Click the play button below to listen to Chris' interview with New Harbor Financial Group (47m:27s):
Chris Martenson: Welcome to another Peak Prosperity podcast. I am your host, of course, Chris Martenson. Today we’re offering the second segment in our financial podcast series. Now, as most of our readers are aware, Adam [Taggart] and I have worked hard to identify a few independent financial advisory firms that see the world through a similar lens as we do. We did this to have a useful, well-vetted solution to the many requests we get each month from people seeking a referral to financial advisers who “get it.”
Now that we’ve endorsed these advisers, we thought it would be a helpful exercise to bring them on the program from time to time to ask them to address the money-related questions our readers care about most. So today we’re going to do just that.
Once again, we’ve asked you to submit your pressing questions about 401ks and other retirement accounts. And, boy, did you deliver. Today I’m pleased to be speaking to the team at New Harbor Financial. That’s Bill Cole, Mike Preston, and John Llodra.
Now, before we get started, I’ll make it clear that Peak Prosperity has a commercial relationship with New Harbor Financial, one in which fees are shared on referred accounts. It’s important to note that this arrangement does not result in any increased fees charged to the end consumer. You’re charged the same as if you had walked into the front door. All the details on this arrangement are provided clearly in writing during the referral process.
Okay, now, with that out of the way, how about each of you briefly introduce yourselves by telling us how long you’ve been in the financial profession and your role at New Harbor.
Bill Cole: Hi. Thanks, Chris. I’m Bill Cole. I’ll go first because I’m by far the eldest here. I started in 1980 with Payne Webber, actually. I stayed there until we – the three of us – left Wall Street, so to speak, in order to establish New Harbor Financial Group. We did that in January of 2005. And all has been very good since then. It’s nice to talk to you again, Chris.
Mike Preston: Hi, Chris. This is Mike Preston. I’m one of the partners here at New Harbor Financial. I’ve been in this business since 1999. Thanks for having us in the podcast today.
Chris Martenson: Oh, my pleasure. John –
John Llodra: Hello, Peak Prosperity listeners. John Llodra here. I came to the financial services industry by way of the energy industry, first as a management consultant and then as an executive at an investment bank in commodity energy trading. I’ve been in the retail financial services industry since about 2002.
Chris Martenson: Great. Thank you all. So, New Harbor – you all joined up together. It’s a great firm. It happens to be one that’s managing money of relatives of mine as well. What is it that you think makes you stand out – makes you different from potentially other advisory firms out there?
Bill Cole: Well, let me answer that. It’s Bill here. At first, anyway, we started New Harbor because we recognized that clients – and we felt that the proper way in which to address client concerns and manage money and retirement goals, etc. – required that we be independent. We’ve certainly not regretted that. We’ve been happy to avoid all the embarrassments and conflicts of interest that our former employers got into later. At New Harbor, we’ve been able to be completely on the same side of the table as the client and talk to them about things that often don’t involve investments per se – certainly not financial investments. We help with debt management, and we help with outside assets and a lot of the concerns that many Peak Prosperity listeners and others have.
So we established it that way. We work with clients on a holistic sort of basis to see where they stand and where they want to be and how we can hopefully help them get there with the least amount of risk.
Chris Martenson: Excellent. It was a number of years ago that you and I, Bill, got together because you had watched the Crash Course. Starting at the outside here, the world of investing – look at all the predicaments we have out there. We’ve got them in the economy, energy, the environment. Further, the most heavily interventionist Fed in history coupled with the most asleep-at-the-switch regulatory environment. What sorts of investing principles govern your daily actions and overall portfolio strategy here?
Bill Cole: Well, I’d have to say that we put a real premium on flexibility. We do not accept that the so-called “traditional” paths to investing and success are going to work. We agree with you, Chris, that the next 20 years – and we're probably already in them – are going to be unlike those of the past, and we want to be able to be flexible. We don’t know just what that means or when it’s going to happen. Therefore, we have to diversify and, as they say, stay pretty nimble. We do not want to be tied into any vehicles or any plans that are going to hold us in place when we would perhaps be seeing decisions and patterns unfold. Decisions by banks and governments and investment trends change. We don’t want to be trapped into anything.
So we believe those diversifications that are critical involve cash. They involve physical metals, as we’ve talked about with you and clients many times; other hard assets; skills, as I said; debt management; allocating in the proper place; and basically nontraditional investments like mutual funds and limited-choice 401ks, etc.
Chris Martenson: Great. Speaking of not wanting to be trapped, a lot of our listeners right now do feel trapped, trapped by their retirement accounts. The number one question we get at Peak Prosperity, either at the website or when I’m traveling, is should I cash out my 401k? or derivatives of that question. I know there’s no easy answer to that. There are a lot of variables to consider, including age, income, tax bracket, other assets, many more. So, to begin to unpack this really complex and vitally important topic of retirement and retirement accounts, let’s walk through it carefully.
So, if I approached you guys at New Harbor and requested help with retirement planning, what would the process be like? Can you walk me through it?
John Llodra: Sure, Chris. This is John. Well, the first steps we would take are probably not unlike many other well-qualified financial service firms. We would first want to meet with the client in person or over the phone. A lot of our clients are very geographically distant. We certainly can do our work over the phone. We want to take a pretty in-depth inventory of our client’s particular situation – routine things like inventory of assets and liabilities, some of the softer things like what their concerns are, what their goals are. We’d also like to – in that discussion – talk with them about areas where they may have invested in their own resiliency, a common scene that many Peak Prosperity readers are certainly in tune with and have taken meaningful steps to make progress with.
We very much know what we can do for clients so far as investment management. It’s just one quadrant of their life that they should be taking very serious and thoughtful steps to prepare for. We would ask them about their timelines in terms of needs for money and what kind of goals they have for themselves. We would certainly review investment allocations. That’s where it would really tie back into Bill’s comments about our belief that flexibility and nontraditional investment approaches are very much – not only important, but we would say critical for the years ahead that we would foresee.
So, we would look for ways to coach them as to how – either working with a firm like ours or on their own self-direction – they can either avail themselves of solutions that are available to them through their retirement plans at work or otherwise, or coach them through some specific mechanisms by which they can kind of get un-trapped, if you will, from those plans.
So, for example, there are very specific rules that one can comply with to get money out of employer plans without incurring tax penalties or taxes on the tax-deferred monies as well as IRAs. For example, many clients or prospective clients are not aware that even while they’re still working at a particular employer, many times they can get money out of these employer-sponsored plans that have typically very limited investment choices that don’t allow for a 3Es-strategy use of the Peak Prosperity lexicon. Things like an in-service roll over, where you can roll over an employer-sponsored plan – without leaving that employer – into a self-directed IRA, which can be invested in almost an unlimited number of ways. And then there are specific tax code rules, like section 72t, that allows one, no matter their age, to take money out of an IRA without the normal penalties that would apply for someone who is below the age 59½. We’d be happy to explore in detail those rules with you.
Chris Martenson: So let me get specific, then. Let’s assume I have a retirement account and it’s from a current employer. I’m interested in protecting it, at a minimum, but maybe I have an open set of questions as to whether I should add more, because my employer has this incredible matching function. Maybe I don’t add any more – does that make sense today? Or maybe I take some out and redeploy it elsewhere? Or maybe even just dump the whole thing, take the hit, and use the money in some other way? That’s the typical range of options people are considering here.
So, let’s start right at the top, then. I have this employer-sponsored plan and I’m in it right now. First of all, I want to protect it. I want to make sure this is reasonable and well-run and it’s going to be there for me. How do I begin to approach that?
Mike Preston: Hi, Chris. This is Mike. I’ll respond to that. You’ve really raised a lot of topics there that are very important and a lot of our clients are asking. They are very concerned about the safety of their funds inside of a 401k plan. When assessing the safety of a 401k plan, there are really two sets of risks that you have to be concerned with. One would be the risk of the custodian itself. If you had a 403b – which is a plan very similar to a 401k at an insurance company, where most of them reside – we’d want to take a look at the safety and the financial stability ratings of the insurance company.
For the most part, 401ks are held at very large providers, and other than reading public documents, there’s not really a lot you can do to assess the underlying viability of that institution. There are some things we can take a look at. I probably prefer to handle those on a one-by-one basis. I think a bigger risk is the investment risk inside of the 401k. We will probably talk about the risk of confiscation a little bit later, but it’s really investment risk that I think we should focus on here. That’s the easiest thing to get your arms around.
In terms of investment risk, we tend to run into a lot of clients that are locked into a 401k and don’t have a lot of choices. That’s the number-one complaint we have, that clients don’t have a lot of fund choices inside of their 401k. They might only have four or five choices, and they won’t typically include any nontraditional choices like either inverse or short funds, or gold and precious metals funds.
So, if really their problem is limited fund choices – which is by far the biggest complaint we see – we would ask them to lobby with their employer to perhaps change providers. Then, changing to a different provider, obviously we could choose or help them choose one that’s a little more financially safe. But at the same time, make sure that new provider offers a lot of alternative choices like I just mentioned – perhaps falling dollar funds, or inverse funds, or gold and precious metal funds.
Also, some plans offer a self-directed brokerage window, which means you can take a portion of the money in your 401k and invest it through a regular brokerage account. Of course, when you do that, you can invest directly in just about anything you want – including gold and precious metals, exchange rate funds, and closed-end funds, and things like that. If it’s a company owner, for instance, if it’s a small business owned by one or two people – a small firm with not a lot of employees – you can shut down the plan and potentially even choose a plan with more flexible options like a simple IRA, or a SEP IRA if it’s a very small company.
Chris Martenson: Okay. That’s excellent advice. Mike, you said [there are] two big risks here. We have custodian risk. We’ve got the investment risk. On the investment risk side, maybe our hands can be a little tied if our 401k opportunities or universe is not that large at the company we work for. So, we might lobby. Maybe we could get to self-directed brokerages.
But let me start with the highest level of investment risk there is. What are your views on the good old days of buy-and-hold? That is what I was always told, once upon a time, and it’s tempting, right? You just put money into your 401k, close your eyes, hope for the best, wake up in 20 years, and look at your statement and hope you did good. Where do you stand on buy-and-hold these days?
John Llodra: Chris, this is John. I’ll chime in on behalf of our team on that. Really, getting back to Bill’s opening comments, we do place high value on flexibility. That, by extension, means we don’t really believe that traditional buy-and-hold approach is fitting for the times we’re in. These markets are very volatile, and we expect them to remain that way – certainly fueled by some of the policy decisions that we’ve seen come from policymakers throughout the world.
Buy-and-hold, if we could translate that in layperson’s terms, is blind faith in markets. We certainly have a healthy skepticism, as we think most folks should, for the financial markets in the traditional sense – stocks, bonds, and that kind of thing. That’s why, where most industrialized financial service firms would lead you to believe that every day you're out of the market is a lost opportunity, we think the hallmark of investment success is knowing when not to invest, or at least having times of restraint in plowing one’s financial assets into financial markets.
That’s why, when we measure risk to be high and rewards to be on the low side, we’ll routinely hold sometimes high levels of cash in an account. Not because, certainly in the current environment, we think cash is ticking off a lot of meaningful interest, but it’s simply a safe haven to keep some powder dry for when we expect pullbacks in various financial assets to present more attractive buying levels. You know the old adage: Buy low; sell high. Well, you can only do that if you have cash on hand to buy low. So that’s one of the most simple ways of shunning the buy-and-hold approach in favor of a more flexible approach.
Chris Martenson: All right, so let’s assume we're comfortable with the custodial risk. We’ve got an investment strategy. We’re proportioning across the 3Es strategy, if that’s what appeals to us. Maybe we're diversifying by holding cash as a reasonable asset. We’ve got maybe gold. We’ve got other ways of sort of diversifying into what we think this environment is. But let’s start with the question around withdrawal. I face this question from people who are young and people who are very close to retirement age or in retirement. How do you go about the process of withdrawals? I know it was mentioned earlier that there are some provisions in the code – 72t and things like that. I want to understand what the process is for assessing when and how much to begin the process of withdrawals.
First up, are there any big differences between the different types of retirement accounts out there that I need to be aware of?
Bill Cole: Right – Bill here, again – yes, there certainly are. The employer-sponsored plans like the 401k and the 403b typically – but not always, especially in recent years – come with the provision of a match by the employer. I will say that in general, the main reason – and for some people the only reason – to participate in an employer-sponsored plan like that is to get the match. Therefore, we often find ourselves telling people, sure; they’re going to give you 100% or 50% or even 25% of the first three or four or five or six percent of your salary that you put into that plan. Then, go ahead and do it. Collect the match, which you're entirely invested in, but don’t do any more than that. That extra part you might do beyond a match is – really, the only benefit is the tax deferral.
In traditional days, people would say, my tax bracket is going to be lower when I retire. I can save and compound with this buy-and-hold strategy and take it out later and everything will be fine. But we don’t believe that’s likely to be the case. We certainly suggest that the matched part is enough to put into those plans. Beyond that, if they want to continue to save somewhere else, they can do it in a taxable account, which has various tax benefits, too, like long-term gains treatment; dividend tax treatment that’s favorable. They also could invest in a Roth [IRA] if they wanted to, rather than the tax-deferred IRA or additional monies in the 401k.
Click back, though, to one thing I wanted to add when we talked about withdrawal strategies from a plan in general. Mike had mentioned that if you actually control the company, you might want to replace the plan. And one key component of that strategy is that by closing the plan rather than simply replacing it, you might actually free up all that money to go into a self-directed IRA and then start a new plan if you wanted to. Many employers don’t like that concept, but the ones that are in control might be able to do it.
Secondly, there are some easy things we should just touch on real quick. If you're in a 401k and you're wondering how to get your money out, remember that the money that came from a former employer that you might have rolled into that one is available for you to move right from that current employer’s plan into an IRA.
There’s also the situation where if you are laid off or quit or whatever, and you're 55, that’s where the penalty comes into play with your 401k plan. In fact, it’s only 50 years old if you're a firefighter or a police officer; you can access that money without that penalty. So there we want to be careful not to take that out and put it into an IRA, where it would be subject to that penalty up to 59½.
So, getting the money out – I think it’s important to have a strategy to get the money out and over the tax hurdle. We do have the 72t strategy, which is a complicated formula. But to take money out of that, you basically can pull it out and avoid the penalty as long as you do it with substantially equal periodic payments and do it until you're 59½ or for five years, whichever is later. Therefore, you can get some money out anyway. The numbers are approximate, but if for every $100,000 you put into a 72t program – and by the way, there’s one for annuities too, 72q – every $100,000 of money that you put into that program will get you, if you're 50 years old, about 3.5% typically. So, if you've got $100,000 there, you can get a little bit of money out every year anyway without that penalty. But you're committed to stay with that plan. You don’t have to do it with the whole balance. You can commit some to that strategy.
Earlier, John had mentioned in-service withdrawals, which are sometimes available depending on the plan. And then, the situation also where you simply decide to pay the penalty and get the taxes out. You can run illustrations and you’ll typically find that you better really be comparing it to a much higher tax bracket down the road in order to pay normal taxes, plus the 10% penalty at this point. Some people are committed to doing that, but many are not.
You also want to look at your tax bracket. They’re probably going to rise for everybody. We don’t know that, but probably they are. People should be aware – for many reasons – of where their marginal bracket is and take money out to the upper end of the bracket [in which] they’re willing to pay taxes.
Chris Martenson: What were these in-service withdrawals? Can you spell those out for me?
John Llodra: This is John. The very first place listeners should start is by obtaining or asking for what’s called the Summary Plan Description for the qualified retirement plan, be it a 401k or 403b. That’s a layperson’s kind of description of the plan that they’re in. Every plan is required by law to provide that Summary Plan Description (or SPD, for short) to anybody that requests it.
If the listeners have an online portal that they can log into their 401k plan, if it’s at a firm like Fidelity or a similar firm, oftentimes there’s a document section in their login. They can simply go to the document section and they’ll most likely find a copy of the SPD, or summary plan description. In that, there will be certainly a section that will speak to the scenarios by which folks can get money out of their retirement plan. The usual one is, when you separate from service – get fired or electively leave – that’s certainly an event where one can roll money out of an employer-sponsored plan.
But, many plans – and we find that typically some of the larger blue-chip type companies have this feature, more often than not – will offer what are called in-service withdrawals or distributions. That simply allows an employee, sometimes regardless of their age, to do a rollover of funds to a self-directed IRA while still maintaining employment at the particular company, and thereby allowing themselves to get access to a self-directed investment strategy that can tap into a wide variety of assets.
It’s funny. Many folks aren’t aware of this. In fact, we’ve had many clients and prospective clients get to the point where they literally considered quitting their job just to get their money out. You can bet they were very relieved to find that they didn’t have to quit their job to get their money to a more flexible investment platform.
Chris Martenson: Wow. That is a serious consideration, then. Some people, though, are considering the idea of taking withdrawal because they want to just get the money out of whatever vehicles they happen to be in at this point in time. I’m sure there are a lot of implications of that – your age; the tax bracket you're in right now. Bill, you had mentioned the future potential tax brackets. There are a lot of variables that have to factor into that. So I assume you'd help walk somebody through that.
A question we get a lot though – I know nobody can predict the future – is where are tax rates going to be in the future? You gave a little tip of the hand, Bill, when you said potentially a lot higher. Given the state of the world and where governments are going, that seems to be useful. How do we get our arms around this idea that the rules will get changed – be those tax rules, be those withdrawal rules, be those age limitations, whatever those rules happen to be. Is that something that you make a pass at in your planning? Or is that something you just advise people that we just have to wait and see?
Bill Cole: Well, we do like to weigh different possibilities and guide people accordingly. But that guidance typically has to do with diversification and flexibility, as I say, because we don’t know what’s going to happen. It’s easy to imagine some scenarios where tax rates would rise for people with substantial income, or perhaps even someday people of substantial wealth, and not so much for people who are having a hard time. Many people, as long as they’re working, they’re not concerned so much about pulling their 401k or IRA money out at a high cost. But if they’re unemployed, then they would need to get to that money.
So, let’s remember that if that happens – or they have substantial medical expenses or college expenses and some of those things that do qualify for tax exceptions from withdrawal – if they need it later, there’s a good chance they won’t be in a high-income tax bracket because of their loss of employment, typically. So we may want to weigh some scenarios like that. Or, if somebody says I’m going to move to my farm on the countryside, I’m not going to have much income, and therefore in three years my tax bracket is going to drop way down. Well, that might be a good time to say, instead of paying a penalty now, let’s go ahead and look at taking income out at a very low bracket down the road. Perhaps a low bracket, even if they’ve risen in general.
We can kick around scenarios, but of course we can’t predict what’s going to happen. Except that it’s hard to imagine that taxes are not going to rise for at least some of the population, given the deficit situation.
Chris Martenson: Sure, and what about in the case of somebody who literally has all of their retirement assets parked in a 401k and they don’t have any access to precious metals, don’t feel they can get access to that within the construct of their 401k? This is a question that does come up. People say, I would like to have precious metals exposure, but I don’t see how to do it, and all my money is tied up over there. What would your advice be there?
Bill Cole: Well, it comes up a lot for sure. Like Mike had mentioned earlier, you can lobby for different choices, so maybe they’ve got something to do in there inside the plan. If they end up wanting to get some metals, not wanting to pay the penalty, then the 72t withdrawal situation that we talked about can make some sense. Again, if they have all their money, as you say, tied up – let’s just say it’s $500,000 in a 401k and they need money out at 55 years old. They’re going to be able to take out $20,000 a year that would be taxable but not subject to a penalty. That money might be well-invested in precious metals; sure. They can do that. Or they can go somewhat beyond that and pay the penalty if they decide to. You don’t have to do it with the whole thing. But you know, it’s hard to imagine rates are going to rise very quickly – like in three or four years – so that everybody is going to be paying a 50% bracket on whatever they take out.
John Llodra: Chris, this is John. One thing you're hitting the nail on the head with here is, many folks aren’t aware that really – specifically with respect to IRAs – let’s assume you can get some money out of your employer-sponsored plan into an IRA account. There are a lot of nontraditional assets that one can hold in an IRA. In fact, the law allows you to hold essentially anything in an IRA except for collectables, like artwork and things like that, and life insurance. Anything else is legally possible. For example, one can own farmland – physical farmland – in an IRA. One can own a strip mall if they are so desiring, not that we're recommending that. But, the point is, you can hold a lot of different nontraditional – nonfinancial, I’ll even say – assets in an IRA.
So, folks that are inclined to want to ensure a big tax hit to get money out to put into nonfinancial assets, they should know they don’t necessarily need to do that, because they can hold these kinds of things in an IRA. The trick is when you're talking about nontraditional assets like this – and physical gold bullion would qualify in our minds, as well as physical land or business entities, for that matter – the trick is finding a nontraditional custodian that will serve as the reporting custodian for this nonfinancial, nontraditional asset.
Many of the readers’ questions touched upon this. In fact, we saw at least one response [that] rightly pointed out that if you do a Google or a web search for nontraditional custodians, there are dozens of firms out there that do this. There’s no shortage of firms that do this. There certainly are some things we’d advise folks to look for and be careful of in doing this, but just know that these options are available.
Some of the things you want to be mindful of is – or think about – are things like, say we’re going to invest in physical farmland in an IRA. Well, if you sell crops from that farm, technically the proceeds need to be retained inside the IRA. You can’t take the money and go buy a car with it, because it essentially would be a distribution from the IRA. There are actually some pretty complicated rules. So, if you're going to own a farm, you're most certainly likely to form some kind of business entity.
There are a couple terms I’d like to throw out, and our time constraints here really don’t allow us to dive deeply into these. But there are what are called “prohibited parties” and “prohibited transactions.” Quite simply, prohibited parties are the IRA owner – him or herself, their parents, children – direct lineage, basically. For example, you can’t buy a house in an IRA and live in it, because you're deemed to be receiving a current benefit from that house that would invalidate the tax-deferred nature of that holding. Likewise, you can’t buy a house and have your mother live in it, because, again, it would be a prohibited party.
There are also prohibited transactions. This is where it gets to the level of higher complexity, and we certainly can’t touch upon that in detail. But things like, if there’s a business entity, no more than 50% of the ownership interest can be comprised collectively of prohibited parties.
Now, there’s a lot of good resources out there. In fact, we came across a small, nontraditional custodian that has a wealth of educational resources on their website. That particular company is called Advanta IRA. The website is advantatrust.com. It’s a small company, so we urge clients to do their own due diligence, but they have a lot of good educational resources on this topic on their website.
Chris Martenson: In every case then, do all of these nontraditional IRAs – whether we're going to be investing in farmland or in some sort of real estate or potentially in something else – those all have to be held by a custodian?
Mike Preston: Hi, Chris. This is Mike. I’ll respond to that. Yes, you need to have a custodian involved when you are investing IRA money in nontraditional assets. Now, the nontraditional custodian, if we could use that term – all they really are is a service provider. The two biggest things a nontraditional custodian does are, they receive money from the IRA owner, and then they send a check off to the ultimate investment. So, basically, they make the investment for you. That’s one of their biggest functions. The second biggest function that they perform is that of a record-keeper. So they will take into account annual evaluations and appraisals and things like that of assets. In the case of precious metals, it’s pretty easy, because they’re marked to market basically by the minute. Those are easy to value.
In the case of real estate, an appraisal might be ordered for annual evaluation. The evaluations are important because these custodians have to report to the IRS, on form 5498, the valuation of the nontraditional IRA on an annual basis. They also will take and process distributions for the IRA owners and send the 1099 to the IRS as well. So, really, they are a service provider, a liaison, or a middle-person (if you will) that helps you get the nontraditional investment done.
But once a nontraditional investment is done, that money is off at the ultimate destination. For instance, if you're buying a piece of farmland, the party that sold the farmland will receive money from the nontraditional custodian. Really the only way the nontraditional custodian will be involved from that point is they’ll do an annual evaluation and the appropriate reporting to the IRS.
Chris Martenson: So, I’m interested. Maybe I want to hold precious metals. Maybe I want to hold farmland. Maybe it’s life insurance as measured. How do I choose a custodian? What are the things I want to consider here?
Mike Preston: Okay, again this is Mike. Let me point out that life insurance is prohibited in IRAs – life insurance and collectables. But, talking about the other assets such as precious metals and other tangibles –
Chris Martenson: Clear this up for me real quick, because I know that precious metals are taxed at what’s called a “collectables rate.” So we’ve used the word collectibles as not-okay in a self-directed IRA. Can you clarify that for me?
Mike Preston: Yeah; in general when you hold collectibles – precious metals – in a regular taxable way or in a taxable account, a special collectibles tax rate of 28% does apply, which is a maximum tax rate. Of course, if your income is in the lower levels, then you might actually pay less than 28%. However, when you hold precious metals and nontraditional assets like that in an IRA and then ultimately take possession of them – that is, to distribute them out of the IRA – you'll pay tax at your present marginal tax bracket. So really, people are confused thinking they always pay 28% on distributions of, let’s say, gold from their IRA. That’s not true.
If they either sell the gold inside the IRA and take the cash out, or take a distribution in kind of the gold, the value of that distribution once it’s pulled out of the IRA will be taxed at that IRA owner’s marginal tax bracket. It will be taxed as ordinary income on their Form 1040.
Chris Martenson: Okay, great. So, in this nontraditional IRA, we can hold everything except collectibles – but precious metals are okay – and life insurance; can’t hold that either. So, how do I choose a custodian here?
Mike Preston: Choosing a custodian, it’s important to understand – as I mentioned earlier – a custodian is simply just a service provider. So, there’s really a couple things you have to think about, but really one of the most important besides safety – I’ll get into that in just a moment – one of the most important is how’s their service, because that’s really what their job is. Are they responsive? Are they reachable? There’s some big firms out there that are very hard to get in touch with. There’s some big firms that are great. There’s some small firms that are very, very easy to get in touch with and help you answer the questions that you have.
So first of all, you have to try to assess what is their level of service. Really, that only comes about by making a few calls. You can just – again, as John mentioned earlier – do a Google search. There are a number of large firms, three to five firms that will come up right away if you do a Google search.
Really, the only thing to be concerned about besides their level of service is who is their custodian. So, some of the smaller firms are service providers and they have a separate custodian. Some of the larger firms have their own custodian. You really want to drill down to who is the custodian that is reporting and where are uninvested funds held.
So, when you send $100,000 off to one of these nontraditional custodians, where is that money held? For instance, if you send $100,000 off and then subsequently buy $50,000 worth of gold, where is the $50,000 in cash held? That’s pretty important. You want to be sure that it’s held at an FDIC-insured bank and that those funds are secure.
John Llodra: Then, of course – this is John – I’ll add to that. In this example Mike just laid out, where you're buying physical bullion, the key piece on that $50,000 is where is that bullion being held physically? This is different than the custodian. Typically the custodian doesn’t do the holding. They’re typically a depository or vaulting option that is separate from the service agent/custodian. You know, obviously one wants to do their due diligence in terms of the segregation practices of the particular vaulting option that’s being utilized. You want to be able to verify the existence; obviously the whole reason for holding the physical gold of your physical allocation. So, the two together are very important points of due diligence that one wants to go through.
Chris Martenson: All right, and there is some complexity here in this nontraditional IRA. You mentioned before there are these prohibited parties and transactions, direct lineage, can’t derive the present benefit. You mentioned a website before, John, that is advantairatrust.com?
John Llodra: No, to clarify, its advantatrust.com. Again, we point to this because we’ve found it to be a great website for information. Certainly, due diligence is needed with all these custodians, but they have a very good educational page there for interested readers.
Chris Martenson: Oh, I’m interested. So, I’m going to go look at that. So, that’s advantatrust.com. Thank you.
So, what I’m getting from this whole 401k/IRA/nontraditional IRA discussion is that obviously there are a lot of moving pieces. There’s quite a bit of complexity built up here. One of your specialties is helping people sort of sift and winnow through all of these options. They’re fairly specific and unique, it seems. Even though there are some broad brush strokes that we can paint, I guess almost every circumstance has its own wrinkles.
Bill Cole: Well, there’s truth to that, yes. It is complex. Let me just interject that because complexity is generally not something we favor, I would say if somebody wants physical gold – and they often ask how to do that in their IRA – I would suggest they first ask whether they have all they want or can afford outside of an IRA. I mean, to physically have possession it seems to me to meet the basic reasons that we would have such a thing, much better than having it anywhere in an IRA.
Chris Martenson: Oh, absolutely. I fully concur with that.
All right, let’s move on. We’ve got a little bit of time left. I know that IRAs and 401ks and whatnot are just one component of the retirement equation here. What about Social Security benefits? We get a lot of questions around those people who are wondering if they’re young, are they going to be there when I get there? For people who are close or are actually already receiving, there are still considerations and things to know. What’s the basic primer there? What do we need to know about Social Security?
Bill Cole: Right; Bill here, again. I would say that for the younger people, first of all, they don’t have a lot of choice. It’s going to be going into the system through their payroll, and probably if they’re self-employed, they should be making those contributions anyway, in order to build up their eligibility and then find out down the road what they really get. They certainly are much more likely than people in their 50s to see a real erosion of the likely benefits they’ll get.
That said, people in their 50s probably will see a further pushed-off full retirement age, perhaps a different indexing of benefits, maybe more means testing, maybe more taxation of the Social Security benefit – which is, right now up to a maximum of 85% of it is taxable at a normal rate. So we’ll probably see some impact on that. But I’m not one to say that we shouldn’t count on those benefits, particularly for people who are 50 or above. Obviously it’s a huge voting lobby, as you pointed out many times, Chris. Politicians are not likely to mess with that if they don’t have to. They may erode it, but I think there will be benefits there for people. Let’s just assume that.
What people really need to understand is the best way to take that money. Most would know you can start at 62 – full retirement age for most people – and take a reduced amount at that point, or you can let it go longer, all the way up to age 70, where it maxes out at an amount about 8% higher per year than had you started at 62.
Generally, that makes sense to do if one can afford to, or at least go to 66, particularly if one is married, because the spousal benefit is going to continue for the survivor at the same level where it was set by the higher earner. But let’s also talk about the inner play – briefly, here, because it’s very complicated – of spousal benefits. A couple goes in and decides on the best strategy. They’re not likely to get this advice just from the Social Security representative. It’s claimed that there’s ten or more billion dollars a year in benefits that are simply not collected by people because they don’t choose the right strategy annually.
So, when the couple goes in, they really want to look at their age, at their respective benefits – which are based on their earnings history – and then decide whether it’s best for both of them to start at one point, like 62 or 66, or both to defer, or whether or not – this is more likely – that it makes sense for one of them to file, but not actually collect it; let their own benefit go longer.
But by filing-and-suspending, as it’s called, the spouse, at their own full retirement age, can come in and collect half of the benefit that the person who is actually in deferral on it would have collected. So that spousal benefit can be very valuable. Then, later, they go onto their own benefit if it gets to be higher than the spousal.
So there’s a real inner play there, and people have to understand those things. So they’ve got to go in armed with the right questions to get the right answers. The same kind of things happen when you talk about survivor benefits, where it’s a complicated area and many benefits are left on the table.
Chris Martenson: How about for annuities? Do you find people coming to you with questions around annuities? Are annuities things that really can be managed? Or are they for the most part really fixed and just something you have to accept as-is? What are the options there?
Bill Cole: I’m glad you asked that, because it does often come up. Many times we’ll take an inventory and people will say, yeah that’s everything I have I can do anything about, but I do have some annuities over here. They think they can’t do anything with them, which is generally not true at all if they haven’t already annuitized and turned it into a monthly payment. So deferred annuities – whether they’re fixed annuities (which is an obligation of the insurance company) or a variable annuity (which is basically a tax-deferred mutual fund account) – either of those can be moved into more modern vehicles that have many more investment choices, including some in precious metals, or against the dollar, or against the market, even, and so forth.
If they’re beyond a penalty period – that’s usually three, four, five, six, seven years that they’re committed to stay in the original product – once they’re beyond that, they can move outside that and find a better home for it, perhaps one that’s managed and much more flexible. Every annuity has really two components. The amount of money that went into it, which is after-tax money, assuming we’re not talking about investing in an annuity within a retirement account. So, they have their original after-tax money that goes in. And then everything that it has grown by, which is all taxable income, deferred as it would be in an IRA and not taxed until it’s taken out, and then taxed at normal tax rates – same as an IRA.
But, there are ways, as I said earlier, including a 72q option, which allows you to avoid the same kind of 10% penalty that applies on annuity income before 59½. But basically, we want to see that people have the best choice, have the beneficiaries lined up the way they should be, manage that money, and have an exit strategy, if you will, for when to pay the taxes on it. So, yes, finding out what they have and what options they have and how they could improve the situation is important.
Annuities can go from one old contract to a new contract without any taxes or penalties through what’s called a 1035 Exchange.
Chris Martenson: All right, and thank you for that. We did not make it through all of the questions that were submitted here. There are a lot of other ones around estate planning, healthcare, pensions, life insurance, and things like that, which I would have loved to have gotten to. And I want to make it crystal clear that you gentlemen at New Harbor know a lot about retirement planning, but that is certainly just one facet of what you do in understanding these vehicles. You do all manner of financial planning and investing at this point in time.
Bill Cole: True. We are each a CFP – certified financial planners.
Chris Martenson: Fantastic. Well, thank you, gentlemen. That was really helpful, very specific, and gave people – I hope – lots to chew on.
Bill Cole: Thank you, Chris.
John Llodra: Thanks, and hello to everybody.
Mike Preston: Thanks, everybody. We hope you get some value out of this podcast.
Chris Martenson: I trust that anybody listening has a better sense of why these trusted advisors have our seal of approval. They’re aligned with our views on how best to navigate the murkier-than-usual financial waters that we find ourselves in these days.
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Thank you for listening. I hope you found this helpful. And thank you again, gentlemen for your time today.
Bill Cole: Thank you.