Ask Liz Weston

Get smart with your money

Investing

Q&A: So you’ve got a friend spewing investment advice from social media. Here are some grains of salt

By

Dear Liz: I am in my early 60s and have a friend the same age who keeps telling me to invest in companies which she has found from looking at YouTube videos. She says that she picks stocks by seeing which companies are repeated over and over again in different videos. She claims she is making a 400% return. She tells me I am losing money by investing in safer products, such as certificates of deposit. First of all, is this a good idea to invest everything in stocks, when one is in their mid-60s to 70s, when retirement is on the horizon? Also, neither she nor I are working full time at the moment, so, the risk is great if the market goes up and down and the value of a portfolio changes. I’ve seen my retirement funds drop the last few years, even though they are ever so slowly creeping back up. Finally, what is your opinion on getting financial advice or stock picks from social media platforms?

Answer: Perhaps your friend is the next Warren Buffett. More likely she’s exaggerating her results or simply hasn’t dealt with a down market yet. Few investors can consistently produce outsize returns over time, especially when they’re essentially picking stocks at random.

In answer to your first question: It’s rarely smart to invest everything in any one thing, whether it’s stocks, bonds, real estate, certificates of deposit or alpaca farms. Diversification helps investors reduce risk. If one type of investment is performing poorly, another may be doing better.

Having some money in “safe” investments may be prudent, but you’re typically losing ground to inflation with low-return CDs or Treasurys. Most people will need to have at least some portion of their portfolios in stocks, before and after retirement, if they want to outpace inflation.

Q&A: How to dump your broker and invest your own money

By

Dear Liz: I have a mutual fund and a Roth IRA that are actively managed by a broker. The accounts have not done well. I would like to withdraw them from the broker and reinvest them on my own. How do I safely and securely withdraw them from the broker? What paperwork and fees should I expect?

Answer: Look through your records to find the agreement you signed with the brokerage when these accounts were opened. The agreement may include the steps for closing the account along with any fees. You also could try searching for the name of the brokerage and “account closure fees” to see what, if anything, you might owe.

The brokerage may give you the option to manage the account on your own, or you may want to set up accounts at a new, less expensive discount brokerage. Once the accounts have been opened, your new brokerage will help with the transfers. If any of your money is invested in “proprietary funds” — that is, investments offered only at the old brokerage — those investments probably would have to be sold first. Such a sale wouldn’t incur any tax consequences with your Roth IRA. If your mutual fund is proprietary, though, its sale may incur capital gains taxes.

Q&A: Tax consequences of annuity conversion

By

Dear Liz: Several years ago my wife inherited an IRA when her mother died. Her banker suggested rolling the IRA into an annuity with an insurance company. That company is difficult to deal with and not forthcoming about how the annuity is invested. She wants to convert the IRA into a certificate of deposit so it is insured by the FDIC. What are the tax consequences of doing that?

Answer: There are many different types of annuities. If your wife purchased an immediate annuity, which offers a stream of payments in return for a lump sum, then she probably can’t change her mind since those transactions are effectively irreversible.

If she purchased a deferred annuity, though, she has more options. Deferred annuities allow people to defer the stream of payments until later — often years or even decades in the future. In the meantime, the annuity may pay a fixed rate, a variable rate based on the performance of underlying investments, or an indexed rate based on a market benchmark.

Your wife won’t face taxes if she switches from a deferred annuity to a CD, since changing investments within an IRA isn’t considered a taxable event. The annuity itself may have surrender charges, however. Because annuities often pay advisors substantial commissions, surrender charges help discourage investors from withdrawing the money before insurers can recoup those fees.

These charges and high expenses in general make deferred annuities a poor fit for many investors, and many financial planners especially dislike seeing them in IRAs. A deferred annuity’s primary advantage is tax deferral, which an IRA already offers.

If your wife feels she was misled about this investment, she can make a complaint with her state insurance regulator.

Q&A: Whether to close elderly mom’s CDs

By

Dear Liz: I have the power of attorney for my 92-year-old mother, who has dementia. She has numerous financial accounts including money market, checking and savings accounts and certificates of deposit. When she passes, would it be easier to settle her estate if I start closing her CDs now and put that money into, say, her money market? I am the sole beneficiary for all of this.

Answer: If your mom has multiple accounts at different institutions, then consolidating those accounts now can save time and hassle later. You’ll want to review the rules for FDIC insurance, though, to make sure her accounts would remain adequately covered.

There’s probably less urgency if all her accounts are already at the same institution and under FDIC limits. Closing CDs prematurely could mean losing some interest, which may not make sense unless she urgently needs the money.

If you haven’t already, consider checking in with an estate planning attorney who can give you suggestions about what you can do now to ease the transition later.

Q&A: Should your retirement savings plan include life insurance? Here are some pros and cons

By

Dear Liz: Are indexed universal life insurance products worthwhile, and how do they compare to a Roth IRA?

Answer: Both offer the potential for tax-free distributions in retirement, but indexed universal life insurance is a complex product with high expenses that’s not a good fit for most investors.

With a Roth IRA, virtually all of your money can go toward your retirement investment. (Most investments have fees of some kind, but you can minimize those by using exchange traded funds or low-cost index funds.) With permanent life insurance, some of your money goes toward paying premiums for the death benefit and other administrative expenses, including commissions for the person who sells you the policy. The remaining cash can be invested in accounts that are tied to the performance of a stock market index. Your principal is guaranteed, but the amount you earn is subject to caps.

Financial planners generally recommend that you first max out other retirement savings options, such as 401(k)s and IRAs, before considering investing through a life insurance policy. Also, you should be someone who needs permanent life insurance — the kind that is meant to cover you for the rest of your life. (Term insurance, by contrast, is a much less expensive option meant to cover you for a set term, such as 20 years.)

Some people do need permanent coverage. Their estates may be large enough to incur estate taxes that they want to pay with insurance, for example. Or they may have a special needs child who will require ongoing support. If you need permanent coverage, consider hiring a fee-only financial planner to help you sort through your options.

Q&A: Roth IRA or traditional IRA? Here’s why one might be a better choice for young workers

By

Dear Liz: My mid-20s nephews and I discussed financial planning for them. After recommending they check with their employers for a 401(k) or equivalent program, we spoke about traditional versus Roth IRAs. Would younger investors benefit more from a Roth IRA because the length of time the money would be invested is so long that the eventual tax-free withdrawal of the earnings outweighs the initial tax benefits of a traditional IRA? At this time, we cannot determine if my nephews will have a higher tax rate post-retirement than now (even assuming income tax rates stay the same).

Answer: The usual advice has been that people should contribute to a Roth IRA rather than a traditional IRA if they expect to be in the same or higher tax brackets in retirement. (Contributions to Roths are not tax-deductible but withdrawals in retirement are tax-free. By contrast, contributions to traditional IRAs are often deductible, but withdrawals are taxed as income in retirement.)

Of course, you can’t predict future tax rates with any certainty. But it’s a pretty good bet that 20-somethings who are at the beginning of their careers will earn more — and thus face higher tax rates — down the road. In other words, your nephews’ current tax rates may be the lowest they’ll ever be. Your nephews may not get much benefit from a tax deduction now but could get huge benefits from tax-free withdrawals in the future.

Also, premature withdrawals from traditional IRAs are usually taxed and penalized, but you can always withdraw the amount you contribute to a Roth without paying taxes or penalties. That flexibility often appeals to young people who worry about “locking up” their money or who don’t yet have a substantial emergency fund.