Certified Financial PlannerTM professionals deal in a subject matter that is cramped at every turn by regulations, laws, and rules. We are forever telling clients and consumers “no.”
“No, your son can’t own assets in his own name until he reaches a certain age.”
“No, you can’t let your qualified retirement funds accumulate forever.”
“You can’t take a medical exemption for your golden retriever, even though your physician told you to get a pet and start taking it for regular walks.”
So the real challenge for most CFP® professionals is keeping their clients on the right side of the rules, at the same time finding creative solutions for their unique needs. Oftentimes this requires thinking outside the box: using financial strategies or tools designed to do one thing for another purpose altogether. Or it may involve a creative “work around” – getting where the client wants to go, albeit in a roundabout way.
So here are some examples of out-of-box ideas (OBIs) that creative CFP® professionals have advocated to clients, as ways to get around the status quo (SQ):
SQ: Interest rates are abysmally low right now. There’s nowhere to invest my cash and get decent returns without taking a lot of risk.
OBI: Review all your debt obligations – car loans, outstanding credit card balances, even your mortgage. Assuming you do not need your cash for the foreseeable future, use it to pay down debt balances, starting with the ones with the highest rates first. The rates on your debt are almost certainly significantly higher than what money markets are now paying. Suppose you have a car loan at 5 percent: with every dollar you pay off, you are in effect making 5 percent on that dollar, and not taking any more risk to do so.
SQ: It doesn’t make sense to invest in a 529 prepaid tuition plan if my child is not certain to attend a school in the sponsoring state.
OBI: Of those states offering prepaid tuition plans (approximately 16), most have a provision that if the 529 plan beneficiary does not go to a state college or university where the tuition has been prepaid, you can withdraw funds equal to what the that state’s tuition would be. Some states instead offer a refund of the amount invested with the equivalent of accumulated money market returns.
Therefore, putting a part of a 529 investment in a given state’s prepaid plan is, for all intents and purposes, like the allocation you would otherwise make in a 529 college savings plan to a money market account – an advisable holding, especially as the child gets older, to mitigate the risk of more risky investments. However, having the investment in the prepaid plan (rather than in a money market fund within a savings plan) gives you a further benefit, if in fact your child changes his mind and stays in the state offering the plan.
SQ: I’ve maxed out all the various options for saving for retirement: IRA, Roth IRA, employer’s retirement plan, but want to save more.
OBI: One common strategy is to invest in a non-qualified annuity, where you can get additional money accumulating tax-deferred, without worrying about annual limits on contributions. This is not, however, the best OBI, since annuities can have high expenses and fees. A better idea might be to open a Health Savings Account (HSA), combined with a high deductible health insurance plan. These accounts offer a triple-play, tax-wise: they are deductible from gross income, grow tax-deferred, and can be withdrawn for qualified medical expenses without being taxed. Given that you will certainly be incurring medical expenses during your retirement, your HSA is an ideal retirement savings account for these expenses which otherwise will be paid from your RAs or qualified plans.
SQ: I can’t contribute to a ROTH IRA because my adjusted gross income is too high (>$191,000 married filing jointly, or $129,000 single)
OBI: There are no income limits on non-deductible traditional IRAs, though there are annual contribution limits of $5,500 or $6,500 if over age 50. So if you want to set up a ROTH IRA, but make too much money to do so, one solution is to contribute to a non-deductible traditional IRA, and then immediately convert it to a ROTH. (By doing so immediately, you will have no earnings in the IRA, and thus no taxable income upon conversion.) There is, however, an important caveat that may limit this OBI: if you have other IRA accounts, the amount you convert to the ROTH is considered to have come from all your IRAs, pro-ratably, based on each IRA’s account balance. If your other IRAs hold deductible contributions and tax-deferred earnings on those contributions, then some of the amount put into the new ROTH IRA is assumed to come from these pretax funds, and would therefore be taxable upon conversion. An additional OBI to solve this glitch is to roll all of your IRA accounts into your employer’s plan, IF you have such a plan and it accepts rollovers. Because you cannot roll over any portion of an IRA that represents post-tax contributions into the employer plan, these funds will remain in the IRA, and can then be converted to the ROTH IRA without tax consequences.
It’s definitely advisable to consult with a CFP® professional before attempting these work-arounds, just to make sure they are still viable options and are right for you.
As CFP® professionals, we frequently have to say “No” to clients, but rarely do we say “Never.” With a solid understanding of the rules, and a healthy dose of creative thinking, we can find solutions for just about any financial issue our clients may have.