Dear Liz: When I changed jobs, I rolled my 401(k) account into an IRA and took it to a financial planner. He invested it initially and now has a management company watching it. So now I am paying quarterly fees to him, the management company and the IRA custodian. The fees average about $2,000 a year. I am thinking about moving my account to my current 401(k), which has lower fees.
I feel like the planner has me in way too many investments, and my returns aren't great. My account is up about $40,000 on a $122,000 initial investment. I will be 60 this year and plan on working for another six-plus years.
Answer: If your employer accepts IRA transfers — and many do — then rolling the money into your current 401(k) could be a great way to go.
Many 401(k) plans offer ultra-low-cost investment options that aren't available to retail investors. Many also offer target date funds that would take care of diversifying your investments while making sure the mix gets more conservative as you get closer to retirement.
Right now you're paying above-average fees to get below-average performance. If you had put your money into a low-cost option such as the Vanguard Balanced Index Fund five years ago, your account would now be worth nearly $190,000. The expense ratio for the balanced fund can be as low as 0.08%, compared with the 1.23% you're paying now. (Your actual cost probably is higher; you didn't include the expense ratios of the underlying investments in your account.)
Fees matter a lot. Higher fees depress returns and can increase your chance of running short of money in retirement.
At the same time, the years just before and after retirement are crucial because you'll be making a lot of decisions with major consequences (such as when to claim Social Security and how much to withdraw from retirement accounts). Paying 1% in fees could make sense if you were getting comprehensive financial planning advice that addressed your retirement planning needs as well as other aspects of your finances, such as insurance, taxes and estate planning. If all you're paying for is investment management, though, you can get that for a lot less.
If your employer doesn't accept transfers or doesn't have low-cost options, you could consider transferring your IRA to a custodian that offers low-cost computerized investment services. These include Betterment, Wealthfront, Vanguard Personal Advisor Services and Schwab Intelligent Portfolios, among others. The all-in fee for their services, including expense ratios of underlying investments, is typically less than 0.5%.
If you do opt for less expensive investment management, you still should consider hiring a fee-only financial planner before you retire to review your plan. You can find fee-only planners who charge by the hour at Garrett Planning Network.
How to avoid triggering gift taxes
Dear Liz: Is it possible to make student loan payments directly toward our son's lender without them being considered a gift and thereby subject to the gift tax after a certain amount?
Answer: No. But gift taxes aren't an issue for the vast majority of Americans. You and your spouse would have to give away more than $10 million for gift taxes to be triggered.
You don't even have to file a gift tax return if the amounts you give are under certain annual limits. The annual gift exclusion in 2017 allows you to give away $14,000 per recipient without having to file a gift tax return, so the two of you could pay $28,000 of your child's loans without informing the IRS.
Only the amounts above $14,000 count toward the gift tax, and gift tax is owed only when those excess gifts total more than a certain amount, which in 2017 was $5.49 million.
When gift taxes are an issue, there are some workarounds. In addition to the annual gift tax exclusion amounts, people can pay an unlimited amount of someone else's medical expenses or tuition without triggering gift taxes — as long as the payments are made directly to providers. In other words, the tuition checks need to be made out to the college bursar, not to the child or to another creditor. Paying student loans isn't included in that unlimited exemption.