Frank McLaughlin | Merriman

I’ve Been Laid Off — What Now?

by Merriman | Feb 13, 2023 | 401k, Advisors, Ask Merriman, Chris Waclawik, Emergency Savings, Frank McLaughlin, Lowell Parker, Risk & Reward, Sarah Kordon, Sierra Butler, Tech Focus, Wealth Protection

News headlines everywhere are talking about widespread layoffs, particularly in the technology industry. Thousands of people have lost their jobs with still many more losses predicted in Q1 of 2023. With so many heavy hitters right here in the Pacific Northwest—Microsoft, Google, and Amazon, just to name a few—it’s likely these tech world layoffs affect you or someone you know. Many of our own clients have expressed concern over their own job security, understandably anxious and full of questions.

Of course, the primary concern when facing a layoff is finding a new job, but that can take time. Here are a few things to think about as you adjust to your new normal. Perhaps most importantly, DON’T PANIC!

Here are the things that should be first on your list:

Give us a call! Your Wealth Advisor is here to help put your financial picture into perspective and to assist with planning to protect your investments. We can help you wade through the pros and cons of everything in this article—decisions regarding your 401(k), insurance, benefits, cash flow, taxes, retirement concerns, and more.
Start networking! Reach out to alumni groups, job boards, professional organizations, former colleagues, recruiters, etc.
Understand your rights under state law.
Review company documents and your severance agreement. There may be some terms of the layoff you can negotiate, like extending healthcare or retaining some company perks.
Apply for unemployment benefits.
Once you know the details of your severance agreement and unemployment benefits, plan out how to fill the income gap. See below for the pros and cons with some of the different options available.
Look at your options for any vested and unvested stock options or RSUs.
Review healthcare options. Should you sign up for Cobra, get coverage via a Marketplace plan, or join your spouse’s coverage? A layoff is a triggering event, so these options are all available to you, but there are pros and cons to each that depend on your situation.
Review your expenses and cut back if needed.
Consider your 401(k) options.

What are your options for filling the income gap?

Spending down your assets – Sarah Kordon, CFP®, CRPS®, Wealth Advisor

Ideally, you have an emergency savings account specifically appointed for a situation like this. If so, this should be the first asset you begin to use to supplement your income. Keep in mind that you will want to rebuild your emergency savings account after you are settled in a new job, so don’t spend frivolously. Revisit your monthly budget and look for ways to cut costs so you can stretch these savings for a longer period and rebuild them quickly when your new income stream picks up.

Spending down assets may also affect your larger financial goals, so before you dip into your savings and investments too heavily, be sure to consider the ramifications. Hopefully shorter-term goals, such as buying a new home or taking a grand vacation, can simply be postponed. Longer-term goals, such as retirement at a certain age, can also be adjusted if needed, but hopefully your emergency cushion is large enough to keep that from being necessary.

If you need to take distributions from investments, we can help you evaluate the tax consequences and understand the impact of such actions on your goals, which may make some tough decisions a little easier and provide you peace of mind.

Taking a 401(k) loan or withdrawal – Sierra Butler, CFP®, CSRIC™

When you’ve stopped getting a paycheck, using some of your 401(k) assets through a loan or withdrawal might seem like an attractive choice, but here are some reasons why it should be your last resort.

Most 401(k) plans do not allow new loans after an employee has left the company. If you already have a 401(k) loan, the plan may demand an immediate repayment or a shorter repayment plan. The loan must be repaid before rolling over the balance into a new 401(k) or IRA, which would prevent you from consolidating your accounts and potentially taking advantage of superior investments in a different account.

If you instead take a withdrawal from your 401(k), or if the loan is not repaid, it will be treated as a taxable withdrawal and is subject to ordinary income tax. Additionally, you will incur an early withdrawal penalty of 10% if you are younger than age 55.

One of the biggest risks of a 401(k) loan or withdrawal is missing out on market gains should the investments do well after you take the withdrawal. I caution folks from viewing their retirement accounts as piggy banks for current spending as it can be a quick way to deplete their retirement nest egg.

Should I take on gig or contract work? – Frank McLaughlin, CFP®, CSRIC™

This question depends entirely on your financial situation and tradeoff preferences. Assess these by asking yourself questions like:

Have I saved up enough cash to weather this period between jobs?
Am I able to cut back on certain expenses to allow me to search for a new job without taking on a gig? Is cutting back on expenses worth it, or do I prioritize maintaining a certain lifestyle?

Note: Don’t forget to consider new potential expenses, such as healthcare costs.

Do I have another source of income, such as a working spouse who could temporarily pick up the additional burden for a while? Would my significant other be okay with that arrangement?

If you find yourself answering no to more than one of the assessment questions above, taking on a side gig or contract work may be a great option to explore.

Could there be a silver lining?

Consider retiring early, staying home with the kids, or taking a sabbatical – Lowell Parker, CFP®

After a layoff, the most common course of action is to work toward finding a new job. But that isn’t the only path available to you. Burnout is real! Maybe this is your sign to take a break if you can afford to. Can you take this opportunity to retire early or stay home with the kids for a few years? Or perhaps take advantage of the temporary break from work and go on that long trip you’ve been dreaming about, or use the time off to work on a home remodel?

The obvious and large warning for any of these options is that your financial plan must support it. Do you know what these choices would mean for your future lifestyle? This is a major decision to make, and there are many factors to consider. What retirement lifestyle are you dreaming of? Are the assets you have saved enough if you won’t continue to have an income stream from a job? It’s important to revisit your financial plan and make sure you have saved enough to make work optional, whether temporarily or permanently, throughout a variety of potential future market scenarios. If this is something you’re considering, reach out to your Wealth Advisor to see if you can make it happen.

Make it work to your advantage at tax time – Chris Waclawik, AFC®, CFP®

After you’ve reviewed your income sources following a layoff and you have an estimate of the tax impact of using these sources for income, you may be able to create a plan to take advantage of the situation.

The “good” news is that a layoff, especially one that happens early in the year, can potentially place you in a lower tax bracket for the year, which opens up some planning opportunities. Here are a few to consider:

First, your health insurance choice may come with tax perks. When being laid off, many employees have the choice of COBRA, to extend current health insurance, or health insurance through the Marketplace. Purchasing coverage through the Marketplace can have subsidies (provided through your tax return) that can reduce the cost of coverage by over $1,000 per month depending on age, income, and the number of family members to cover.

Second, it may be possible to realize long-term capital gains at a 0% rate. This is a great opportunity to diversify out of a concentrated position without incurring a huge tax burden.

Third, finding yourself temporarily in a lower tax bracket can be a good opportunity for Roth conversions. By intentionally moving some investments from an IRA to a Roth account, you may be able to reduce taxes over your lifetime.

While I think everyone agrees layoffs aren’t fun to experience, at least we may be able to take advantage of them to reduce our tax burden for that year and potentially well into the future.

If you are experiencing a layoff yourself, remember: Your first step should be to contact your Wealth Advisor. If you’re not already working with one, schedule a meeting today. We can take some of the stress of these decisions off your plate and help you find the silver lining.

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

Financial Football – Who’s on Your Team?

by Frank McLaughlin | Nov 29, 2022 | Advisors, Frank McLaughlin, Goal Planning, Reasons Why Merriman, Tech Focus, Wealth Enhancement, Why Merriman

Having been born and raised in Seattle, the start of fall is always a bittersweet feeling for me. I get sad that our short but beautiful PNW summer is ending, but I love that football season is beginning. I have seen many terrific and many not-so-great Seahawks teams over the years, but I always continue to show up as a fan. After having watched the start of our season thus far, one word comes to mind: uncertainty. Over the past few years, we’ve lost cornerstone players to other teams and to retirement. This truly reached a new level when we traded away our star quarterback this past summer. Those players had brought us over a decade of stability and success. All we knew was winning, and we easily left behind the memories of the 2008 and 2009 seasons where we had 9 wins and 23 losses.

I can’t help but notice the parallels between the Seahawks and the financial markets in 2022. This year has been full of uncertainty and volatility for investors. After more than a decade of mostly positive returns, we easily forget the pain of going through the short but sharp decline of 2020, the financial crisis of 2008, and the many bear markets before that. It’s human nature to do so. So, as we are currently in the midst of a difficult season, how do we put together the right team to win you a super bowl trophy (or at least help you achieve your goals)?

Your financial advisor will be your quarterback. You and your advisor must create the proper game plan together for what you are looking to achieve. They will be responsible for knowing exactly what play every teammate is supposed to carry out, and you need to keep in constant communication as the game progresses in order to make the necessary adjustments.

Your research and investment team will be your offensive line. They are critical to protecting your assets and marching your team down the field. As your research team watches the markets, like a great coach, they need to understand when to bring an additional player to the line for extra strength—especially when churning through tough, muddy times. They also need to understand when to send an extra player such as a tight end out on a passing route for additional firepower for your offense.

Many other players are vital to the functioning of your team. These positions are filled by your client service members, your trading department, internal operations, and outside experts like accountants and attorneys. If just one of these pieces is lagging, then your roster will be exploitable.

It is important to call out that not every drive down the field is going to result in a touchdown, much like financial markets won’t generate positive returns every year. But if you can put together an excellent roster, minimize mistakes, and follow a well-crafted dynamic game plan, then you put yourself in a position for success.

Are you ready to have a team that supports you? I really enjoy watching football, but I LOVE helping clients make it to their financial goal line. Call me this season, and let’s strategize on some plays!

The Roth Rulebook

by Frank McLaughlin | Feb 15, 2022 | Advisors, Frank McLaughlin, Goal Planning, Investing 101, Retirement Savings, Tech Focus, Wealth Enhancement

When preparing for retirement, it can be important to save money in different types of accounts to give you flexibility when it comes time to spend those funds. One of the most powerful and misunderstood types of accounts is the Roth. A Roth account is an after-tax retirement account that can be in the form of an IRA or an employer-sponsored plan such as a 401(k). The after-tax component means you pay tax on the front end when receiving the income, and in exchange, you can receive tax-free growth and tax-free withdrawals if you follow the rules of the Roth. There are three components to consider: contributions, conversions, and earnings. Contributions and conversions refer to the principal amount that you contribute or convert, while earnings refer to the investment growth in the account. There are contribution and eligibility limits set by the IRS each year, but today we will focus on withdrawing funds from a Roth IRA to maximize the after-tax benefit.

Roth Contributions

After you contribute to a Roth IRA, you can withdraw that contribution amount (principal) at any time without paying taxes or the 10% penalty. That is an often-overlooked fact that can come in handy.

Example: Ted is 38 years old and decides to open his first Roth IRA. He contributes $5,000 to the account immediately after opening it. Two years later, Ted finds himself in a financial bind and needs $5,000 for a car repair. One of the possible solutions for Ted is that he could pull up to $5,000 from his Roth IRA without paying any tax or penalty.

Roth Conversions

A Roth conversion is when you move funds from a pre-tax account such as a traditional IRA. You will owe income tax on the amount that you convert. This can be a powerful strategy to take control of when and how much you pay in taxes. There is no limit to how much you can convert.

When it comes to withdrawing money used in a Roth conversion, five years need to have passed or you need to be at least 59.5 years old to withdraw the conversion penalty-free. It is important to remember that each conversion has a separate 5-year clock.

Example: Beth is 50 when she executes a $40,000 conversion from her IRA to her Roth IRA in January 2020. In March 2025, Beth finds herself needing $40,000 for a home renovation. One of the possible solutions is that Beth could pull up to $40,000 from the conversion that she did over five years ago even though she is under 59.5.

Earnings

When it comes to withdrawing earnings from growth that has occurred after contributing or completing a conversion, you must wait until age 59.5 and five years need to have passed since you first contributed or completed a conversion. If you don’t follow both of those rules, then you could have to potentially pay income tax on the growth and a 10% penalty.

Example: With our previous examples above with Ted and Beth, even though they can withdraw their contribution and conversion respectively, neither of them can touch the earnings in their Roth accounts until they are 59.5 and have satisfied the 5-year rule.

Other Important Details

There are a few other exceptions that allow a person to avoid the penalty and/or income tax, such as a death, disability, or first-time home purchase.

For ordering rules, when a withdrawal is made from a Roth IRA, the IRS considers that money to be taken from contributions first, then conversions when contributions are exhausted, and then finally earnings.

Strategies

Have a thorough understanding of the rules before withdrawing any funds from a Roth account.
Speed up the 5-year clock.
- You can technically satisfy the 5-year clock in less than five years. You can make contributions for a previous year until the tax filing date (typically April 15th, but as of this writing, it may be April 18th in 2022). This means that a contribution on April 1st, 2022, could be designated to count toward 2021, and the clock will count as starting on January 1st, 2021. This shaves 15 months off the 5-year clock! Note: Conversions must be complete by the calendar year’s end (12/31), but you can still shave 11 months off the 5-year clock.
Start the 5-year clock now!
- Even a $1 contribution or conversion starts the clock for you to be able to harness tax-free gains, so start as soon as possible.
After the passing of the SECURE ACT in 2019, most non-spousal IRA beneficiaries must now fully distribute inherited IRAs within ten years. This means that an inherited Roth IRA owner could potentially allow the inherited Roth to grow tax-free for up to ten more years and then withdraw those funds tax-free. If it fits into an individual’s financial plan, this can be a tremendous tax strategy to take advantage of.

Roth accounts can be incredible but also very confusing. As advisors, we figure out the best way to use these accounts to your advantage in terms of maximizing growth and minimizing taxes. If you have any questions about how you can best utilize a Roth account, please don’t hesitate to reach out to us. We are always happy to help you and those you care about!

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable; however, Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Nothing in these materials is intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Merriman does not provide tax, legal, or accounting advice, and nothing contained in these materials should be relied upon as such.

Breaking Down the Barriers to Sustainable Investing

by Frank McLaughlin | Apr 13, 2021 | Advisors, Charitable Giving, Frank McLaughlin, Tech Focus, Wealth Transfer

Wow—2020 was a year unlike any that we have ever experienced. In addition to a global pandemic, events throughout the year exposed many causes that need great support. At Merriman, we are about much more than just the numbers. We aim to have a deep understanding of our clients in order to help them incorporate their values in all aspects of their lives. This led to us having conversations with families about climate change, social issues dealing with race and gender, how to help neighbors and struggling communities, and how to make individual voices heard by large corporations and governments, amongst many other important topics. During the year, did you feel sad, confused, shocked, or overwhelmed by any of these? I know that I sure did, so you are not alone. There is hope, and you can take action in ways that you may not have previously considered. It doesn’t take a large financial or time commitment. You can incorporate your values and support causes through sustainable, responsible, and impact (SRI) investing. Equally important, you can implement an SRI strategy without having a negative impact on your investment returns or retirement goals. It may even lead to the opportunity for outperformance. I want to use this article to break down the barriers to sustainable investing.

It is helpful to first look at some data. In September 2019, Morgan Stanley conducted a study with 1,000 individual investors that they surveyed in two-year increments starting in 2015. Then they published the white paper Sustainable Signals: Individual Investor Interest Driven by Impact, Conviction and Choice. I want to take a moment to highlight two graphs from that white paper:

Chart 1: Interest in Sustainable Investing

Source: Morgan Stanley, Sustainable Signals white paper, 2019.

Chart 2: Perceived Barriers to Adoption

Source: Morgan Stanley, Sustainable Signals white paper, 2019.

The first chart shows that there is a significant interest in sustainable investing, and that interest continues to grow. The second chart shows the perceived roadblocks that prevent investors from choosing sustainable funds. This explains why currently the actual implementation and use of sustainable funds is much lower than the interest levels show. Below are the reasons why those perceived barriers shouldn’t stop you.

I’d like to share a story to address the investment performance roadblock. In 2007, I went to Costa Rica as part of a school group called The Eco-Explorer’s Club. Our mission for the trip was to protect sea turtles from poachers and predators during the turtle’s nesting season. The trip was a success, and it was one of the greatest things I have ever been a part of. I remember being filled with so much joy that we had made a positive impact for the wildlife there and also for the wonderful people of Costa Rica. Tourism intended to support conservation efforts is a large part of their economy and provides many jobs. That is when I first made the connection that it is possible to simultaneously support planet and profit. The best of both worlds. Investment funds are able to achieve this as well, as companies increase their revenue by adopting sustainable practices, cutting costs, and listening to client demands.

The next roadblock is thought to be lack of investment products. That was true at one point in time, but it is no longer the case. There are hundreds of publicly traded mutual funds and ETFs available that thoroughly integrate environmental, social, and governance factors into their investment processes and/or pursue sustainability-related investment themes and/or seek measurable sustainable impact alongside financial returns. We are big fans of the DFA Sustainability Funds.

The third and fourth roadblocks go hand in hand. It is true that it requires time to understand sustainable investments and to stay current. That is why there are professionals such as us to help. You don’t need to do this alone. We are here and available to help you get the best plan in place. You can schedule a conversation directly on my calendar by clicking HERE.

After reading this article, I encourage you to click the link above for a virtual coffee chat or to forward this article to a friend who may be interested. Thank you.

Reference: https://www.morganstanley.com/content/dam/msdotcom/infographics/sustainableinvesting/Sustainable_Signals_Individual_Investor_White_Paper_Final.pdf

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

How to Optimize Your Accounts After The SECURE Act

by Frank McLaughlin | Apr 28, 2020 | 401k, Frank McLaughlin, Tech Focus, Wealth Enhancement

The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation, which we recommend reading prior to this series.

We’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries. Here is our second of six installments.

In light of the SECURE Act, should I convert my IRA to a Roth IRA, and if so, how much of it should I convert?

The answer is maybe. First, some old Roth conversion strategies may still hold true. If you are in an especially low tax bracket for a few years (e.g. you are retired and no longer bringing in employment income, but you haven’t started taking social security yet), then a Roth conversion may make sense for you. It would likely be a good idea to convert as much as possible during those lower income years without pushing yourself into the next bracket. The idea is to pay the least amount of tax possible on that tax-deferred money so more makes it into your pocket. In light of the SECURE Act, there are now additional considerations due to the elimination of the stretch IRA for most non-spouse beneficiaries. These beneficiaries will now have to withdraw inherited IRAs down completely within 10 years, which could have major tax ramifications for them. A Roth conversion might make sense if all the following criteria are met:

You will not need your IRA for your own retirement needs.
You can afford to pay the tax bill out of pocket or with non-retirement assets.
You want to leave the money to someone other than your spouse, your minor child, someone not more than 10 years younger than you, or someone who is chronically ill.
The beneficiary will likely be in a higher tax bracket than you are now.

Example: Gertrude dies in 2020 and leaves her IRA to designated beneficiary Suzie, her granddaughter. Suzie is not an eligible designated beneficiary because she is more than 10 years younger than Gertrude and not her minor child. The balance in the inherited IRA must be paid out within 10 years after Gertrude’s death, which means a large tax bill for Suzie as she is in her prime working years. Had Gertrude converted that IRA money to a Roth, the taxes would have been paid at Gertrude’s much lower bracket, and thus Suzie would have received more money when all is said and done. With the Roth IRA, Suzie must still abide by the 10-year withdrawal rule, but now she can let that money grow tax free in the Roth until year 10 and then withdraw it without paying taxes.

I’m still working. Should I be contributing to a Roth IRA / Roth 401(k) / taxable account instead of a pre-tax account now?

It depends, and there are a lot of factors to consider. To start, please see the question and answer directly above and consider whether an IRA or Roth account makes more sense for you today. The analysis will consider your current tax bracket, your estimated future tax bracket, whether or not you will need the money for your own retirement, and who your beneficiaries are.

If you are nearing retirement while in your prime working years, it likely makes sense to contribute to a pre-tax account versus a post-tax account. You are potentially in your highest tax bracket now, so getting the tax break with a pre-tax contribution is generally more valuable. After retirement, when you are in a lower tax bracket, you may decide to make Roth conversions at that time to take advantage of the lower rates.

Taxable accounts are another story completely. Due to their flexibility, having a taxable account is beneficial whether you are also contributing to an IRA or a Roth. If you plan on leaving money to non-spouse heirs, then a taxable account can be a great way to do so. There is no contribution limit on these accounts and there will be a step up in basis upon your death. This will eliminate capital gains as the account passes on to your heirs and they will not have to deal with the forced 10-year withdrawal rule.

Again, this is a loaded question with many moving parts and will be very specific to each individual. It would be best to speak your advisor about which type of account makes the most sense in your situation.

As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.

First Installment: I’m Planning to Leave Assets to Charity – How Does the SECURE Act Change That?

Second Installment: How to Optimize Your Accounts After the SECURE Act

Third Installment: Must-Know Changes for Your Estate Plan After the SECURE Act

Fourth Installment: How to Circumvent the Demise of the Stretch: Strategies to Provide for Beneficiaries Beyond the 10-year Rule

Fifth Installment: The SECURE ACT: Important Estate Planning Considerations

Sixth Installment: Inheriting an IRA? New Rules to Consider

Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.

The Importance of Having an Emergency Fund

by Frank McLaughlin | Feb 12, 2019 | Emergency Savings, Frank McLaughlin, Tech Focus, Wealth Enhancement

Life can throw you curveballs and if you aren’t prepared financially, these curveballs can turn into major problems. That’s why it’s so important to have a savings buffer, also called an emergency fund. An emergency fund is a cash account that you keep separate for life’s unexpected events. It can help prevent additional stress when these events occur. (more…)