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Annual Bonus and Your 401(k)

The goal in retirement savings is to sock away as much as you can reasonably afford to.  Elective deferrals to company plans provide a mechanism to save money for retirement and defer income tax.

Elective Deferrals are amounts contributed to a plan by the employer at the employee's election and which, except to the extent they are designated Roth contributions, are excludable from the employee's gross income. Elective deferrals include deferrals under a 401(k), 403(b), SARSEP and SIMPLE IRA plan.

One issue with investing a percentage of your bonus, especially if you are a higher-income employee maxing out your 401(k), is that it might cause you to hit your annual contribution limit, currently, $19,500 ($26,000 if you are 50 or older), before the calendar year is up. And if you hit the $19,500 cap too early in the year, you could miss out on company matches in the later months. 

Here is an example, let's say you earn $200,000 and you are under age 50 (not eligible for catch-up contributions). By contributing 10% of your annual salary, you can stretch your contributions all the way into December. If you contribute any amount less than 10% you will not have contributed up to the $19,500 maximum by December. If you contribute more--let's say 15%--you will have already maxed out your $19,500 maximum contribution somewhere around the beginning of August, so you would miss out on collecting more than four months' worth of employer match. In the example above, 10% is the sweet spot in terms of 401(k) contribution percentage, where (depending on your salary) you are not exceeding the annual IRS contribution limit before the end of the calendar year, which will also allow you to also nab the full employee match. But also be aware that not all plans work this way--some plans match after-tax contributions or include provisions that "true-up" or reconcile the employer contribution to make sure employees get the maximum potential match. If you're not sure how your plan works, ask your benefits department or consult the plan document.


Important Year End Estate Planning Task

Make sure your beneficiary designations are up to date and accurate.

  1. Check that the person or persons listed on all accounts that have beneficiary designations are the people you intend them to be.
  2. Make sure that the percentages given to these individuals are how you want them.
  3. Understand the type of designation you are making and what happens if one of your beneficiaries passes away before you do.
  4. Lastly, make sure that the beneficiaries on all of your accounts are coordinated properly with your wishes and other estate planning documentation.


Roth IRA vs. Traditional IRA:Distribution Advantage

Roth IRAs have a specific advantage vs. Traditional IRAs when it comes to distributions.

For a Traditional IRA all distributions are deemed to consist of both contributions and earnings. This makes the entire distribution taxable becasue the contributions where made with pretax money.

Roth IRA potential distribution advantages over a Traditional IRA are based off of the order of distributions. There are three types of distributions that occur with Roth IRAs:

1) Return of Contributions: Principle is returned first, and there is no income tax or 10% penalty assessed on this portion.

2) Return of Conversion Amount: If there was a conversion of Traditional IRA money to a Roth IRA this money will not be subject to income tax, since it was taxed when converted. If the individual is under age 59 1/2 it will be subject to the 10% early withdrawal penalty if the funds have not been in the Roth IRA for at least 5 years from date of conversion.

3) Return of Earnings: Earnings come out last. They will not be taxed if it is a qualified distribution. Qualified Distribution is a distribution of money for an individual attaining 59 1/2 and the five year holding requirement has been met. If it is not a qualified distribution, then it will be subject to income tax and the 10% early withdrawal penalty for individuals under 59 1/2 years old.

Being able to distribute contributions first and avoid taxation is a big advantage of Roth IRAs. 



Why Cash May Not Always Be King!


Cash as an asset is very comfortable for many people to own. It is an asset you can actually touch, feel and hold. Prudent financial and investment planning suggest that you should hold some cash, especially for emergency purposes. Often, 3 to 6 months and sometimes more depending on your personal situation is a good rule of thumb. There are some situations where holding more cash might be prudent. One example that comes to mind are people that have specific known medical conditions that require cash to cover the expenses of healthcare that insurance does not cover. Having cash often helps provide a sense of safety and a feeling of being able to sleep better at night. That is completely understandable!


I have found that the job of a professional advisor is to listen to a client’s needs and craft a plan that has the greatest chance of achieving those needs. I tell my clients that my job is not to tell you what makes you feel good but to advise you on what needs to be done to achieve those goals. That said let’s take a look at Cash as an asset and how potentially the good feeling of having lots of cash, “Cash Is King” may not be the best and potentially could be increasing your risk.


In order to understand that cash may not be king we must understand the effects of inflation on our buying power, and current and historical interest rates on cash. We will use CPI (Consumer Price Index) as the proxy for inflation and the 30 day treasury bill rate for the interest rate on cash, as is customary.


First: inflation as measured by CPI can be defined as a sustained increase in the general price we pay for goods and services over a period of time. We all know that the price of a loaf of bread has gone up since we first started eating it in our childhood. So we understand that things get more expensive over time. If we put money in our mattress when we were 3 years old to buy 10 loafs of bread at the price we would have paid for it then and took it out several years later we would likely not be able to buy as much bread. That can be what holding cash can do if no interest or rate of return is achieved on it.


Second: cash as an asset class is typically not stored in mattresses. More commonly it is stored in bank accounts and brokerage accounts. Rates of interest on cash have varied widely over the past 20 years and for quite some time have averaged 0% in most cases.


Let’s now assume that for a period of 5 years inflation averaged 2.5% and cash averaged 0% interest. Our simplistic real rate of return on that cash is not 0% it is negative 2.5%. Hence we have been losing money during that time and not even potentially realizing it because, well, we still have the same amount of dollars on hand so “I did not lose any of them.” That is factually correct that you have not lost any of the dollars you can count but you have lost on the amount of goods you can turn those dollars into.


Starting off in a position where you are in a negative return scenario right out of the box is a hard perspective for investors to grasp but that is exactly what has been happening for the majority of the last 5 years. Looks to me like holding cash is risky and potentially more risky than many know. This is at the core of why Financial Professionals after understanding a person’s current situation, future goals, feelings and family dynamics, as well as one’s understanding of risk and tolerance for it may need to recommend less cash as a percentage of portfolio holdings than someone may find comforting. We as professionals need to strike the best balance we possibly can in order to achieve those goals. Even if the goals are not exactly achievable, it is our duty to provide a plan that can make the money invested last as long as possible, to achieve as much of the goal as possible. Ultimately, however, investors comfort levels are important and should they decide that holding cash still feels best in light of what we just reviewed then "Maybe Cash Is King" for those investors.


For those of you who are technically and visually minded the following chart will illustrate this issue. It is a 20 year chart dated 03/18/1995 to 03/18/2015:

Ycharts_chart (23)




This chart illustrates the relationship between the inflation rate (measured by CPI) in the United States and interest rates on cash (measured by 3 month treasury rate). We have named the blue line US Inflation rate which is the monthly inflation rate measured by CPI. The Orange line is the cumulative growth of the consumer price index which illustrates the cumulative effect of inflation on goods and services. The Red line is the average monthly rates of return on a 90 day treasury bill, our proxy for interest rates on cash.


What we see is that although inflation rates and 90 day treasury bill rates diverge, cumulative inflation continues to increase, showing that our goods and services get more expensive over time and interest rates on cash do not always help us combat this phenomena. Furthermore, we can be in periods of time, which are multiple years in length, where cash interest rates are lagging behind the rate of inflation. This greatly reduces the effectiveness of our cash as a purchaser of goods and services. Also important to understand is that these negative divergences require us to spend more money on an item in times of low interest rates or negative real interest rates on cash, further hampering the ability for our money to grow when cash rates of return are higher. Why is this, it is because we have to spend more of the cash during these times and we have less of it saved for when rates are above inflation helping us actually grow our money.


Ultimately we must all be comfortable with our investment portfolios and cash is a major component of the mix of assets we own. Hopefully next time you here the phrase “Cash is King” you remember that maybe it truly isn’t as safe as you once thought.


Disclaimer: The Charts provided in this article was produced by Ycharts a third party provider of analytical data and charts. We believe that the information used to create this chart is accurate to the best of our knowledge however we cannot guarantee the accuracy of its content.


Negative Returns In Retirement: Draw Down


Retirement, time to sit back relax and enjoy life. Wait for many people retirement will last 30+ years. This often means needing equities in a portfolio, riskier assets...Relax again you have an asset allocation designed to generate the needed returns, balancing risk, to get you through retirement. Wait what if when you go to generate needed income from your investments and the market is in a downward trend, multiplying the effect of the downward pressure on your portfolio...Can this significantly reduce your ability to achieve your retirement income goals because now you have less working toward those goals?

Positive returns over loner periods of time for a portfolio although very important often do not show the truth of how generating returns effect a persons ability to use their money and  meet their real goals of a specific lifestyle. Yes you will here that the stock market averages a certain rate of return annually, 7% or 8% or..., and that over time history has shown us stocks will go up and we can plan based off of these potential returns. This is true for most assets. The problem with this thinking while in retirement is understanding that most assets do not generate these returns in a "sequential" fashion. Meaning that although the market may historically return any given rate of return over time the course that those returns take are not predictable and reliable. 



This was particularly on display for many investors nearing or in retirement in the 20008 to 2010 period. Recently in an article I read online written by a wise advisor, this concept was well articulated by using a rain fall analogy. I being a skier will give one using snow fall....

My favorite ski resort advertises a long season typically starting in early November and running all the way through the end of June and often as far as the 4th of July. They also boast about 400+ inches of seasonal snow fall...Wow...50 inches of snow per month not bad, 4 feet of snow each month no wonder they can make it to July often. Wait, there are years they close early and often the conditions are lousy. Why? The answer is that 200+ inches has fallen in any given month of the season at a time and some months there is none. This can make for a tough season especially those of us who travel 5+ hours to get there on the weekends when we have the time during the season. Would be nice to be able to enjoy the powder when it falls. Alas I cherish the days I get when their is fresh powder. I have gone seasons with out it!

Now back to the point of investing, retirement and understanding the need to manage for downward returns...

While in retirement it is good to invest at least some portion of your retirement assets in investments or with investment managers that have a mandate of minimizing the effect of the decline of the asset(s). 

Understanding the concept of maximum draw down and using strategies and managers that seek to minimize the effect of this on a portfolio of investments can be extremely important for investors nearing or in retirement. You need your assets to last. Looking at managing the depth of your portfolios downward performance can greatly enhance the potential of your meeting your true investment goals, which are to live the lifestyle you want or can for as long as you can.

Selecting the right bonds, mutual fund managers, ETF's, Separately Manged Account Managers or using sophisticated options strategies to structure a portfolio in order to help minimize draw downs can limit upside but it can also help with making sure the portfolio is less depleted in a down market when income generation is needed.


Roth IRA Conversions Benefits

Not working


Roth IRA conversions: are often a great strategy used to minimize the effects of taxation on your hard earned and saved money. Taxes are important to understand in managing our wealth. It is not just about how much money we have it is also about how much we can use for our own purposes.

With a Roth IRA conversion investors convert a Traditional IRA to a Roth IRA. This allows for the utilization of the Roth IRA rules which can often be more beneficial than Traditional IRA rules. Primarily the benefit of not having to pay income tax when you withdraw funds for retirement out of a Roth IRA is what is attractive to investors. Not everyone is eligible to contribute to a Roth IRA. Individuals are not allowed to contribute if their income exceeds Roth IRA income limits.

People that do not qualify to invest in a Roth IRA often end up investing in 401k plans and Traditional IRAs. Traditional IRAs also are subject to income limits and other eligibility requirements, allow for a tax break on the contribution but you pay income taxes in retirement. 401(k) plans have similar tax treatment on contributions and distributions in retirement to a Traditional IRA. Roth IRAs are opposite.

The IRS allows for individuals to convert their Traditional IRAs to Roth IRAs without income limitations. There is no 10% early withdrawal penalty as long as the funds are moved into the Roth IRA in a 60 day period. Most often the conversions are done immediately.

When you convert to a Roth IRA from a Traditional IRA you pay income tax on the contributions. The taxable amount that is converted is added to income and regular income tax rates are applied.

Why Convert?

Paying as little tax as possible allows for investors to enjoy more of their money. Conversion to a Roth IRA generally allows investors to save money in the long run. Choosing a year where an investor might know their taxable income is going to be lower than others allows them to execute a conversion in a low income tax bracket year. If the government announces upcoming income tax rate increases this also provides a reason to execute the conversion in the existing lower tax bracket year.

The benefit then becomes that in retirement the entire balance of the funds in your Roth IRA are available for investors to use and there is no after-tax balance calculations to manage. The original owners of the Roth IRA are also not subject to Required Minimum Distributions (RMDs) beginning at age 701/2 like owners of a Traditional IRA and other retirement plans are. This is often also perceived as a potential benefit for owners.

Please keep in mind though that high income earners may convert to a Roth but may not be able to make additional contributions of funds.

For more information and an analysis on how this strategy might benefit you please call us at 310-433-5378 or contact us via the web at


Retirement Accounts: Creditor Protection?

Keep my money

Often clients are looking for ways to protect there assets from creditors and have questions about whether their IRA provides any protection.

The answer is that retirement accounts are protected from creditors to varying degrees under state and federal bankruptcy laws. This includes most IRA accounts.

However, there is one situation that has recently been changed that investors should understand. Recently the U.S. Supreme Court case of Clark vs. Rameker, June 12 2014, held that Inherited IRA's are NOT protected in bankruptcy. The ruling was made after the court decided that Inherited IRA's are not retirement accounts and thus not eligible for creditor protection.



Retirement: What to do in your 40's!

I have been advising clients for over 12 years on building retirement assets and planning for income needs in retirement. The most important issues can all be addressed in a properly executed financial plan with the help of an advisor. So creating a financial plan with an financial advisor is the #1 thing I believe that should be done. Good advisors are trained to ask questions and listen, gather needed information and analyze it, put an action plan together with appropriate recommendations to achieve goals and finally help clients monitor and evaluate the success of the plan all while making necessary changes along the way. For list of action items there are many and some do depend on a person or couples specific situation.

Here are 10 areas to start (not in a particular order):

  1. Create Personal Financial Statements.
  2. Budget.
  3. Understand what tax advantaged savings vehicles are available to you for retirement and plan to maximize the savings you can put in them.
  4. Retirement Savings vs. College Savings-understanding why retirement savings should come first.
  5. Risk Assessment- looking at ones insurance coverage needs (not just life insurance).
  6. Estate Planning- Wills, Trusts etc.
  7. Asset Allocation-Strategic vs. Tactical.
  8. Financial Advisor, Accountant and Attorney-understanding the value of advisors.
  9. Portfolio Review-know what you have and why, are their conflicts of interest, understanding fee structure.
  10. Debt Management.

You do not have to do these things alone as often people do. Having professionals help free's up time and allows one to concentrate on what they are professionals in. Also having different perspectives often helps identify areas that require more attention. 

Contact us at 310-433-5378 or find us on the web at to inquire about how we can help you.


Don't Abandon Your Employer Retirement Plan!

Making sure your company sponsored retirement plan investments are appropriately allocated and working in conjunction with other assets in other accounts is critical to achieving your financial planning goals.


 Walking Away


All too often assets in retirement plans with one’s employer are left unattended. I have been advising people on asset allocation (percentages in equities, fixed income, alternatives and cash) and investment selection for more than a decade. One area I see that often is not paid enough attention to (or at all) is the mix of investments owned in one’s company sponsored retirement plan such as a 401k, 403b and 457 plans.

Many investment advisors are also not doing enough to ensure that these assets are working correctly with regard to the entire financial picture and conflicts of interest often exist.

Recently I conducted a free portfolio review for a new client. In our initial conversation I asked to see the statements from his investment accounts with his current advisor and any accounts he had elsewhere such as his company sponsored retirement plan and life insurance policies. In our first face to face meeting he brought along his brokerage statements, IRA statement, 529 plan statement, life insurance statement and annuity statement.

When I asked about his company 401k he mentioned he didn’t bring it along because he didn’t think it was important to bring along. I asked why he thought that way and he said:

“My current advisor has never asked about it and does not provide advice on it.”

My next question was why he hasn’t asked about it or provided advice on it? He said:

“I don’t know. He never asked and I never mentioned it because it is money that he cannot manage and get paid on so I thought it was not important for this review either.”

We then discussed his risk tolerance preference, time horizon, financial and retirement goals and set a meeting for a future date to discuss my findings upon completion of my review. I also asked if he could provide me with his 401k statements as soon as possible.

This particular client happened to be in his early 40’s with a time horizon of 25 years or more to retirement and a fairly aggressive tolerance for risk. He was able to provide me with a copy of his 401k statement, plan investment selections and program specifics. In reviewing that statement I found that 48% of his holdings where in one conservative allocation mutual fund that predominantly held bonds. This of course appeared to be in conflict with his profile: fairly young investor, with a long time horizon to retirement and a need to accumulate as much capital as possible to support his retirement income needs. It was clear a change to align his 401k investments was appropriate.

In our meeting to review my findings I had asked how the investments where selected in his 401k. He answered:

“I was in my early 30’s and new I had to start investing so I chose two investments to start and never really paid attention to it since.” 

His 401k represents about 25% of his total investments and an even greater portion of his retirement asset base. Ultimately we made some changes to his asset allocation percentages to bring them in line with his investor profile and we made new investment selections in his accounts in order to align them with his goals. We made some significant changes to the investments in his 401k and plan on reviewing them on a consistent basis going forward.

Making sure that assets held in company sponsored retirement plans are not abandoned is critical to successfully achieving your retirement planning goals.

At Prominence Capital we strive to make sure that all of our client’s assets, including those assets not under our direct management are working in the appropriate manner to achieve your goals. Often this may not happen right away but work should be done to ensure these assets are not forgotten.

Contact us today at 310-433-5378 or visit us at  for a Free Portfolio Review to see if all of your investments are aligned with your goals.


Maximize Your Social Security


Maximizing Social Security Benefits is a cornerstone to Retirement Income Planning. Making choices on how you elect your benefits is key to getting the most income out of Social Security. This can increase the income available to you in retirement, extend the life of your investments and help protect them from unnecessary depletion. As one of your most important retirement assets Social Security is a key component in making sure you can reach your retirement income goals.

Attached is a brochure with more information. Click download link below.

Download Maximize Your Social Security-Prominence Capital

Each of us have different circumstances that dictate what election strategies may be best. At Prominence Capital we help people understand what strategies are available to them base on their unique set of circumstances. We also offer integration of your strategy in retirement plans and full comprehensive financial plans. 

For further information on the retirement income planning and social security planning services Prominence Capital offers to clients please contact us at 310-433-5378 or visit us on the web at and click the "Contact Us" button on the top right of the screen.