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‘They all have 2 areas of concern that I do not like.’ I have seven figures saved, and I’ve interviewed a bunch of financial advisers. These are the two things they’ve all told me — what should I do about it?

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How to find the right financial adviser for you.


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Question: I’m about three years from FIRE (Financial Independence, Retire Early) status and have been looking at placing a portion of my investable assets with an advisor, which would still be seven figures. As I’ve been conducting interviews with many of them, they all have two areas of concern that I do not like and give me pause. One, they want to charge a fee even if they are not making my assets grow (they get paid no matter what the portfolio does), and two, they want me to place my assets all at one time, whereas I prefer a “leg in” strategy over time, much the way I handle any stocks I buy. Since I don’t know the advisor nor their firm, I’d like to move assets over in tranches, perhaps 25% each quarter for 4 quarters. (You can use this tool to get matched with a financial adviser who might meet your needs.)

Are these expectations of mine unrealistic, and am I going to have a very difficult time finding an advisor that fits my preferences with which I am comfortable?  I’ve been in the markets for over 20 years and have been comfortable, up to this point, in managing my own investments.  But I want to spend less time on that and allocate time to other pursuits during my second act, and I also want to be sure the investments are being managed for my wife in the event I predeceased her since she is not financially savvy.

Have a question about working with your financial adviser or looking to hire one? Email picks@marketwatch.com.

Answer: Let’s start with your first issue: why all the advisers wanted to charge you a fee no matter how the assets performed. That’s probably because one of the most standard fee structures among financial advisers is for them to charge a percentage of your assets under their management (roughly 1% is common). They do it because markets do go up and down, and advisers want to protect themselves. And adds Steve Stanganelli, certified financial planner at Clearview Wealth Advisors: “Many, not all, investment advisers will also be providing retirement projections, portfolio withdrawal scenarios, advice on Social Security, tax projections budgeting and cash flows or even real estate issues in addition to standard rebalancing and investment allocation.” No doubt, they want their time on those tasks paid for as well, so the assets under management system may work well for them. 

That’s not to say that you can’t find someone who doesn’t work like this. Some advisers charge performance-based fees, though certified financial planner Mark Brinser of Stewardship Advisors says this may be difficult to find. “Performance based fees are when an adviser only collects a fee if they outperform a certain benchmark and the fee is forfeited if the adviser does not beat the benchmark,” says Brinser. This compensation method was actually banned for registered investment advisers for a time, and now, it’s only allowed for clients who meet certain criteria. (You can use this tool to get matched with a financial adviser who might meet your needs.)

And one thing to note: Even in a traditional assets under management model, should an account value drop and the dollar amount decrease, the adviser still has an incentive to make good investment decisions to help the account recover as quickly as possible, says Brinser. “In fact, I would argue that a good financial adviser demonstrates their value the most when markets are volatile. We can listen to clients’ concerns and help them develop a strategy to get through market turmoil,” says Brinser.

Avoiding the assets-under-management pay structure

One option you may want to consider is paying an adviser hourly or a one-time fee to set you up a plan. “You might be able to enlist an advice-only, fee-only, certified financial planner to help streamline your investments to a point where you can still enjoy your pursuits without handing it over to someone else,” says Jay Zigmont, certified financial planner and founder of Live, Learn, Plan.  “The challenge is that you are going to have to find a sweet spot between do-it-yourself and delegating responsibility,” says Zigmont. For this reason, you should work with your adviser to create a comprehensive financial plan that takes into account both your preferences and consideration and the adviser’s approach and experience. (You can use this tool to get matched with a financial adviser who might meet your needs.)

Can you move your money over to an adviser slowly? 

Zigmont says it’s not odd for people to move only part of their portfolio to an investment adviser — and plenty of advisers should be willing to work with you on this.

So why did the advisers not let you move money slowly over to them? One possible reason is this: The more assets they have under management, the more they take home from your accounts, so they want more, not less money. Some firms even have asset minimums. “Advisers can make such accommodations given a client’s particular circumstances, but each firm has an assets under management minimum for a reason,” says wealth adviser Bruce Tyson at Morton Wealth. The reason firms may have minimums is to keep their client roster within a certain range and to possibly dissuade short-term investors from taking up time that could be spent on longer-term clients.  And moving over the funds in increments creates special challenges when planning a client’s asset allocation. “As with any business, there is much more under the hood than most clients may initially realize,” says Tyson.

You can use this tool to get matched with a financial adviser who might meet your needs.

What can you do about concerns about your spouse?

If you’re concerned about your less money-savvy spouse, Stanganelli says you should consider adding life insurance to the mix. “This will provide replacement income and even liquidity for any state-level taxes that your wife’s estate may ever end up having to pay,” says Stanganelli. 

Have a question about working with your financial adviser or looking to hire one? Email picks@marketwatch.com.

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American Weed Stocks Are Cheap. They’re About to Get a Sales Bump.

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However bad the year has been for most stocks, it has been especially harsh for state-licensed cannabis sellers.

In just the past month, the


AdvisorShares Pure US Cannabis


exchange-traded fund (ticker: MSOS), which tracks America’s multistate operators—or MSOs—fell 25%, while the


S&P 500


dropped 7%.

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How Do Mega Backdoor Roths Work?

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A mega backdoor Roth is a unique 401(k) rollover strategy that’s designed for people whose incomes would ordinarily keep them from saving in a Roth Individual Retirement Account. The advantage of using a Roth IRA to save for retirement is being able to make tax-free qualified withdrawals. But not everyone can contribute to these accounts; higher-income earners are excluded. That’s where the mega backdoor Roth comes into play. If you have a 401(k) you’d like to roll over, you could use this strategy to enjoy the tax benefits of a Roth IRA without having income be an obstacle.

Make sure you’re taking advantage of every opportunity to maximize your retirement assets by working with a financial advisor.

Roth Account Basics

Before diving into the specifics of a mega backdoor Roth, there are a few things to know about Roth accounts, including Roth IRAs and Roth 401(k)s.

First, these accounts are both funded with after-tax dollars. That means when you make qualified withdrawals later, you won’t pay income tax on the money since you already paid it upfront. This is the key characteristic of Roth accounts and what makes them so appealing to investors who anticipate being in a higher tax bracket at retirement.

Next, your ability to contribute to a Roth 401(k) is not restricted by your income. But it is for a Roth IRA. For the 2021 tax year, you must be within these modified adjusted gross income limits to make a full Roth IRA contribution:

  • Single filers: MAGI of $125,000 or less

  • Married filing jointly: MAGI of $198,000 or less

  • Head of household: MAGI of $125,000 or less

You can make partial contributions above those income limits. But your ability to contribute phases out completely once your MAGI hits $140,000 (if you file single or head of household) or $208,000 if you’re married and file a joint return. For 2021, the full contribution allowed is $6,000 with a $1,000 catch-up contribution for savers aged 50 and older.

Finally, Roth 401(k) accounts are subject to required minimum distribution rules just like traditional 401(k) accounts. This rule requires you to begin taking money from your 401(k) starting at age 72. A Roth IRA, on the other hand, is not subject to RMD rules.

What Is a Backdoor Roth?

A backdoor Roth offers a work-around for people whose incomes are above the limits set by the IRS. When you execute a backdoor Roth, you roll money over from a traditional IRA to a Roth account. This way, you won’t have to pay taxes on your retirement savings in the Roth IRA when it’s time to make withdrawals. And you’re not subject to required minimum distribution rules either.

But there is a catch. You have to pay income tax on the money you roll over to a Roth account. So while you could save money on taxes in retirement, you’re not escaping the tax liability of a traditional IRA altogether.

How a Mega Backdoor Roth Works

A mega backdoor Roth is a backdoor Roth that’s designed specifically for people who have a 401(k) plan at work. This type of backdoor Roth allows you to contribute up to $38,500 to a Roth IRA or a Roth 401(k) in 2021. This is in addition to the regular annual contribution limits the IRS allows for these types of accounts. To execute a mega backdoor Roth, two conditions have to be met. Your 401(k) plan needs to allow the following:

You can ask your plan administrator whether your 401(k) meets these criteria. And if your plan doesn’t allow for in-service withdrawals or distributions, you could still attempt a mega backdoor Roth if you plan to leave your job in the near future.

If your plan meets the criteria, then you can take the next steps to execute a mega backdoor Roth. This is typically a two-step process that involves maxing out after-tax 401(k) contributions, then withdrawing the after-tax portion of your account to a Roth IRA.

Again, whether you can follow through on the second step depends on whether your plan allows in-service withdrawals. If it doesn’t, you’ll have to wait until you separate from your employer to roll over any after-tax money in your 401(k) into a Roth IRA.

You also need to watch out for the pro rata rule. This IRS rule says you can’t only withdraw pre- or post-tax contributions from a traditional 401(k). So if you’re completing a mega backdoor Roth, you couldn’t just withdraw post-tax contributions if your account holds both pre- and post-tax funds. In that case, you may have to roll over the entire balance to a Roth IRA.

Benefits of a Mega Backdoor Roth

There are three key benefits associated with executing a mega backdoor Roth. First, you can contribute significantly more to a Roth IRA upfront this way. For 2021, the contribution limit is $38,500 on top of the regular annual contribution limit and any catch-up contribution limits that may apply.

You’ll need to know the maximum amount you’re allowed to contribute to the after-tax portion of your 401(k). So for 2021, the IRS allows a maximum contribution of $58,000 or $64,500 if you’re 50 or older. You’d subtract your 401(k) contributions and anything your employer adds in matching contributions to figure out how much you could add to the after-tax portion.

Next, you can enjoy tax-free withdrawals in retirement. This is a benefit you may otherwise not being able to get if your income is too high to contribute to a Roth IRA. By reducing your tax liability in retirement, you can help your investment dollars go further. And you may have a larger legacy of wealth to pass on to future generations.

Finally, a mega backdoor Roth IRA would allow you to sidestep required minimum distribution rules. This means that you could retain control over when you choose to take distributions from a Roth IRA.

So who is a mega backdoor Roth right for? You may consider this move if you:

  • Have an eligible 401(k) plan at work

  • Have maxed out traditional 401(k) contributions

  • Are not eligible to contribute to a Roth IRA because of your income

  • Have additional money that you want to invest for retirement

  • Want to leverage the higher Roth IRA contribution limits allowed by a mega backdoor rollover

Talking to your financial advisor can help you decide if a mega backdoor Roth makes sense. And your 401(k) plan administrator should be able to tell you if it’s possible, based on your plan’s guidelines.

Mega Backdoor Roth Alternatives

If you can’t execute a mega backdoor Roth because your plan doesn’t allow it, there are other ways to increase your retirement savings. For example, you could try a regular backdoor Roth instead. This might be something to consider if you still want to enjoy the tax benefits of a Roth IRA but your plan doesn’t fit the criteria for a mega rollover. You could also elect to make Roth 401(k) contributions to your retirement plan at work. This way, you still get the benefit of contributing after-tax dollars and making tax-free withdrawals. You’d be subject to the regular contribution limits and you’d still have to take the required minimum distribution. But that may outweigh the value of tax savings in retirement.

Investing in a Health Savings Account (HSA) is another option. While these accounts are not specifically designed for retirement, they can yield multiple tax benefits. Contributions are tax-deductible and grow tax-deferred. Withdrawals are tax-free when used for eligible healthcare expenses. And at 65, you can take money out of an HSA for any reason without a tax penalty. You’ll just owe ordinary income tax on any withdrawals that are not used for healthcare expenses.

Finally, you could open a taxable brokerage account to invest. This doesn’t necessarily save you money on taxes since you’ll owe capital gains tax when you sell investments at a profit. But it could help you to diversify your investments and there are no limits on how much you can invest in a brokerage account annually.

Bottom Line

A mega backdoor Roth strategy could work well for higher-income earners who want to take advantage of Roth account benefits. There are certain rules that need to be followed to make it work, however, so you may want to talk to your plan administrator or a tax professional before going ahead. Keep in mind also that even if you can’t complete a mega backdoor Roth rollover, you still have other options for growing retirement savings.

Tips for Retirement Planning

  • If you’re saving for retirement in a 401(k) or IRA, pay attention to the fees you’re paying. For instance, check the expense ratios for each fund you’re invested in to understand how much you pay to own that fund on an annual basis. You can then compare that to the fund’s performance to determine whether the fees are justified. Also, consider any administrative fees you might be paying and how those affect your net returns.

  • Consider talking to your financial advisor about a mega backdoor Roth and whether it could be right for you. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. You can get your personalized recommendations in minutes just by answering a few simple questions. If you’re ready, get started now.

Photo credit: ©iStock.com/designer491

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Alibaba Is Tumbling. Chinese Tech Stocks Have a New Headache.

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Chinese tech stocks were tumbling on Monday as two of the embattled sector’s leading players faced fresh fines from market regulators over disclosure rules.

China’s State Administration for Market Regulation announced Sunday a wave of penalties for improperly reporting past deals, in breach of competition law.


Alibaba


(ticker: BABA) and


Tencent


(0700.H.K.) were among the companies fined as a result.

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