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What is Wealth Management?

What is Wealth Management and Is it Right for Me?

Wealth management is a tool used by high-net-worth individuals to plan for their financial future and ensure their assets are being used safely and effectively. It is usually only necessary in cases where a client’s liquid assets exceed $1 million and their financial situation has complex, specific complications requiring specialist knowledge to navigate.

Key Takeaways

  • Wealth management is a set of services designed to grow assets safely, avoid costly setbacks, and minimize future financial obligations.
  • These services are typically only needed by high-net-worth individuals with more than $1 million in liquid assets.
  • When choosing a wealth manager, be sure to find a person or firm with experience relating to your specific needs. Specialization is key when it comes to challenging, complex financial situations.

What is Wealth Management 

 Wealth management is the means by which your money can be leveraged to generate more wealth as safely as is possible. This is accomplished by making wise investments, understanding how to diversify your assets properly, and planning for your financial future. 

What Does a Wealth Manager Do?

A wealth manager provides a diverse set of services to their clients, utilizing every available resource and technique to grow and protect the assets entrusted to them. 

Much of a wealth manager’s work is preemptive, including long-term financial planning, estate planning, and tax planning. Knowing what to expect in the future is a critical part of this job, and it allows them to make the best choices possible for their clients.

Another key job of an effective wealth manager is offering investment management and risk assessment. This often includes setting achievable goals and striving to meet them amid changing market conditions.

In many cases, a wealth manager will also be expected to provide some general assistance with financial literacy for their clients. Not everyone has a background in finance, and an experienced wealth manager can be an invaluable resource when dealing with any number of financial hurdles.

How Do Wealth Managers Get Paid?

Not all wealth management contracts are the same—some managers work on commission, others charge a percentage of the assets they manage as their fee, and others receive hourly or one-time fees for their work. When dealing with a larger wealth management firm, individual managers may receive a salary while the firm collects one or both of these types of fees.

How Do You Know if Wealth Management Services are Right For You?

Generally speaking, wealth management services are most useful to high-net-worth individuals with complex financial situations.

This could include business owners with complicated tax structures, individuals who have received sizeable but complex inheritances, those facing retirement planning decisions or any number of other financial arrangements requiring specialized assistance.

In many cases, the cost of a wealth manager is dictated by their experience with less-common financial proceedings that only impact individuals with substantial assets. The estate tax, for instance, only applies to inheritances in excess of $14 million, but an individual with assets of that size must be able to understand and fulfill their tax obligations for that money. That’s where a wealth manager comes in.

How Much Money Do You Need for Wealth Management?

There is no cut-and-dry answer to how much money you must have before a wealth manager is needed, but generally speaking, these services are used by people with over $1 million in liquid assets or investments.

Certain wealth management firms even have a minimum investment threshold, usually somewhere between $2 million and $5 million.

How to Find a Wealth Manager

Finding a wealth manager doesn’t have to be difficult. Depending on your situation, you may have certain circumstances that present unique challenges necessitating a wealth manager’s services. When searching for a manager, be sure to talk with individuals or firms with experience in similar financial situations to yours.

You’ll also need to confirm that you have enough assets to invest in the firm you wish to work with. Certain firms will only take on clients with exceptionally high net worths in the millions of dollars.

Horizons Wealth Management offers services to individuals looking for support in their financial journey. Set up a call to discover if wealth management or one of their many services is right for you.

What to Look for in a Wealth Manager

The number one qualification in any sort of financial planning role is trustworthiness—be sure you feel comfortable working with anyone you plan to trust with your financial well-being, and don’t be afraid to shop around if the first manager you meet doesn’t feel like a good fit.

It’s important to vet a possible manager before diving in, and this includes asking about things like professional certifications and past success managing clients’ assets for them. You want to be sure your manager is aligned with your financial goals and has the necessary specializations to take on any unique situations you might find yourself facing based on the structure of your assets.

Bottom Line

Wealth management isn’t a necessary service for everyone, but individuals with high net worths must maintain good financial health. A wealth manager will have the experience and resources essential to make your money work for you while minimizing risks and avoiding potential pitfalls. When selecting a wealth manager, be sure to choose someone you can trust and who has the right specializations for your particular financial needs.

Wealth Management FAQs

What is wealth management in simple terms?

Wealth management is a service that combines the management of existing assets with short- and long-term financial planning to maximize returns on investments and minimize exposure to risks. It is typically only necessary for individuals possessing liquid assets in excess of a million dollars.

What is considered high net worth?

An individual with between $1 million and $5 million in liquid assets is generally considered to be “high net worth.” Individuals with between $5 million and $30 million are described as “very high net worth,” and individuals possessing more than $30 million in liquid assets are considered “ultra high net worth.”

Are there other services that may benefit me if I don’t have enough money for a wealth manager?

Wealth management isn’t for everyone, but that doesn’t mean individuals with fewer liquid assets shouldn’t enlist the help of a qualified financial adviser. 

What are the disadvantages of wealth management?

While there can be some potholes to avoid when seeking your perfect wealth manager, generally speaking, these services are entirely beneficial to individuals who find the right manager for their needs. 

Because some financial matters relating to high-net-worth people are complicated and do not come up often, you can miss out on some big opportunities if you don’t employ someone with the right specializations and experience.

There are also no certainties when dealing with financial matters—using a good wealth manager can help you navigate difficult situations. Still, sometimes the market is unpredictable, and a manager’s job becomes more about damage control than growing your assets. With the wrong manager, this sort of situation can be damaging to an investor and their portfolio.

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What are RMD (Required Minimum Distributions) and What You Need to Know

After a certain age, individuals with retirement accounts must withdraw a certain amount from these accounts each year as a minimum. This withdrawal is known as a required minimum distribution, or RMD, and it typically becomes mandatory at age 73.

Key Takeaways

  • Required minimum distributions are the minimum amount you must withdraw from your tax-deductible retirement accounts.
  • These withdrawals are required by law after the age of 73.
  • RMDs can be donated to reduce or eliminate the tax burden created by the additional yearly income.
  • The amount of an RMD is determined by the total value of your qualifying retirement accounts and factors like age, beneficiaries and the original owner of the retirement account.

What Does RMD Stand For and When Does it Start?

Required minimum distributions have been a part of retirement planning in the United States since the mid-1970s with the introduction of IRAs as a new type of long-term investing mechanism. These withdrawals are required by statute for all types of retirement accounts except for Roth IRAs and certain similar types of accounts.

Most people with retirement accounts must start making these withdrawals at age 73, but there are some exceptions to this rule. You aren’t technically required to make your first withdrawal from your retirement accounts until April 1 of the year following your 73rd birthday, for instance. Qualifying charitable contributions from your retirement accounts are also counted toward your RMD, meaning you can offset some or all of your required withdrawal with certain philanthropic contributions.

What If I’m Still Working?

There are also RMD exemptions for individuals who are still working at the company sponsoring their retirement plan, as long as they own less than 5 percent of the company administering the account. This allows people who continue to work past the minimum retirement age to take full advantage of the benefits offered by an IRA or similar account.

What Accounts Require RMDs?

RMDs are required for many types of employer-sponsored retirement plans. The most common types of accounts subject to RMD rules are:

  • Traditional IRAs
  • Rollover IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • 401(k)s
  • 403(b)s

It’s worth noting again that Roth IRAs, Roth 401(k)s and other types of Roth accounts are not subject to the same RMD requirements as these retirement plans.

How to Determine RMD Amount?

How much you’ll need to withdraw from your accounts each year is calculated by dividing each account’s balance as of Dec. 31 by a life expectancy factor calculated using tables provided by the IRS. These life expectancy factors are determined based on a number of factors relating to you, your beneficiaries, and the original owner of the retirement account. 

How to Handle Multiple IRAs

RMDs are calculated for each individual account—if you have more than one IRA, you will need to calculate the RMD for each one based on all the factors considered by the IRS. Once you’ve determined your total RMD for the year, however, you can withdraw that amount from any one IRA or combination of accounts as long as the total withdrawal meets or exceeds your minimum requirement.

How are RMDs Taxed?

Assuming all of your retirement account contributions were tax-deductible, the income gained by withdrawing your RMD will be treated like any other income and taxed accordingly.

In some cases, an individual might make contributions to an IRA or other retirement account that are not tax-deductible but are still subject to an RMD after age 73. In these cases, you will need to work with the IRS or your tax professional to determine how much of your RMD income must be taxed and how much is exempt for the year.

How to Use RMD Assets

Funds withdrawn from your retirement accounts through an RMD can be used in a variety of ways, and some of these uses can help reduce your tax burden or make the assets more useful to your beneficiaries. 

Reinvest the funds

One common use for RMD funds is to reinvest the money elsewhere simply. This can help protect the money from inflation and continue to make it work for you even once it’s no longer in a tax-protected retirement account.

The only caveat to this approach is that the funds cannot be placed back into a typical retirement account—if they are made using RMD funds, the investments must be made into a taxable form of investment account.

Donate to Charities

Charitable donations are another common use of RMDs, and if they’re done correctly, you can avoid paying taxes on some or all of the money withdrawn for the year. Donations made to charitable organizations directly out of your RMD funds are called qualified charitable distributions, or QCDs, and up to $100,000 of these funds each year can be omitted from your taxable income.

Support Education for Your Family

If you have young family members planning to go to college, a 529 education savings plan might be a good use of your RMD funds each year. These savings plans allow your money to continue to grow tax-free and will remain tax-deductible as long as the funds are used for a qualifying educational expense in the future.

Bottom Line

While an RMD can seem confusing at first, especially if you’re recently retired or haven’t had to make withdrawals from your retirement accounts yet, the process is relatively straightforward and doesn’t have to be a financial burden if done correctly. By using your withdrawal wisely through reinvesting and charitable contributions, your RMD can become an opportunity rather than a burden each year. At Horizon Wealth Management, we can help you ensure your financial future is clear with retirement planning services and financial planning services. Schedule a discovery call today!

RMD FAQs

What is the biggest RMD mistake?

Probably the most common mistake people make with their first RMD is failing to withdraw the correct amount or missing the withdrawal deadline. These errors are sometimes accompanied by substantial fines from the IRS, but they can be easily avoided by working with a qualified investment professional to ensure the process is followed correctly and in a timely manner.

Is it better to take RMD monthly or annually?

In the long term, there is little difference if any in an individual’s finances if they choose to withdraw their RMD monthly, quarterly or annually. This decision should be made based on an individual’s needs and personal preferences, and will likely be informed by what other forms of income, if any, the person has.

Do RMDs affect Social Security or Medicare premiums?

RMDs do not directly impact social security payments but can affect Medicare premiums. If your RMDs raise your tax bracket, this can have a secondary effect on the amount of taxes paid on social security income and the Medicare surcharge premiums calculated based on your Modified Adjusted Gross Income.

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How to Avoid IRMAA Medical Premium Surcharges

If you are approaching Medicare eligibility or are already enrolled, you may have heard the term IRMAA (Income-Related Monthly Adjustment Amount). For many, IRMAA can significantly increase their Medicare premiums, which can be frustrating for those trying to manage healthcare costs in retirement. In this guide, we’ll break down what IRMAA is, how it is determined, and, most importantly, how to avoid it.

Key Takeaways

  • IRMAA is based on your MAGI, meaning higher income can result in significantly higher Medicare premiums.
  • Strategic financial planning, including tax-deductible contributions and Roth conversions, can help lower your MAGI and avoid IRMAA surcharges.
  • Appealing IRMAA may be possible if your income was unusually high due to life-changing events, like retirement or a one-time financial windfall.

What is IRMAA?

IRMAA, or the Income-Related Monthly Adjustment Amount, is an additional surcharge added to your standard Medicare premiums based on your income. It applies to individuals who earn above a certain threshold, meaning the wealthier you are, the higher your Medicare premiums will be. IRMAA applies to both Part B (medical insurance) and Part D (prescription drug coverage).

This surcharge is determined by your Modified Adjusted Gross Income (MAGI), which includes your taxable income plus any tax-exempt interest (like municipal bond income). The IRMAA surcharge was introduced to help ensure that Medicare is adequately funded as healthcare costs rise, with those who can afford to pay a bit more contributing a larger share.

The Role of MAGI in Determining Medicare Premiums

Your MAGI plays a crucial role in determining whether you will incur an IRMAA surcharge and how much it will be. MAGI is your Adjusted Gross Income (AGI) plus any tax-exempt interest. For example, if you have an AGI of $100,000 and $5,000 in tax-exempt interest income, your MAGI would be $105,000.

The Social Security Administration (SSA) uses your MAGI from two years prior to determine your IRMAA surcharge for the current year. For instance, the income you earned in 2021 will affect your 2023 Medicare premiums.

If your MAGI exceeds a certain threshold, you will be subject to the IRMAA surcharge. These thresholds vary depending on whether you file taxes as an individual or jointly. For example, in 2023, individuals with a MAGI above $97,000 or couples earning more than $194,000 may face higher premiums.

How to Avoid IRMAA

The good news is that there are several ways to avoid IRMAA or minimize the surcharge, particularly if you have flexibility in your income or financial planning. Below are key strategies to help you reduce or avoid IRMAA altogether.

1. Charitable Giving

One way to lower your MAGI is through charitable donations. Charitable contributions can be deducted from your taxable income, lowering your AGI and MAGI. By donating to a qualified charity, you can reduce your reported income, which may help you avoid the IRMAA surcharge.

If you’re over 70½ and want to donate directly from your IRA to a charity, consider strategies like donor-advised funds (DAFs) or qualified charitable distributions (QCDs).

2. Tax-Deductible Retirement Account Contributions

Contributing to retirement accounts like a Traditional IRA or 401(k) can also reduce your taxable income. These contributions are typically made pre-tax, which lowers your AGI and consequently your MAGI. This is especially helpful if you are still working or have a high income in your pre-retirement years.

By contributing the maximum allowable amount to tax-deferred accounts, you can lower your taxable income enough to avoid the IRMAA surcharge.

3. Tax-Free Retirement Income

Consider focusing on tax-free income sources, such as Roth IRAs or municipal bonds. Since the income from Roth IRAs and municipal bonds is not included in your MAGI calculation, it won’t trigger an IRMAA surcharge.

If you’re in a higher tax bracket and want to minimize IRMAA, converting some traditional retirement savings into a Roth IRA could be a strategic move (though it could trigger taxes on the conversion itself, so it’s important to plan carefully).

4. Tax-Efficient Investments

Tax-efficient investments are designed to minimize your tax liability. These include investments like tax-managed mutual funds, index funds, and ETFs that generate less taxable income. The less taxable income you generate from your investments, the less likely you are to exceed the income thresholds for IRMAA.

It’s important to consult with a financial advisor to design an investment portfolio that minimizes taxable income and maximizes tax benefits.

5. Tax-Efficient Withdrawal Strategies

When it’s time to begin withdrawing funds from your retirement accounts, doing so in a tax-efficient manner can help you avoid IRMAA. For example, you might want to prioritize withdrawing funds from taxable accounts or Roth IRAs rather than traditional retirement accounts, as these withdrawals don’t count toward your MAGI.

By structuring your withdrawals carefully, you can keep your taxable income (and MAGI) below the IRMAA thresholds.

Medicare Savings Accounts (MSAs)

For those who are self-employed or have a high-deductible health plan, Medicare Savings Accounts (MSAs) can be a useful tool for reducing income. Contributions to MSAs are tax-deductible, and the growth of these funds is tax-deferred. By lowering your taxable income, you can reduce your MAGI and avoid the IRMAA surcharge.

Roth Conversions

Roth conversions involve converting funds from a traditional IRA or 401(k) into a Roth IRA. While Roth conversions are taxable events, they can be a powerful strategy if managed carefully. By converting funds in years when your income is low enough to avoid IRMAA, you can create tax-free growth for the future.

It’s important to time these conversions wisely to minimize their impact on your MAGI for IRMAA purposes.

Appealing IRMAA

Suppose your income in the year the SSA uses to determine your premiums was unusually high due to a one-time event (like selling a business or receiving a large inheritance). In that case, you may be able to appeal IRMAA. The SSA allows beneficiaries to request a reconsideration of their IRMAA surcharge in cases of life-changing events. If your income has dropped due to circumstances like retirement or divorce, this could be an effective strategy to reduce your premiums.

Utilizing Financial Planning to Avoid IRMAA

The most effective way to avoid IRMAA is by using proactive financial planning. By working with a certified financial planner or tax professional, you can create a strategy that minimizes your income in retirement and helps you stay below the IRMAA thresholds.

A financial planner can help you balance withdrawals, investments, and retirement contributions to ensure that an IRMAA surcharge does not blindside you.

Bottom Line

IRMAA can significantly increase your Medicare premiums, but with careful planning and knowledge of how MAGI impacts your premiums, you can reduce or avoid it altogether. By implementing strategies like charitable giving, tax-deductible retirement contributions, and tax-efficient investment planning, you can protect your retirement income and avoid unnecessary Medicare surcharges.

Remember, it’s always a good idea to work with a financial advisor to navigate these complexities and ensure that your retirement is as financially comfortable as possible. Understanding how to avoid IRMAA can save you hundreds or even thousands of dollars in extra premiums over the years.

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These surprising spending truths could upend your retirement

When do retirees typically spend the most money (and what are they spending it on)?

How much you spend will have a big impact on how well you live in retirement, according to new research from J.P. Morgan.

Learn more here.

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How Cars Affect your Financial Freedom

It’s not that I don’t want a really fancy car, it is just that there is something I want a bit more: financial freedom. Car payments are many times the #1 obstacle that causes the average family not to achieve financial stability. Spend some time thinking about your current car situation.  Are your car purchases making your bank richer or you?

Here is a great read about “How Your Car Affects Your Financial Freedom.”

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The Boring Secret to Getting Rich

Many people dream of becoming rich but don’t have any idea how to make it happen.  There’s no magic formula, but there are many steps you can take to gain an advantage.  The secret to getting rich is simply doing what most people can’t.

Click here to learn Money Magazine’s boring secret to getting rich.

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10 Ways To Prevent Money From Ruining Your Marriage

Arguments about money are by far the top predictor of divorce. It’s no secret that fighting about money puts a huge strain on a relationship. Money issues are so troublesome that people who say they’re experiencing stress in their relationship cite “finances” as the number one reason.

This may seem like a grim prognosis for married couples, but it doesn’t have to be.  There are various steps that experts say couples can take to avoid letting money matters get the best of their marriage.

So whether you’re about to say “I do” or money problems have you thinking maybe “I don’t anymore” the following tips can help prevent money from destroying  your relationship.

Click here to read more.

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In Your 20s? 30s? 40s? 50s? 60s? The Best Financial Goals for Every Age

We’ve devised a little roadmap of goals that everyone can follow to make sure they are meeting the right financial goals for their age.  Of course, you can accomplish any of these goals sooner, but this is a good general map of where you should be at any given age:

Learn more here.

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10 Reasons You’re Not Rich Yet

No matter how much you earn you could be creating your own barriers to financial success without even knowing it. Here are 10 things you might be doing that are preventing you from achieving financial freedom.

Click here to read Money Magazine’s 10 Reasons You’ll Never Be Rich. 

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Financial Habits That Will Make You Sexier

Ditch the makeup and hair products. Your budgeting skills might be the thing you should really show off on your next date.  Money skills are more important than even good looks when seeking a mate!

In a recent survey about relationships and finances, MONEY found that both baby boomers and millennials agree on the three most attractive traits in a potential mate: a sense of humor, compassion, and—yes—financial responsibility. For both groups, those qualities all rank higher than physical chemistry, diligence, and even intellect.

Click here to find MONEY’s survey results on the most attractive traits.

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