Question:
I will be moving and leaving my current employer soon. I’ve had a 401(k) with them for years. It is fully vested. I’m going to be a stay-at-home mom for a while, but I don’t want to lose my 401(k). What can I do?
Answer:
We recommend that you open an IRA account at a brokerage firm, such as, Schwab or Fidelity. Your 401(k) administrator can provide you the paper work you will need to complete to roll the funds into the IRA. This trustee-to-trustee transfer should have no tax consequences to you. Depending on your plan administrator, the investments in your plan and the custodian you choose for your IRA, you may be able to transfer your investments “in-kind,” meaning you would not have to liquidate your holdings before rolling the money into the IRA. Once the money or investments are in your IRA, you have the flexibility to invest in any asset you choose.
If you have more than $5,000 in your former employer’s 401(k) plan, your former employer cannot force you to roll the assets into an IRA or other 401(k). However, we do not recommend staying enrolled in your former plan. You will no longer be able to contribute funds, you are limited to the investment selections within the plan, and if your former company were to make a change in plan administrators, paperwork could be a hassle.
Given that you are choosing to be a stay-at-home mom, it is likely that your family’s income will decline. This may present you an opportunity to convert some of the 401(k) rollover assets to a Roth IRA. You will have to pay ordinary income tax on the assets you convert to a Roth, but if you are in a lower income tax bracket, the tax bite may not be unreasonable. Funds in the Roth IRA should continue to grow and provide you with tax-free withdrawals in retirement.
Question:
I wanted a BarcaLounger for our anniversary. Instead my wife invested in La-Z-Boy Inc. She’s quirky and trying to be more involved in our finances. So what should we do with this holding?
Answer:
While you may not have received the luxury reclining chair of your dreams, the shares of La-Z-Boy, Inc. (NYSE: LZB) have been good to you. The stock is up 87% year to date. It is a high beta name, meaning it can be a volatile stock. The company provides a good product, and has good pricing power. While the stock does not meet our financial strength criteria, we think you should be OK to hold the stock. The company has a price-to-earnings to growth ratio of less than 1, indicating the stock may be undervalued given its recent earnings performance.
Question:
If my objective is capital preservation and income producing investments, is it smart to invest $150,000 in municipal bonds yielding 4.5% or an income stock portfolio that pays regular cash dividends around 7%?
Answer:
First, any municipal bonds yielding 4.5% are very likely poor quality, and not ones we recommend you hold. Likewise, a portfolio yielding dividends around 7% may consist either of questionable companies or be a limited partnership that is paying 7% on principal, but part of that 7% is also return of principal. A portfolio yielding 7% in dividends may also contain leveraged bond funds, which are highly risky. If interest rates were to rise, leveraged bond funds would get hammered. We urge you to be extremely careful if a broker or product is promising these numbers.
Currently, 10-year, AAA-rated municipal bonds are yielding between 1.5% and 2%. A portfolio of high-quality dividend stocks yields about 3% to 4% in dividends.
Now on to the question of what you’d rather invest in: We recommend common stocks with strong dividends and dividend growth. If we were to experience inflation, companies can raise the price of their goods, and their profits could continue to increase, which could lead to increased dividends. However with a bond portfolio, if you have a bond worth $50, it will pay out $50 when it matures. If we experience inflation, that $50 will buy less.
If you need any portion of the money within the next 10 years, we recommend a bond or a CD as principal preservation should be paramount.
Question:
I own Oxford Industries based on a recommendation from my adviser. It’s got some big labels, but I don’t know it as well as some of the other apparel makers. What do you think of this? Is it worth holding? I was underweight in consumer cyclicals.
Answer:
Oxford Industries Inc. (NYSE: OXM) is an apparel company, which designs, markets and distributes products under the brand names Tommy Bahama—which accounts for 62% of sales—Jack Nicklaus golf apparel and Lily Pulitzer. The brands range from high quality to medium and low priced names, giving the company some pricing power. The stock pays a dividend of 1% and has a PEG ratio of 0.75. The stock has a beta of 1.7, so it can be a bit more volatile than the market as a whole. In 2012, the company refinanced its debt, which turned out to be a good move. The company has optimal debt at 33% of capital. The stock does not meet our financial strength criteria. With a recent run up, you should consider taking profits.
At Henssler Financial we believe you should Live Ready, and that understanding the fundamentals of your investments. If you have questions regarding your holdings the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
