Characteristics of an ideal TBD account

A financial professional who understands the philosophy of To-Be-Determined accumulation may use a variety of financial instruments to achieve the objective. But whatever the specifics, here are some features that should figure prominently in a TBD program. It…

Offers tax-favored withdrawals or distributions. Since this is primarily a long-term accumulation account, the goal is to minimize or eliminate any tax costs on the earnings or investment returns from the invested principal. However, be careful about committing TBD money to account formats that permit pre-tax deposits, because the only way you get a break for funding this type of account is by paying tax on distributions. A TBD account will almost certainly involve distributions that are reallocations to other financial instruments. Better to pay a known cost on the deposits than incur an unknown cost on a future transfer.

Accepts regular deposits, and requires low minimum balances. You don’t want an accumulation vehicle with a $25,000 minimum to open the account. And when you determine it’s time to reallocate, you don’t want a minimum balance requirement to stop you from making the move.

Involves minimal principal risk with competitive returns. Because you know this money will most likely be reallocated in the future (perhaps to fund college costs, supplement retirement, or whatever), you don’t want to unnecessarily risk principal; when you need the funds, they have to be there. This may mean sacrificing potential high returns for a higher degree of financial certainty. At the same time, a TBD account is not an oversized checking account; while the fund is growing, you want a boost from compounding.

Is accessible (but not too accessible). A lot of your financial life happens before age 59?, and when it does, you want the liquidity to handle emergencies and seize opportunities. A TBD account shouldn’t have an ATM feature, but once you request funds, there should be liberal access privileges. This means minimal transaction fees or surrender charges, and flexible repayment terms if the funds will be taken as a loan.

Possible sources for TBD funding

If you understand the To-Be-Determined concept, the next step is figuring out how to fund it. The simplest way is to redirect other less-efficient financial transactions. Every situation is different, but most of us have some current savings that could be reallocated, such as:

· Additional principal payments on mortgages

· 401(k) contributions, especially those that exceed the employer match

· College funding allocations

· Non-qualified annuity deposits, especially if younger than 59?

Think BIG with your TBD

In the “old days,” some financial experts might have called a TBD account an “emergency fund,” and some contemporary finance authors still give lip-service to this idea. But their TBD discussions are more like a disclaimer, a brief word of caution before revealing the “I-Can-Make-You a-Millionaire” details on how to invest in stocks, ladderbonds, flip real estate, etc. That’s a mistake. A substantial accumulation of readily available assets opens up a variety of financial opportunities. Unlike other issue-specific accounts, money may flow in and out, but over time a TBD account should keep growing. A TBD account that surpasses a million dollars isn’t necessarily over-funded, if you understand the advantages of a wait-and-see financial challenge.

Elozor Preil is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at [email protected] See www.wagroupllc.com/epreil for full disclosures and disclaimers.

Guardian, its subsidiaries, agents, or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.

By Elozor M. Preil