WHEN YOU CHANGE JOBS
You May Have an Important Decision to Make…
What to do with your money in an employer-sponsored retirement plan, such as a 401(k) plan. Since these funds were originally intended to help provide financial security during retirement, you need to carefully evaluate which of the following options will best ensure that these assets remain available to contribute to a financially-secure retirement.
Take the Funds:
You can withdraw the funds in a lump sum and do what you please with them. This is, however, rarely a good idea unless you need the funds for an emergency. Consider:
Leave the Funds:
You can leave the funds in your previous employer’s retirement plan, where they will continue to grow on a tax-deferred basis. If you’re satisfied with the investment performance/options available, this may be a good alternative. Leaving the funds temporarily while you explore the various options open to you may also be a good alternative. (Note: If your vested balance in the retirement plan is $5,000 or less, you may be required to take a lump-sum distribution.)
Roll the Funds Over:
You can take the funds from the plan and roll them over, either to your new employer’s retirement plan (assuming the plan accepts rollovers) or to a traditional IRA, where you have more control over investment decisions. This approach offers the advantages of preserving the funds for use in retirement, while enabling them to continue to grow on a tax-deferred basis.
Why Taking a Lump-Sum Distribution May Be a Bad Idea:
While a lump-sum distribution can be tempting, it can also cost you thousands of dollars in taxes, penalties and lost growth opportunities…money that will not be available for future use in retirement.
Please contact my office if you would like additional information on rolling funds over from a previous employer’s retirement plan.
The purpose of this newsletter is to provide information of general interest to our clients, potential clients and other professionals. The information provided is general in nature and should not be considered complete information on any product or concept described.
by The Virtual Assistant; © 2012 VSA, LP
How much would you have to earn each year from a taxable investment in order to equal earnings on a tax-deferred investment? This chart illustrates the potential benefits of a tax-deferred investment vs. a taxable investment.
|Annual Tax-Deferred Yield||Federal Income Tax Bracket:|
|Annual Taxable Equivalent Yield|
This chart illustrates the potential benefits of a tax-deferred investment vs. a taxable investment. For example, if an investor in the 25% federal income tax bracket purchases a tax-deferred investment with a 5% annual yield, that investor’s taxable equivalent yield is 6.67%. This means the investor would need to earn at least 6.67% on a taxable investment in order to match the 5% tax-deferred annual yield.
This chart is for illustrative purposes only and is not indicative of any particular investment or performance. In addition, it does not reflect any federal income tax that may be due when an investor receives distributions from a tax-deferred investment.
1. The difference between saving and investing:
Some people think these are one and the same, but they’re not. The focus in saving is on preserving money that you accumulate over time. Money that is saved is typically “stored” in low-risk vehicles, such as bank savings accounts, CDs and money market accounts, which offer a relatively low return, but guarantee the principal and interest. A savings approach is appropriate for shorter-term needs that generally require a higher degree of liquidity, but is generally not the best approach for accomplishing your longer-term financial objectives. Investing, on the other hand, emphasizes accumulation through growth. Investment vehicles, such as stocks, bonds and mutual funds, involve a greater risk to principal than do savings vehicles, but also offer a higher return potential and may better guard against inflation. Most financial plans reflect a combination of savings and investments.
2. The “magic” of compound growth:
Compound growth is simply earnings paid on previous earnings. The “magic” appears over time. To illustrate, let’s say we have one person who invests $100 per month for 20 years, from age 25 to age 45, and then invests nothing more for the next 20 years. Assuming an 8% annual return, this person’s initial $24,000 investment would grow to almost $275,000 by age 65. Another person, however, waits to begin investing until age 35 and then also invests $100 per month but for 30 years, from age 35 to age 65. Assuming this person realizes the same 8% annual return, the amount available at this person’s age 65 would be about $149,000. The second person invests more ($36,000 over 30 years vs. $24,000 over 20 years), but ends up with a good bit less at age 65 ($149,000 vs. $275,000). The moral here is to start saving and investing early, because the person who waits can never catch up to the person who starts at a younger age!
3. Risk and reward:
First off, let’s understand that there is risk in saving and investing…it can’t be avoided. You could keep your savings in a mattress and the mattress could catch on fire! The key is to understand the different types of risk and the relationship of risk and reward. For example, savings vehicles typically have no risk of loss of principal (market risk) or lack of a ready market when you need the money (liquidity risk). Without these risks, however, they produce a relatively low return, which means that they may not grow at a rate to keep pace with inflation (purchasing power risk). Investment vehicles, however, do come with both market risk and liquidity risk, including the risk of losing your principal investment. With these risks, however, investment vehicles offer the potential to produce a higher return and greater accumulation over time. The objective is not to eliminate risk. Rather, the objective is to balance risk and return in a way that is consistent with your temperament and financial goals.
Diversification is an investment technique designed to minimize losses from the inevitable market downturns that will occur. When you diversify, you mix a variety of saving and investment vehicles in your portfolio, thus minimizing the impact of a single investment on the overall performance of your portfolio. The objective of diversification is to ensure that gains offset losses and the portfolio continues to grow in value.
5. Understand saving and investment vehicles:
Take the time to understand what you’re saving and investing in…the potential risks and rewards, the fees and expenses, the advantages and disadvantages.
6. Investment resources:
Know where you can turn for advice. Decide whether you want to actively manage your investment portfolio or whether you’d prefer to pay an advisor to recommend specific investments, as well as make market timing and asset reallocation decisions.
The primary goal of most retirees is to have adequate retirement money they will not outlive. This goal could conflict withthe objective of the required minimum distribution rule which is to ensure that the entire value of a traditional IRA or employer-sponsored qualified retirement plan account will be distributed over the IRA retiree’s life expectancy.
The big question is what happens to retirees who live past normal life expectancy? Longer life is becoming more common with each passing day. Centurions are the fastest growing age group in the U.S.
When Must Required Minimum Distributions Begin?
How Are Required Minimum Distribution Amounts Calculated?
What Happens if Minimum Distribution Requirements Are Not Met?
May I Withdraw More Than the Required Minimum Distribution?
Related post- Are RMDs a Danger to Retirement
NOTE: The above discussion does not apply to non-deductible Roth IRAs, which are not subject to minimum distribution requirements.
For our purposes, a trust is a legal device for the management of property. Through a trust, one person (the “grantor” or “trustor”) transfers the legal title to property to another person (the “trustee“), who then manages the property in a specified manner for the benefit of a third person (the “trust beneficiary“). A separation of the legal and beneficial interests in the property is a common denominator of all trusts.
In other words, the legal rights of property ownership and control rest with the trustee, who then has the responsibility of managing the property as directed by the grantor in the trust document for the ultimate benefit of the trust beneficiary.
A trust can be a living trust, which takes effect during the lifetime of the grantor, or it can be a testamentary trust, which is created by the will and does not become operative until death.
In addition, a trust can be a revocable trust, meaning that the grantor retains the right to terminate the trust during lifetime and recover the trust assets, or it can be an irrevocable trust, meaning that the grantor cannot change or terminate the trust or recover assets transferred to the trust.
Trusts can be used:
Trusts are complex legal documents and are not appropriate in all situations. Before establishing a trust, you should seek qualified legal advice.
Taking control of your finances and your financial future can help you reach your desired destinations in life. You want to control your finances, not let them control you. You can do this by creating a strong financial foundation upon which you then build or live a satisfying retirement.
The Managing your Financial Life guide book covers these 8 topics.
Download a free copy of A life guide for Managing Your Financial Life
Did you have a New Year dream that taxes disappeared? I didn’t think so. 2015 is here and will be over before we know it. Since taxes are fact of life we all must plan with them in mind. Here is a table/chart of 2015 Federal Income Tax Rates for Individuals to help plan ahead.
For additional information regarding: 2015 Federal Income Tax Digest
For additional information Requests contact Tim Barton, ChFC at www.timbarton.net
In order to relieve loved ones of additional stress, anxiety and expense at the time of a death in the family, consider recording as much information as possible in advance and providing copies to family members. Using our When a Loved One Dies Life Guide, you’ll be able to record and share the following information:
In addition, this Life Guide provides information and suggestions on the actions to take immediately following a death in the family, as well as in the days, weeks and months to follow.
People who die without a valid will, die intestate. In this event, the state in which they resided effectively provides a will through the state’s intestacy law. This means that the state dictates who will receive the estate owner’s property and in what proportion.
While state intestacy laws do attempt to provide for a “fair” distribution of property, the state’s “one-size-fits-all” will simply cannot reflect the specific wishes of the estate owner in regard to either property distribution or the unique needs of the estate owner’s heirs.
In addition, state intestacy laws require that the probate court appoint a guardian for any minor children. The court-appointed guardian, who may not even be a relative, may be required to post bond and the guardianship will be supervised by the probate court.
Finally, when a person dies intestate, the probate court appoints an administrator of the estate. This administrator can be anyone of the court’s choosing and is required to post bond, an additional expense that must be paid by the estate.
The choice is yours…
you can draw your own will or the state will do it for you!
The Advantages of Having a Will Include:
A power of attorney is a written document in which one person — the principal — authorizes another person — the attorney-in-fact — to act on the principal’s behalf.
What Authority Is Granted by a Power of Attorney?
The authority granted by a power of attorney depends on the type:
General Power of Attorney: The authority granted is very broad…the attorney-in-fact is granted essentially the same legal authority held by the principal. This means that the attorney-in-fact can exercise such powers as making gifts, buying and selling assets and filing tax returns on behalf of the principal.
Special Power of Attorney: The authority granted to the attorney-in-fact is limited to those powers specifically defined in the document.
The authority granted by both a general and a special power of attorney is typically limited to acts performed on behalf of the principal while the principal is competent, which brings us to a third type of power of attorney:
Durable Power of Attorney: The attorney-in-fact is authorized to act on behalf of the principal even if the principal becomes incapacitated. In fact, a durable power of attorney can become effective immediately, or it can become effective only if the principal later becomes incapacitated.
Why Should You Consider a Durable Power of Attorney?
In the event of future incapacitation, a durable power of attorney can be particularly useful in:
As with any legal document, legal advice should be obtained before entering into a power of attorney.
There can be significant tax advantages in giving appreciated assets to a charity. Examples include real estate and securities. If you were to sell an appreciated asset, the gain would be subject to capital gains tax. By donating the appreciated asset to a charity, however, you can receive an income tax deduction equal to the fair market value of the asset and pay no capital gains tax on the increased value.
For example, Donor A purchased $25,000 of publicly-traded stock several years ago. That stock is now worth $100,000. If she sells the stock, Donor A must pay capital gains tax on the $75,000 gain. Alternatively, Donor A can donate the stock to a qualified charity and, in turn, rece
ive a $100,000 charitable income tax deduction. When the charity then sells the stock, no capital gains tax is due on the appreciation.
When a donor makes substantial gifts to charity, however, the donor’s family is deprived of those assets that they might otherwise have received.
A Potential Life Insurance Solution:
In order to replace the value of the assets transferred to a charity, the donor establishes a second trust – an irrevocable life insurance trust – and the trustee acquires life insurance on the donor’s life in an amount equal to the value of the charitable gift. Using the charitable deduction income tax savings and any annual cash flow from a charitable trust or charitable gift annuity, the donor makes gifts to the irrevocable life insurance trust that are then used to pay the life insurance policy premiums. At the donor’s death, the life insurance proceeds generally pass to the donor’s heirs free of income tax and estate tax, replacing the value of the assets that were given to the charity.
“Living will” is a term commonly used to refer to a legal document available in most states that allows an adult to state in advance whether or not life-sustaining medical procedures should be used to prolong life when there is no chance for a reasonable recovery.
Why Should You Consider a Living Will?
Reasons to consider a living will include:
How Do You Implement a Living Will?
While the validity of a living will is determined by state statute, the requirements generally include that the document be:
In addition, doctors and their employees, as well as hospital employees, are generally not acceptable witnesses. Consult your doctor or attorney for more information about the availability of a living will in your state.
Once a living will has been executed, copies should be given to close family members, the primary doctor and the family attorney.
A living will can be revoked at any time by destroying the document and any copies or by signing a notarized revocation of the document.
Need retirement income you can’t outlive? Have coffee with Meg. Take a video break and learn how Meg uses a single premium immediate annuity (SPIA) to alleviate concerns about outliving her retirement assets and being unable to meet monthly expenses.
Retire with Confidence
People are living longer than ever before, meaning that unpredictable market performance, higher healthcare costs and rising inflation could impact your retirement nest egg. Social Security is in question, and you may or may not have a pension.
The reality is, many individuals simply may not be able to maintain their standard of living — or worse — may run out of money during retirement.
Live Comfortably with Retirement Income- Consider the risks that can affect your retirement and life:
At what rate can you safely withdraw from your portfolio to address these risks?
You might know that you can move money from your employer’s qualified retirement plan to an IRA when you leave the employer. But do you know you may be able to take advantage of this opportunity while still employed by the company? There can be big benefits to this move.
What is an In-Service Withdrawal?
Basically, some companies allow active employees to move funds from an employer-sponsored qualified plan, such as a 401(k) or 403(b), while still contributing to the plan. When handled as a direct rollover, an actively working employee (usually age 59½ or older) then can buy an Individual Retirement Annuity (IRA) without current taxation. Of course, if a withdrawal is not rolled over to a qualified plan or IRA, it is considered taxable income (and may be subject to a 10% federal penalty if less than age 59½). But done right, there can be advantages to making this move.
What are the Benefits of an In-Service Withdrawal?
Using an in-service withdrawal to fund a deferred annuity in an IRA can offer these potential benefits:
What are the Next Steps?
Importance of Direct Rollover
As you consider an in-service withdrawal, it’s important to be certain your financial professional and plan administrator handle it properly — as a direct rollover.
With a direct rollover, your funds transfer from the plan trustee directly to another qualified retirement plan or IRA. By doing so they are not subject to tax withholding.
If your funds transfer to you, the plan participant, plan administrators must withhold 20% for federal income tax purposes, even if you intend to roll all the funds over within the 60-day time limit. This is a critical detail; one you don’t want to dismiss.
Added Considerations: Get the Complete Picture
The marital deduction (I.R.C. Sections 2056 and 2523) eliminates both the federal estate and gift tax on transfers of property between spouses, in effect treating them as one economic unit. The amount of property that can be transferred between them is unlimited, meaning that a spouse can transfer all of his or her property to the other spouse, during lifetime or at death, and completely escape any federal estate or gift tax on this first transfer. However, property transferred in excess of the unified credit equivalent will ultimately be subject to estate tax in the estate of the surviving spouse.
The 2010 Tax Relief Act, however, provided for “portability” of the maximum estate tax unified credit between spouses if death occurred in 2011 or 2012. The American Taxpayer Relief Act of 2012 subsequently made the portability provision permanent. This means that a surviving spouse can elect to take advantage of any unused portion of the estate tax unified credit of a deceased spouse (the equivalent of $5,000,000 as adjusted for inflation; $5,340,000 in 2014). As a result, with this election and careful estate planning, married couples can effectively shield up to at least $10 million (as adjusted for inflation) from the federal estate and gift tax without use of marital deduction planning techniques. Property transferred to the surviving spouse in excess of the combined unified credit equivalent will be subject to estate tax in the estate of the surviving spouse.
If the surviving spouse is predeceased by more than one spouse, the additional exclusion amount available for use by the surviving spouse is equal to the lesser of $5 million ($5,340,000 in 2014 as adjusted for inflation) or the unused exclusion of the last deceased spouse.
What Requirements Apply to the Marital Deduction?
To qualify for the marital deduction, the decedent must have been married and either a citizen or resident of theU.S. at the time of death. In addition, the property interest (1) must be included in the decedent’s gross estate, (2) must pass from the decedent to his or her surviving spouse and (3) cannot represent a terminable interest (property ownership that ends upon a specified event or after a predetermined period of time).
Source: Giving USA Foundation™ – Giving USA 2013 Highlights
People give to charities for a variety of reasons. They give:
Regardless of your reasons for giving, a careful review of the various ways to structure charitable gifts can help make your gifts more meaningful, both to you and to the charities you choose to support.
A charitable gift is a donation of cash or other property to, or for the interest of, a charitable organization. The gift is freely given with the primary intention of benefiting the charity.
Whether given during lifetime or after death, charitable gifts are eligible for a tax deduction, but only if made to a qualified charitable organization. For example, you may have a relative who has fallen on hard times, someone you choose to help with gifts of cash. While you may be motivated by charitable intentions in making these gifts, you cannot deduct them for either income tax or estate tax purposes.
In general, qualified charitable organizations include churches, temples, synagogues, mosques and other religious organizations, colleges and other nonprofit educational organizations, museums, nonprofit hospitals, and public parks and recreation areas. Gifts to these types of organizations qualify for a federal income tax deduction if made during your lifetime or, if made after your death, can be deducted from the value of your estate for federal estate tax purposes.
On the other hand, examples of non-charitable groups include labor unions, social clubs, lobbying organizations, chambers of commerce, for-profit groups and individuals. Gifts to any of these are not eligible for a charitable tax deduction.
If in doubt about an organization’s qualified status, ask the charity for documentation of its tax-exempt status. Alternatively, the IRS provides a complete listing of approved charitable organizations in Publication 78, Cumulative List of Charitable Organizations (http://www.irs.gov). (search Pub 78)
Don’t forget to check how much of your contribution is used for the charity’s mission verses how much is paid out in other expenses such as administration, salary, employee benefits and fundraising. http://www.charitynavigator.org/ is a good site to research a charity.
At this point in our lives we’ve raised our own kids and hopefully the values we struggled to impart before they left home have become part of their family lives. Now they’re raising our grandchildren and like us, when we were new parents our kids will try to bring all of their life lessons into the mix. The hard part, at times, at least for me, is to keep my mouth shut not give unasked for advice. Anyone else have that problem?
This narrows my options to – just setting the best example I can no matter the subject matter. When it comes to money and finances. Money does not grow on trees.
These are just few examples of actions and conversation points I use to demonstrate how to use money with my grandkids. Actually I did the same things with their parents as they grew up and remember how I appreciated any support from other adults. As a grandpa I just wait for the “teachable” moment or when the conversation flows that way. To be effective today’s kids are no different than yesterday’s kids- the brains shut off during “the talk”.
Need more ideas? Download my PDF booklet
“Money Doesn’t Grow on Trees… Teaching Kids about Money”
What Are the Obstacles to Successful Retirement Planning?
There are a number of obstacles that you may face in planning for your retirement:
Discipline to Save
Saving to Spend
Longer Life Expectancies
Longer life expectancies also increase the risk of inflation eroding the purchasing power of retirement income.
Return of Money Trumps Return on Money
Gallup March 31,2014
“United States investors are generally a cautious group when thinking about risk versus return options for their retirement savings.”
Nearly 2 thirds (66%) of investors surveyed by Gallup said a guarantee that their initial investment was secure even if that meant lower growth potential; outranked having high growth potential that carried some risk of losing their initial investment.
The Takeaway – In 2013 – Interest guarantees and income guarantees increased annuity sales 5% higher, to 230,100,000,000 industry wide. According to LIMRA, 2/24/2014
Retirees who take income from an annuity are happier than those who adopt a different approach according to “Annuities and Retirement Happiness” (September 2012) The report from consultants Towers Watson, concluded-
“…while workers and retirees might have very different needs, almost all of them can benefits from annuitizing some portion of their of their retirement income (beyond Social Security).
Business partners? Yes. Father and sons? Yes. Charitable donors and donees? Yes. Non-spousal joint annuitant structuring provides added flexibility for income solutions.