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Retirement Planning

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

  •  Many people find it difficult to form the habit of “paying themselves first,” by making regular deposits to a savings plan.

 Saving to Spend

  •  Money is saved for retirement purposes, but then is spent to make purchases.

 

 Income Taxes

  •  Income taxes can erode the growth of your retirement savings.

Longer Life Expectancies

  •  Longer life expectancies increase the risk of retirees outliving at least a portion of their retirement income.

Inflation

Longer life expectancies also increase the risk of inflation eroding the purchasing power of retirement income.

  • For example, if inflation increases at 3.5% a year, it would require over $1,400 in 10 years in order to maintain the original purchasing power of $1,000.

 

 

 

 

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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).

Non-Spousal? Non-Problem

Business partners? Yes.     Father and sons? Yes.  Charitable donors and donees? Yes.    Non-spousal joint annuitant structuring provides added  flexibility for income solutions.

 

 

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Is it time to take some risk money off the table?
Not if you believe the market will always go up and that all the risk of future downturns have been made illegal.

This graph certainly looks good.  As of June the Bull market has been around for 64 months that’s the third longest bull market in a half a century. The 1990′s bull lasted 9 years with much higher gains. Are we in the early stages of a new phenomena where the market never goes down?

Cause for concern

Investors still sell low & Buy High

To get an idea of the temperature of financial attitudes we can check the ”Advisor Confidence Index”  It shows financial advisors are strongly optimistic about the economy and markets.  Eerily just like they were in 2007 and more disturbing is the confidence of the small investors who are choosing to invest now.

I do not give investment advice nor can I see into the future, but I do study behavior and in the past the average investor  almost always buys high and sells low.  There is are no indications that has changed.

Perhaps it’s time to consider a lateral transfer of your gains to safety.  www.FixedindexAnnuity.com

 

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A qualified retirement plan is a program implemented and maintained by an employer or individual for the primary purpose of providing retirement benefits and which meets specific rules spelled out in the Internal Revenue Code. For an employer-sponsored qualified retirement plan, these rules include:

  • The plan must be established by the employer for the exclusive benefit of the employees and their beneficiaries, the plan must be in writing and it must be communicated to all company employees.
  • Plan assets cannot be used for purposes other than the exclusive benefit of the employees or their beneficiaries until the plan is terminated and all obligations to employees and their beneficiaries have been satisfied.
  • Plan contributions or benefits cannot exceed specified amounts.
  • The plan benefits and/or contributions cannot discriminate in favor of highly-compensated employees.
  • The plan must meet certain eligibility, coverage, vesting and/or minimum funding standards.
  • The plan must provide for distributions that meet specified distribution requirements.
  • The plan must prohibit the assignment or alienation of plan benefits.
  • Death benefits may be included in the plan, but only to the extent that they are “incidental,” as defined by law.

 

Question Why do employers comply with these requirements and establish qualified retirement plans?
Answer To benefit from the tax advantages offered by qualified retirement plans.

Qualified Retirement Plan Tax Advantages:

In order to encourage saving for retirement, qualified retirement plans offer a variety of tax advantages to businesses and their employees. The most significant tax breaks offered by all qualified retirement plans are:

  • Contributions by an employer to a qualified retirement plan are immediately tax deductible as a business expense, up to specified maximum amounts.
  • Employer contributions are not taxed to the employee until actually distributed.
  • Investment earnings and gains on qualified retirement plan contributions grow on a tax-deferred basis, meaning that they are not taxed until distributed from the plan.

Depending on the type of qualified retirement plan used, other tax incentives may also be available:

  • Certain types of qualified retirement plans allow employees to defer a portion of their compensation, which the employer then contributes to the qualified retirement plan. Unless the Roth 401(k) option is selected, these elective employee deferrals are not included in the employee’s taxable income, meaning that they are made with before-tax dollars (see page 13 for information on the Roth 401(k) option).
  • Qualified retirement plan distributions may qualify for special tax treatment.
  • Depending on the type of qualified retirement plan, employees age 50 and over may be able to make additional “catch-up” contributions.
  • Low- and moderate-income employees who make contributions to certain qualified retirement plans may be eligible for a tax credit.
  • Small employers may be able to claim a tax credit for part of the costs in establishing certain types of qualified retirement plans.

The bottomline is that the primary qualified retirement plan tax advantages – before-tax contributions and tax-deferred growth – provide the opportunity to accumulate substantially more money for retirement, when compared to saving with after-tax contributions, the earnings on which are taxed each year

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The US Supreme Court has unanimously ruled that funds held in inherited IRAs are NOT “retirement funds”  and therefore are not protected in bankruptcy. It is clear that IRAs are exempted but, before the Clark case decision, whether an inherited IRA was subject to the same protection had varying precedent. The decision in Clark is another reason why naming a qualified trust as beneficiary of an IRA is beneficial.

This decision covers both Roth and Traditional IRAs.

An inherited IRA is a traditional or Roth IRA that has been inherited after its owner’s death.

Justice Sotomayer delivered the opinion-

If the heir is the owner’s spouse, as is often the case, the spouse has a choice: He or she may “roll over” the IRA funds into his or her own IRA, or he or she may keep the IRA as an inherited IRAs spouse inherits the IRA, he or she may not roll over the funds; the only option is to hold the IRA as an inherited account. Inherited IRAs do not operate like ordinary IRAs. Unlike with a traditional or Roth IRA, an individual may withdraw funds from an inherited IRA at any time, without paying a tax penalty. Indeed, the owner of an inherited IRA not only may but must withdraw its funds: The owner must either withdraw the entire balance in the account within five years of the original owner’s death or take minimum distributions on an annual basis. Relying on the “plain language of §522(b)(3)(C),” the court concluded that an inherited IRA “does not contain anyone’s ‘retirement funds,’” because unlike with a traditional IRA, the funds are not “segregated to meet the needs of, nor distributed on the occasion of, any person’s retirement.”

 

 

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Long-term care insurance purchased today can help provide you with the financial security you need and deserve in your retirement years. By acting today, you will have protection to help pay for whatever long-term care needs a long life brings!

Long-term care refers to help with daily activities needed by people with disabilities or chronic, longer-lasting illnesses, such as help with eating, bathing and dressing. Long-term care also includes assistance for those suffering from cognitive impairments, such as Alzheimer’s disease and dementia. Other types of insurance, such as health insurance and disability insurance, do not typically pay for these services. Long-term care can be provided in a variety of settings, such as your home, an assisted living community or in a nursing home.

A typical long-term care insurance policy helps cover the cost of long-term care services, including:

  • Assistance in your home with daily activities, such as bathing, dressing, meals and housekeeping services.
  • Visiting nurses and/or home health aides who come to your home.
  • Services available in your community, such as adult day care.
  • The cost of an assisted living community.
  • Nursing home care.

While the good news is that people are living longer, the bad news is that increased life expectancy also increases the odds of needing long-term care services, which can be expensive.

Without long-term care insurance to help meet the cost of needed long-term care services, you run the risk of depleting a lifetime of savings. With long-term care insurance, you’re in a better financial position to make the choice of what long-term care services you receive and where you receive them. PLUS, qualified long-term care insurance receives favorable income tax treatment…the benefits from qualified long-term care insurance, for the most part, are not taxable income to the recipient, up to a per diem limit ($330 for 2014).

Eligible premiums paid for qualified long-term care insurance can be applied toward meeting the 7.5% “floor” for medical expense deductions on your federal income tax return. The amount of eligible long-term care premium that can be applied to the 7.5% floor depends on your age:

If you are this age by the end of the year: This is the maximum eligible long-term premium for tax deduction purposes in 2014*:
40 or less $370
41 – 50 $700
51 – 60 $1,400
61 – 70 $3,720
More than 70 $4,660

* The maximum eligible long-term care premium is adjusted each year for inflation.

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According to Insurance News the cost of health care in the United States is approximately $9,000 per person.   As a country we spend $2.8 trillion or about 17.2% of gross domestic product on healthcare.  Some think the cost is too high but remember for the most part this spending is going to create maintain good U.S. employment.

$2.8 trillion spending breakdown

  • $882 billion hospitals
  • $565 billion physicians
  • $263.3 billion prescription drugs
  • $76.4 million services i.e. physical therapy, optometry or chiropractic care.

Private Insurance companies pay the most of the nation’s healthcare bills – $917 billion followed by:

  •  Medicare $572.5 billion
  • Medicaid $421.2 billion
  • Patients paid $328.2 in out of pocket costs on their health insurance plans.

What do we get for all this spending?  The longest life expectancies in the history of the world.  Not only is life expectancy long they are, for the most part high quality and active.  Which is why poll after poll of seniors has shown their number 1 fear is Outliving Their Money.

 

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Avoiding Probate

June 1, 2014 by

Probate is simply the Latin word for prove, which means that the estate probate process is the process by which your will is brought before a court to prove that it is a valid will. The courts charged with this responsibility are generally known as probate courts, which may actually supervise the administration or settlement of your estate.

Supervision of the estate settlement process by the probate court can result in additional expense, unwanted publicity and delays of a year or more before heirs receive their inheritance. The publicity, delays and cost of probate motivate many people to explore ways in which to avoid or minimize the impact of probating a will, including:

State Statute

  • If specific requirements are met, many states have made provision for certain estates to be administered without the supervision of the probate court, resulting in less cost and a speedier distribution to heirs.

Form of Property Ownership

  • The joint tenancy form of holding title to property allows ownership to pass automatically to the surviving joint tenant, who is normally the surviving spouse.

Transfer on Death

  • Many states have enacted Transfer on Death statutes that allow a person to name a successor owner at death on the property title certificate for certain types of property, including real estate, savings accounts and securities.

Life Insurance

  • Unless payable to the estate, life insurance proceeds are rarely subject to the probate process.

Lifetime Giving

  • Gifts given during life avoid the probate process, even if made shortly before death.

Trusts

  • A “Totten” trust, which is a bank savings account held in trust for a named individual, can be used to pass estate assets at death outside of the probate process.
  • A revocable living trust, created during the estate owner’s lifetime, can be an effective way to avoid the expense and delay of probate, while retaining the estate owner’s control of his or her assets prior to death.

Proper planning may serve to minimize the impact of the probate process on your estate and heirs.

Any potential method of avoiding probate, however, should be evaluated in terms of its income and/or estate tax consequences, as well as its potential impact on the estate owner’s overall estate planning goals and objectives.

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In a recent United States Tax Court case, Bobrow v Commissioner, the Tax Court ruled that all IRAs of a taxpayer should be looked at in aggregate when it comes to the one-rollover-per-year rule. Prior to this ruling it was widely accepted, as well as published in IRS publication 590, that the one-rollover-per-year applied to each IRA independently.

Following the court decision the IRS issued Announcement 2014-15, stating their intention of enforcing the new aggregated one-rollover-per-year rule. However, they are allowing a grace period until January 1, 2015 before enforcement will begin.
As a reminder, the one-rollover-per-year rule applies only to indirect (60-day) IRA to IRA rollovers. Information on the IRS website implies that the limit will apply separately to indirect Roth IRA to Roth IRA rollovers. It appears that traditional, SEP and SIMPLE IRAs would be aggregated for purposes of the rule.

Please also keep in mind:

  • There is no limit on the number of rollovers between an IRA and a qualified plan.
  • There is no limit on the number of IRA to IRA transfers.
  • It appears that there is no limit on the number of indirect traditional IRA to Roth IRA conversions.

 

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On March 28 I wrote a post about a U.S. tax court altering the rules on IRA to IRA  rollovers and wondered when the IRS would officially change the rules and start enforcement.  Previously according to publication 590 and several IRS letter rulings a taxpayer could rollover each IRA account IRA to IRA once per year- per account.  The tax court changed this long standing precedent by limiting each taxpayer to one 60 day IRA to IRA rollover per year.  No matter how many IRA accounts a taxpayer owns they are now limited to only one rollover per year.

On January 1, 2015 the IRS will begin enforcing this new interpretation.  In order to avoid scrutiny a taxpayer should do all IRA rollovers as institution to institution direct transfers.  These direct transfers will remove all IRS questions and prevent a taxpayer for enduring audit, extra paperwork, penalties and unintentionally taxation of IRA funds.

For more background please read the previous post-    IRA Rollover Rules Altered by Tax Court http://retire.areavoices.com/2014/03/28/ira-rollover-rules-altered-by-tax-court/

Going forward a taxpayer should consult a well informed professional prior to doing any IRA rollovers.

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The January 2014  Bobrow tax court ruling  is an IRA game changer with huge ramifications for IRA owners.   The tax court has ruled the once a year IRA rollover rule applies to all of someone’s individual retirement accounts and not to each separately.  This ruling is stunning in that it changes the Internal Revenue Service’s long standing position in private letter rulings and  IRS Publication 590 that the once a year rule applies to each IRA separately.

According to IRC Section 408(d)(3)(B) IRA owners can roll over only 1 distribution within a 1 year period, 365 days not calendar year.   The 365 days starts on the day the IRA owners receives the money. Until this January 2014 court ruling it was clear the owner of  IRAs could rollover each IRA separately once per year.  If the owner wanted they could rollover each IRA once per year.

This a significant departure from everyone’s previous understanding thus making it prudent to only do one IRA to IRA rollover per year.

If an IRA owner needs to rollover more than one IRA account it is best to use the trustee to trustee transfer commonly  referred to as a direst transfer or institution to institution transfer.  These are the preferred methods to avoid tax trouble.

Is the IRS going to look back on taxpayer IRA rollovers?  Unknown at this time.  If they did -  taxpayers who  rolled over more than one IRA in a 365 day period could be required to pay the 6% penalty for excess contributions if the money was moved into another retirement account.

To avoid the above tax problems always  do direct transfers.  These  avoid comingling  IRA funds with regular “nonqualified” account funds (checking or saving account).  If a rollover is coming from a 401(k) or other tax qualified plan it is common practice for the institution to send the funds to the owner.  Make sure the check is made payable to “new institution FBO owner’s name” This check can be forwarded to the new institution without the comingling of funds.

 

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With advances in medical treatment and technology, many people now survive critical illnesses that would have been fatal in the past.  As a result of this increased life expectancy senior Americans have the opportunity to watch grandkids grow into adulthood and start families of their own.  Enjoying some great grandkids is a real possibility.

Some unhappy news; many retirees will at some point become critically ill as the following statistics demonstrate.  The need for planning in order to avoid becoming destitute is more important than ever.

Cancer:

  • Men have a slightly less than 1 in 2 lifetime risk of developing some form of cancer. For women, the lifetime risk is a little more than 1 in 3.
  • Between 2002 and 2008, the 5-year relative survival rate for all cancers was 68%, up from 49% in 1975 – 1977.
  • It is estimated that over 1.6 million new cancer cases were diagnosed in 2013.

(Source: Cancer Facts and Figures 2013; American Cancer Society)

Heart Disease:

  • An estimated 80 million Americans have one or more types of heart disease.
  • Each year, an American will suffer a heart attack about every 34 seconds.
  • The lifetime risk for cardiovascular disease at age 40 is 2 in 3 for men and more than 1 in 2 for women.
  • It is estimated that the total costs of cardiovascular diseases in the U.S. was over $448 billion in 2008.

(Source: Heart Disease Facts, Centers for Disease Control and Prevention, July 2013)

Stroke:

  • Someone in the United States has a stroke every 40 seconds.
  • Stroke is a leading cause of serious, long-term disability in the U.S.
  • It is estimated that Americans paid about $38.6 billion in 2010 for stroke-related medical costs and lost productivity.

(Source: Stroke Fact Sheet, Centers for Disease Control and Prevention, July 2013)

Will you have sufficient funds available to pay for:

  • Any insurance co-payments and deductibles;
  • Alterations to your home and/or automobile to meet any special needs;
  • Out-of-town transportation and lodging for medical treatment;
  • Treatments not covered by traditional health insurance; and/or
  • Shorter-term home health care during your recuperation?

Surviving critical illnesses increase our life expectancies, we will live longer than ever before.  At the same time, fortunately annuity ownership is rising  An annuity is the only guaranteed financial  hedge against longevity.  More than ever a retiree’s goal should be lifetime income not just income for 20-30 years.

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At retirement, if you have a pension, you have to make a difficult decision that could negatively impact your future financial security and that of your spouse.  Most people with company pension plans give this decision little thought and simply select the first payout option listed on their pension estimate; Joint and Equal Survivor Option.

For example, assume your maximum lifetime pension benefit is $2,000 monthly.

With the joint and equal survivor option, you’ll receive a significantly lower lifetime pension payment. Your surviving spouse, however, will continue to receive 100% of your pension benefit if you die first.

  • For as long as you live, you receive 75% of $2,000 the maximum life income option benefit.  Your benefit is reduced to $1,500 per month, for life.
  • If you die first, your spouse will receive a lifetime monthly pension benefit equal to 100% of your benefit, or $1,500 per month.
  • If your spouse dies first you will continue to receive $1500 per month.  There is generally no going back to the maximum $2,000 benefit. 

Second choice is  – Joint and One-Half Survivor Option:

If you elect the joint and one-half survivor option, you’ll receive a lower lifetime pension payment. On the other hand, if you die first, your surviving spouse will continue to receive a lifetime pension benefit equal to 50% of your pension benefit prior to your death. For example:

  • For as long as you live, you receive a monthly pension benefit of $1,700 or about 85% of the maximum life income option benefit.
  • If you die first, your spouse will receive a lifetime monthly pension benefit equal to 50% of your benefit, or $850 per month.
  • If your spouse dies first, however, your monthly pension benefit remains at $1,700.

Next choice is – Life Income Option:

If you receive your pension benefit under the life income option, you receive the maximum lifetime pension payment. If you die first however, your surviving spouse receives nothing after your death. For example

  • For as long as you live, you receive a monthly pension benefit of $2,000.
  • If you die first, however, your spouse will receive a monthly pension benefit of $0.
  • If your spouse dies first, your monthly pension benefit remains unchanged at $2,000.

At retirement, you will have to decide how your pension benefit will be paid out for the rest of your life:

  • If you elect to receive the maximum retirement check each month for as long as you live, with the condition that upon your death, your spouse gets nothing.
  • If you elect to receive a reduced retirement check each month, with the condition that upon your death, your spouse will continue to receive an income.
  • This pension decision is permanent.
  • The decision you make will determine the amount of pension income you receive for the rest of your life.
  • The decision is generally irreversible.
  • In making this decision, many people unknowingly purchase the largest death benefit (life insurance) they will ever buy and one over which they have no control.

How Can Retirement Income Protection Help Solve the Pension Benefit Dilemma?

Federal law allows a pension plan participant to waive the “joint and survivor” annuity payout requirement, with the written consent of his or her spouse.  This means that, with your spouse’s consent, you can elect to receive the MAXIMUM life income annuity payout at your retirement.

  • However, what happens to your surviving spouse’s income and lifestyle if you should die first?

The solution, you maintain sufficient life insurance to replace the pension income lost at your death, assuring that your spouse will have an adequate source of income after your death.  This is a death benefit you control and if your spouse predeceases you the life insurance can be surrendered paying you back part or all of your premiums;  Depending on when death occurred.

In making this important decision, you should evaluate the risks associated with retirement income protection funded with life insurance:

  • Your income after retirement must be sufficient to ensure that the life insurance policy premiums can be paid and coverage stay in force for your lifetime. Otherwise, your spouse may be without sufficient income after your death.
  • If your pension plan provides cost-of-living adjustments, will upward adjustments in the amount of life insurance be needed to replace lost cost-of-living adjustments after your death?
  • Does your company pension plan continue health insurance benefits to a surviving spouse and, if so, will it do so if you elect the life income option?
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Don’t forget about your unemployed or under-employed spouse when it comes to IRA contributions. Given the current unemployment rate, you may have a nonworking spouse at the moment. That doesn’t mean they are not able to make an IRA contribution.

As long as you are married, filing a joint tax return, and under the age of 70½, you can look to the following scenarios to see if you can make a contribution to a traditional IRA, and check if the contribution is partially or fully deductible.

One or more spouses working – neither spouse is covered by a qualified retirement plan (QRP) at work: Both spouses can make a deductible contribution to a traditional IRA up to $5,500 for 2013 ($6,500 if age 50 or older) and $5,500 for 2014 ($6,500 if age 50 or older) regardless of adjusted gross income (AGI). (Earned income must at the least be equal to the amount of the traditional IRA contribution.)

One or more spouses working – one spouse is covered by a qualified retirement plan (QRP) at work: The non-covered spouse can make a deductible IRA contribution up to $5,500 for 2013 ($6,500 if 50 or older) and $5,500 for 2014 ($6,500 if age 50 or older); however, deductibility is phased out based on joint AGI. The covered spouse’s ability to take a deduction for a contribution to a traditional IRA for 2013 is phased out with joint AGI between $95,000 and $115,000, and for 2014 is phased out with joint AGI between $96,000 and $116,000. The non-covered spouse’s ability to take a deduction for a contribution to a traditional IRA for 2013 is phased out with joint AGI between $178,000 and $188,000, and for 2014 is phased out with joint AGI between $181,000 and $191,000. (Earned income must at the least be equal to the IRA contribution amount.)

One or more spouses working – both are covered by a qualified retirement plan (QRP) at work: If both spouses are working and covered by a QRP they can each still take a full deduction for a contribution to a traditional IRA for 2013 if joint AGI is below $95,000, and for 2014 if joint AGI is below $96,000. Deductibility is phased out in 2013 when their joint AGI is between $95,000 and $115,000 and in 2014 when their joint AGI is between $96,000 and $116,000.

Roth IRA contributions
With Roth IRAs, participation in a QRP is not an issue, nor is age. As long as you are married, filing a joint tax return, each spouse can make a contribution to a Roth IRA up to $5,500 for 2013 ($6,500 if age 50 or older) and $5,500 for 2014 ($6,500 if age 50 or older) as long as earned income is at least equal to the 2014 Roth contribution and joint AGI is below the phase-out eligibility limit of for joint filers, $178,000 for 2013 and $181,000 for 2014. The phase-out range for determining how much of a contribution can be made to a Roth IRA is $178,000 to $188,000 for 2013 and $181,000 to $191,000 for 2014.

The dollar limits for contributions to a Roth IRA for year are reduced by any contributions to traditional IRAs for than year.

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Taxes are inevitable.  You know that part.  Each April 15, you tally up all of your 1099 forms that you have received and pay taxes on your investments, even if you haven’t actually spent a penny of those dividends and interest earnings.  Unfortunately, the money lost to taxes will never be available to you again.  But if you use the principles of tax diversification, you could benefit by paying taxes on what you spend – Not on what you earn. 

Tax diversification is as important as investment diversification when it comes to managing retirement saving risks.  With the proper advice you can create flexibility by selecting the best tax situation for your specific needs and time horizon.

Think about your financial goals for today, the next 10-15 years and down the road as you near retirement and answer these questions:

  • What investments do you currently hold?
  • What is the intent for that money?
  • Can it be allocated more tax efficiently?
  • How many years until you retire?  If you are retired how much and long do need your income?
  • Are you planning a major purchase?
  • What do you pay in taxes on each year- as reflected in IRS Form 1099

Now divide your investments into these three categories:

  1. Money that is taxed now
  2. Money that is taxed later (tax deferred/taxed when withdrawn)
  3. Money that is never taxed (paid in with after tax dollars and tax free during accumulation and at withdrawal)

Reallocate your investments into the appropriate category, if necessary.


For help you may ask questions in the comments

Or click here to contact me privately: Tim Barton Chartered Financial Consultant

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The Estate Tax Bill

February 25, 2014 by

The federal government will not accept a percentage of your estate as payment for your estate tax bill. Instead, your estate tax bill must be paid in cash, and it must be paid within nine months after your death.

If your estate is subject to the federal estate tax, there are FOUR ways to provide your estate with the cash needed to pay your estate tax bill:

100% METHOD

  • You could accumulate enough cash in your estate to pay your estate tax bill outright. Rarely, however, does a successful person accumulate such large sums of cash. Instead, the reason for financial success is usually due to the investment of cash in appreciating assets, rather than accumulating it in a bank.

100% PLUS METHOD

  • Your estate could borrow the cash needed to pay your estate tax bill. This, however, only defers the problem, since the money will then have to be repaid with interest.

ASSET LIQUIDATION METHOD

  • Your estate could liquidate sufficient assets to pay your estate tax bill. This choice may make sense if your estate owns considerable assets that can be readily sold for a gain following your death. Keep in mind, however, that if a forced liquidation is necessary, it may bring only a small fraction of the true value of your assets. In addition, sales expenses are bound to be incurred.

DISCOUNT METHOD

  • Assuming you qualify, you can arrange now to pay your estate tax bill with life insurance dollars. For every dollar your estate needs, you can give an insurance company from approximately one to seven cents a year, depending on your age and health. No matter how long you live, it is unlikely you will ever give the insurance company more than 100 cents on the dollar. In addition, the life insurance policy can frequently be structured to accommodate your unique premium payment requirements.
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The ObamaCare penalties for failing to purchase qualified health insurance start in tax year 2014. If a person was required to purchase minimum essential coverage and did not, she/he would only be required to pay a tax penalty for not purchasing PPACA coverage (if she/he files a U.S. tax return). In many cases, this tax is far less than the premiums that a person would pay for obtaining PPACA/ObamaCare coverage.

Q: What will my penalty tax be if am required to purchase qualified ObamaCare coverage, but do not purchase it?

Penalty Tax Calculations:

Tax penalties begin in 2014 and rise in years following. In each year, the tax consists of the higher of a dollar amount or a percentage of household income. For a given household, the tax applies to each individual, up to a maximum of three.

Following is the schedule of ACA penalty taxes:

  • 2014: The higher of $95 per person (up to 3 people, or $285) OR 1.0% of taxable income.
  • 2015: The higher of $325 per person (up to 3 people, or $975) OR 2.0% of taxable income.
  • 2016: The higher of $695 per person (up to 3 people, or $2,085) OR 2.5% of taxable income.
  • After 2016: The same as 2016, but adjusted annually for cost-of-living increases.

 Tax Penalty Examples:

  • 2014- Family of 2 with a taxable income of $26,000. Penalty Tax is $260;  because $260 ($26,000x 1%) is more than $190 ($95 x 2 persons).
  • 2014 -Family of 3; with a taxable income of $26,000.  Penalty Tax is $285;  because $285 ($95×3 persons) is more than $260 ($26,000 x 1%).
  • 2014 -Family of 3; with a taxable income of $50,000.  Penalty Tax is $500;  because $500 ($50,000 x 1%) is more than $285 ($95 x 3 persons).
  • 2015 -Family of 3; taxable income of $26,000.  Penalty Tax is $975;  because $975 ($325  x 3) is more than $525 ($26,000 x 2%)
  • 2016 -Family of 3; taxable income of $26,000.  Penalty Tax is $2,085;  because $2,085 ($695 x 3) is more than $650 ($26,000 x 2.5%)
  • After 2016: The same as 2016, but adjusted annually for cost-of-living increases.

For those buying health coverage on the government run exchange make sure to check the provider network limits.  Network limitations may cause additional financial penalties.   For example if a person needs health services while traveling out of their network area there are costly out of network penalties.  If coverage is available at all.

Many insurance companies still offer policies off the Exchange.  The premiums are about same with lower deductibles and more robust networks.  However, buying on the government’s exchange is the only way to get the subsidy.  Many people don’t qualify for the subsidy or it’s greatly reduced due to income.  

 

 

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Retirement plans come with a wide array of tax code abbreviations IRA, Roth IRA, SEP, 401(k), 403(b), HR10 just to name a few. There are times to consider doing a rollover of these funds.

When should you consider rolling over or transferring  your retirement plan?

  • Change of employment- Most retirement plans become what is known as orphaned when you leave the employer who sponsored the plan.  In order to maintain control of your money it is wise to rollover these plans into a personal retirement account.
  • Of course, when you are retiring – This is the time when you may want to start receiving income from your retirement plan.  Your plan may or may not have income options if it does shop these payments among private insurance companies.  This will insure you receive the highest income payments possible.
  • If you are receiving part of a spouse’s retirement plan due to a marital status change – It is a good idea to rollover the funds in order to maintain personal control.
  •  When your current retirement plan is terminating -  For a variety of reason employers will discontinue a plan and start another leaving the previous plan “frozen in place”.  A good time to do a rollover.
  • In-service distribution from your current plan when available can be rolled over into a personal retirement with guarantees in order prevent future losses.
  •  When you’re inheriting money as the beneficiary of a retirement plan account – Depending on your relationship with the deceased you may be able to do a spousal transfer without taxation into your own personal IRA.  Sorry kids you will have to pay income taxes.
  •  When you have worked for multiple employers, participated in multiple plans, and now desire to consolidate the assets from those different plans into a single plan.
  • If your retirement plan has no safe money investment options – it is advisable to diversify using a rollover whenever your plan allows.

A recent tax court ruled that only one IRA rollover is allowed per year.  To avoid tax problems it is better to do an institution to institution transfer.  This way the funds are never comingled with any of your other money.

Consult with a professional to help you make the most informed decision when a rollover is in your best interest.

You may ask questions in the comments or contact me privately Tim Barton, ChFC

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2014 IRA Rollovers

February 17, 2014 by

An IRA Rollover does not involve current income tax deductions, but rather is a method through which tax favored retirement plan assets can be transferred from one plan to another plan while maintaining their tax favored status.

What Types of Rollovers Are Permitted in 2014?

Eligible Plans

  • Eligible rollover distributions from qualified plans, 403(b) annuities and Section 457 plans may be rolled over to any of the other types of plans that will accept such rollovers. A Section 457 governmental plan must separately account for funds received from qualified plans, 403(b) annuities or IRAs, or it may not accept such funds.

Spousal Rollovers

  • Distributions from a qualified plan paid to the surviving spouse of a deceased participant may be rolled over within 60 days to another qualified plan, a Section 403(b) annuity, a regular IRA or a Section 457 plan.

Rollover Maximum

  • The maximum amount generally eligible for rollover is the amount that would be included in income if not rolled over. There is, however, an exception…after-tax employee contributions distributed from a qualified plan can be rolled over to a regular IRA or to a defined contribution plan in a direct trustee-to-trustee transfer, if separately accounted for.

Roth IRA Rollovers

  • Participants in traditional (non-Roth) qualified plans can roll plan distributions over to a Roth IRA. The rollover amount, less any after-tax contributions, is included in gross income in the year of the distribution.

Roth Accounts

  • Participants who receive a distribution from a Roth account in a qualified plan need to roll that Roth account over into a Roth IRA in order to maintain the income tax free character of Roth distributions.

Hardship Exception

  • The Act gave the Secretary of the Treasury the authority to waive the 60-day rule for rollovers where failure to comply is due to casualty, disaster or events beyond the reasonable control of the taxpayer.

Can Funds Be Transferred Between Traditional IRAs and Between Roth IRAs?

Yes, funds can be moved from a traditional IRA to another traditional IRA or from a Roth IRA to another Roth IRA without any taxes or penalty, assuming certain requirements are met:

  • The trustee of the existing IRA either transfers the funds directly to the trustee of the receiving IRA; or
  • The funds in the existing IRA are distributed to you and you roll them over to the receiving IRA within 60 days of receiving the distribution.
  • Only one rollover from a traditional IRA to another traditional IRA, or from a Roth IRA to another Roth IRA can be made in any one-year period.

 Can Funds Be Transferred From a Traditional IRA to a Roth IRA?

  • Yes. All taxpayers have the option of rolling funds over from traditional qualified plans into a Roth IRA. The conversion income must be recognized in the year the rollover or conversion takes place.

 Can Funds Be Transferred From a Roth IRA to a Traditional IRA?

  • No, funds cannot be moved from a Roth IRA to a traditional IRA.
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Do you own fixed annuities?

Do you wonder why so many retirees own fixed annuities?

The Top 3 Reasons to Own Annuities

46% own annuities to Supplement Social Security and Pension Income

  • Planning Tip

Do you receive interest earnings that you’re not using for income? Not only are you paying unnecessary taxes on this money, but those earnings may increase the amount of your taxable Social Security benefit. Repositioning certain assets into a tax-deferred annuity can reduce or eliminate excessive taxes

 34% own annuities to Accumulate Assets for Retirement

  • Planning Tip

One common way is to move assets into a tax-deferred annuity. This approach works because annuity earnings are excluded from provisional income until withdrawn, reducing provisional income — and taxes due — in the meantime. Remember, the real value of your Social Security benefit isn’t the amount you receive, it’s what remains after taxes.

27% own annuities to Receive Guaranteed  Lifetime Income

  • Planning Tip

Immediate annuities can offer retirement income for life.

 

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