Safe Retirement Income

Your Retirement Depends on It

Tim Barton, Chartered Financial Consultant

Pepin Wisconsin
715-220-4866

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What is a Qualified Retirement Plan?

What is a Qualified Retirement Plan?
What is a Qualified Retirement Plan?

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 bottom line 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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Teaching Grandkids about Money… Money Does Not Grow on Trees

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.  Does 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.

  • Young children can understand the concept of money.  When I take them out and we’re going to buy a little something like an ice cream I give them the money to pay for it.   This teaches them money is exchanged for things we want.
  • Save all my “change” for grandkids. I split up this money into 3 coin purses for each kid marked 20% for savings,  10% sharing, and all the rest for whatever they want. (with parent’s permission of course)   The savings are used for their bigger desires/wants. The sharing can be used to buy things like ice cream, candy bars and other treats for the family on outings or they will deposit it into Salvation Army kettles or other charitable containers found at the checkouts.  Elementary school age is a good time to start.
  • Demonstrate to the grandkids how to reach a savings goal.  Show them how saving X amount of their money each month and in how many months this money will equal an amount needed to buy a computer game, book or whatever.
  • When the grandkids are coming for a barbeque, a couple like to help cook.  We plan a menu, make a list of needed ingredients, figure out the budget (money to purchase listed items) and go to the store.  As we pick things out we discuss pricing,  brand names and how to evaluate the best deal.
  • Needs versus wants concept is very important throughout life for all of us.  As they age and gain understanding there are things associated with my hobbies that reflect needs versus wants which make good subject matter for discussion with my grandkids. Particularly an activity they have an interest in, like fishing for example.

These are just a 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”

Download Teaching Kids about Money booklet here

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She Solved Her Retirement Needs. And So Can You

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 health care 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 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:

  • Lifespan – Living longer and outliving your retirement money.
  • Inflation – Cost of living increases that erode your retirement buying power.
  • Fluctuation – Market volatility that impacts your retirement assets.
  • Experience – Life events that require retirement plan flexibility.

At what rate can you safely withdraw from your portfolio to address these risks?

  • According to the Journal of Financial Planning, the safe withdrawal is 2.52%.

Contact www.TimBarton.net

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Enhancing Dollars through Tax Bracket Planning

Enhancing Dollars through Tax Bracket Planning

Did You Know That…

Tax brackets have an impact on funding insurance solutions to the needs of closely-held corporations and their shareholders?

For example, a corporation in the 21% tax bracket gets to keep 79 cents of every taxable dollar it makes, while an individual in the 35% tax bracket gets to keep only 65 cents of every taxable dollar he or she makes. Since life insurance purchased to fund a buy-sell plan must be paid for with after-tax dollars, it may make more sense to pay the premiums with 79 cent dollars as compared to 65 cent dollars.

Impact of Tax Brackets on Buy-Sell PlanningLower bracket corporation — If the corporation is in a lower tax bracket than the shareholders, a stock redemption buy-sell plan can be funded with enhanced dollars since the corporation pays premiums. Higher bracket corporation — If the corporation is in a higher tax bracket than the shareholders, a cross-purchase buy-sell plan may be more cost effective since premiums are paid with enhanced dollars by each shareholder.

Conversely, the marginal tax brackets of the corporation and shareholder-employees can have an impact on the total cost of a selective benefit plan. Benefits provided to corporate employees on a selective basis generally are either tax-deductible by the corporation or are not currently taxable to the employee, but not both. As a result, the relative impact of tax brackets should be considered in selecting an executive benefit plan that produces the most advantageous overall tax results.

Impact of Tax Brackets on Executive Benefit PlanningLower bracket corporation — When the corporation is in a lower tax bracket, selective benefits that are nondeductible by the corporation and non-taxable to the shareholder-employee generally produce the better overall tax results.Higher bracket corporation — When the corporation is in a higher tax bracket, selective benefits that involve tax-deductible corporate payments are generally more advantageous, even if taxable to shareholder-employees.

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Will IRA Payouts be Mandated?

Will IRA Payouts be Mandated?

Will there soon be a law mandating how a retiree must take money from their IRAs?  Perhaps. Since 2006 some congressional members and government agencies have discussed the idea of encouraging personal 401 (k) and IRA funds be converted into lifetime annuities.

In June 2015 Dr. Mark Warshawsky, visiting scholar at Mercatus Center of George Mason published a study designed to influence government policy on individual retirement accounts (IRA).  The title is Government Policy on Distribution Methods for Assets in Individual Accounts for Retirees.

Study’s conclusion;

“I judge the life annuity an effective instrument to produce lifetime retirement income–generally somewhat better than the commonly used withdrawal rules” 

Proposes government policy be used to:

  • Mandate minimum level in dollars or percentage of all qualified plans be automatically converted to life annuity payments for all qualified plans.
  • Make lifetime annuity payments the default option for defined contribution plans.  (401 k and IRAs)
  • Mandate that retirement plan sponsors offer a life annuity option.
  • Encourage retirees to take a lifetime annuity option through favorable tax treatment.  For example, a portion of the annuity income payment would be free from taxation.
  • Create a government-sponsored source of life annuities provided by private insurers. Similar to Healthcare.gov.

 

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75% Want Certainty

When it comes to retirement 75% want income certainty

Volatility Concerns.  Market swings can upset plans.

A market correction can wipe out trillions of dollars of the global markets value and in the process, it can impact the plans of current and future retirees. 

Income Solutions.  Get a retirement income strategy in an unpredictable world.   Three-fourths of retirees rate income certainty higher than portfolio performance.  One vehicle that can guarantee retirement income for a lifetime is an annuity.

Less Worry.  More stability.

Annuities are a predictable strategy in an unpredictable world.  Volatility risk need not be a worry related to retirement.  If you’re among the 75% who want a reliable, repeatable, sustainable retirement income you can count on, consider the certainty of a fixed annuity.

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8 Ways to Payday

Retirees like income. So they want to know the many ways an annuity may pay. Confidence comes with knowing how an annuity may pay to help meet your financial needs.

  1. Withdrawals. You can access your money any time.  Beginning immediately, up to 10% of the accumulated value annually without a surrender charge.
  2. Annuitization. Convert a lump sum into income guaranteed for your life, or your life and another person’s.
  3. Payout Options. Immediate annuities offer payout options for specific amounts or periods; plus, increasing payout options to help address inflation over time.
  4. SEPPs. Substantially Equal Periodic Payments taken at least annually for 5 years and to the age of 59 1/2 are not subject to the 10% IRS penalty tax on withdrawals before age 59 1/2.
  5. Combination Plans. Pair two annuities–one generates immediate income, one pursues accumulation.
  6. RMDs. Required Minimum Distribution programs pay the amount IRA owners and qualified plan participants must take yearly from accounts starting by age 70 1/2.
  7. Death Benefit. Distributions upon death provide payouts and may extend tax-deferral benefits for a beneficiary’s life.

Commutation. Provides a lump sum from an immediate annuity for unforeseen life events while continuing reduced regular payments.

For confidence, it pays to plan for retirement with an annuity.

 

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Considerations for a Reverse Mortgage

Considerations for a Reverse Mortgage

A reverse mortgage is a loan against the value of your home that does not have to be paid back for as long as you live in the home. Simply put, a reverse mortgage converts some of the equity in your home into income.

In Evaluating a Reverse Mortgage, Consider…

  • Typically, a reverse mortgage must be a “first” mortgage, meaning that if you still owe money on your home, you must pay off the existing mortgage before you can get a reverse mortgage (note: an initial lump sum payment from a reverse mortgage can be used to pay off an existing mortgage).
  • Keep in mind that, while you don’t have to repay a reverse mortgage for as long as you live in the house, the amount that ultimately has to be repaid does grow over time.
  • While the amount of debt grows over time, the reverse mortgage repayment cannot exceed the value of your home at the time it is ultimately sold.
  • If you take out a reverse mortgage, you continue to own your home. This means that you continue to be responsible for expenses such as property taxes, hazard insurance and home maintenance and repair.
  • Reverse mortgage proceeds may affect eligibility for assistance under state and federal programs.
  • The upfront costs associated with a reverse mortgage, such as an origination fee, closing costs and mortgage insurance premium, can be significant. This means that a reverse mortgage may be expensive if the loan is repaid within a few years of closing. As a result, if you anticipate moving within a few years, you should explore another alternative, such as a home equity loan.
  • Repayment of a reverse mortgage when your home is sold will mean less equity left to pass to your heirs.

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Should a Retiree Sell or Stay in Their Home

Should a Retiree Sell or Stay in Their Home

This depends on many factors both financial and personal lifestyle.  If the choice is to sell and move there are financial considerations.  As it is with so many decisions today the tax implications must be considered. Whether you decide to stay or move on here is a quick checklist. 

Homeowner’s Tax Checklist

Certain costs associated with acquiring and maintaining your principal residence, a second home or a residence you rent out are tax deductible, while others are added to your cost basis and used to reduce any taxable gain on the sale of the property.

Closing Costs

Most closing costs incurred in buying a home are added to cost basis (mortgage interest and real estate taxes paid at closing, however, are immediately deductible). Closing costs incurred in selling a home reduce the selling price. 

Real Estate Property Taxes

Deductible in the year paid, assuming you itemize deductions on your federal income tax return. 

Mortgage Interest

Interest is deductible on loans up to $1 million for buying, building or substantially improving your principal residence and one other home. Interest on home equity loans of up to $100,000 is also deductible.

Points

Points paid on loans to buy, build or substantially improve your principal residence are deductible in the year paid.

Improvement and Repairs

Repairs are nondeductible, unless allocatable to business or rental use of the property. The cost of permanent improvements that add to your home’s value or prolong its life are added to cost basis.

Casualty Losses

Unreimbursed damage to your home may be deductible if you itemize deductions (after a $100 reduction, deductible to the extent the loss exceeds 10% of adjusted gross income).

Home Office Expenses

If you are self-employed and use part of your home exclusively and on a regular basis as your principal place of business or as a place of business to meet customers or patients, certain expenses allocatable to the office may be deductible. A home office can qualify as the principal place of business if it is used exclusively and regularly by the taxpayer to conduct administrative or management activities of a trade or business and if there is no other fixed location of the business where the taxpayer conducts substantial administrative or management activities of the business.

Be aware when a home that has been depreciated for business purposes is sold a part or all of those deductions are added back into the gain side for tax purposes.  Consult a qualified tax professional regarding the rules.

Rental Expenses

Certain expenses allocatable to a rental of part of your home may be deductible.  Some retirees rent part of their homes for extra income.  This is a business use and many of the tax rules applicable to a home office will also apply in this case.  

Mortgage Insurance Deduction

Taxpayers with adjusted gross incomes of $100,000 or less who itemize can deduct the full cost of mortgage insurance on loans that were originated after December 31, 2006. The deductible amount quickly phases out above $100,000, so that no deduction is available to taxpayers with an adjusted gross income above $109,000. Under current law, the deduction is available only through 2011.

 

You may ask questions in the comments or contact me privately:

Tim Barton

Chartered Financial Consultant

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Capital Gains & Dividend Taxation

Capital Gains & Dividend Taxation

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) provided capital gains tax relief for long-term capital gains realized after May 5, 2003 and extended capital gains tax rates to qualified dividends, beginning with dividends paid by corporations to individuals in 2003, but only through December 31, 2008.  The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), signed into law in May 2006, extended the lower JGTRRA capital gains and dividend tax rates through December 31, 2010.  The 2010 Tax Relief Act further extended the favorable tax treatment through December 31, 2012.  The American Taxpayer Relief Act of 2012 made permanent the lower capital gains and dividend tax rates for all but higher-income taxpayers.

Long-Term Capital Gains and Dividend Tax Rates

A capital gain results when an asset is sold or exchanged for more than its cost basis. Capital gains realized on assets held for one year or less are short-term capital gains and are taxed at ordinary income tax rates. Long-term capital gains resulting from the sale or exchange or an asset held more than one year, however, receive more favorable tax treatment.taxes

2015 Tax Brackets 2015 Tax Rate
10%, 15% 0%
25%, 28%, 33%, 35% 15%
39.6% 20%

Medicare Contribution Tax

Higher-income taxpayers are subject to a 3.8% Medicare contribution tax on unearned or net investment income, which includes interest, dividends, rents, royalties, gain from disposing of property, and income earned from a trade or business that is a passive activity.  The tax applies to single taxpayers with modified adjusted gross income (MAGI) in excess of $200,000 and to married taxpayers filing jointly with a MAGI in excess of $250,000.