retirement planning – Page 2 – Safe Retirement Income

February 19, 2015 by Tim Barton Leave a Comment

The 3 Sources of Retirement Income

What Are the Available Sources of Retirement Income?

When you retire and your earning power ceases, you will have to depend on three primary sources for your retirement income:

Social Security

According to the Social Security Administration, the average retired worker in 2015 receives an estimated $1,328 monthly benefit, about 40% of average preretirement income. As pre-retirement income increases, however, the percentage replaced by Social Security declines.

Employer Sponsored Plans and IRAs

You may be eligible to participate in a retirement plan established by your employer and receive pension income at your retirement. You may also be able to contribute to an individual retirement account (IRA) to supplement Social Security and pension benefits.

Home Ownership and Personal Retirement

For many people, there is a gap between the retirement income they can expect from Social Security and employer-sponsored plans/IRAs and their retirement income objectives. Home equity can be used to bolster retirement security.
Personal retirement savings, including bank and brokerage accounts and insurance and annuity contracts, can be used to bridge a retirement income gap.

If sufficient retirement income is not available, will you defer your retirement age, or will you choose to reduce your standard of living?

January 25, 2015 by Tim Barton Leave a Comment

What is Trust?

The word “trust” is applied to all types of relationships, both personal and business, to indicate that one person has confidence in another person.

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 of 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.

Also, 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; one that the grantor cannot change or discontinue the trust or recover assets transferred from the trust.

Trusts are used:

To provide management of assets for the benefit of minor children, assuring the grantor that children will benefit from trust assets. They will not have control of the trust assets until the child is at least age of maturity.
To manage assets for the benefit of a disabled child, without disqualifying the child from receiving government benefits.
To provide for the grantor’s children from a previous marriage.
As an alternative to a will (a “revocable living trust”).
To reduce estate taxes and, possibly, income taxes.
To provide for a surviving spouse during his/her lifetime, with the remaining trust assets passing to the grantor’s other named beneficiaries at the surviving spouse’s death.

Trusts are complex legal documents and are not appropriate in all situations. Before establishing a trust, you should seek qualified legal advice.

October 28, 2014 by Tim Barton Leave a Comment

Another Role for Life Insurance

Another Role for Life Insurance…
The Wealth Replacement Trust

The Problem:

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.

September 3, 2014 by Tim Barton 1 Comment

Benefits of Retirement Plan In-Service Withdrawal Make Sense for You?

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:

You may be able to gain more control over the retirement funds.
You may be able to protect your retirement funds from market volatility.
You may be able to choose options you feel better suit your retirement needs.
You may be able to ensure yourself a guaranteed income stream in retirement.

What are the Next Steps?

Talk to a Pro: Talk to your financial professional and see if taking an in-service withdrawal to fund an individual retirement annuity may benefit you.
Talk to a Plan Administrator: Talk to your employer’s plan administrator about eligibility and requirements. They can tell you if the plan allows in-service withdrawals, and about any rules, such as withdrawal limits, fund types, transfer timing, etc.

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

Talk with a tax advisor about potential tax implications before moving money out of your retirement plan.
Use the proper paperwork. Most qualified plans have specific forms for direct rollovers.
Some qualified plans may cease matching contributions for a period after taking an in-service withdrawal.
The tax code allows the following to be rolled over from a qualified plan as an in-service withdrawal: Employer matching and profit-sharing contributions Employee after-tax contributions (non-Roth)
Employee pre-tax and Roth contributions after age 59½
The tax code does not allow rolling over the following before age 59½:
Employer safe harbor match or safe harbor non-elective contributions
Employee pre-tax or Roth contributions

March 6, 2014 by Tim Barton Leave a Comment

Difficult Pension Benefit Decision

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?

February 9, 2014 by Tim Barton Leave a Comment

An Income Annuity Solution

How Can an Income Annuity Protect Against the
Risk of Living Too Long?

The purpose of an annuity is to protect against the financial risk of living too long…the risk of outliving retirement income…by providing an income guaranteed* for life.

In fact, an annuity is the ONLY financial vehicle that can systematically liquidate a sum of money in such a way that income can be guaranteed for as long as you live!

Here’s How an Income Annuity Works:

The annuity owner pays a single premium to an insurance company.

Beginning immediately or shortly after the single premium is paid, the insurance company pays the owner/ annuitant an income guaranteed to continue for as long as the annuitant is alive. There are other payout options also available.
With a cash refund provision the insurance company pays any remaining funds to the designated beneficiary after the annuitant’s death.

Seeking a secure life long retirement income? Click the video box to left of this post.

February 4, 2014 by Tim Barton Leave a Comment

What Happens at an IRA Owner’s Death?

The following is an overview of the options available to an IRA beneficiary. Depending on the type of IRA, whether or not the IRA beneficiary is the spouse of the deceased IRA owner and the IRA beneficiary’s needs and objectives, different options may be appropriate.

In order to avoid unforeseen and/or negative tax consequences, an IRA beneficiary should seek professional tax advice before selecting an option.

Inherited Traditional IRA Options:

The options available to an individual who inherits a traditional IRA include the following:

Immediate Lump-Sum Distribution: Surrender the inherited IRA and receive the entire value in a lump sum. The taxable value of the IRA is then included in the beneficiary’s income in the year of surrender.
Distributions Over Five Years: If the IRA owner was under age 70-1/2 at death, the beneficiary can take any amounts from the inherited IRA, so long as all of the funds are distributed by December 31 of the year containing the fifth anniversary of the original IRA owner’s death. This option is not available if the IRA owner was over age 70-1/2 at death.
Life Expectancy: The IRA assets are transferred to an inherited IRA in the beneficiary’s name, where the date by which required minimum distributions must begin depends on whether or not the beneficiary is the surviving spouse and by the IRA owner’s age at the time of death.
Spousal Transfer: Under this option available only to surviving spouses who are the sole IRA beneficiary, the spouse beneficiary treats the inherited IRA as his/her own and the IRA assets continue to grow tax-deferred. IRA distribution rules are then based on the spouse’s age, meaning that distributions may not be available prior to the spouse’s age 59-1/2 without paying a penalty tax and required minimum distributions must begin by the spouse’s age 70-1/2.

For spouse beneficiaries:

If the deceased spouse was younger than age 70-1/2 at the time of death, the surviving spouse may delay required minimum distributions until the year in which the deceased spouse would have reached age 70-1/2.
If the deceased spouse was older than age 70-1/2 at the time of death, the surviving spouse must begin taking required minimum distributions by December 31 of the year following the spouse’s death.

For non-spouse beneficiaries:

Required minimum distributions from the inherited IRA can be spread over the non-spouse beneficiary’s life expectancy, with the first payment required to begin no later than December 31 of the year following the year of the IRA owner’s death.

Inherited Roth IRA Options:

The options available to an individual who inherits a Roth IRA include the following:

Immediate Lump-Sum Distribution: Surrender the inherited Roth IRA and receive the entire value in a lump sum. The earnings, however, may be taxable if the Roth IRA is not at least five years old.
Distributions Over Five Years: The beneficiary can take any amounts from the inherited Roth IRA, so long as all of the funds are distributed by December 31 of the year containing the fifth anniversary of the original Roth IRA owner’s death. Any earnings distributed before the Roth IRA is at least five years old, however, may be taxable. Since all amounts other than earnings can first be withdrawn tax free, it may be possible to minimize or eliminate any taxation on earnings by withdrawing them last.
Life Expectancy: The IRA assets are transferred to an inherited IRA in the beneficiary’s name. For non-spouse beneficiaries, required minimum distributions based on the beneficiary’s life expectancy must begin no later than December 31 of the year following the year of the deceased Roth IRA owner’s death. For a spouse who is the sole IRA beneficiary, required minimum distributions may be postponed until the year in which the deceased Roth IRA owner would have reached age 70-1/2. Since contributions are considered to be withdrawn first, it’s unlikely that any taxable distribution of earnings will take place if the Roth IRA hasn’t been in existence for five years.
Spousal Transfer: Under this option available only to surviving spouses who are the sole Roth IRA beneficiary, the spouse beneficiary treats the Roth IRA as his/her own. Roth IRA distribution rules are then based on the spouse’s age, meaning that distributions of earnings may not be available prior to the spouse’s age 59-1/2 without tax or penalty. Since Roth IRAs have no required beginning date and no required minimum distributions, the spouse can leave the money in the Roth IRA as long as he/she wants.

April 18, 2013 by Tim Barton 5 Comments

RMDs a Danger to Retirement Plans?

Government regulations dictate senior’s retirement income plans. The question; Is this government “retirement plan” the best option?

If they have a traditional IRA, 401(k) and/or any other qualified retirement plan they must take Required Minimum Distributions (RMD) upon reaching age 70- 1/2. If they do not take RMD as required the penalty is a harsh 50%. Most seniors follow the RMD plan so it must be the optimal way to receive retirement income… Right?

The new reality is nothing could be further from the truth. Expected longevity continues to increase well past the I.R.S. life tables used to calculate RMD withdrawals. This could set up a dangerous financial situation later in life.

The alternative solution and one most seniors have not considered is a Life Income Annuity. Rollovers from IRAs and 401(k)s are easy and there are no taxes due or 10% penalty even if income is started before age 59.

Advantages of Life Income Annuities are significant and perform better than RMD plans:

After enduring a decade of sub economic performance, low interest rates, disappearing pensions and a decreasing Social Security trust fund seniors need protection from steep market swings. Income annuities eliminate market risk by providing a steady monthly pay check.
Saves the golden decade of retirement; the 10 years from age 70 – 80. RMDs are scheduled to be lower during this time and increase later. The lifetime annuity has on average a 60% higher payout during the golden decade and guarantees these payments for life with any remaining principal paid to beneficiaries.
Prevents the RMD crash. A typical life income annuity starts payments at age 70 about 60% higher than RMD withdrawals. It is true RMDs increase with age but assuming a 3% growth rate at their peak they will provide an income 15% lower than the annuity. After the RMD’s peak withdrawal years the annual income begins decreasing until the money runs out.

Lifetime annuities take the RMD drop off and longevity risk away while offering a higher payout.

For help you may ask questions in the comments

Or contact me privately: Tim Barton Chartered Financial Consultant

March 17, 2013 by Tim Barton Leave a Comment

Roth IRA Enhancement

The Roth IRA may be one of the most under used retirement income strategies. Due to the deductibility of other retirement saving plans like Traditional IRAs and the 401(k); Roth IRAs are usually just an afterthought. After all who does not want to pay as little income tax as possible? It seems a very simple rational decision. Initially a Roth has no effect on the amount of income tax due because the taxpayer receives no immediate tax deduction.

Today one of the most relevant retirement/tax planning question is –

Do you think tax rates are headed down, stay the same or will they go up in the future?

Clearly if you feel tax rates are going rise at some point then the decision is to pay a smaller tax now or a bigger tax on a larger sum later. A Roth IRA is worth serious consideration, especially if you consider an enhancement by utilizing available lifetime income options.

The new generations of annuities offered today either have income options built in or offer the option to purchase a guaranteed lifetime income rider. Using either of these options the annuity owner has the ability to start lifetime income at a specified age.

If retirement planning is being done correctly income points are identified. These are points in time when a retiree needs to start an income stream.

To help understand the magnitude of the enhanced Roth advantage let’s use a simple example. A future retiree is currently 49, they start contributing to a Roth annuity with lifetime income available as early as age 59 ½. The Roth’s income benefit base has grown to $100,000 with an annual tax free lifetime payout of 5% available ($5,000). Whether or not they actually plan to retire at this early date they should start the lifetime income payout. Why? Because the income is for life, the earlier it is started the greater chance they will live long enough to get into company money. In other words they would receive all of their money, interest earned and then they receive company money for as long as they live. If cost of living increases are built onto our $5,000 yearly income example so much the better.

Besides, even if still working, who wouldn’t appreciate some additional tax free income every year after age 59 ½?

For help you may ask questions in the comments

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

January 2, 2013 by Tim Barton Leave a Comment

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:
•A mandatory 20% federal income tax withholding will be subtracted from the lump sum you receive.
•You may have to pay additional federal (and possibly state) income tax on the lump sum distribution, depending on your tax bracket (and the distribution may put you in a higher bracket).
•Unless one of the exceptions is met, you may also have to pay a 10% premature distribution tax in addition to regular income tax.
•The funds will no longer benefit from the tax-deferred growth of a qualified retirement plan.

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.

For help you may ask questions in the comments or contact me privately here: Tim Barton Chartered Financial Consultant