Safe Retirement Income

Your Retirement Depends on It

Tim Barton, Chartered Financial Consultant

Pepin Wisconsin
715-220-4866

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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:

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

What are the Next Steps?

  1. 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.
  2. 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

  1. Talk with a tax advisor about potential tax implications before moving money out of your retirement plan.
  2. Use the proper paperwork. Most qualified plans have specific forms for direct rollovers.
  3. Some qualified plans may cease matching contributions for a period after taking an in-service withdrawal.
  4. 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)
  5. Employee pre-tax and Roth contributions after age 59½
  6. The tax code does not allow rolling over the following before age 59½:
  7. Employer safe harbor match or safe harbor non-elective contributions
  8. Employee pre-tax or Roth contributions

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What is the Marital Deduction?

What Is the Marital Deduction?

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).

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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?

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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.

 

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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:

  1. 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.
  2. 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.
  3. 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

 

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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

 

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4% Rule or a Lifetime Income Annuity

Outliving one’s assets is a major concern for today’s retirees. One common approach to address this concern has been the “4% rule,” which is a generally accepted rule of thumb in financial planning for retirement income. It says to withdraw no more than 4% of an asset in retirement annually, and then increase the withdrawn amount by 3% each year to help offset the effects of inflation. Many believe the 4% rule provides a strong likelihood for retirement assets to last 30 or more years.

One problem with the 4% rule is that it does NOT GUARANTEE you won’t run out of money. In fact, with today’s historic market volatility and longer life expectancies, it’s predicted that up to 18 out of 100 people WILL RUN OUT OF MONEY in retirement using the 4% rule.

What if there was a different strategy that could provide the same amount of retirement income as the 4% rule and might even require fewer assets to do so? Additionally, this strategy would protect your income from market loss and GUARANTEE that income would last throughout your lifetime.

This strategy exists today and can be implemented using a fixed index annuity with a guaranteed lifetime income benefit or a secure lifetime retirement income annuity.

For help you may ask questions in the comments

Or contact me privately here: Tim Barton Chartered Financial Consultant

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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

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What Do Pianos Have to Do With Annuities?

In the 1960s and 70s the nation’s largest keyboard company  Baldwin Piano & Organ Company began expanding into banking and insurance eventually creating a large conglomerate of financial services companies.  In 1977 Baldwin merged with United Corp., an investment company, and became Baldwin-United Corp.

Unfortunately for buyers, these contracts proved to be unsustainable and directly contributed to the bankruptcy of Baldwin-United in 1983.  In fact, the $9 billion in liabilities of Baldwin-United exceeded the combined debt of the four previous largest bankruptcies up to that point. 

In the 1983 the states of Indiana and Arkansas took over the majority of Baldwin-United’s assets and began the long process of rehabilitating the two insurance carriers and distributing assets to policyholders.

According to a recent Wall Street Journal article companies

“betting they can wring more profit from annuity contracts” than traditional insurance companies.

Another article in Bloomberg Business Week quotes Benjamin Lawsky, New York State superintendent of financial services

 “Their focus is on maximizing their immediate financial returns, rather than ensuring that promised retirement benefits are there at the end of the day for policyholders,”

Important questions to ask about insurance companies you are considering doing business with.

  • Are they controlled by outside entities that don’t have an insurance background or experience?
  • Do they offer products with features and rates that are far above what the competition is offering?

 The lessons from the past should be kept in mind.

Properly managed insurance companies are among the safest places for your retirement dollars even in the example of Baldwin-United the state guaranty associations made the policyholders whole.  This process is time consuming so it wise to research companies you are considering.

 

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Why Are Taxes Due On A Roth After Age 59 ½ ?

This is a common question.  Many believe there are no income taxes due on Roth withdrawals after reaching that magic age of 59 ½.   However there are conditions on nontaxable withdrawals.  The IRS has rules that define a withdrawal as qualified distributions. Qualified distributions from a Roth IRA are received free of income tax and are not subject to the 10% premature withdrawal penalty tax.

Roth IRA distributions that do not meet the qualified distribution requirements will be included in income to the extent that the distribution represents earnings on Roth IRA contributions and may be subject to a 10% premature withdrawal penalty tax. 

Qualified distributions from a Roth IRA are not included in gross income and are not subject to the additional 10% penalty tax for premature distributions.

To be a tax-free qualified distribution:

  • The distribution must occur more than five years after the individual first contributed to the Roth IRA;  and
  • The individual must be at least 59-1/2 years old, disabled, deceased or the funds must be used to purchase a first home ($10,000 lifetime limit). 

There is no requirement that distributions from a Roth IRA begin by age 70-1/2.

Unlike regular IRAs, contributions to a Roth IRA can be made after age 70-1/2.

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