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Retirement Planning Investing toward
retirement should be different than investing in retirement. View
our Income For
Life presentation to learn more about an investment strategy with the
objective of providing inflation-adjusted income for life. Everyone wants a golden retirement. But
saving for retirement is no easy task. The baby boomer generation is graying.
More and more people are approaching retirement age. With Social Security's
assets being consumed and the number of workers that will support it
shrinking, we will have to rely more on our personal savings when it's time
to retire. Today, we have a myriad of options to help
each of us prepare for the golden years. Yet, without a specific plan of
action, many people find themselves falling short when it is time for them to
live off of their life's work. Click below to learn about some of the
most powerful retirement strategies, including: Take the time to review your options, and
ensure that you're prepared when it's your turn to retire. And when you're
ready to speak with a professional about saving for retirement, call us at
678-385-6800. Annuities are flexible insurance contracts
designed to provide income and help you achieve long-term savings goals. And
these are not unused financial vehicles: last year alone, annuity sales
topped $200 billion. Much like a CD is a contract between you and
a bank, an annuity is a long-term contract between you and an insurance
company. In essence, the same company that insures your home or protects your
family may also help you save for retirement. After making a single lump-sum premium
payment, or a series of periodic payments, individuals can then receive
regular annuity payments from the insurance company. These payments can be
made over a definite period of time, or they can last a lifetime. Payments to the annuity owner can also be
tailored to begin after the contract has been established for a number of
years, or they can begin immediately after the first premium payment is made.
Annuity owners even have the choice of
receiving regular fixed interest rates (better known as a "fixed"
annuity), or having their annuities grow depending on the growth of
underlying variable accounts (referred to as a "variable" annuity).
Over time, insurance companies modified and enhanced both types of annuities;
however, their basic premise has always remained the same. And because
annuities are issued by an insurance company, Congress allows them to grow
tax-deferred under current tax laws. Tax-deferral
is not the only reason why annuities have mushroomed in popularity. While
they typically have maturity dates of 5-7 years, annuities require no medical
exams, and can usually be opened by filling out a basic annuity contract. Today,
there are hundreds of annuities to choose from, designed for different
retirement goals. When it comes to fixed annuities, insurance companies
sometimes offer higher intial rates to attract
would-be buyers, while other companies promise consistent interest rates
throughout the life of the annuity contract. Rates, maturity periods, and
death benefits are just some of the options to look for in a fixed annuity. Modern
variable annuities also give you the option of directing how your money
should be invested in separate accounts. These accounts are offered by some
of the most respected money managers in the industry. Many mutual fund
companies will also offer variable accounts that closely mirror their mutual
funds in terms of performance, holdings and risk. During the
late 1980's, insurance companies began bundling more of these segregated
accounts inside their variable annuity products. To remain competitive and
increase brand awareness, well-known money managers began offering even more
variable annuity accounts, in addition to their existing mutual funds. You can
find many of the most popular money managers in today's variable annuity.
When you own a variable annuity, you can tell the insurer which underlying
accounts you would like to use. The value of the annuity contract will then
vary depending on the performance of the separate accounts you chose. These
variable accounts may rise or fall in value. However, with variable
annuities, you can invest in a number of different options without additional
costs or transaction fees. Plus, many insurance companies will offer a death
benefit that will never be lower than the amount you originally invested. With
today's variable annuity, you can tailor your retirement account to meet your
own individual needs. Annuities
are one of the most flexible savings vehicles today. You can use after-tax
money to deposit into an annuity, or you can fund your annuity by
rolling-over qualified money. For
example, traditional IRA and 401(k) owners can transfer their accounts into a
qualified annuity, which maintains their tax-preferred status. In some cases,
annuities will offer fixed interest rates, added death benefits, or other
features from the insurance company that are not available in a qualified
retirement plan. Non-qualified
(or "after-tax") annuities are just as popular. Because no rollover
from another account is involved, non-qualified annuities often require less
time to establish. In addition, when you withdraw funds, you'll only pay
taxes on your accrued interest, since your principal was already taxed once
before (when you earned it). Up until
this point, we've focused primarily on options available during the
accumulation phase. But what about the payout phase, when the annuity returns
its value to you? Fortunately, annuities can also provide incredible flexibility
during the payout phase, as well. When the
payout phase begins, you can opt to receive your annuity's value in one
lump-sum, or you can elect to receive a steady stream of payments in regular
intervals (e.g. monthly, quarterly, etc.). If you
decide to opt for a regular stream of payments, many insurers will allow you
to have annuity payments last for a set amount of time (such as 10 or 20
years). Many contracts also allow you to receive payments for as long as you
and your spouse live. For many
annuity owners, having indefinite payments for the rest of your life provides
a predictable source of income. Some variable annuities will even let you
choose between fixed payments, or payments that fluctuate based on the
performance of mutual fund investment options. As a
rule of thumb, the longer your payment period, the smaller your payments will
be. These conditions are clearly spelled out in the terms of the annuity. Want
more flexibility? Some annuities are designed to be immediate annuities.
Immediate annuities have no accumulation phase whatsoever. They begin paying
you in regular increments the moment you purchase the contract. When shopping
for an annuity, there are several considerations that must be weighed. Fixed
vs. Variable Fixed
annuity owners appreciate stability. Owners of fixed contracts know exactly
how much their contract is earning, and when interest will be credited. Fixed
annuities offer assurances that you just cannot find anywhere else. However,
for those that believe they can "do one better" than the insurance
company's interest rate, then a variable annuity may be an option. Variable
annuities allow you to enjoy the upside of the market. Plus, some insurers
minimize downside risk by guaranteeing that your annuity value will not
decrease below your initial premium. Some
annuities are also designed to mimic the performance of the market, such as
the S&P 500. These so-called "indexed annuities" provide an
easy way to track performance, since market figures are readily available via
the press. Immediate
vs. Deferred Income When it
comes time to withdraw your money out of an annuity, you have a variety of
payment options to choose from. The insurance company can pay you either in a
lump sum, make periodic payments, or guarantee you a lifetime of income on a
tax-advantaged basis. Depending on the annuity contract you purchase, the
choice is yours. Qualified
vs. Non-Qualified Annuities
can accomodate qualified or non-qualified money.
For instance, suppose you are switching jobs and need to move over a 401(k).
However, you already have an IRA and are looking to diversify your portfolio.
You can reduce your portfolio exposure by rolling into an annuity, and not be
forced to lose your money's tax advantages. In
another scenario, suppose you receive an inheritance of $20,000. If you don't
need the money right away and want to build a long-term nest egg, consider
putting the inheritance into an annuity. You'll gain the advantage of
tax-deferral. Plus, when it comes time to withdraw from your non-qualified
annuity, you'll only be taxed on the accumulated interest, not the principal
itself. Insurance
Company The
quality of the insurance company is important, especially when purchasing a
fixed annuity. Working with a respected, highly-rated insurer can help
eliminate default risk, and ensure a retirement income when you need it most.
Variable
annuities, unlike fixed annuities, are not commingled in the insurer's
general fund. The separate accounts inside a variable annuity provide an
extra hedge of protection should the insurance company run into problems.
Nevertheless, the quality of the insurer is vital, especially if your variable
annuity has any additional death benefits or rate guarantees. All
annuities, fixed or variable, share several common benefits. Here's a summary
of what annuities can bring to your retirement portfolio:
If you
are a conservative investor looking for a consistent way to build your
retirement savings, then fixed annuities may be the answer for you. However,
if you are financially savvy and believe you can do better choosing your
annuity's direction, variable annuities offer you much greater flexibility
and control. Modified
Endowment Contracts (MECs) For
nearly two decades, tax-deferred annuities have enjoyed remarkable
popularity. Most tax-deferred annuities require a single premium payment in
the beginning, which then accumulates on a tax-deferred basis. However,
annuities are not perfect. For instance, if you should pass away while your
annuity is accumulating, all deferred taxes on your growth suddenly become
due. Annuities with substantial growth could be reduced significantly, and
your children and grandchildren could end up with a fraction of your
annuity's value after taxes. For
retirement savers looking to preserve a little more wealth for their family,
there may be a solution: a type of life insurance policy known as a Modified
Endowment Contract (MEC). In
financial circles, MECs are often compared to
annuities because of their similarities. In fact, MECs
are technically life insurance contracts that have many of the benefits of
accumulation found in annuities... but if anything happens to you, your loved
ones will usually receive more than your initial premium, not less. The
Basics of MECs The same
insurance companies that issue annuities also underwrite Modified Endowment
Contracts. MECs are very similar to annuities in
terms of tax-deferred accumulation of your initial premium. However,
the tax code is not very favorable, particularly if the owner passes away
during the annuity's accumulation stage. If that happens, all deferred income
taxes on growth become due. MECs are able to overcome this by
including an insurance "rider" in the contract, designed to pass
the entire account value to your beneficiaries
income tax-free. While specific features will vary by company, MECs offer several distinct advantages over deferred
annuities and other wealth-accumulation vehicles:
MECs can provide a retirement income for
you, while preserving your legacy for your loved ones. Reducing
Taxes The
Internal Revenue Code provides tax advantages for MECs,
regardless of whether you choose a fixed MEC or a variable MEC. Insurance
products have always received very favorable treatment by Congress, and MECs are no exception. Unlike stocks and mutual funds,
which are taxed every year, any earnings within your MEC remain untaxed as
long as they stay within the MEC account. You choose when to pay taxes, since
income taxes on the growth of your MEC are due only upon withdrawal. Over the
long haul, this tax-free accumulation can produce dramatic advantages. Tax-deferral
provides this added value, because of the time value of money. Compare the
accumulation of a jumbo CD and a MEC, and let's assume both are earning 7%.
The CD is taxed on the earnings, reducing your net interest rate. If you're
in the 27% tax bracket, you're actually earning 5.11%. However,
for the MEC, it's a different story. Since income taxes are deferred, the MEC
is credited with the full 7%. Of
course, CDs have much shorter maturities than MECs,
and they're offered by banks (not insurance companies). CDs are also
FDIC-insured, while MECs are not. Plus, remember
that when funds are finally withdrawn from the MEC, income taxes will be due.
However, your MEC money will have worked harder for you, thanks to the time
value of money on your side. Long-Term
Strategy Tax-deferral
is wonderful, but there is a small price to be paid in terms of liquidity. MECs are able to grow without annual income taxes being
paid, because they are designed for retirement. Like
annuities and traditional IRAs, money placed inside a MEC must remain there
past age 59 1/2. If you make a withdrawal from the MEC before that age, the
IRS will slap a 10% penalty on any withdrawals made. For this reason, they
are not liquid, and should remain in there until you're ready to draw money
in the form of retirement income. It's
important to make a distinction between "liquidity" and "flexibility."
Because MEC money must remain inside the retirement account past 59 1/2 does
not mean you don't have options. To the contrary, many fixed MECs offer a wide variety of payout options to suit your
needs. Variable
MECs go one step further, allowing you to choose
from several variable accounts. These "variable accounts" are often
run by the same professional money managers who run mutual funds. And if you
have a favorite mutual fund, chances are the mutual fund manager also runs
variable accounts for use in variable MECs. Let's
not forget that as long as your account is accumulating and no withdrawals
are made, no Form 1099s reporting income will be generated. At the very
least, this maintains a degree of privacy. And, in many states, MECs also offer asset protection from creditors. If
anything happens to you, your MEC also avoids probate. Resembling an annuity
once more, MECs pass probate-free to your named
heirs. This probate bypass will spare your family the time, expense and
public exposure that probate can bring. When
purchasing a MEC, it's important to look at the quality of the issuer. If you
were buying an annuity or life insurance policy, you'd want a highly-rated
insurance company behind your purchase. MECs are no
different, since the same insurance companies that offer traditional life
insurance and annuities also offer Modified Endowment Contracts. If
you're concerned about your MEC issuer's stability, there are many safeguards
already in place by law. For instance, in a variable MEC, each variable
account is in a separate custodial trust. Your money is invested with the
separate portfolio managers, and is not commingled with the issuer's general
accounts. Once you
purchase a MEC, you don't have to keep it forever. Section 1035 of the Internal
Revenue Code allows you to switch from one MEC to another without incurring
taxes on the growth of your MEC. However, if you switch to another MEC before
your guarantee or "maturity" period has expired, you may incur
company-imposed surrender charges. Always check those charges carefully
before choosing your MEC. Plus, MEC's usually have a death benefit higher than the actual
cash value. This feature is especially useful for variable MECs, since your family may be guaranteed a death benefit
greater than the payments you made, no matter what happens with the
performance of your variable accounts. Roth
IRAs, unlike traditional IRAs, have a simple premise: you pay income tax
going in, rather than when you pull out. Named
for Sen. William V. Roth from The Roth
IRA is a type of account that you establish through a qualified broker.
Beginning in 2002, you can contribute up to $3,000 annually to your Roth IRA.
Any contributions that you make to your Roth IRA are considered
"after-tax," and cannot be deducted from your tax return. However,
when it is time for you to draw money from your account, you will not pay
income taxes on the growth of your account. If you're in a high tax bracket,
that can amount to tremendous savings. The
Economic Growth and Tax Relief Reconciliation Act of 2001, signed into law by
President Bush, increased the annual amount you can contribute from $2,000 to
$3,000 ($3,500 if age 50 or over). Plus, in 2005, the annual amount increases
to $4,000. And in 2008, the maximum annual contribution rises once again to
$5,000. Just
like a traditional IRA, Roth IRA accounts can hold stocks, mutual funds, and
other types of investments. Retirement-minded investors, looking to build
their nest egg, can open a Roth IRA brokerage account and invest it like they
would any other account. However, unlike other types of brokerage accouts, your broker will usually ask you to pick a
designated beneficiary for your Roth IRA funds, should you pass away with the
account open. People
who are still working and are eligible to contribute more have to think about
what kind of IRA they should contribute to. This is especially true if you
have already accumulated a large IRA, perhaps from the rollover of a
retirement plan, and if you want to know whether you should convert that pot
of money into a Roth IRA. If you
have accumulated a large traditional IRA, you can elect to convert the entire
account to a Roth IRA. Upon conversion, you must declare the entire IRA
taxable balance as taxable income and pay taxes on it in the year of
conversion. From that point on, the IRA is federal income tax-free during compounding,
and federal income tax-free when you pull money from it (if you have held the
Roth IRA for at least five years, you are age 59 1/2, or meet other
requirements). If you
are a mature American with a large IRA, you have a big decision. Should you convert
your nest egg to a Roth IRA? In many cases, it makes sense. If you qualify
for a conversion, you may save thousands of dollars for both yourself and
your heirs. Better
to Pay Now or Later? Are you
better off waiting to pay taxes, or paying them now? For many, paying your
taxes owed now is the smart thing to do. Forget the math... just know that
politicians like to spend other people's money. After all, Uncle Sam could
collect his pound of flesh later, or just a few
ounces now. Traditionally, the U.S. Government prefers to collect its money
now, even if the long-term goal is more reduction of the budget deficit. In this
era of budget balancing, politicians need collections today to show that they
are working hard to keep the budget balanced. Looking
long-term, Congress may have problems later, but only after our hard-working
politicians are probably long-gone. Congress' short-term outlook can be
turned around to work for you. Even if you already own a traditional IRA, you
can convert it to a Roth IRA. For existing IRA owners, there are restrictions
on conversions. For instance, you can convert only if your AGI (Adjusted
Gross Income) is no more than $100,000 in the year you make the switch,
assuming you're single or married filing jointly. Who should
not convert their existing IRA to Roth? If your tax bracket is higher now
than your heirs' tax bracket will be when the money is spent. Also, be very
careful if you aren't sure about falling under the $100,000 ceiling.
Converting and then discovering later that your income was higher could blow
up in your face, creating significant tax penalties. From an
estate planning standpoint, if your main goal is to accumulate as much as you
can and leave it for your heirs, conversion can make a lot of sense. Traditional
IRA owners must begin taking distributions by age 70 1/2. However, Roth IRAs
require no minimum distributions each year during the life of the IRA owner, nor on the life of the IRA owner's spouse. If you want to
keep your money growing on a tax-preferred basis longer, then the Roth IRA
may hold your solution. A
Look at the Numbers Suppose
you own $20,000 of growth stocks in a qualified IRA, and you believe that you
it will be worth $60,000 by the time you spend it. For
simplicity, you are in a 36% tax bracket now, and expect to be in the same
bracket in the future. If your
assumptions are correct and you leave your IRA alone, the IRA will grow to
$60,000. After paying $21,600 in taxes, you will have $38,400 of spendable cash after taxes. But suppose,
in the beginning, you made the conversion to a Roth IRA. You convert, using
$7,200 from the account itself to pay the immediate tax bill. The remaining
$13,600 triples to $38,400. The two outcomes
are identical. In this scenario, there's no difference between the two...
unless you were under age 59 1/2, in which case money taken from the Roth IRA
account to pay tax would also be subject to a 10% early withdrawal penalty. However,
there is another option. Suppose you convert to a Roth IRA in the beginning,
and come up with the $7,200 in initial taxes from some other source of cash
that would not have qualified for tax-deferred compounding. Assuming
the same growth rate, your Roth IRA would have tripled in value to $60,000 (a
full $21,600 more). Best of all, the entire amount would be income tax-free
when you needed to make withdrawals... plus, there would not have been a 10%
tax penalty on money taken from the account if you were under age 59 1/2. Sure,
you're missing that $7,200 from your outside account, and that money could
have grown. However, its growth would've been stunted by the fact you were
paying taxes on the income all along. Remember:
in this case, the "time value of money" is definitely on your side.
The Roth trade is a bad one for Uncle Sam, and a good one for you. |
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Securities, Inc., A Broker/Dealer and Member NASD/SIPC Investment Advisory Services offered
through Investment Advisory Representatives of NFP Securities, Inc. a
Federally Registered Investment Advisor Strategic Stewardship is an affiliate
of National Financial Partners Corp., the parent company of NFP Securities,
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