Evolution of Wealth » IRA

Have you talked to your employer today?

Evolution Of Wealth — Thu, 15 Oct 2009 16:16:07 +0000

Have you heard of the new IRS website for small businesses? In an attempt to make it easier for small businesses to find the right retirement plan, the IRS has rolled out the IRS Retirement Plan Navigator. It is tagged as “An easy retirement plan guide for small employers”. It’s main content is directed to choosing, maintaining and correcting a plan. As well as providing a plan comparison table.

Do you think a website like this really works? It does accomplish providing a comparison based on very broad information. Does that really help an employer? Or does it just confuse them? I guess I just feel bad for the small businesses out there, trying to do all of this themselves. It must take a lot of time and effort. Isn’t it just easier to have a trusted professional do it for you?

What other options does an employer have? They can do the research themselves or they can find someone to do it for them. At the very lease they will need an investment company/person to work with no matter what their plan. Isn’t it easier to just start their and find a trusted investment person to help you figure out which plan is best? Do they feel it is easier to deal with the person that answers the 800 number after they’ve done all the research themselves? The time it must take to figure out what type of plan they want and who they want it with. How many man hours do they put into this research?

What can you do to help? Most employees feel helpless about their retirement plan options. Have you talked to your employer about it? Better question, do you know who to talk to? Take 5 minutes out of your day and let the HR department or CFO or owner of your company know what you think of their retirement plan. If you love it, tell them. If you hate it, tell them. Just make sure to tell them why you feel the way you do so that they know what kind of job they are doing and how to make it better. This information will be a lot of help to a good employer, trust me. Send me an e-mail and let me know how you feel about your employer plan. I’m interested and maybe I can help if you need it.

RMA: Income Planning Program

Evolution Of Wealth — Sat, 10 Oct 2009 16:25:43 +0000

What advisors need is some sort of hybrid product that successfully integrates asset management with guaranteed income, said Tom Modestino, senior analyst at Cerulli who wrote the report: “State of Retirement Income: Addressable Opportunity, Strategies and Future Outlook.”

This is an excerpt I read last week from Advisors Need Better Income-Generating Tools on financial-planning.com.

So today I am going to tell you about a vehicle that will address this. I really wonder if Tom or the person writing the article is aware of this. This vehicle is called the Retirement Management Account. I won’t go into too much detail of the history but it was actually designed by Jerry Golden. He is the one that developed the Guaranteed Minimum Income Benefit at The Equitable back in 1996.

The RMA at its core is an income planning and monitoring program. What it accomplishes is simplifying a person’s retirement income planning by using one account where multiple use to be needed. The benefit of this is an easier to use and understand account for the client to manage not only their retirement income but also the taxes and rules surrounding that access of retirement accounts. It allows a single monthly distribution check, a single statement and a single account in compliance with custodial IRA requirements.

The RMA is made up of two separate pieces in one shell. The two pieces are mutual fund model portfolios and a multi-premium immediate annuity, also known as a Flexible Benefits Annuity. This creates more flexibility for the client than the traditional lump sum annuitization. The FBA also has built in cost of living and survivorship options.

The biggest benefit of this program is flexibility and liquidity. It allows the client to balance guaranteed income and market participation. By combining the two under one shell, distributions can be taken through one check and can be turned on or off at any time. Now you might be thinking that you can’t turn off an annuity, which is true. By using one shell, it allows the client to turn off distributions from the account. The way it does this is by flowing the annuity income stream back into the mutual funds, thus, avoiding any taxable distributions that aren’t needed. This could be a huge benefit in years such as 2009 where the IRS waives required minimum distributions. It also can allow the mutual funds to recover from market losses by not only, not drawing on them in a down market but in fact adding to them without taxable consequences.

The downside to such a program is that it is still at the heart, mutual fund portfolio plus immediate annuity. Any money that is annuitized is just that and turned into a stream of income. The mutual fund portfolio also is not an open architecture platform. What that means is your fund choices are limited. Some people might not mind this and it might be a deal breaker for others. The account is limited to retirement money, it is an IRA account. One other question that arises is fee structure. The mutual funds have an asset based fee of 1% or less depending on the level of assets while the FBA pays a commission just as any annuity does. This means that the advisor’s role with a program such as this is to help manage the mutual fund portfolios while also reviewing and aiding with decisions in regards to the need for guaranteed income.

This program is designed for the baby boomers. It’s target market is people ages 55-75 who have either retired or are planning to do so. In today’s environment this type of program can really increase the flexibility and control a person has over their retirement money. Today more and more people are figuring how to deal with losses in their account, increasing expenses and thus increasing needs. When things change for you, you need to have a program that can change with you. This just might be a piece to that puzzle.

If you have any further questions about this program please feel free to e-mail me.

Tax Savings, The Finale

Evolution Of Wealth — Sun, 20 Sep 2009 23:57:35 +0000

Have you been following along? In our attempt to dispel myths surrounding retirement savings and how it affects your taxes, I think we’ve learned a lot. Have you learned some new things? What has been your favorite so far?

Let’s look more closely. We have learned how the Traditional 401k and Roth 401k work. We have also taken a look at what it says in your enrollment booklet. A lot of those booklets mention tax savings that we have been looking for all along. We just can’t seem to find it yet.

In episode I: Tax Savings, Where’s That?, we saw that even if we save the money we don’t have to pay in taxes it probably won’t be enough to offset the taxes we will have to pay later.

Then in episode II: Tax Savings, It’s In The Paycheck?, we saw that saving money pre-tax versus after-tax doesn’t mean you have more spendable income.

In the last reading, episode III: Tax Savings, Advantage Over The Roth?, we saw that, all things being equal, the Traditional 401k equals the Roth 401k in the long run.

With all these things what questions are left? One question you might have is that in episode I we demonstrated what happens if you save the supposed tax savings. Well where is that accounted for in episode III? You might even argue that your better off with the scenario in episode I because you’d have the extra $17,000. The problem is that all things aren’t equal between the two. See in episode II we established equal spendable incomes. Between I and III we have two different spendable incomes so these aren’t apples to apples.

What we are left with is that everything being equal, apples to apples, all things are the same. So it’s the almighty question, if you change the variables how does it affect the scenarios? Let’s look at it.

Taxes are probably the easiest one. If you think that taxes will go up in the future then it is more beneficial to contribute to a Roth. It’s taxed at today’s rates. Does anyone believe that taxes will be more favorable in the future?

The other main thing to look at is distribution regulations. The Roth has the definite advantage here. The biggest thing is not having to take withdrawals after the age of 70½. This allows your money to continue to benefit from tax-deferred growth. There can also be more flexibility with early access of a Roth account, definitely an IRA and depending on plan documents, a Roth 401k, as you may have access to the contributions at anytime.

Now that we’ve looked at some fallacies surrounding your Traditional 401k, has it changed your opinions at all? Is it going to change your behavior? You need to ask yourself where do you want to be in retirement. Is your goal to live off less money? Chances are you will have a lot less tax deductions, if any. There seems to be a trend of taking those away from taxpayers, don’t you think? Maybe you’ll have less expenses, pay off the mortgage? Or maybe you’ll have higher expenses trying to keep up with health care or your hobbies? I mean you need something to pass the time that you previously spent working and if it’s not making money then it just might be spending it, right?

Tax Savings, Advantage Over The Roth?

Evolution Of Wealth — Fri, 18 Sep 2009 22:09:54 +0000

We couldn’t find a tax savings in pre-tax contributions in Episode I: Tax Savings, What’s That?

We couldn’t find the tax savings in our income in Episode II: Tax Savings, It’s In the Paycheck?

I think we might have found it in the classic debate of Traditional 401k versus Roth 401k. You’ll remember in Episode I that our $10,000 grows to $80,000 at 7% over 30 years. When taxes come into play at our 25% tax bracket the $80,000 quickly becomes $60,000.

Roth 401k

The key difference of the Roth 401k is that money goes in after-tax so that growth is tax-deferred and the withdrawals are tax-free. We start with our $10,000 then pay our taxes before we can contribute to the Roth 401k. This puts $7,500 into our retirement account. Using the Rule of 72, again, we know that it will double every 10 years. It doubles once to $15,000, twice to $30,000 and third times a charm, to $60,000.

$60,000, either way we look at it we end up with the same amount. Where’s the tax savings there? Oh your remember that we a good boys and there’s some extra money not accounted for from Episode I. I guess you’ll have to wait for the season finale to get that explained.

To Be Continued…

Tax Savings, It's In The Paycheck?

Evolution Of Wealth — Fri, 18 Sep 2009 14:41:40 +0000

This is a continuation from: Tax Savings, Where’s That?

Well we couldn’t find the tax savings in the first post. However, you remember those enrollment books we mentioned in the last post. They mention having more money in your paycheck. So the tax savings must be there, right? Let’s look at it…

We have our $4,000 paycheck here. We’re going to have our $400 Traditional 401k contribution come out pre-tax. Then we only have to pay taxes on $3,600. Great. In a 25% tax bracket that means we only pay $900 in taxes. That leaves us with a spendable income of $2,700 (4000-400-900). With the Roth 401k the taxes come out first. So we get our $4,000 paycheck and first take out $1,000 for taxes. Then our $300 Roth 401k contribution, that’s $400 minus 25% taxes. This leaves us with a spendable income of $2,700 (4000-1000-300). Wait, that’s the same amount. That isn’t right is it?

We paid less taxes, $900 vs $1,000. Plus we have $400 in our 401k instead of $300. Yeah, we have the same spendable income but this must be the advantages we are looking for. So the advantage is in the Traditional 401k?

To Be Continued…

Tax Savings, Where's That?

Evolution Of Wealth — Thu, 17 Sep 2009 21:40:40 +0000

Have you ever read an enrollment book for your 401k? A lot of them show examples of how much ‘tax savings’ you can get by investing in your 401k. They say that if you are in a 25% tax bracket that for every $100 you contribute you’ll pay $25 dollars less in taxes, right? Ever hear your account tell you that a strategy for paying less taxes is to max out IRA or 401k contributions? Do you believe these statements? Let’s look at it…

You’ve got an extra $10,000 you want to put away for retirement and you are trying to figure out whether to do all in your Traditional 401k or all in your Roth 401k and you are in a 25% tax bracket. You hear about this great ‘tax savings’ so you say…

Traditional 401k

You have $10,000 the full $10,000 goes into your Traditional 401k. So you’ve probably been told that you don’t pay taxes on the $10,000 so you’re saving $2,500 in taxes, right? To keep that math simple we’re going to use a 7% rate of return and the Rule of 72 let’s us estimate that it will double every 10 years. So in 10 years it doubles to $20,000; another 10 years and it’s $40,000; and the final 10 years and you have $80,000. Now your in a Traditional 401k so the growth is tax-deferred which means you don’t owe any taxes on the growth.

Now when you want to access the money in your Traditional 401k it’s fully taxable because you haven’t paid any taxes on it right? Right. So all things kept equal, you are still in the same 25% tax bracket because who wants to retire on less money. That means you owe $20,000 in taxes on your $80,000. So you only really have $60,000.

We forgot something, your ‘tax savings’. You’ve been a good boy and saved the $2,500 you were told you saved. So you put it into an investment and it got a 7% rate of return, so you’re doing awesome. It doubles, $5,000; doubles again, $10,000; then the final double, $20,000. Great so your laughing all the way to where ever you want as you go to cash in this investment. You are about to offset the taxes they say you owe and guess what? Your hit with capital gains (best case scenario) on your investment that you just sold off. Now today that’s 15%. So where do you come up with the money to pay the $3,000 capital gains tax bill? You now have $17,000 to pay a $20,000 tax bill.

Where’s your ‘tax savings’?

To Be Continued…

Who Controls Your Retirement Money?

Evolution Of Wealth — Wed, 20 May 2009 19:02:46 +0000

Here’s a Wall Street Journal article on changes in pension plans http://cli.gs/MUSXME.

This is what spurred me to write today. The American public is taught about the great tax savings that retirement plans offer them. Don’t forget the two certainties in life, death and taxes. I’ll save that for a different post.

The regulation around the retirement planning can and will change randomly. In the 1980s the IRS saw fit to add an extra tax on to retirment plan withdrawals. You save your money into a ‘tax-benefit’ account such as a 401k, 403b, IRA, pension, etc. In most cases it’s your money to invest how you see fit. Do you control that money then? In order to receive these so-called ‘tax-benefits” you give the IRS permission to make rules to limit your access to your money. The IRS limits the access to your money for the first 59 1/2 years of your life and then forces you to access your money from age 70 1/2 on. During these restricted times the rules can change without notice. Your money might not be able to change with them. Maybe these time frames will change. What if tax rates go up? Anyone think that can happen?

Did anyone have any big losses in a tax qualified (retirement) account in 2008? In a regular investment account you might choose to deduct some of those losses. You would have that option. Not inside your retirement account.

One final thought…you become the perfect taxpayer with each dollar you put into a qualified retirement plan. All the money in that plan is 100% taxable at the rate the IRS decides. Could it be more perfect for them? How about for you?