Friday, April 24, 2015
United Life has two new products
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Friday, April 10, 2015
The Split Annuity. Why?
What is a split annuity?
An annuity is a contract purchased from an insurance company that can be used to
accumulate money on a tax-deferred basis for retirement and/or to convert retirement
assets into a stream of income. A split annuity isn't really one annuity, but a combination
of two or more annuities funded with a single sum of money. A portion of the money is placed in an immediate annuity that
makes a fixed payment to you for a fixed period of time, such as ten years. The balance of the money is invested in a
fixed-interest deferred annuity, which accrues sufficient interest to equal the beginning sum used to fund both annuities by the
time the immediate annuity payments stop. The amount of income you receive depends on the amount of money paid into
each annuity, and the terms and interest rates applicable to each contract.
An annuity is a contract purchased from an insurance company that can be used to
accumulate money on a tax-deferred basis for retirement and/or to convert retirement
assets into a stream of income. A split annuity isn't really one annuity, but a combination
of two or more annuities funded with a single sum of money. A portion of the money is placed in an immediate annuity that
makes a fixed payment to you for a fixed period of time, such as ten years. The balance of the money is invested in a
fixed-interest deferred annuity, which accrues sufficient interest to equal the beginning sum used to fund both annuities by the
time the immediate annuity payments stop. The amount of income you receive depends on the amount of money paid into
each annuity, and the terms and interest rates applicable to each contract.
Benefits of a split annuity.
Fixed income--The immediate annuity makes fixed payments to
you for a fixed period of time, regardless of changing interest rates
or stock market fluctuations.
Possible tax-advantaged payments--The tax code treats
payments received as an annuity as being divided into two
parts: a nontaxable portion that represents the return of premiums
paid into the annuity, and a taxable portion that corresponds to the
earnings in the annuity. As a result, only a portion (i.e., the
earnings) of each payment is included in your gross income. The
remainder is a return of principal and not taxed.
Tax-deferred accumulations--The earnings on a fixed-interest
deferred annuity (i.e., the interest earned on your money) are tax
deferred until withdrawn. Unlike most taxable investments, you pay
no taxes on your annuity earnings until you begin to take payments
or receive income. Income tax deferral allows your money to potentially grow faster than in a taxable account, because
earnings that otherwise would be subject to taxes are available for growth.
Flexibility--The fixed-interest deferred annuity can provide a new income stream at its maturity. Also, most fixed-interest
deferred annuities allow you to withdraw a portion of the annuity's cash value without penalty. This option provides you with
access to additional money should you need it in addition to the immediate annuity payments.
Return of principal--At the end of the immediate annuity payout period, the fixed-interest deferred
annuity is worth the original amount of your investment in both annuities. At that time, you can use
the money from the fixed-interest deferred annuity however you wish, including another split
annuity.
you for a fixed period of time, regardless of changing interest rates
or stock market fluctuations.
Possible tax-advantaged payments--The tax code treats
payments received as an annuity as being divided into two
parts: a nontaxable portion that represents the return of premiums
paid into the annuity, and a taxable portion that corresponds to the
earnings in the annuity. As a result, only a portion (i.e., the
earnings) of each payment is included in your gross income. The
remainder is a return of principal and not taxed.
Tax-deferred accumulations--The earnings on a fixed-interest
deferred annuity (i.e., the interest earned on your money) are tax
deferred until withdrawn. Unlike most taxable investments, you pay
no taxes on your annuity earnings until you begin to take payments
or receive income. Income tax deferral allows your money to potentially grow faster than in a taxable account, because
earnings that otherwise would be subject to taxes are available for growth.
Flexibility--The fixed-interest deferred annuity can provide a new income stream at its maturity. Also, most fixed-interest
deferred annuities allow you to withdraw a portion of the annuity's cash value without penalty. This option provides you with
access to additional money should you need it in addition to the immediate annuity payments.
Return of principal--At the end of the immediate annuity payout period, the fixed-interest deferred
annuity is worth the original amount of your investment in both annuities. At that time, you can use
the money from the fixed-interest deferred annuity however you wish, including another split
annuity.
Split Annuity Uses.
While the split annuity concept is not the only alternative for pursuing a particular financial objective,
it may be useful in a number of situations.
Dependable income and savings--Many people, especially retirees, want a dependable income
coupled with preservation of retirement funds. The split annuity concept may offer a means to both
objectives. Not only does the immediate annuity pay a fixed income for a fixed period of time, but a
portion of each payment received from the immediate annuity may not be subject to income tax
because it is considered a return of premium. Immediate annuity payments are fixed and don't fluctuate during the payout
period, regardless of changing interest rates. Moreover, the deferred annuity part of the concept offers a fixed interest rate on
that portion of the money allocated to it. Most deferred annuities also allow for a portion of the account value to be withdrawn
without penalty, so if you need more money in addition to the immediate annuity payments, you can withdraw it from the
deferred annuity.
For retirement plan income--Say your only retirement income is Social Security. You have savings but you're concerned that
if you take out too much, you may run out too soon. The split annuity can provide a steady source of income without
exhausting your principal. It's also flexible enough that if you need more income, you can take some from the fixed-interest
deferred annuity (subject to early withdrawal penalties). At the end of the fixed income period, you can reevaluate your
finances and determine whether you need more, less, or the same income, and adjust accordingly.
Bridge the gap between retirement and Social Security--You have some savings in the bank and you want to retire, but
you don't want to (or are too young to) apply for Social Security retirement benefits. The income payments from the immediate
annuity part of the split annuity concept may provide the income you want between retirement and Social Security. The
fixed-interest deferred annuity preserves your principal by earning interest on the money you apportion to it. When you're
ready to begin receiving Social Security retirement benefits, the fixed interest deferred annuity will have earned enough
interest to equal your original principal investment.
it may be useful in a number of situations.
Dependable income and savings--Many people, especially retirees, want a dependable income
coupled with preservation of retirement funds. The split annuity concept may offer a means to both
objectives. Not only does the immediate annuity pay a fixed income for a fixed period of time, but a
portion of each payment received from the immediate annuity may not be subject to income tax
because it is considered a return of premium. Immediate annuity payments are fixed and don't fluctuate during the payout
period, regardless of changing interest rates. Moreover, the deferred annuity part of the concept offers a fixed interest rate on
that portion of the money allocated to it. Most deferred annuities also allow for a portion of the account value to be withdrawn
without penalty, so if you need more money in addition to the immediate annuity payments, you can withdraw it from the
deferred annuity.
For retirement plan income--Say your only retirement income is Social Security. You have savings but you're concerned that
if you take out too much, you may run out too soon. The split annuity can provide a steady source of income without
exhausting your principal. It's also flexible enough that if you need more income, you can take some from the fixed-interest
deferred annuity (subject to early withdrawal penalties). At the end of the fixed income period, you can reevaluate your
finances and determine whether you need more, less, or the same income, and adjust accordingly.
Bridge the gap between retirement and Social Security--You have some savings in the bank and you want to retire, but
you don't want to (or are too young to) apply for Social Security retirement benefits. The income payments from the immediate
annuity part of the split annuity concept may provide the income you want between retirement and Social Security. The
fixed-interest deferred annuity preserves your principal by earning interest on the money you apportion to it. When you're
ready to begin receiving Social Security retirement benefits, the fixed interest deferred annuity will have earned enough
interest to equal your original principal investment.
Thursday, April 9, 2015
72T Retire Early
Wednesday, April 8, 2015
Some of you out there may be interested in how to retire early using Rule 72t, or 72(t) of the internal revenue code. As you all know, if you take money out of your 401k or other tax-deferred retirement accounts prior to age 59 1/2, you will not only be taxed on that distribution as ordinary income, but you’ll also pay an additional 10% penalty tax on top of that. After you add on state taxes, you could end up losing more than 1/2 of your withdrawal to taxes.
Rule 72t provides an exception to the 10% penalty tax so that you can avoid it, as long as you follow some straitforward guidelines in taking these early withdrawals. Another name for Rule 72t is “substantially equal periodic payments (SEPPs).
The requirements for taking SEPPs are fairly simple. You can begin taking SEPPs out at any age, but you have to continue taking out the same amount (at least annually) for at least 5 years, or till age 59 1/2, whichever comes later. You have to make sure you do the following things:
- You need to take out the payments at least once per year
- The payments much be calculated according to one of the IRS-approved methods for determining SEPPs
- You cannot make contributions, transfers (in or out) or rollover into the account from which you are taking SEPPs, nor can you take extra withdrawals from that account.
While these 72t rules are fairly simple, the penalties for not following them are severe. If you don’t follow these rules, the entire amount that you take out prior to age 59 1/2 may be subject to a retroactive application of the 10% early withdrawal penalty, plus interest.
What are the IRS-approved calculation methods?
There are 3 IRS-approved methods for calculating SEPPs, or 72t distributions. Keep in mind that once you choose a method of calculation and determine a payment, you cannot change that withdrawal amount for 5 years, or until age 59 1/2, whichever comes later.
Amortization method
The amortization method requires that a “reasonable” rate of interest* be used in the calculation. Using your retirement account balance (generally as of 12/31 of the year before you start the 72t plan) and the account owners single life expectancy (or joint life expectancy of the account owner and a beneficiary) taken from IRS life expectancy tables, this method calculates the equal payments that can be taken.
Annuity method
Using the annuity method, distribution amounts are calculated by dividing the retirement account balances by an annuity factor based on the account owner’s single life expectancy and a reasonable rate of interest*. This method essentially turns your retirement account into a lifetime stream of income payments. Like the amortization method, these 72t payments must remain the same from year to year.
MRD method
The MRD method recalculates your payment every year. The annual payment is generally the 12/31 account balance divided by the life expectancy from the applicable IRS Life Expectancy Table, based on your age or the age of your beneficiary. Because the MRD method recalculates the distribution amount every year, this method reacts to teh changes in your overall account balance, so you are less likely to rapidly deplete your account if the balance has dropped due to market decline.
*Note: IRS guidance provides that the interest rate that may be used is one that is not more than 120% of the federal mid-term rate for either of the two months immediately preceding the month in which payments begin.
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