Category: Retirement - PFwise.com

Multiple Accounts and Impact on Estate Planning

10/22/2021

Q. For estate taxes, does it matter what types of accounts I'm leaving to heirs? What if all my money is in a retirement account, like a 401(k), or it's all in a brokerage account or some other type of account? Do I need to start reorganizing how my money is held given the changes ahead?

A. The federal estate tax applies to the value of all assets that a decedent owns or controls at death, regardless of the type of account in which the asset is held.

You might want to consider, though, that only assets held in certain types of accounts can be efficiently transferred. For example, retirement accounts, such as 401(k)s or traditional IRAs, cannot be transferred to a third party during the account holder's lifetime without triggering income taxes and possibly penalties.

For this reason, most gifting strategies focus on transferring nonqualified, or taxable, assets, such as assets in a brokerage account or real estate. For people with a disproportionate amount of their wealth in retirement accounts, planning strategies shift to improving the income tax efficiency of the transferred accounts to reduce the beneficiary's income tax burden. Roth conversions, for example, may be an effective strategy to accomplish this goal. But, for estate tax purposes, the entire value of the converted Roth account will be included in the owner's estate.

Tax Plan Upends Estate Planning Using Trusts With Life Insurance

10/19/2021

Financial-planning.com has an article that details why the proposed tax plan upends estate planning using trusts with life insurance.

‘Crisis stage’
The blow to life insurance in trusts, a bread-and-butter wealth preservation strategy of the rich for decades, is one of many proposals in the emerging tax bill that take aim at the wealthy to finance President Joe Biden’s $3.5 trillion social spending plan.

The draft bill would raise the top individual rate to 39.8% from 37% and bump up the top capital gains rate to 28.8% from 23.8%. It would tax capital gains at the top ordinary rate once income hits $1 million, crack down on large retirement accounts and end backdoor Roth conversions, a favorite strategy of high-income earners to create tax-free profits. And it would kill the use of grantor trusts, the workhorse of estate planning, whether or not they contain life insurance.

It's easy to see what the tax perk has been. Say a person dies owning a $3 million home, $7 million in retirement accounts and $4 million of life insurance not held in a trust. With the current estate tax exemption at $11.7 million, $2.3 million of that $14 million estate would incur the 40% estate tax — a bill of $920,000. Now assume instead that the insurance policy is in a grantor trust. It wouldn’t go into the person’s estate, leaving nearly $1 million more for heirs.

Such savings would no longer be possible under the proposal. In any case, the historically high level at which estate taxes kick in would fall by nearly half to under $6 million in the House plan.

Under the House bill, “the life insurance issue has moved things to crisis stage,” said Steve Parrish, who co-directs the Center for Retirement Income at The American College of Financial Services.

“Right now, webinars, emails and panicked calls are circulating among estate planning professionals.”

One particularly hairy element, he said: Advisors are “trying to draft answers to their clients that avoid professional liability if they’re wrong.”

‘A major impediment’
The legislative proposal has upset financial advisors and estate lawyers because it’s common for life insurance to be held in a widely used type of trust called a grantor trust.

“This problem with insurance is really buried in the legislation,” said Warren Racusin, the head of the trusts and estates group at law firm Lowenstein Sandler in New York.

A grantor trust is a type of trust over which the owner, meaning the grantor, retains control and pays income tax on its gains. It comes in many flavors, including intentionally defective grantor trusts, or IDGTs, and grantor retained annuity trusts, or GRATs — all alphabet soup names well known to estate planners for the rich. Advisors say that most irrevocable life insurance trusts, or ILITs, are set up as grantor trusts, so they’d be hit by the curb, too.

The proposal says, in obscure language, that any assets contributed to grantor trusts come 2022 would become part of the grantor’s estate for estate tax purposes. The issue is that under the plan, a policyholder who pays her annual premiums for a policy that’s held in a trust would be “contributing assets,” thus making the trust subject to the 40% estate levy.

While the proposal would “grandfather” existing grantor trusts, that’s small comfort for those with life insurance. According to Mari Galvin, the chair of the trusts and estates group at law firm Cassin & Cassin in New York, it’s not clear from the proposal whether all of a trust could be shunted into the owner’s taxable estate if premiums are paid after this year, or just the portion related to the premium payments starting next year. “Time will tell,” Galvin said.

In any case, the grandpa safety net could be mighty small. Trusts that already exist and whose policies are fully paid would “most likely” remain grandfathered, according to Andrew Bass, the chief wealth officer of Telemus Capital, an independent advisor with brokerage services in Southfield, Michigan, that manages nearly $2.2 billion for high net worth investors. But only, Bass added, if the terms of the trust prohibit it from using its own income to pay premiums. The problem, he said, is that “most trusts were written with language that allowed trust income to be used for payment of premiums, thus forcing a loss of grandfathered status.”

In any case, wealthy individuals who want to create a future trust for their life insurance couldn’t make their spouse a beneficiary without subjecting the trust to estate tax. That’s because such a trust is automatically a grantor trust and thus would have to pay estate tax under the proposal.

“That is a major impediment, as insurance is typically needed by a surviving spouse,” Bass said.

The solution becomes the problem
The proposal has the potential to upend retirement planning.
“Life insurance is used by the well-heeled to both conserve and create an estate,” Parrish said. But if a policy’s death benefit gets hit with a 40% tax at death, “the insurance becomes the problem rather than the solution.”

The idea of pre-paying premiums revolves around using outside funds, not money inside the trust, as the latter would get caught by the proposed curb.

“We are advising clients to pre-fund their premiums now” by contributing cash or other assets before the new law passes so that no additional outlays are required to pay future premiums, said David Handler, a partner in the trusts and estates group at law firm Kirkland & Ellis in Chicago.

That’s easier said than done. Ponying up early premiums for a large “permanent” policy that lasts for life can cost millions of dollars. Where to find those dollars between now and New Year’s Eve? Individuals might have cash on hand, or they might contribute securities to the trust which can be sold over time to pay the premiums, Racusin said.

Handler said that others "might borrow from banks.” But Parrish said many investors would be left out in the cold, because “in many cases, these policies are financed through loans, so it’s impractical to pre-pay the premiums.”

Flying blind
The proposed curb would hit not just the very rich. People of more middling wealth, for whom a life insurance policy is often their trust’s single largest asset, would also feel pain.

For example, a person might have a net worth under the estate tax threshold but also a large life insurance policy to care for their family if they die prematurely and their income grinds to a halt, Handler said. Which means that when the insurance death benefit is paid, the decedent’s total assets can exceed the estate tax exemption.

Wealth advisors and estate planners say they're flying by the seat of their tax pants.

Advisors, Parrish said, “are feeling damned if they do” (pre-paying or taking other moves) and “damned if they don’t" (adopting a wait-and-see approach to whether the proposal becomes law).

Bass said one solution might involve “decanting” a grantor trust, like a fine wine. That strategy involves “pouring” a trust’s assets into a new trust. Or a trust could pay the insurance premiums through so-called split dollar arrangements, which are common with wealthy executives.

Or it could be set up so that beneficiaries other than a spouse would have to approve any distributions out of the trust to the spouse, “but that could cause family rifts and may have gift tax implications for the kids,” Handler said.

Racusin likened the tax contortions to navigating wealth planning with blinders on. “It’s kind of like an architect telling a builder, ‘hey, I need you to build this house right now, but I don’t have the plan, but you need to start building it right away.’”

5 Reasons to Make Changes to Medicare Coverage

10/18/2021

The good news for individuals enrolled in Medicare: If you're not satisfied with your current Medicare coverage, you can make changes during the Medicare Annual Enrollment Period (AEP), which runs every year from October 15 to December 7.

Generally, there are 5 reasons why you might consider making changes to Medicare coverage:

You want a less expensive plan. If you find that Medicare is taking a bigger bite out of your retirement budget, it can pay to shop around to save money.
Your health situation has changed, and you need different coverage. If you experience a significant change to your health, you may find that the plan you signed up for cannot support such a change.
The cost of your prescription drugs has increased. Sometimes health insurance companies that provide prescription drug coverage raise the price of certain medications. If you happen to take one of those medications, it could end up costing you a lot more money.
You're not satisfied with the quality of medical services in your current network. You may need the ability to see certain specialists or pursue additional avenues of treatment.
You want to simplify and consolidate coverage options. This is often the case when people want to shift to an "all-in-one" Medicare Advantage (MA) plan to bring all their coverage together instead of multiple plans handling different types of health care coverage such as Part A, Part B, a Medicare Supplement plan, or a Part D prescription drug plan (PDP).

Tip: Keep in mind, any changes you make take effect on January 1 of the upcoming year.

Why You Might Want to Switch Your Medicare coverage

10/17/2021

Not to Enroll in Medicare When Turn 65 If With Insurance

10/16/2021

Q. I am retired and covered under my wife's work insurance. Do I need to enroll in Medicare when I turn 65?

A. As long as your spouse is actively employed and insured, you can remain on her policy until she leaves the job or retires.

After that, you can sign up for Medicare Part B (covers doctor visits and outpatient services) and Part D (covers prescription drugs) without paying any late sign up penalties.

In the meantime, when you turn 65, you can still enroll in Medicare Part A (covers hospital bills), there is no cost for that and it gets you into the system.

The caveat, if your spouse works for a business with fewer than 20 employees, you may have to enroll in both Parts A and B.

6 Things to Know About RMD

10/13/2021

How much do I need to withdraw? RMDs will vary from person to person and account to account because they’re based on your age and the value of your account on December 31 of the previous year. It’s a good idea to be aware of the IRA and workplace retirement plan minimum distribution rules that apply to you. Worksheets and tables are available on the IRS website. Your RMDs should be calculated each year based on your account balance at the end of the previous year, your current age, and your life expectancy. It’s important to plan properly for these annual distributions if you want to avoid paying penalties and excess taxes.
Are there exceptions? Of course. A Roth IRA has no RMDs during the owner’s lifetime. However, Roth IRAs are subject to RMDs after the owner dies, and the same 50% penalty will apply if the beneficiary of the Roth IRA does not take the RMDs.
How will it affect my taxes? IRA RMDs usually count as ordinary income in the year you receive the distribution. The RMD will be added to all your other income for that year and will be taxed according to your tax bracket. If you made nondeductible IRA contributions or after-tax contributions to your company retirement plan, the amount of your contribution will not be taxable, but the earnings are. For your IRA, review your IRS Form 8606 to calculate how much of your RMD would be taxable. For your company retirement plan, contact your plan administrator to determine what amount is nontaxable.
Will this impact my Social Security check? It definitely could. RMDs increase your taxable income, which may push you into a higher tax bracket. That can impact other retirement benefits like Social Security and Medicare.
What is the deadline to take the RMD? Your first IRA required minimum distribution is due by April 1 the year after you turn 72. After that first year, the annual deadline is December 31. Consider taking your first distribution by December 31 the year you turn 72 if you want to avoid having two taxable distributions in the same year. Similar rules apply to taking RMDs from company retirement plans. The difference is you may need to withdraw your first RMD by April 1 of the year after you turn 72 or retire, if your employer’s plan allows it.
What is the penalty? It’s a big one, which is why it’s important to make sure you adhere to the guidelines. If you don’t take your full RMD by the deadline, you may end up paying a 50% tax on the amount you failed to take, as well as any applicable income taxes on the entire amount of the distribution.

3 Social Security “Do-over” Strategies

10/12/2021

There are three Social Security “do-over” strategies for people who have already claimed benefits.

First, any individual who has claimed Social Security retirement benefits can withdraw their application within 12 months of doing so. This allows the individual’s monthly benefit to continue to grow, but they (and any family members receiving benefits based on the worker’s earnings record!) must pay back any benefits already received. This strategy could be useful for individuals who decide to go back to work within a year of claiming their benefits.

Second, going in the opposite direction (for those who wish they had claimed earlier) is to elect to receive a lump sum payout of six months of retroactive benefits, which is available to (only) those individuals who have reached their Full Retirement Age (FRA). Thus, a retiree in need of a short-term cash infusion could retroactively start their benefits if they wish they had started earlier (and take the lump sum for what they missed!).

The third strategy for recipients who have reached their FRA is to suspend retirement benefits in order to get delayed retirement credits until age 70, at the latest. This option is potentially useful for married couples because, if the higher-earning spouse had originally started benefits early (reducing their payments), subsequently suspending their benefits can increase their benefits again, such that if the higher-earning spouse dies first, the survivor will get the larger benefit amount.

Notably, those who claim a retroactive 6-month payment for delaying can do so and then also suspend their benefit after taking the lump sum, receiving the lump sum (for a small infusion of cash) and still earning delayed credits up to age 70!

How to Retire Early But Not Risking Your Future?

10/10/2021

This excellent article from Fidelity.com discusses how to delay Social Security, boost benefits, and build an income bridge to get there.

It answers or helps you think several questions:

Does it make sense to delay claiming Social Security benefits?
How to factor in your longevity into the consideration.
How to avoid running out of money?
How to bridge an income gap to Social Security?

Potential Retirement Income Approaches

10/9/2021

Despite the advancements in measuring risk tolerance, Pfau and Murguía argue that risk tolerance questionnaires are more valuable during a client’s accumulation years, and are less useful when assessing risk tolerance in their decumulation years in retirement when sequence-of-return risk becomes a serious issue.

Accordingly, Pfau and Murguía suggest advisors and clients first need to decide on a retirement income strategy, and only then consider a (risk-tolerance-appropriate) asset allocation in retirement.

Potential retirement income approaches include:

total return (drawing from a diversified investment portfolio)
protected income (using guaranteed lifetime income products to build a floor for essential expenses)
risk wrap (blending investment growth potential with lifetime income benefits), and
time segmentation (earmarking assets for spending immediately, soon, and later).

Once a strategy is selected, Pfau and Murguía propose a tool that uses two scales to determine the client’s risk tolerance in the decumulation period: probability-based income sources (e.g., from market growth) versus safety-first income sources (e.g., from contractual obligations), and optionality (degree of flexibility) versus commitment (adherence to a single solution) with respect to how much a client is willing to change their approach in response to economic or personal developments.

The results of this exercise can then be used to select appropriate investment products to meet the client’s needs. The key point is that selecting an appropriate allocation of assets in retirement isn’t just a function of the retiree’s tolerance for market volatility… instead, it starts with their preferences for even taking a risk-based investment (versus a more guaranteed-income) approach in the first place, and how much spending flexibility they have (or want or need) along the way!

Why Splitting Contributions Between Traditional and Roth IRA is Not Tax Diversification

10/7/2021

Mathematically, the Roth-versus-traditional IRA decision will actually be the same, regardless of growth rates and time horizon, as long as both accounts remain intact and tax rates don’t change.

If future tax rates do change, though, the Roth IRA will result in more wealth when tax rates rise in the future, while the traditional IRA will benefit when tax rates are lower in the future. Though in practice, because the tax burden for a Roth IRA is paid upfront – when the (after-tax) contribution is made – there is no future uncertainty with respect to its future tax rate; instead, changes in tax rates primarily impact the future value of a traditional IRA, in particular, making it better or worse off depending on whether or how tax rates change.

To cope with this uncertainty, one popular approach is to ‘tax-diversify’ between the two types of accounts, splitting contributions between traditional and Roth IRAs so that there is at least ‘some’ benefit regardless of which direction tax rates go (as higher tax rates benefit the portion of dollars in the Roth, and lower tax rates would benefit the traditional IRA dollars instead).

However, the reality is that splitting dollars between traditional and Roth retirement accounts isn’t just a form of diversification; because the outcomes are correlated to each other, the net result is that tax diversification doesn’t actually diversify the risk, it simply neutralizes the opportunity altogether. Or viewed another way, splitting between traditional and Roth IRAs is more akin to just bailing out of stocks altogether and owning zero-return cash.

If you want to see a more thorough discussion of this topic, here is an excellent article.

Retirement Solution Shopping Video

10/6/2021

Are you ‘shopping’ for retirement solutions? You may have growth, guarantees, lifetime income, tax advantages and more on your list … but do you know annuities could offer you all?

Here is a “Retirement Shopping” video.

Backdoor Roth Alternatives

10/5/2021

Roth 401(k)
People who have the option can contribute to a Roth 401(k) in order to accumulate assets in a Roth account. The proposed legislation does not limit these contributions, and the money can be rolled over to a Roth IRA when you leave your employer.

In many cases, a Solo 401(k) can offer a Roth option as well. This would work in the same fashion as a 401(k) offered via an employer as far as the employee contribution component.

Health Savings Account (HSA)
HSAs are a great vehicle for people who have access to a high-deductible health insurance plan. Health savings accounts allow for pretax contributions and withdrawals to cover eligible medical expenses are tax-free.

HSAs can act as another retirement account in that the money contributed to the HSA can be carried over from year to year if not used. This makes an HSA a great way to save for medical costs in retirement, essentially making it a tax-free retirement savings account. Many HSAs allow the money to be invested. If the money is not used for medical expenses in retirement, it can be withdrawn just like a traditional IRA with taxes due on the money.

Contribution limits for an HSA are:

Individuals can contribute $3,600 for 2021 and $3,650 for 2022.
Families can contribute $7,200 for 2021 and $7,300 for 2022.
Those over age 55 can contribute an extra $1,000.

Life Insurance
A whole life insurance policy, along with some other types of cash value life insurance, is another way to build tax-free income in retirement. This is more complex than a backdoor Roth to be sure, but if this is a fit for you this can be an alternative.

Essentially, you would purchase the life insurance policy. Part of the premium funds the growth in cash value. They can withdraw the portion related to the premiums tax-free and take a policy loan against the rest of the cash value that will have accrued from dividends. The additional withdrawals will serve to reduce or eliminate the death benefit. Upon their death, the death benefit passes to your heirs tax-free.

There are a number of cautions and caveats to this approach, including ensuring you don't withdraw too much so as to create a modified endowment contract situation. Additionally, the cost of the premiums and your need for the death benefit should also be considered.

What To Do If Congress Stops Backdoor Roth Conversion?

10/4/2021

The House Ways and Means Committee recently passed $2.1 trillion in tax hikes that will help fund President Joe Biden’s American Families Plan. Among their proposals are the elimination of backdoor Roth and mega backdoor Roth IRA conversions. Both of these provisions could affect people who earn too much to contribute to a Roth IRA and those who want to ramp up their Roth account balances.

The proposed legislation would end the ability to convert after-tax contributions in both 401(k) plans and traditional IRAs to a Roth after Dec. 31, 2021, effectively killing both of these options.

People who have been making after-tax contributions to their 401(k) plan to fund a mega backdoor Roth conversion need to make some decisions this year.

If their plan allows for the conversion of this money to a Roth 401(k) account within the plan, this needs to be done prior to Dec. 31, 2021, if the legislation passes as is. Note that any earnings on these after-tax contributions will be taxable upon conversion. If the plan allows for in-service withdrawals in order to roll this after-tax money to an IRA and convert to a Roth, you will want to consider doing this by the end of the year.

If none of these options are available to you, the after-tax contributions would be stuck in the plan until you leave the company. Unless this happens prior to Dec. 31, 2021, you will lose the opportunity to convert this money to a Roth if the proposed legislation passes.

For people who may want to make an after-tax contribution to a traditional IRA and do a backdoor Roth conversion, this also needs to be done by Dec. 31 of this year if this legislation passes.

IRAs With Alternative Assets Will Be Banned in House Tax Bill

10/2/2021

It seemed like a smart strategy: put an illiquid alternative asset, like a single-family rental house, into an IRA and then the income it generates will grow tax-free (or tax-deferred).

This works particularly well if you're Peter Thiel and the asset you're contributing is low-basis shares of PayPal, but it's also a popular tactic for middle-class taxpayers on up.

But here comes the Biden Administration to mess up your plans. Under the new tax bill, this strategy would be disallowed, writes Lynnley Browning at Financial-Plannig.com.

The emerging tax bill would ban individual retirement accounts of all types and any size from holding alternative investments intended only for investors whom securities regulators consider “sophisticated.” That means shares in anything other than publicly-traded stock, bonds or mutual funds — such as private businesses, startups, private equity-backed firms, real estate, hedge funds and peer-to-peer lending networks.

Under the House tax bill, investors would be prohibited from holding in their IRAs any investments that are only available to accredited investors starting next year. Affected investors would have two years to sell their investments or forfeit the tax-advantaged status of their IRA.

Read how things will change if the bill passes — and get ready to scramble.

4 Health Care Options If You Retire Early

9/26/2021

If you decide to retire early and cannot rely on Medicare, here are several options for health care:

Work part-time or just enough hours to get health insurance.
Buy health care insurance on the market — keep in mind that the premiums increase as you age and are usually more than what you’d pay when you’re employed.
Join a health-sharing ministry, which are religious organizations that pool health care costs across their members.
Self-insurance and costs can often be lower if you choose to retire outside of the United States.

4 Signs You Are Ready for Roth IRA Conversion

9/23/2021

The sweeping tax overhaul enacted in 2017 lowered tax rates starting with the 2018 tax year. These lower rates are scheduled to end with the 2025 tax year.
The Setting Every Community Up for Retirement Enhancement (Secure) Act eliminated the ability to stretch an inherited IRA for most non-spousal beneficiaries and requires that these beneficiaries fully withdraw the money in the IRA within 10 years. This applies to inherited Roth IRAs as well, but there is no tax to the beneficiaries in most cases with an inherited Roth IRA.
There are many unknowns as to what impact President Joe Biden’s tax proposals might have on rates, making Roth IRAs a viable option for many investors.

Here are 4 signs that the time may be right for Roth IRA conversion:

1. You earned less than usual this year.
A key issue to consider is your tax bracket for the year. If you are still working and fall into a lower-than-normal tax bracket, that can present an opportunity to do the Roth IRA conversion at a lower tax rate then you would incur during a more normal earning year.

2. You have retired but want to delay Social Security.
One time period where you might be in a lower tax bracket is your first few years of retirement. Your income is likely lower due to not receiving a salary or self-employment income. If you’ve decided to delay taking Social Security to maximize its benefit, this could provide a window of several years in which you are in a low tax bracket.

It is important to know that if you have reached the age where RMDs have commenced that the RMD money cannot be diverted to a Roth IRA conversion and that RMDs must be taken before any conversions are done.

3. You want to donate to charity.
Along the lines of managing your tax bracket, if you plan to give appreciated assets to charity, the tax deduction from these donations can be used to offset the tax hit of the Roth IRA conversion. It’s important that you are able to take an itemized deduction for the contribution, however.

4. You have cash on hand.
While it probably goes without saying, it’s critical that you ensure you have the cash available outside of your IRAs to pay the taxes. Having to take money from your traditional IRA to cover the taxes due will reduce the net amount that is ultimately converted to a Roth.

Additionally, the money to pay the taxes would end up as a distribution from the traditional IRA in this case. That money would be subject to taxes and to a 10% early withdrawal penalty if you are under age 59 ½. This type of situation would greatly diminish the benefits of a Roth IRA conversion and should be avoided in virtually all cases.

2 Great Websites With Tons of Useful Financial Planning Information

9/22/2021

Professor Laurence Kotlikoff of Boston University: https://kotlikoff.net/
This site includes an easy-to-navigate compendium of his columns, articles, and books on the left sidebar. Super useful.

Ed Slott’s resources page: https://www.irahelp.com/iraResources.php
His specialty is IRAs, but this resources page has a ton of helpful links to retirement planning resources, including his monthly advisor newsletter.

Annuity Wealth Transfer Concept

9/17/2021

Meet Rick and Karen, both age 59, decided that they do not need the annuity for retirement and want to pass the value to their children at death. However, they want to maximize the money they can pass to their children and avoid passing a tax burden.

Enter annuity wealth transfer concept, this method helps people like Rick and Karen to minimize tax and leave more assets for their beneficiaries. See details below.

Financial Do's and Don'ts If You Have A 7-Figure Retirement Fund

9/14/2021

8 Financial Do's and Don'ts for the 7-Figure Retirement is an article from Morningstar.com, it highlights a number of key decision points - and the related do's and don'ts - to consider in helping people with high retirement assets make the transition from working to retirement.

Some of the important points include:

It's important to be mindful of sequence of return risk, especially when retiring early (thanks to all of that wealth), as the longer the time horizon, the more risk there is with an untimely early retirement market decline;
Most pre-retirees have relatively stable tax planning because their income is consistently buoyed by annual wages, and consequently may underestimate the volatility of their taxable income in the early retirement years (and miss opportunities for tax planning to maximize tax-efficient retirement withdrawals);
Be mindful of the timing when starting Social Security retirement benefits, especially for those who otherwise have plenty to live on, expect a long life, and can afford to bridge the early retirement years from their portfolios in order to delay Social Security;
Beware locking in "expensive" payments and financial commitments... including not only the second/vacation/retirement home, but over-extending the "Bank of Mom and Dad" to adult children;
and finally, remember that just because you have the financial affluence to be able to afford not working anymore, doesn't mean you will find a life without work to be fulfilling, as in the end it's much better to be retiring towards something rather than just retiring away from our current life!

THE MEGA BACKDOOR ROTH IRA STRATEGY AND SOLO 401(K) PLANS

9/12/2021

Do you know Solo 401(k)s for side jobs or businesses can possibly be rolled into mega backdoor Roth IRAs? This blogpost shows you this strategy - the required conditions and caveats to implement it, worth a read if your situation fits the bill.

Note: only after-tax contributions are allowed to be used in this strategy, and your side business must not be related to your regular job to take advantage of this rollover, and of course your side business must be successful so you can afford the cash flow contribution.

Why Inflation is a Stealth Tax?

9/2/2021

Inflation is a "tax" that has nothing to do with revenue - instead, it diminishes your clients' purchasing power. Today, a 50/50 portfolio of U.S. Treasury bonds and the S&P produces 75% less income than it did 10 years ago, in July 2011. Van Mueller explains how this works, why that last bag of Doritos felt a little lighter than usual, and why now is the best time ever to get cash value life insurance.

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What is inflation? Isn’t it a very complex concept? Doesn’t the government intend for it to be complex, so that the American people don’t understand that they are being taxed, again, without it being called a tax? Isn’t it a way for the government to tax the poor, middle class and the upper middle class without those groups even realizing what is happening to them? Isn’t it a way for our government to add additional tax revenue from the wealthy? Did you notice I didn’t say super-rich? Most of the super-rich do not pay income taxes. They have planners who put strategies in place to offset the damage caused by inflation and yes, even take advantage of inflation. Shouldn’t our customers be made aware that the same strategies are available to them?

So, in its simplest terms, what is inflation? The simplest answer is that it is the lost purchasing power of our money! We will discover later in this month’s newsletter that it is much more complex than that. However, our customers do not desire complexity from us. They desire simplicity. They want to understand exactly what is happening to their money.

Our customers do not desire complexity from us. They desire simplicity. They want to understand exactly what is happening to their money.

Here is an example of the lost purchasing power of our money that is relevant to many of the customers we talk with.

Healthview Services is an organization that reviews Social Security and Medicare and reports on the effectiveness of those programs. They recently reported that if you were receiving $2,000 per month in Social Security benefits in the year 2000, that in 2020 you would now require $2,800 per month to buy the same amount of goods and services. There are two important points to share. First, that increase was during a low inflation period. It even included a deflationary period in 2007 and 2008. Second, the information did not include the massive inflation increase that we are seeing in 2021. How does the dictionary define inflation? In economics, inflation (or less frequently, price inflation) is a general rise in the price level of an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the PURCHASING POWER per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. The opposite of inflation is deflation, a sustained decrease in the general price level of goods and service. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index, usually the consumer price index, CPI, over time.

There are other indices that are used widely as measurements.
1. Producer Price Indices – This is an increase in costs at the producer level rather than the consumer level.
2. Commodity Price Indices – This measures a basket of commodities.
3. Core Price Indices – Food and oil prices can change quickly. Therefore, most statistical agencies also report a measure of “core inflation.” That removes volatile expenditures like food and oil from a broader index like the consumer price index. Many times, the inflation rate we are reported excludes spending on food, oil and even home purchases. It is dramatically understated. Why? Because the government doesn’t want most of America to realize that their standard of living is being reduced. That’s why people in the know call inflation a “stealth tax.”

The government doesn’t want most of America to realize that their standard of living is being reduced. That’s why people in the know call inflation a “stealth tax.”
4. GDP Deflator – This measures all the prices for goods and services against our Gross Domestic Product (GDP). This is a measurement of all the goods and services produced by Americans.
5. Regional Inflation – Prices are very different in different regions of our country. Costs of things could vary dramatically if measured by the north versus the south or the east versus the west or the coasts versus inland United States.
6. Asset Price Inflation – This is a dramatic increase in the price of financial assets such as stocks, bonds and real estate.

There are three major sources of inflation.
1. Demand-Pull – When demand for goods or services exceeds production capacity. When people want to buy Giannis Antetokounmpo sneakers and they can’t be produced fast enough, the price increases.
2. Cost-Push – When production costs increase prices. If the price of helium increases for special occasion balloons, that will increase the price for the balloons.
3. Built-In – When prices rise, wages rise also in order to maintain living costs. If wages rise, prices will increase. This has been under control for a while. This reason for inflation is heating up again.

In order to understand the impact of inflation in the future we must look at inflation in the past. Let’s look at the last time we had excessive inflation. From 1975 to 1990 we had very aggressive inflation in our country and the world for that matter. Do you know that in the 46 years since 1975 you now need $5,050.11 today to buy the same amount of goods and services that $1,000.00 bought in 1975. That means your money only buys 19.80 percent of what it could buy in 1975. You lost 80 percent of your purchasing power. The average inflation rate over those 46 years is 3.58 percent. That means you need to double your income every 20 years in order to maintain the purchasing power of your money when you began. Even at only 3.58 percent average inflation retirees would need almost a double and another half of a double increase during their life expectancy to maintain their purchasing power if they retired at age 65 and lived to age 95.

You need to double your income every 20 years in order to maintain the purchasing power of your money when you began.What happens to the quality of your retirement if you retired in 1975 when the rate of inflation was 9.13 percent and lived through bad inflation like those retirees had to until 1990? What happens to your standard of living?

Here are the rates of inflation from 1975 to 1990.
1975: 9.13 Percent
1976: 5.76 Percent
1977: 6.50 Percent
1978: 7.59 Percent
1979: 11.35 Percent
1980: 13.50 Percent
1981: 10.32 Percent
1982: 6.16 Percent
1983: 3.21 Percent
1984: 4.32 Percent
1985: 3.56 Percent
1986: 1.86 Percent
1987: 3.65 Percent
1988: 4.14 Percent
1989: 4.82 Percent
1990: 5.40 Percent

Any inflation rate over 2 percent is considered unfavorable. Any inflation rate below 2 percent is also considered unfavorable for the economy. From 1991 to 2020 the inflation rate was in the 2 to 4 percent range. 2021 is the first time it has entered the 5 percent range at 5.05 percent. Simply stated, that means that in 2022 you will need $1,005 to buy the same amount of goods and services that you bought in the year 2021. A cup of coffee was $0.25 in 1970. In the year 2000 a cup of coffee had increased in price to $1.00. In 2019 it increased to $1.59. That’s not a Starbucks cup of coffee, that’s a regular cup of coffee. That is inflation.

So, what’s happening with inflation today? Are we creating 1975 to 1990 inflation right now? Let’s review a few things and see if we can figure out what our government is currently doing.

The Federal Reserve’s current Quantitative Easing programs created $120 billion per month to $1.4 trillion of newly printed money annually. Jerome Powell said they would reduce this amount in 2022 or 2023. That will probably not happen now. The Biden administration let it be known that President Biden will reappoint Jerome Powell as the Federal Reserve Chairman in 2022. The administration would not have reappointed Mr. Powell unless he agreed to continue President Biden’s strategy going strong into the November 2022 elections. That means no reduced quantitative easing or rate hikes or money tightening strategies for a while. So, if shutting down the economy causes a depression, they will print money. If the stock market crashes 30 or 40 percent, they will print money. If municipal bonds collapse because investors don’t believe our cities and states will be able to meet all their healthcare, pension and debt obligations, won’t they print more money? If our economy continues to struggle because the Delta variant of the COVID-19 virus causes state officials to partially or completely lock down their economies, what will the Federal Reserve do? Won’t they print more money? What if the economy doesn’t recover fast enough. What will the government do? Won’t they just print more money? They don’t really have ANY other alternatives. Don’t believe me yet? Please try to wrap your head around the next few sentences. Our government has printed so much money to offset the negative consequences of the COVID-19 lockdowns that if you add up all the money that our country has ever printed; over 40 percent of that money was printed in the year 2020. This won’t stop soon. There will be trillions for infrastructure, climate change and many other things. We are not allowing our economy to heal itself. We are artificially manipulating the economy to win elections or pursue short-term agendas that promote candidates or party’s rather than the longterm well-being of our country and our country’s economy.

Our government has printed so much money to offset the negative consequences of the COVID-19 lockdowns that if you add up all the money that our country has ever printed, over 40 percent of that money was printed in the year 2020.All of this additional liquidity is causing problems globally. There is no place to hide. There used to be global alternatives, however, we sold the Kool-aid to the rest of the world. Since March 2020 central banks have printed more than $27 trillion in stimulus. That is approximately 30 percent of the GDP of the planet. There are no words to explain the eventual damage that will be done to the world’s economy.

Using your own common sense, you will also understand that the government continues to mislead on inflation. The Bureau of Labor Statistics shared that healthcare spending has increased only one percent in the last year. If you sell health insurance, you know that is ridiculous. The same Bureau of Labor Statistics reported the housing portion of inflation increased 2.6 percent in the last year. Housing prices have increased over 14 percent. They are currently rising at the fastest rate since the real estate bubble of 2007 and 2008. They are not counting the costs of housing or medical care or food costs or energy costs even remotely correctly. This is even more manipulation

Inflation creates dramatically unfair and dishonest behavior in the markets. If you were to use a wine maker as an example, let’s see what choices are required to be made if the Federal Reserve doubles or triples the money supply. If the wine maker is selling his wine for $22 per bottle, he is now confronted with a very difficult decision. Here are his choices: He can continue to sell his wine for $22 per bottle and lose 50 percent or more of his profit, or he can use cheaper ingredients and destroy the quality of his wine and continue to sell it for $22, thus maintaining his profit, or he can double the price to $44 per bottle. The issue with the third idea is that the wine maker will face competition pressures from other wine makers who don’t have as much pride in their product or integrity in the way they operate. Inflation puts financial pressure on individuals to be dishonest. They must weigh their moral integrity against their financial wellbeing. Average individuals gain no long-term benefits from excessive inflation. It is taxation without representation.

Inflation puts financial pressure on individuals to be dishonest. They must weigh their moral integrity against their financial wellbeing.Inflation is a tax. It’s not an actual tax like a sales tax or income tax. It has nothing to do with tax revenue. There is no line for it on form 1040 that makes you pay two or three percent of your earnings because of inflation. There is no payment that must be made to account for the rising inflation rates. The inflation tax is unseen. The inflation tax is a “stealth tax.” That is why it is so complicated and difficult to plan for. The inflation tax is a forfeiture on the cash you hold as inflation increases. As inflation increases, cash becomes less valuable. In short, what you save today will be worth less tomorrow.

In a recent article in Think Tank Advisor, Dr. Michael Finke who is a professor of wealth management at the American College of Financial Services stated this:

“Unfortunately, if these retirees hope to live on income from these investments, they will feel the effects of asset inflation. Asset inflation should also affect the expected growth in portfolios of bonds and stocks. A 50/50 portfolio of 10-year U.S. Treasury bonds and the S&P 500 produces exactly 75% less income today than it did 10 years ago, in July 2011.

In other words, $1 million today will produce the same annual dividends and interest income from a balanced portfolio as $250,000 did for a retiree in 2011. Retirees who reach for yield by taking greater risk in credit markets are facing spreads between risky corporate high-yield bonds and Treasury bonds lower than they were before the pandemic, despite a likely tapering in bond buying by the Fed in the coming months.”

WOW! Americans have lost 75 percent of the dividend and interest income they were receiving in 2011. How do they make that up?

Americans have lost 75 percent of the dividend and interest income they were receiving in 2011.One more thing: Become aware of the word “shrinkflation.” Instead of raising prices, companies are hiding those rising costs by shrinking the size of everyday products. As an example, General Mills shrank its family size cereal boxes from 19.3 to 18.1 ounces.

With rising labor costs and ingredient prices combined with increased demand and a shipping crisis, you can expect shrinkflation to expand exponentially in the future. Here are some additional examples of shrinkflation.

Clorox now includes 75 wipes per pack, down from 85, for the same price.
Frito-Lay just shrank their bags of Doritos from 9.75 ounces to 9.25 ounces. Both are currently for sale at Target for the same price.
Hershey’s cut its 18-ounce pack of dark chocolate kisses by almost two ounces.
Hefty’s mega pack went from 90 bags to 80 bags, at the same price.
A two-pack of Reese’s Peanut Butter Cups used to weigh 1.6 ounces. Now it’s just 1.5 ounces.
Tubs of Pringles are different weights depending on the flavor in the U.S., but at Walmart they all cost the same.
Tillamook deceased the size of its ice cream cartons from 56 ounces to 48 ounces. It said that it didn’t make the decision lightly, but that if it didn’t make its cartons smaller it would have had to hike up prices because of rising ingredient costs.
Some of Royal Canins’ cans of cat food now weigh 5.1 ounces, down from 5.9 ounces, but they still cost the same. Royal Canin, a subsidiary of Mars, said that it reduced some product sizes because of unprecedented demand for pet food during the pandemic.
Charmin toilet paper originally had 650 sheets per roll. It now only contains around half of that. Even its Mega Rolls and Super Mega Rolls don’t have as many sheets as the original. The sheets have reportedly gotten smaller as well.
Cadbury changed the shape of its famous Dairy Milk bars in 2013 and changed the weight of them too. The individual pieces now have round edges and contain nearly 10 percent less chocolate than before.

This information is why it is the greatest time ever to be an insurance and financial professional and it is without a doubt the greatest time ever to sell cash value life insurance.

This information is why it is the greatest time ever to be an insurance and financial professional and it is without a doubt the greatest time ever to sell cash value life insurance.

It is obvious that there are no products by themselves that can overcome the challenges of aggressive inflation. It is also obvious that only STRATEGIES must be used to not be hurt by inflation and actually take advantage of inflation. I know you are all thinking to yourselves, HOW? You already know how. I have been writing this newsletter for years with ideas to beat inflation. We are the only industry that can. Here are several bullet points to remember. We will go into more detail in the months ahead.

1. Never Lose Any Money!
2. Have access to your money that you didn’t lose to take advantage of opportunities when they present themselves.
3. Reduce or eliminate income tax liability
4. Use pennies to buy dollars. Use leverage to make money more effective and more efficient.
5. Have one dollar do the work of many dollars. My dollars benefit if you die too soon, live too long, become disabled, have a catastrophic illness, have a terminal illness, require long term care or wish to supplement your retirement income. All with the same dollar.
6. Finally, learn and use mortality and longevity credits to increase retirement income.

So, what do you think? Do you know more about inflation than you ever wanted to know? I hope not. This will be an important concern for every American going forward. Let’s help our customers be in control of that journey.

Original Medicare vs Medical Advantage - Part IV

8/27/2021

In last blogpost, we compared original Medicare and Medicare Advantage, now we will show you who might benefit from the original Medicare the most.

Who benefits from original Medicare the most?

Generally, original Medicare is popular among people who:

Travel often or have more than one residence
Want flexibility in choosing doctors and hospitals
Prefer to manage their own health care
Live in areas that have limited or no Medicare Advantage providers
Don't mind managing multiple insurance policies

Original Medicare vs Medical Advantage - Part III

8/26/2021

In last 2 blogposts, we discussed original Medicare and Medicare Advantage, now we will compare these two options.

How many enrolled in each option?
About 60% of enrollees in original Medicare and 40% in Medicare Advantage.

What are the joining processes for each option?
Original Medicare: beneficiaries sign up for part A and part B directly with Medicare, and purchase part D directly from private insurers.

Medicare Advantage: an enrollee needs to first sign up for Medicare part A and part B with the government in order to receive the Medicare card. Then fill out an enrollment form with the plan in Medicare Advantage to join.

Any restrictions in each option?
In original Medicare, you may choose any doctor or hospital that accepts Medicare.

In Medicare Advantage, you have to use doctors and hospitals in its networks in order to be covered.

How about costs for each option?
For original Medicare, the government adjusts premiums, deductibles, and copays that apply to all enrollees nationwide. You are responsible for 20% of health bills.

For Medicare Advantage, private plans also adjust premiums, deductibles, and copays annually, so you need to review each autumn when adjustments are announced. Generally these plans have lower copays and out-of-pocket costs than original Medicare.

Any coverage differences for these two options?
The original Medicare pays for most basic medical needs but has some gaps (see first blogpost's discussion).

The Medicare Advantage coves everything original Medicare does, some plans also cover dental, vision and hearing, as well as prescription drug costs. Some also provide services such as transportation, home-delivered meals and health-related home improvements.

In next blogpost, we will summarize which option best fits for what kind of enrollees.

Original Medicare vs Medical Advantage - Part II

8/25/2021

In last blogpost, we discussed what the original Medicare covers and not covers.

What are the other costs for original Medicare?

Roughly 80% of original Medicare enrollees buy supplemental (or Medigap) insurance policies to protect themselves from oversize out-of-pocket costs if big health issues emerge. Those who don't are typically very poor (Medicaid will cover most of their incremental costs) or the very rich (who can afford to pay any incremental medical costs).

In 1990, Congress passed a law establishing 10 standard Medigap insurance policies (plans A through J).

What is Medicare Advantage?

In 1997, Congress approved a competitor to original Medicare, known first as Medicare+Choice (M+C), then renamed Medicare Advantage in 2003.

Part C plans allowed HMOs and PPOs into the Medicare system. So now Medicare enrollees face a choice: original Medicare (managed directly by the fedeal government), or Medicare Advantage (through a private sector provider).

We will compare these two choices in next blogpost.

Original Medicare vs Medical Advantage - Part I

8/24/2021

These couple of blogposts intend to help you decide which one fits your needs better - the Original Medicare or Medicare Advantage.

What does original Medicare cover?

The original Medicare covers 4 major areas:

Part A: this covers most costs of hospitalizations. It also pays all or most of the costs for up to 100 days of extended care in a nursing home or rehab facility after a hospital stay. For most enrollees, no monthly premium cost, but you must pay for some costs for every hospital visit.
Part B: this covers doctor visits, medical tests and other outpatient services. Most enrollees pay for a monthly premium for this coverage, and there is financial penalty if you don't enroll when you are eligible to enroll.
Part D: this covers most prescription drug costs. Unlike Part A and B, this benefit is purchased from private insurers, so enrollees need to shop to see which plan fits their needs, healthy situation, and budget.
Preventive care: with the pass of Affordable Care Act, Medicare now provides enrollees with free preventive care, including mammograms and prostate screenings.

What doesn't original Medicare cover?

There are some major coverage gaps in original Medicare, including:

Residential nursing home care
Dental care
Vision care
Hearing services
Cosmetic and other elective surgeries
Care outside of the U.S.
20% (or more) of your health care costs

In next blogpost, we will discuss other costs for original Medicare.

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