Category: Retirement - PFwise.com

Roth IRA Contribution Rules: A Comprehensive Guide

4/16/2021

A Roth IRA can be an excellent way to stash away money for your retirement years. Like its cousin, the traditional IRA, this type of retirement account allows your investments to grow tax-free. However, it also lets you take tax-free withdrawals of your contributions (but not earnings) at any time.

KEY TAKEAWAYS

Only earned income can be contributed to a Roth IRA.
You can contribute to a Roth IRA only if your income is less than a certain amount.
The maximum contribution for 2021 is $6,000; if you’re age 50 or over, it is $7,000.
You can withdraw contributions tax-free at any time, for any reason, from a Roth IRA.
You can withdraw earnings from a Roth IRA, but it may trigger taxes and penalties depending on your age and that of the account.

Asset Repositioning: an Alternative to the New Stretch IRA Rules

4/14/2021

If you meet the following 2 conditions:

You have assets in an IRA that don’t intend to use or need during your lifetimes,
You want to leave a meaningful legacy to the people you love.

Then you will be impacted by the new Secure Act rules.

The Solution
Consider the income tax free alternative to the new stretch IRA rules. For details, please see a case study below.

Retirement Income Planning - 3 Tips

4/11/2021

1. Zero Percent Capital Gains Tax Brackets
The 0% capital gains bracket can create unique planning opportunities. The standard deduction for those who are married and filing jointly is $25,100. Those who are married and over age 65 or blind receive an additional $1,350. A married couple filing jointly, both over 65, could have $108,600 of capital gains and pay no federal income tax at all, as long as the gain is the only thing on the return. Understanding the interaction between different types of income like capital gains, ordinary income and Social Security is essential to maximizing this opportunity.

2. Social Security Taxation
As your taxable income increases, the potential tax you have to pay on Social Security benefits can also increase quickly. The combination of Social Security income with other taxable income could result in being subject to an effective marginal tax rate as high as 49.95% on a portion of your income. Delaying Social Security benefits increases the monthly benefit you are entitled to receive and gives you more time to withdraw from pretax retirement accounts without creating an overlap between the two income sources.

3. Medicare Premiums
Medicare Part B and Part D premiums are based on modified adjusted gross income. For people who are older than 65 or within two years of enrolling in Medicare, beware that Roth conversions can trigger premium surcharges. Understanding these thresholds will help you identify how much you should convert to the Roth.

A Checklist from Financial Planners to Financially Plan Post-retirement

4/9/2021

How financial planners help their clients financially plan for post-retirement? Below is a checklist used by financial planners.

Can I Withdraw Roth Contributions Without a Penalty?

4/8/2021

Yes, you can!

Savers fund Roth IRAs with after-tax contributions, and the earnings on those contributions grow tax-free. To withdraw those earnings without paying taxes and a 10% penalty, the account must be open for at least five years, and the holder must be at least 59½. But there's a workaround.

The key word is earnings. The timeframe, taxes, and penalties apply only to earnings.

You can withdraw your contributions at any time, without penalty, regardless of your age or when you established the account, because taxes were already paid on that money.

For example, if someone owns a $100,000 Roth that consists of $75,000 in contributions and $25,000 in earnings, the investor can pull out that $75,000 with no penalties.

Because withdrawn Roth contributions can be used for anything, it is one of the most flexible retirement accounts

There are also three qualified reasons why someone who has owned their Roth IRA for five years, but is under the age of 59½, can take distributions on both contributions and earnings without triggering penalties or paying taxes:

Buying, building, or rebuilding a first home, with a $10,000 lifetime maximum withdrawal.

The account owner becomes permanently disabled.

A beneficiary or the person's estate makes a withdrawal after the account owner's death.

The ABCD of Medicare Costs - Summary of Total Costs

4/7/2021

See Medigap description here.

Here is an average cost example using the unbundled approach. This example shows Medicare coverage for a married couple with Modified Adjusted Gross Income (MAGI) of less than $174,000 per year.

The ABCD of Medicare Costs - Medigap

4/6/2021

See Medicare Part C here.

See summary of all the Medicare costs here.

The ABCD of Medicare Costs - Part C

4/5/2021

See Medicare Part D here.

PART C: MEDICARE ADVANTAGE
Combines parts of Medicare A, B, and D

It’s a Medicare health plan offered through private insurers that contract with Medicare to provide you with all of your Parts A and B benefits
Available in three formats: managed care plans (HMOs and PPOs), private fee-for-service plans, or medical savings accounts
Private insurers may be able to offer lower premiums than Original Medicare, but can limit you to in-network providers

See Medigap description here.

The ABCD of Medicare Costs - Part D

4/4/2021

See Medicare Part B summary here.

See Medicare Part C - a combination of Part A, B, and D here.

The ABCD of Medicare Costs - Part B

4/3/2021

See Medicare Part A here.

See Medicare Part D here.

The ABCD of Medicare Costs - Part A

4/2/2021

See Medicare Part B here.

5 Retirement Risks and Considerations

3/31/2021

6 Phases of Retirement

3/29/2021

The classic view of retirement is that it is the third and “final” phase of life - after we go through the first phase of youth and learning (from birth to adulthood), and the second phase of our ‘productive’ working years (from adulthood until we can no longer work anymore), allowing us to reach a final stage of rest, relaxation, and leisure.

However, in practice, retirement itself is really a multi-phased experience – given both the substantive nature of the transition itself from what precedes it and the sheer duration of retirement that encompasses many years and decades (throughout which our lives continue to change).

Accordingly, Andy Millard highlights a series of 6 key phases of retirement, including:

Honeymoon (when the initial retirement transition happens, and suddenly you’re free from work and have the time to take that extra-long cruise, finish that home project, or pick up an ad hoc hobby);
Rest and Relaxation (once you’ve gotten through the honeymoon activities, where you settle into the ongoing routine of retired life and the extra time it allows);
Disenchantment (when eventually it settles in that all this rest and relaxation is nice for a while, but then begins to lead to a sense of lost purpose and a gnawing wonder of “is this all?” and “what’s next?”);
Reorientation (where we try to break ourselves out of the disenchantment phase by finding a new way to become engaged and have purpose, looking for new ideas and new possibilities, from taking up a new hobby to joining a new club, getting involved in a non-profit or even starting a new business);
Retirement Routine (as the new reality becomes the new normal, with the new more-meaningful activities in retirement becoming the new retirement routine); and then, alas,
Termination (the harsh reality that all good things come to an end… and that it is important to plan for it, even if only so we can better enjoy retirement as long as we can?).

Comparison of Retirement Income Sources

3/28/2021

Family Bank Trust 101 - Part C

3/27/2021

In last blogpost, we discussed why including life insurance in family bank trust. Now we will introduce a case study.

Example

Rosemary Mills, age 71, is a retired professional with two children and two grandchildren.
Her children are polar opposites. One child is an advertising executive who is married with two children. The other has never been married and has a history of trouble with the law and some substance abuse.
Her current estate value exceeds $10 million, so she will probably have an estate tax liability.

Goals and Objectives:

Rosemary is considering transferring a large portion of her estate directly to her grandchildren and would therefore like to leverage her GSTT exemption.
She places a strong value on education and wants future generations to incorporate this value in their own lifestyles; therefore, she would like to provide incentives in her trust document that would encourage all of her descendants to obtain a college degree.
Because of her son’s history, Rosemary is nervous about leaving him a lump sum inheritance. Additionally, she would like to encourage him to settle down and get a steady job. Consequently, she decides to include an incentive provision in the trust which requires the trustee to match her son’s salary—hoping this will provide him the incentive to get his life in order.

Family Bank Trust 101 - Part B

3/26/2021

In last blogpost, we discussed what is a family bank trust and why one needs it.

Why Include Life Insurance in Planning with a Family Bank Trust?

There are 2 major benefits:

1. Instant Liquidity
With a life insurance policy, one can rest assured that instant cash will be available to their loved ones upon their passing.

2. Tax-Efficient
Life insurance proceeds owned by a Family Bank Trust will ultimately pass income tax-free to beneficiaries. In addition, the money that one gifts to the trust to pay premiums may be sheltered from gift tax and will reduce one's estate for estate tax purposes. Furthermore, life insurance policy cash values grow on a tax-deferred basis and the death benefit of a Family Bank Trust-owned policy will be sheltered from estate tax.

What are the Profiles of One Who Needs a Family Bank Trust?

Anyone - not just an “ultra-wealthy” individual - who would like to create a family legacy to benefit successive generations over a long period of time
People who plan to leave substantial assets to grandchildren and therefore want to utilize GSTT exemptions as effectively as possible
Those who would like to promote specific goals and values in future generations

In next blogpost, we will introduce a case study - how a family bank trust works for someone.

Family Bank Trust 101 - Part A

3/25/2021

What is a Family Bank Trust?

A Family Bank Trust is a form of irrevocable life insurance trust; also known as a Generation Skipping Transfer Trust or Legacy Trust. The trust allows its creator to minimize transfer taxes and maximize the legacy left behind to children, grandchildren and future generations.

The Generation Skipping Transfer Tax (GSTT) applies to both outright gifts and transfers in trust to either related persons who are more than one generation below the donor or to an unrelated individual who is more than 37½ years younger than the donor. Now that the estate, gift and GSTT exemption amounts are unified at $5.43 million for 2015, with proper planning significant amounts of wealth can be transferred without transfer taxes being imposed.

Why a Family Bank Trust?

A Family Bank Trust can help accomplish multiple goals:

Passes wealth from generation to generation without the burden of transfer taxes.
Minimizes a beneficiary’s potential to mishandle an inheritance and keeps trust assets out of the reach of a beneficiary’s creditors or divorcing spouse.
Promotes positive behavior in beneficiaries by requiring that they adhere to specific standards in order to be entitled to trust distributions, such as graduating from college, maintaining a career, and getting married.

In next blogpost, we will discuss how life insurance play a role in a family bank trust.

Who May Benefit the Most by Using Life Insurance for Legacy Building

3/24/2021

People who can most benefit from legacy building are those usually within retirement age that have dormant assets. These are typically assets they plan on leaving for heirs, a church, charity, or possibly to help pay educational costs for grandchildren.

These assets are often held in low interest-earning accounts or vehicles, which may not be an efficient method of wealth transfer for the purpose of legacy building. These “legacy assets” may be leveraged into a greater benefit and a more efficient method of wealth transfer using life insurance. Let’s take a look at a typical profile:

Is within the retirement ages of 55-75 and has a retirement plan in place
Needs death benefit protection or may have an underperforming life insurance policy that needs to be reviewed
Holds funds designated to leave to heirs or children savings vehicles such as savings accounts, or money market accounts, especially accounts designated as “payable/transfer on death” or POD/TOD
Has titled assets jointly with heirs
Has annuities coming out of surrender
Currently takes required minimum distributions (RMDs), but doesn’t have a current need for the funds

Usually, there are two types of people - those fully committed to the strategy and those who are committed now but may want to change their strategy down the road.

For the fully committed: Find a life insurance product that can provide maximum death benefit that meets their needs. Consider a guaranteed death benefit product.
For those committed now, but who may want to change: Find a life insurance product that offers the opportunity to build cash value. The cash value may provide the client with alternative options, like using the potential cash value to help supplement retirement income.

Estate Planning With Life Insurance

3/23/2021

Why life insurance?

First, having a will in place is crucial. A will allows one to control how and to whom assets are distributed, and it can be used to suggest a guardian for the care of children or other dependents. Without a will in place, state inheritance laws could determine how one's property is distributed, and even who should care for your children. Having a will helps to ensure your wishes are met.

However, even with a will, assets may not always transfer immediately to beneficiaries. There are many circumstances that can impede the process - the most common being probate court. Debt, funeral expenses, and the care of dependents could all be hanging in the balance during a potentially lengthy court process. At the time of death life insurance can provide generally tax-free access to the death benefit proceeds - helping to give beneficiaries the financial support they may need during a difficult time.

Life insurance may help create a solid estate plan that allows one to not only preserve what they have now, but also build their estate throughout their lifetime. Good estate planning works to help protect assets while also considering other factors, like outpacing inflation and growing the estate value.

How does it work?

Estate planning is a complex process and should be done in collaboration with other professionals you may work with (e.g. attorneys, accountants, trust officers, etc.). An in-depth analysis of personal and professional assets can help determine what will best benefit the estate. Plans for the allocation of different types of property can be constructed, as well as a life insurance policy to provide a liquid asset in the form of the death benefit proceeds.

A popular method is to use a joint survivorship life insurance policy. This type of insurance policy can insure two lives under one policy for a low cost and provides death benefit proceeds when both insureds have died, providing financial support to those who need it. The beneficiaries are typically children, a charity , an organization or a trust. The death benefit can also be used to help pay taxes on sizeable estates upon death.

How to Optimize Retirement Planning - Part C

3/22/2021

In last blogpost, we divided the retirement life into 3 phases, now we will introduce a blend and customize strategy for asset distribution in retirement time.

The blended approach of strategies, customized to suit each person's situation, when combined with insurance strategies, provides a better outcome. It is essential to:

Determine essential vs. discretionary expenses and legacy objectives.
Fill gaps between Social Security (plus any other pension income) and essential expenses, preferably using an annuity to eliminate the longevity risk for needed guaranteed income.
Ensure adequate life insurance and LTC insurance for the no-go phase. Premiums for these are a part of essential expenses.
Divide remaining assets to be used for discretionary spending using the bucket plan — “now” (the next 1-2 years), “soon” (3-5 years), and “later” (years 5-plus) and invest in capital preservation, fixed income and growth equity strategies respectively.
20/30/50 asset allocations seems to offer an ideal balance.
Optimize allocations and distributions by using a tax-diversified approach of taxable, tax-deferred, and tax-free assets.

The portfolio created for a retiree factoring in the above methods should be designed to generate about 6% income for the go-go phase and provide about 4% income for the slow-go stage.

How to Optimize Retirement Planning - Part B

3/21/2021

In last blogpost, we showed 5 typical distribution strategies.

None of the distribution approaches provides optimized outcomes for the majority of retirees. Instead, an enhanced strategy that recognizes the three phases of retirement should be adopted:

1.The go-go phase:
Early years in retirement are when people are very active. It includes much travel and acquisition — buying a new toy such as a boat, etc.

2.The slow-go phase:
Typically, in the middle years, people are settled and mellow out.

3. The no-go phase:
In this phase, the retirees could require much caregiver help, long-term nursing home care, and includes the final act of passing away.

For different reasons, phases one and three are each more expensive than phase two. Therefore, using the 4%, fixed-percentage, fixed-dollar amount, systematic withdrawal, or bucket plan methods mentioned before do not work as they do not alleviate all the risks optimally.

Based on the above design of retirement phases, a blend and customize strategy will work the best, as explained in the next blogpost.

How to Optimize Retirement Planning - Part A

3/20/2021

The distribution strategies retirees use typically falls into one of the following five approaches:

4% rule:
Withdraw 4% of your account balance initially and adjust that dollar amount for inflation annually. (Given low-interest rates these days, it is questionable if this rate is even sustainable.)

Fixed percentage:
Withdraw the same rate annually based on prior year-end values.

Fixed-dollar amount:
Withdraw a set dollar amount every month or year.

Systematic withdrawals:
Withdraw only interest and dividend income leaving principal intact.

Bucket plan:
Hold some assets in cash equivalents, some in fixed-income, and some in equities filling the cash bucket when low from the fixed-income bucket or the equities bucket, depending on which is appropriate.

These methods are vulnerable to factors including market volatility, low-interest rates, inadequate savings and investments in place. Then there’s the possibility of retiring too early, living too long, risk-tolerance mismatch, inflation risks, unknown tax consequences and out-of-pocket health care costs.

So, how to develop an optimized distribution strategy in retirement?

Focus on the amount of income needed in golden years is the way to go. See next blogpost for more details.

How to Maximize Social Security Benefits?

3/18/2021

Only about 4% of retirees make the optimal Social Security claiming decision. This results in a loss of wealth of roughly $2.1 trillion for current retirees that made a suboptimal claiming decision.

The above is quoted from an article at ThinkAdvisors.com, it thoroughly discusses how to evaluate the social security claiming decision.

Below is an example in the article that clearly explains how to approach such an evaluation:

=======================
By delaying claiming from age 69 to age 70, the healthy client may forego $30,000 in income for one year in order to receive an additional $2,400 in annual income for life starting at age 70. What is the value of this income?

Simply multiply the survival probability by the present value of the payment. The value of a monthly payment during the 75th year of age for a man is about $2,250. It’s about $1,500 for his 85th year and $470 for his 95th year. In total, the present value is $44,700, or nearly 50% higher than the income he gave up.

For a woman, the present value is $48,500, or 62% higher. Put another way, the healthy female client can gain $18,500 in expected retirement wealth by simply waiting a year to claim.
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12 States That Won't Tax Your Retirement Distributions

3/17/2021

Some states with low or no income taxes have higher property or sales taxes. For example, while Illinois does not tax retirement income, it has one of the highest sales and property taxes in the U.S.

Other low-tax states may have fewer programs that you might find helpful, such as senior centers and public transportation.

How to Avoid Paying Early Withdraw Penalty If You Are under 59.5?

3/16/2021

By using substantially equal periodic payments from a retirement account–more formally known as a rule 72(t) distribution–savers under 59½ can avoid paying the 10% penalty on early withdrawals. These can be taken from traditional or Roth IRAs.

With this type of distribution, account holders must take at least five substantially equal periodic payments, and these distributions must occur for either five years, or until the owner reaches 59½, whichever is longer. That means someone who starts a 72(t) distribution at age 52 must take withdrawals for seven years, while someone who is 57 would have to make withdrawals until age 62.

Rule 72(t) distributions are viable options for people who need access to their money, but they are complex calculations with rigid distribution rules.

There are three ways the Internal Revenue Service allows individuals to calculate these distributions.

The first is the required minimum distribution method, which takes a person's balance, current interest rates and divides it by his or her life expectancy. Each year it is recalculated based on life expectancy and current balance.

The other two methods are a fixed amortization method, which annually distributes by amortizing the account balance over life expectancy, and a more-complex fixed annuitization method, which uses a person's account balance, age and life expectancy and an annuity factor.

Distributions are bound by the prevailing interest rate, so a lower rate means lower payments.

For example, if the IRA is $1 million and the retiree needs $750,000, rather than drawing down the total amount, she recommends opening a second account to represent the 72(t) distribution, in this case $750,000, and leave the $250,000 in the original IRA. Although the retiree will avoid a penalty, he or she will still need to pay taxes on the distribution amount.

Once rule 72(t) distributions are put in motion, they can't be undone.

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