Tax-deferred Investment vs. a Taxable Investment

Presented by Matt Nutzman How much would you have to earn each year from a taxable investment in order to equal earnings on a tax-deferred investment? Annual Tax-Deferred Yield Federal Income Tax Bracket: 10%          15%           25%          28%          33%          35% Annual Taxable Equivalent Yield 3%          3.33%       3.53%       4.00%       4.17%       4.48%       4.62% 3.5%       3.89%       4.12%       4.67%       4.86%       5.22%       5.38% 4%          44%          4.71%       5.33%       5.56%       5.97%       6.15% 4.5%       5.00%       5.29%       6.00%       6.25%       6.72%       6.92% 5%          5.56%       5.88%       6.67%       6.94%       7.46%       7.69% 5.5%       6.11%       6.47%       7.33%       7.64%       8.21%       8.46% 6%          6.67%       7.06%       8.00%       8.33%       8.96%       9.23% 6.5%       7.22%       7.65%       8.67%       9.03%       9.70%      10.00% 7%          7.78%       8.24%       9.33%       9.72%     10.45%      10.77% 7.5%       8.33%       8.82%     10.00%     10.42%     11.19%      11.54% 8%          8.89%       9.41%     10.67%     11.11%     11.94%      12.31% 8.5%       9.44%     10.00%     11.33%     11.81%      12.69%      13.08% 9% 10.00% 10.59% 12.00% 12.50% 13.43% 13.85% 9.5% 10.56% 11.18% 12.67% 13.19% 14.18% 14.62% 10% 11.11% 11.76% 13.33% 13.89% 14.93% 15.38% This chart illustrates the potential benefits of a tax-deferred investment vs. a taxable investment. For example, if an investor in the 25% federal income tax bracket purchases a tax-deferred investment with a 5% annual yield, that investor’s taxable equivalent yield is 6.67%. This means the investor would need to earn at least 6.67% on a taxable investment in order to match the 5% tax-deferred annual yield. This chart is for illustrative purposes only and is not indicative of any particular investment or performance. In addition, it does not reflect any federal income tax that may be due when an investor receives distributions from a tax-deferred investment. Please contact my office if you’d like more information on taxable vs. tax-deferred investments.

Leave on or Live on

Presented by David Corwin Clients at older ages need to start deciding on what sums of money will be “Leave on” or the money that they will “Live on”.  Let’s look at choices that clients have to contend with. Leave on.  Let’s talk about Mutual Funds, CDs, stocks and other non-real estate type investments.  These types of investments (if not held in an IRA form) will generally be extremely difficult to leave on to your loved ones.  The reason is that there are no beneficiary arrangements on these types of accounts, thus the ugly word “probate” comes into play here.  Still within the “Leave on” subject, annuities are beneficial in that there are beneficiary arrangements that allow the money to pass to your loved ones very easily (unless of course you don’t think that three weeks is easy), and they avoid the probate. Live on.  In the same order, I will cover Mutual Funds, CDs and stock investments.  When you want to start living on Mutual Funds and stocks, it becomes problematic due to the possible long or short term capital gains you will face.  Now, I will say that to get access to stocks and Mutual Funds is pretty easy due to the fact that you can just sell them to get the necessary money to live on.  How long the income will last depends upon market fluctuations.  Same thing with CDs, the access isn’t the problem here (unless you don’t mind waiting in long lines at the bank).  You will undoubtedly out live your money; it’s a fact.  Annuities, if structured properly, are the best bet for “living on”.  You can annuitize, take withdrawals, or exercise the income rider. What we have covered here is really just the tip of the iceberg and each individual has their own needs and objectives.  There are certain benefits that may or may not out weigh the features of another and should be explored in depth.

Qualified Retirement Plan Tax Advantages

Presented by Jim Guynan In order to encourage saving for retirement, qualified retirement plans offer a variety of tax advantages to businesses and their employees.

The most significant tax breaks offered by all qualified retirement plans are:

  • Contributions by an employer to a qualified retirement plan are immediately tax deductible as a business expense, up to specified maximum amounts.
  • Employer contributions are not taxed to the employee until actually distributed.
  • Investment earnings and gains on qualified retirement plan contributions grow on a tax-deferred basis, meaning that they are not taxed until distributed from the plan.

Depending on the type of qualified retirement plan used, other tax incentives may also be available:

  • Certain types of qualified retirement plans allow employees to defer a portion of their compensation, which the employer then contributes to the qualified retirement plan. Unless the Roth 401(k) option is selected, these elective employee deferrals are not included in the employee’s taxable income, meaning that they are made with before-tax dollars.
  • Qualified retirement plan distributions may qualify for special tax treatment.
  • Depending on the type of qualified retirement plan, employees age 50 and over may be able to make additional “catch-up” contributions.
  • Low- and moderate-income employees who make contributions to certain qualified retirement plans may be eligible for a tax credit.
  • Small employers may be able to claim a tax credit for part of the costs in establishing certain types of qualified retirement plans.

Calculating RMD’s

Brought to you by Matt Nutzman The objective of the required minimum distribution rule is to ensure that the entire value of a traditional IRA or employer-sponsored qualified retirement plan account will be distributed over the IRA owner’s/retired employee’s life expectancy. IRS regulations include a “Uniform Lifetime Table” that is generally used to calculate the required minimum distributions that must be made from qualified plans, including 401(k) plans, Section 403(b) annuities and regular IRAs. To calculate your annual required minimum distribution, follow these simple steps: Example:
Step 1: Account balance as of the previous December 31:

$______ $200,000
Step 2: Distribution period factor based on your age as of December 31 in the year for which the distribution is being calculated:

25.6
Step 3: Divide Step 1 by Step 2; the result is your annual required minimum distribution for the year:

$______ $7,812.50
Uniform Lifetime Table:

Age

Distribution Period Factor

Age

Distribution Period Factor

Age

Distribution Period Factor

70

27.4

86

14.1

102

5.5

71

26.5

87

13.4

103

5.2

72

25.6

88

12.7

104

4.9

73

24.7

89

12.0

105

4.5

74

23.8

90

11.4

106

4.2

75

22.9

91

10.8

107

3.9

76

22.0

92

10.2

108

3.7

77

21.2

93

9.6

109

3.4

78

20.3

94

9.1

110

3.1

79

19.5

95

8.6

111

2.9

80

18.7

96

8.1

112

2.6

81

17.9

97

7.6

113

2.4

82

17.1

98

71

114

2.1

83

16.3

99

6.7

115

1.9

84

15.5

100

6.3

 and later

85

14.8

101

5.9
EXCEPTION: If your beneficiary is your spouse who is more than 10 years younger than you, instead of this table you can use the actual joint life expectancy of you and your spouse from the IRS Joint and Last Survivor Table to calculate required minimum distributions. NOTE: The above discussion does not apply to non-deductible Roth IRAs, which are not subject to minimum distribution requirements.

Please contact my office if you would like additional information on required minimum distributions.

Components to an Indexed Annuity

Brought to you by David Corwin Indexed Annuity Contract Features will have an effect on Annuity Performance?  Before purchasing an indexed annuity, it is important to understand various contract features and their potential impact on annuity performance. The Index  Indexed annuities credit interest based on the movement of the stock market index to which the annuity is linked. A market index tracks the performance of a group of stocks representing a specific market segment or the entire stock market. The S&P 500 is the index most commonly used for this purpose. Another index, however, may be used, such as the Dow Jones Industrial Average, NASDAQ 100 or Russell 2000. It is important to understand that when you buy an indexed annuity, you are purchasing an insurance contract and not shares of any stock or index. Indexing Method  An indexed annuity earns a minimum rate of interest and then offers the potential for excess interest earnings based on the performance of the index to which the annuity is linked. The indexing method is the approach used to measure the amount of change in the index and, as a result, has a direct impact on the potential growth of an indexed annuity. Participation Rate  The participation rate determines how much of the increase in the index will be credited to the indexed annuity. The participation rate is usually less than 100%. For example, if the S&P 500 increases by 10% and the participation rate is 80%, the indexed annuity would be credited with 8%. The insurance company may have the right to change the participation rate from year to year or when the annuity is renewed for a new term. Margin/Spread/Administrative Fee  Some indexed annuities subtract a specific percentage from the calculated change in the index before crediting interest to the contract. This “margin,” “spread” or “administrative fee” which may be charged instead of, or in addition to, a participation rate, is subtracted only if the change in the index produces a positive interest rate. Index Term  This is the period over which index-linked interest is calculated and/or the length of time during which withdrawals or surrenders are subject to a charge. Cap Rate  Some indexed annuities put a cap or maximum on the index-linked interest that will be credited to the annuity. For example, if the market index increases 20% and the annuity has a 15% cap rate, only 15% will be credited to the annuity. Not all annuities have a cap rate. Floor  This is the minimum guaranteed interest that will be credited to the annuity. This guarantee is based on the claims-paying ability of the issuing insurance company. Averaging  Some indexed annuities use an average of the changes in the index’s value rather than the actual value of the index on a specified date. Interest Compounding  Some indexed annuities pay simple interest during the index term, while others pay compound interest, meaning that index-linked interest that has already been credited to the contract during the term also earns interest in the future. Exclusion of Dividends  In measuring index gains, most indexed annuities count only equity index gains from market price changes and exclude any gains from dividends. Vesting  In some indexed annuities, none or only part of the index-linked interest is credited to the contract if the annuity is surrendered before the end of the term. The combination of these policy features found in any particular indexed annuity will make a difference in the amount of money your annuity investment will earn and in the amount of money you will receive if you surrender the annuity early. As a result, before you purchase an indexed annuity, it is important that you fully understand the various features in the contract you are considering.