Leaving Behind a Non-Qualified Annuity
Presented by David Corwin. It is widely known that a beneficiary of qualified dollars has the ability to receive payments from the IRA based upon their age (using the Required Minimum Distribution table), which is a much more tax efficient way of receiving the money. The beneficiary has to make a withdrawal by December 31st of the year after the owner’s death, and of course, the entire withdrawal is counted as taxable income; however, if the entire lump sum isn’t required, it’s much more tax-efficient than taking it as a lump sum and by withdrawing only a portion, the rest of the asset can still grow. What isn’t as well-known is that non-qualified stretch contracts need to be part of the discussion with the beneficiary when the owner leaves a non-qualified annuity behind. Let me give an example: your client started his contract with $100,000 as basis and 25 years later his contract is now worth $250,000 when he passes away. Without your help, in most of these situations, what will happen is the beneficiary will take a lump sum and not know what is waiting for them; the dreaded 1099 form. The $150,000 gain will be added to their income, and where they may have found themselves in the 28% tax bracket in prior years, they may now be in the 33% bracket and pay $49,500 in taxes. Sound fun? The way to solve that problem would be to structure a non-qualified stretch contract. The $250k will go into the contract and the client will be forced by the IRS to make a withdrawal by end of the next year. If we assume the client/beneficiary is a 40 year-old, then according to the RMD tables his/her factor would be 43.6. The withdrawal required would be $5,733 ($250,000 / 43.6). Since we are still dealing with a nonqualified contract and withdrawals are treated last in first out, he would report the whole $5,733, thus keeping him in the 28% tax bracket AND allowing the remainder of the money to continue to grow. Problem solved.
4 Risk Rules
Presented by Deb Strong Risk 1 – Inflation What is the #1 increase in expenses for a retiree? Most people will say it is Health Care, which isn’t actually accurate. The #1 increase in expenses in retirement is daily living. Every day is a Saturday. What is inflation directly tied to? The increase in the costs of good and services over time…daily living. Not to mention, do you expect inflation to go up or down? Similar to taxes, everyone expects inflation to go up over time. So having at least a portion of the client’s money allocated to a policy that can help them combat inflation is just smart planning for your client. Risk 2 – Market Volatility In the last 14 years the market has corrected by 50% twice! Over that 14 year period investors would have averaged a 2% annualized yield in the market. We are at the top of a 6 year bull market, when the average bull market only lasts 4. If client’s are heavily allocated to the market they may not have time to recover from another major correction. Hence, the reason I like the rule of 100. Take the client’s age from 100 and that is the percentage of their assets that should be at risk (example 100-70=30). This means my 70 year old client should not have more than 30% of their retirement assets at risk. Not to mention, from the Future of Retirement Income Study, 60% of annuity owners and 61% of annuity considerers would be willing to pay ADDITIONAL fees to keep from losing any money in a bad year, while gaining SOME of the market in good years. People are willing to pay for what an index annuity does contractually! Risk 3 – Interest Rate Risk Many clients use bond funds in their retirement income plan. However, most of them do not understand the inverse relationship of bond fund rates to interest rates. In 2013, 88% of bond fund rates lost money. The other interest rate risk is for the $11.3 Trillion dollars on the sidelines earning less than 1% interest, not even keeping up in a low inflation market. Risk 4 – Longevity Longevity is the multiplier of all Risks. One out of 4 people 65 years old today will live past 90. One out of 10 will live past 95. People are in retirement as long as they are in their professional careers. You have to make sure that they have an income they can’t outlive. Unfortunately, many advisors are still using the outdated method of the 4% rule. Which says that if you have a 50/50 stock bond portfolio you can pull out 4% annually and it would be guaranteed to last 30 years. We have a White Paper and tools called Rethinking Retirement Income, which is a study done that shows if you use that, you have less than a 50% chance of success. The real number is more like 2.8%. What I find as more of the real problem versus the percentages is what happens when you outlive the 30 years?
Up to 50% Penalty-Free Withdrawal
Presented by Deb Strong We all have clients that have concerns about being able to access their money in case of emergencies. In fact, 52% of clients are not comfortable unless they know they have access to some of their money – penalty-free. I call this the sleep well at night feature.
Beneficiaries on IRAs
Beneficiaries on IRA’s I read an article covering basic mistakes that agents make that can be very costly errors within the realm of IRA’s. Here are some things that can happen when you don’t spend enough time stressing the importance of good beneficiary planning.- Intended beneficiaries may and in most cases get disinherited or the estate will name alternative beneficiaries than what was intended.
- Expensive lawsuits and litigation when more than one beneficiary involved, but there is no designation as to who gets what.
- No stretch Ira for the beneficiaries, meaning less favorable after death rules on distribution will apply depending on when the IRA owner died.
- 5 year rule will apply to inherited Roth IRAs. Since the Roth IRA has no lifetime RMD (required minimum distribution), a Roth IRA owner is always deemed to have died before his required beginning date because there is no required beginning date.
- No post-death rollovers from company plans to non-spouse beneficiaries. That only applies when there is a designated beneficiary.
- Voids IRA trust planning. The trust will fail as a see-through trust.
- Post death disclaimers may not work out according to plan
- Can negate divorce agreements. The ex-spouse may end up being the beneficiary.
- Can be subject to probate and contests. This will result in an unintended beneficiary.
- Can trigger default provisions that man direct eh IRA to an unintended beneficiary.