Archive for Retirement Planning

How To Use Life Insurance In Your Retirement Planning – Article Recommended by Paul Ferraresi

Investing in the market without taking losses — is it too good to be true? Not according to the University of Michigan’s head coach Jim Harbaugh. In August, University of Michigan helped Harbaugh become the top-paid college football coach in the nation, according to USA Today figures, by creating a deferred compensation package utilizing cash value life insurance called Indexed Universal Life Insurance (IUL).
Just like in Harbaugh’s case, IULs appeal to many executives and business owners because of the advantages they provide. IULs allow cash value within the policy to grow tax-free over time. IULs are funded with post-tax dollars which allow clients to withdraw money tax-free at any age, and provide financial security in the form of a death benefit for the family after the client passes.
One of the main advantages of IULs is that the cash value is protected from drops in the market. An IUL is a cash value policy that has both a death benefit and a savings portion. In an IUL the investments are not placed directly in the market where they would be subject to a loss. Rather, they are put into a strategy that mirrors an index such as the S&P 500, which allows the participant to realize all or most of the gains in the market. These gains are then locked in to protect against potential losses.
In addition, when compared to an IRA or a 401(k), IULs provide more flexibility. Unlike IRAs and 401(k)s, there is no limit on how much money can be added annually, as long as the added cash does not create a Modified Endowment Contract (MEC), which is taxable. An MEC is where the funding has exceeded the IRS limitations known as the “7-pay test,” which limits the amount of excess cash that can be put into a policy in any seven-year period before it loses its tax advantages. IULs allow for a high cash value at the beginning of the policy. There are no restrictions on when the money can be taken out, unlike an IRA. Also, the money inside an IUL can be taken out at any age by the client tax-free and without extra fees.

An IUL is beneficial to those who are looking to invest their extra money tax deferred after they have fully utilized their other retirement accounts, such as a 401(k). IULs are also beneficial to those who clients who do not qualify for a Roth IRA. IULs provide an opportunity for individuals to allocate premiums to flexible and accessible tax-deferred accounts. For younger clients, savings can be rolled over from a previous retirement plan. IULs can also help people who started retirement planning later, due to the fact that an IUL can be over-funded, unlike a 401(k) or IRA, which have strict contribution limits.
Along with tax-free wealth building, IULs provide a source of financial security to the family in the event of death or disability. In an event of the death of the policyholder, the death benefit is received tax-free by the beneficiary of the policy in a lump sum. Some policies can be constructed to include living benefits in the event of disability or chronic illness. In this way, IULs provide a way in which individuals can grow and protect their income, as well as provide extra funds for retirement.
In the case of coach Harbaugh, an IUL was used to save millions in tax-free retirement. This was possible due to the growth of the cash value inside of the policy that increased his retirement funds, which are accessible tax-free at the age of 70. Upon being hired at Michigan, Harbaugh entered a split-dollar loan agreement, in which the premium, cash value and death benefit is split between two parties. This split-dollar agreement was funded by cash value life insurance policy or IUL.

Under this split-dollar agreement, the University of Michigan agreed to pay seven $2 million loan advances into a life insurance policy. By implementing this policy, Harbaugh does not have to pay back the loan taken on the policy until his death, and his beneficiaries will receive the remainder of the death benefit. While he is alive, Harbaugh is able to borrow money out of the policy tax-free. Through this plan, it is projected that Harbaugh could begin taking $1.4 million per year out of the policy tax-free, beginning at the age of 66.
IULs are a popular choice amongst clients who would like the gains of the markets without the losses, as well as protection for their family after death. This makes IULs a comprehensive and flexible wealth building option.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms.

Jacob Alphin, Author, (May 11, 2017). How to Use Life Insurance in Your Retirement Planning. Forbes. Retrieved from https://www.forbes.com/sites/forbesfinancecouncil/2017/05/11/how-to-use-life-insurance-in-your-retirement-planning/2/#16adc1593b1b

Roth IRA/401(k)?

Income tax rates, established under the 16th amendment in 1913, move like a pendulum in a clock. The movement is extreme at each end from ultra high top rates (94% in 1945) to low top rates (24% in 1929). Over all the years the average top rate has been 58% (this does not include state, city or local taxes). At the end of 2016 the top rate is 39.6% plus the 3.8% Obamacare surcharge for a grand total of 43.4% at the federal level. The new Trump administration is proposing 3 rates of 12% – 25% and a top rate of 33%. Think long term in your life. If these lower rates do take place then over time a “regression to the mean” states that rates have to rise in the future (during your retirement years).

One of our goals, at Founders Group, is for each client to have 80% – 100% of their retirement income to be TAX FREE for life. It takes time and planning. It cannot be done at the last minute.

My question to you ……… wouldn’t it make sense to sock money away in tax free investments when rates are low, today, and then harvest the money when tax rates are higher in your retirement years??? There are a few fantastic vehicles to accumulate money for tax free retirement income. For the “do-it-yourself” crowd there are Roth IRAs or Roth 401(k) plans. The problem with both is there are so many strings attached (how much you can contribute, when you can take monies out, etc). Here is some information on Roth’s:

You can take money out of your Roth IRA anytime you want. However, you need to be careful how much you withdraw or you may get stuck with a penalty. In order to make “qualified distributions” in retirement, you must be at least 59 ½ years old, and at least five years must have passed since you first began contributing.

You may withdraw your contributions to a Roth IRA penalty-free at any time for any reason, but you’ll be penalized for withdrawing any investment earnings before age 59 1/2, unless it’s for a qualifying reason. Money that was converted into a Roth IRA cannot be taken out penalty-free until at least five years after conversion.

Not sure whether the money will be counted as contributions or earnings? Well, the IRS view withdrawals from a Roth IRA in the following order: your contributions, money converted from traditional IRAs and finally, investment earnings. For example, let’s say your IRA has $100,000 in it, $50,000 of which are contributions and $50,000 of which are investment earnings. If you withdraw $60,000, the IRS will consider $50,000 of that to be contributions and $10,000 to be earnings. So any penalty would apply only to the $10,000.

There are more sophisticated vehicles that magnify a Roth program and make Roth’s look like child’s play. These programs have been around since 1913 and require education and guidance by a professional adviser.

MASTERING ROLLOVER DECISIONS

Unfortunately, there is no one-size-fits all template that can be used to determine which option is best for a person. Each persons retirement plan must be evaluated individually, based on its own merit and the persons specific situation.

There are numerous variables to consider. These include fees, available investments, services provided, the 10% early distribution penalty, creditor protection, convenience, required minimum distributions and estate planning.

The ability to roll over is not limited to participants in the company plan.

A spouse who is a beneficiary can roll over inherited company plan funds to his or her own traditional or Roth IRA. Non spouse beneficiaries can directly roll over inherited plan assets to an inherited IRA (or directly convert the inherited plan to an inherited Roth IRA).

Probably the strongest argument for an IRA rollover is the ability of a beneficiary to stretch the money for years, keeping it growing in either a tax-deferred traditional IRA or tax-free in a Roth IRA. A non spouse beneficiary can stretch distributions on an inherited IRA over his or her life expectancy.

But many company plans do not allow the stretch option.

Another advantage to a rollover is that IRAs are more flexible than company plans in terms of estate planning and investment choices. IRAs offer the option of splitting accounts and naming several primary and contingent beneficiaries. Individuals can name anyone they wish as their IRA beneficiary.

In many company plans, a participant must name his or her spouse as beneficiary unless the spouse signs a waiver.

In an IRA, individuals can customize investment choices. In addition, investment changes can be made faster in an IRA because there is usually not as much bureaucracy as in a company plan.

Another attraction of a rollover is that it is much easier to access funds in an IRA than in company plans.

Another potential appeal is that an IRA can be a convenient place for a person to consolidate all retirement funds.

IRAs can be aggregated for calculating RMDs. The employee usually has to take his RMD from each company plan separately.

STAY WITH A COMPANY PLAN

If a person is interested in delaying RMDs as long as possible, continuing with the company plan may be a good idea because of the “still-working” exception that may apply. The individual may be able to delay the required beginning date until April 1 of the year after he or she retires. This rule does not apply to IRAs.

At the other end of the time spectrum, individuals who may need their retirement funds early should also give serious consideration to sticking with the company plan. If a person is at least 55 years old when he/she leaves their job, and he/she needs to tap retirement funds, distributions from the company plan will be subject to tax but no 10% penalty. But, if the funds are rolled to an IRA, withdrawals before age 59 ½ will be subject to the 10% early withdrawal penalty. The age 55 exception does not apply to IRA distributions.

For some people, creditor protection may be a concern. Company plans have an advantage here, as they receive federal creditor protection. State laws protect IRAs, and they can vary significantly.

An IRA cannot be invested in life insurance, but life policies can be held in a company plan. For some people, the life insurance offered through their company plan may be the only such coverage a person can qualify or pay for.

If a lump-sum distribution from a company plan includes highly appreciated company stock or bonds, a person may roll it over to an IRA, but he/she may not want to. Under a special rule, the participant can withdraw the stock from the plan and pay regular income tax on it, but only on the original cost to the plan and not on what the shares are worth on the date of the distribution.

The difference is called the net unrealized appreciation (NUA). A person can elect to defer the tax on the NUA until he/she sells the stock. When he/she does sell, he/she will pay tax only at his/her current long-term capital gains rate. The ability to use the NUA tax break is lost if the stock is rolled to an IRA.

Ways to Protect Your 401k Nest Egg

The current stock market volatility has placed many people into a frozen state. They look at their 401k balance daily and wonder if their lifetime savings will be decimated like in 2009. There has not been a 20% market correction since 2009. Normally, there is a correction of this magnitude every 3 years, so we are very overdue. You could take your 401k money and move it all to cash, but, you will miss any upside in the market. Keep it in the market and you can lose 40 – 50%.
For many of our clients we have been using a special program with one of our private money managers, Howard Capital Management. It is designed specifically for 401k plans. Their trade name for the program is: “401k Optimizer”. The program can work with any 401k plan. After a short risk quiz you will be instructed as to how to spread your monies among your plan’s various funds. Then, at least on a quarterly basis (or more if market conditions warrant), you will be sent an email to change your asset mix. In some cases they may tell you to move totally into cash, or, totally into market.

You must make the email instructed changes in your 401k since Howard Capital cannot. Typically, you will have up to 48 hours to make the changes after the signal from Howard Capital in order to benefit from the service. The program was very successful in the 2000 and 2009 meltdowns. The cost for the program is $79 per year… total!! If you want to subscribe or learn more about the program go to www.HCM401koptimizer.com. Once at the home page simply click the button at the top “Individual Investor” and hit “sign up”. Choose “standard subscription” by clicking “sign up now” and complete the personal information. Should you desire to save 10% on the annual fee simply enter coupon code HCM5152 at the bottom of the information sheet.

(I do not receive any compensation from this program). If you would like additional information or to talk with me personally about this, you may call our office Founder’s Group at 713-871-5919, or email: Jamie@fgmci.com.
(This is not an offer to buy or sell any securities and is strictly for educational information).

One thought of advice…Don’t close the barn door after the horse leaves, namely, make your decision to protect your 401k now before the next correction.

Market Swoon

The volatile stock market’s action from July 2015 to present has given most people anxiety.

Over those many weeks none of our clients franticly called in because we had positioned their money into safe vehicles that never lose when the market drops. No I am not talking about parking their money in a cash account. For multiple years this Blog has extolled the virtues of Tax Free Investment vehicles that rise when the market advances but never participates in a loss.

It amazes me that since the year 2000 the average investor has not become whole (on an inflation adjusted basis). Wow! Fifteen years of a zero rate of return. As one approaches, say, age 45 you have to think seriously about locking into something that produces a safe rate of return. Volatility is not your friend. If you are 45 or 50, can you handle another 15 year period of zero return so you enter retirement with the same nest egg as today?

Even if you are 60 you need to protect your assets from a 15 year period of zero returns so they do not wither away as you approach 70-75.
Why do people keep doing the same thing over and over? Why do they keep losing 40-50% in 2000, 2008 and now again?

Ah, the definition of insanity! Doing the same thing over and over and expecting different results.