For those of you who’ve been in the business quite some time, the date Aug. 13, 1982, is hardwired into your memory. For those of you who haven’t, it was the day the taxation of nonqualified (NQ) deferred annuities changed from FIFO (first in, first out) to LIFO (last in, first out).
The planning point of a pre-'82 NQ annuity was that you could recover your basis first before any taxable event occurred. For post-'82 annuities, it’s interest out first, until you get to basis, then it’s return of basis.
Believe it or not, this strategy still exists with NQ monies, with a few caveats. In a world where income planning and taxation is paramount, this strategy may be huge for an income planning case.
Here is how this concept works. Say a client, age 55 with a spouse also age 55, has $100,000 of NQ money to invest. They plan on retiring at age 65, so they have 10 years until income is needed from this deposit. They would place this in a fixed, deferred annuity with an indexed minimum guaranteed withdrawal benefit. The annuity isn’t designed for accumulation, only income. Therefore, in the 10th year, should they decide to walk away, the value would still only be $100,000.
But therein is the positive of this concept. In year 11, the guaranteed income for life is $7,988 over two lives. This is about the equivalent of a 6 percent compounded rollup with a 4.5 percent payout rate. Here’s the home run: Since it’s a deferred annuity with a guaranteed minimum withdrawal benefit, the withdrawals are FIFO since there’s no additional cash value in the contract. Therefore, the first 10 years of income are return-of-premium and tax-free.
Once the principal is recovered, it’s all taxable. But think of the planning possibilities here! If you could have your first 5-10 years of retirement income-tax-free, think of the possibility of converting some of your qualified monies to Roth IRA, as well as the possibility of delaying Social Security to age 70 to maximize benefits.
Throw in the fact you can now move up to 25 percent of your IRA money to a Qualified Longevity Annuity Contract and avoid required minimum distributions to age 85, and now you have some pretty creative income planning scenarios to work with – not just putting monies into an annuity with an income rider and turning it on at 65!
The Bottom Line: A lot changed in 1982, and a lot has changed since then. Talk to your clients about strategies to maximize their income and minimize their taxes in retirement.
Be aware: An IRS clarification that took effect Jan. 1, 2015, now restricts IRA rollovers. Your clients can make only one rollover from any of their IRAs to another (or the same) IRA in a 12-month period, regardless of the type or number of IRAs they own. This one-per-year limit applies across all IRAs in the aggregate including traditional, Roth, SIMPLE and SEP IRAs.
Before Jan. 1, the one-per-year limit applied on an IRA-by-IRA basis. This change in the IRS’s interpretation of the one-per-year rule comes from the U.S. Tax Court’s decision in Bobrow v. Commissioner.
If your clients make more than one rollover in a 12-month period, the improper rollovers may be subject to the following tax consequences:
Your clients can still continue to do as many of the following transactions in a 12 month-period as they want:
The Bottom Line: Make sure you understand the new IRS rules before you make any client recommendations this year. Your Ash Brokerage annuity team is here to help.
We all know annuities are a great solution for retirement. But have you ever considered annuities as a retirement solution for businesses? If you’re working with business owners and executive-level clients, ask if their company has a defined benefit pension plan.
Why? Traditional pension plans have become a thing of past as 401(k) and other contributory plans have overtaken the retirement landscape. As a result, many businesses have decided to do two things:
Here’s how it works: Businesses with a defined benefit pension plan can remove plan liabilities from their books by transferring the risk to a group annuity issued by a top-rated insurance company. This transfer allows the company to eliminate premiums paid to the Pension Benefit Guaranty Corporation along with significant cost savings in the plan administration. These cost savings can be reinvested in their business. Most importantly, the transfer allows the company to make good on the benefit promises made to their employees.
Plan participants benefit from the transfer because it ensures payment of the plan benefits promised to them at retirement that may include guaranteed income, the ability to provide ongoing income for a joint annuitant, and options such as payment frequency or cost-of-living adjustments.
You don’t have to be an expert to help your business clients execute this unique solution – Ash Brokerage has a dedicated team who can do it for you. You should call us – (800) 589-3000 – to learn more or to start identifying opportunities today.
The nature of my job dictates that I spend a lot of time in my car. When I’m driving, I’m typically either talking on my phone or listening to sports radio on ESPN. Not too long ago, one of my favorite sports show hosts was talking about the NFL draft and how difficult it is for franchises to select the best possible college player for their top draft pick. In college football, there’s an abundance of talented athletes who look very promising; however, it’s almost impossible to know for sure if their talent will translate into success in the NFL.
The commenter said selecting a draft pick is exactly like selecting a financial advisor: Regardless of who your advisor is, you would’ve made money over the last two years … You won’t know if you have a great advisor until you see what they do in a difficult environment.
Consider this: On Jan. 5, 2015, the S&P 500 closed at $2,020.58, and just two years ago on Jan. 4, 2013, the S&P 500 closed at $1,466.67 – the index is up 38 percent and near an all-time high.
Despite all the market success, all of the studies we’re seeing point towards the fact that many near-retirees are ready to take some of their “winnings” off the table and “lock in” in their gains. A recent study stated that 86 percent of baby boomers surveyed wanted help protecting a portion of their retirement assets. This same study showed that more than 50 percent of those surveyed formed their opinions of annuities more than 10 years ago … so they may not realize an annuity could give them exactly what they are looking for.
We need to spread the word: Indexed annuities are an attractive option today with more, and better, features than they’ve ever had before. As you’re sitting with your clients, reviewing their portfolios’ performance this past year, ask about their sentiments of the equity market moving forward, and broach the subject of locking in a portion of their gains.
The Bottom Line: Show your clients that you can help them succeed in a difficult environment … show them you won’t disappoint them as their top draft pick. The annuity team at Ash Brokerage would be thrilled to be YOUR top pick to discuss your clients’ situations and help identify the best annuity solutions.
We’ve been in a declining interest rate environment for about the last 10 years, with historic low rates the last few years. These low rates are driven by the Federal Reserve in hopes of jumpstarting the economy by allowing consumers to borrow money cheaply. While lower rates may sound good, they also mean very low returns for products such as CDs and money market accounts.
Even in this low-interest-rate environment, it’s estimated that there’s still nearly $10 trillion on the sidelines in the form of CDs and money market accounts. Many of these investors are concerned that committing their money to an annuity at current rates won’t allow them to take advantage of higher rates in the future. What they may not be considering is that waiting could cause them to lose earnings that may require years to make up, even if they do get a higher rate of return in the future.
For example, if you put $100,000 into an annuity paying 2.25 percent for five years, you would be guaranteed $111,768. If you waited two years before buying that annuity and were earning 0.50 percent in a CD, you would have to earn 3.78 percent over three years in order to get to the same $111,768 you would have been guaranteed with the five-year annuity.
Regardless of interest rates, annuities are really designed for investors’ long-term goals. Annuities offer tax deferral, principal protection, liquidity, lifetime income options and death benefits that are paid directly to the beneficiaries.
The Bottom Line: With $10 trillion on the sidelines, now’s a great time to reach out to investors about the benefits of tax-deferred annuities.
© 2018 Ash Brokerage LLC.