Process of Individual Retirement Planning
Successful planning is much more than accumulating assets, it’s about connecting your wealth with your values so you can do what matters most to you. We can help you to clarify your financial decisions so that you can be certain that you are taking the critical steps necessary to accomplish your goals.
Through a series of meetings, we unpack visual frameworks to educate you on best practices in financial planning. We then begin to collaborate with you to link these frameworks to your financial circumstances so that you have projections that uniquely represent your circumstances and goals. This is what we like to call “client financial review (CFR).”
This process includes building a personal balance sheet, projecting retirement resources over time, linking your asset allocation to such projections and integrating your financial and estate plans.
With dozens of different inputs and assumptions, the CFR allows us to collaborate in changing the assumptions on the spot to show what might happen if your expenses, rates of return, pensions, cost of living adjustments, Social Security benefits, long-term care needs, legacy gifting goals or other inputs change.
As you engage in this collaborative process, you will have increasing confidence that you have considered a breadth of different potential scenarios and made choices that truly align your wealth with your values. Thereafter, regular updates of the plan ensure that you have a sense of your progress toward your goals and any important steps to taken as you continue to move forward.
Five Principles of Retirement Plans: STEMP
Our Retirement Planning Steps:
- Step 1: Initial Client Financial Review (Money In & Out)
- Step 2: Financial Goal Setting
- Step 3: Planning with Time-frame
- Step 4: Individual Solutions & Applications
- Step 5: Review and Course Corrections (Annual Financial Review)
Individual Retirement Tools & Strategies :
IRAs, a.k.a. Individual Retirement Account, allow you to make tax-deferred investments to provide financial security when you retire. Contributions you make to a traditional IRA may be fully or partially deductible, depending on your circumstances, and generally, amounts in your traditional IRA (including earnings and gains) are not taxed until distributed.
Set up your IRA
You can set up an IRA with a:
- bank or other financial institution
- life insurance company
- mutual fund
- stockbroker
Contribution Limits
For 2019, your total contributions to all of your traditional IRA cannot be more than: $6,000 ($7,000 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than this dollar limit. The IRA contribution limit does not apply to:
- Rollover Contributions
- Qualified Reservist Repayments
Claiming a tax deduction for your IRA contribution
Your traditional IRA contributions may be tax-deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.
IRA contributions after age 70½
You can’t make regular contributions to a traditional IRA in the year you reach 70½ and older. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age.
Spousal IRAs
If you file a joint return, you may be able to contribute to an IRA even if you did not have taxable compensation as long as your spouse did. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. If neither spouse participated in a retirement plan at work, all of your contributions will be deductible.
Can I contribute to an IRA if I participate in a retirement plan at work?
You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you might not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level.
Tax on excess IRA contributions
An excess IRA contribution occurs if you:
- Contribute more than the contribution limit.
- Make a regular IRA contribution to a traditional IRA at age 70½ or older.
- Make an improper rollover contribution to an IRA.
Excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year.
To avoid the excess contributions tax:
- withdraw the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
- withdraw any income earned on the excess contribution.
Traditional and Roth IRAs allow you to save money for retirement. This chart highlights some of their similarities and differences.
| Features | Traditional IRA | Roth IRA |
|---|---|---|
| Who can contribute | You can contribute if you (or your spouse filing jointly) have taxable compensation but not after you are age 70 ½ or order. | You can contribute at any age if you (or your spouse filing jointly ) have taxable compensation and your modified adjusted gross income is below certain amounts (see 2017 and 2018 limits) |
| Are my contribution deductible | You can deduct your contribution if you qualify | Your contribution aren’t deductible |
| How much can I contribute | The most you can contribute to all of your traditional and Roth IRAs is the smaller of :
|
|
| What is the deadline to make contributions? | Your tax return filing deadline (not including extensions) For e.g. You can make 2017 IRA contribution until April 17, 2018 | |
| Where can I withdraw money? | You can withdraw money anytime. | |
| Do I have to take required minimum distributions? | You must start taking distributions by April 1 following the year in which you turn age 70 ½ and by December 31 of later years. | Not required if you are the original owner |
| Are my withdrawals and distributions taxable? | Any deductible contribution and earnings you withdraw or that are distributed from your traditional IRA are taxable also, if you are underage 59 ½ you may have to pay an additional 10 % tax for early withdrawals unless you qualify for an exception | None if it’s a qualify distribution (or a withdrawal that is a qualified distribution) Otherwise, part of the distribution or withdrawal may be taxable. If you are under age 59 ½ you may also have to pay an additional 10 % tax for early withdrawals unless you qualify for an exception. |
A Roth IRA is a special retirement account that you fund with post-tax income (you can’t deduct your contributions on your income taxes). Once you have done this, all future withdrawals that follow Roth IRA regulations are tax-free.
There is no up-front tax deduction for Roth IRA contributions, as there is with a traditional IRA. On the other hand, Roth distributions are tax-free when you follow the rules. And because every penny you stash in a Roth IRA is your money—not a tax-subsidized gift from Uncle Sam—you can tap your contributions (but not your earnings on those contributions) at any time, tax-free and penalty-free.
A Roth IRA is an IRA that, except as explained below, is subject to the rules that apply to traditional IRA.
- You cannot deduct contributions to a Roth IRA.
- If you satisfy the requirements, qualified distributions are tax-free.
- You can make contributions to your Roth IRA after you reach age 70 ½.
- You can leave amounts in your Roth IRA as long as you live.
- The account or annuity must be designated as a Roth IRA when it is set up.
The same combined contribution limit applies to all of your Roth and traditional IRAs. Your Roth IRA contribution might be limited based on your filing status and income.
Roth IRAs make the most sense if you expect your tax rate to be higher during retirement than your current rate. That makes Roth IRAs ideal savings vehicles for young, lower-income workers who won’t miss the upfront tax deduction and will benefit from decades of tax-free, compounded growth.
Roth IRAs also appeal to anyone who wants to minimize their tax bite in retirement, as well as older, wealthier taxpayers who want to leave assets to their heirs tax-free. (Unlike Traditional IRAs, there are no required minimum distributions [RMDs] on Roth IRAs, so well-funded retirees can leave their Roth money untouched if they don’t need it.)
You can contribute to a Roth IRA at any age as long as you have earned income from a job. That means they are appropriate for everyone from child actors to septuagenarian Wal-Mart greeters.
Traditional and Roth IRAs allow you to save money for retirement. This chart highlights some of their similarities and differences.
| Features | Traditional IRA | Roth IRA |
|---|---|---|
| Who can contribute | You can contribute if you (or your spouse filing jointly) have taxable compensation but not after you are age 70 ½ or order. | You can contribute at any age if you (or your spouse filing jointly ) have taxable compensation and your modified adjusted gross income is below certain amounts (see 2017 and 2018 limits) |
| Are my contribution deductible | You can deduct your contribution if you qualify | Your contribution aren’t deductible |
| How much can I contribute | The most you can contribute to all of your traditional and Roth IRAs is the smaller of :
|
|
| What is the deadline to make contributions? | Your tax return filing deadline (not including extensions) For e.g. You can make 2017 IRA contribution until April 17, 2018 | |
| Where can I withdraw money? | You can withdraw money anytime. | |
| Do I have to take required minimum distributions? | You must start taking distributions by April 1 following the year in which you turn age 70 ½ and by December 31 of later years. | Not required if you are the original owner |
| Are my withdrawals and distributions taxable? | Any deductible contribution and earnings you withdraw or that are distributed from your traditional IRA are taxable also, if you are underage 59 ½ you may have to pay an additional 10 % tax for early withdrawals unless you qualify for an exception | None if it’s a qualify distribution (or a withdrawal that is a qualified distribution) Otherwise, part of the distribution or withdrawal may be taxable. If you are under age 59 ½ you may also have to pay an additional 10 % tax for early withdrawals unless you qualify for an exception. |
An annuity is a contract that requires regular payments for more than one full year to the person entitled to receive the payments (annuitant). You can buy an annuity contract alone or with the help of your employer.
Annuity Maximization for Individual Retirement
Do you hold an annuity and find you no longer need the income stream it can provide?
You may have used annuities as a savings vehicle as part of your financial plan. However, now you may find that you no longer need the money in the annuity and you want to pass the money on to your heirs. But did you know that the gains on your annuity (the portion that exceeds your original investment) will be taxable income to your heirs?1 In addition, the full value of your annuity is includible in your taxable estate, which could result in a diminished inheritance. By using life insurance to help maximize your annuity funds, you can provide your loved ones with the most value for your annuity funds, without the limitations of income or estate taxes.
Why Annuities for Retirement Plan?
We want you to make an informed decision when you consider the purchase of an annuity. Annuities are an excellent tool to help you plan for your financial security. Annuities offer a variety of benefits including tax-deferred growth, ability to avoid probate, and lifetime income.
Tax-Deferred Growth of Your Retirement Fund
Tax-deferred growth allows your money to grow faster because you earn interest on dollars that would otherwise be paid as taxes. Your principal earns interest, the interest compounds within the contract, and the money you would have paid in taxes earns interest. The chart to the right shows the impact of a tax-deferred annuity.
May Avoid Probate for Your Beneficiary
Annuities offer the ability to name a beneficiary, which may minimize the expense, delays, and publicity that comes with probate. Your named beneficiary may receive death proceeds as either a lump sum or monthly income.
Lifetime Income Potential
Life Insurance Company can provide you with a guaranteed income stream with the purchase of a tax-deferred annuity. You have the ability to choose from several different income options, including life or a specific period. With non-qualified plans, a portion of each income payment represents a return of premium that is not taxable, reducing your tax liabilities.
Common Types of Annuities
Traditional Fixed Annuity
Offers a declared fixed interest rate that is guaranteed for a specific period and guaranteed to never go below a specific percentage.
Fixed Index Annuity
Interest rate credited to your annuity contract is linked to specific market indices that you can choose on an annual basis. Once the interest is credited you are guaranteed that it can never go down based on future market fluctuations.
Variable Annuity
Plan for retirement with a wide range of investment options, professional portfolio management, tax deferral, income options, and death benefits. Variable annuities can help increase your income for retirement and guarantee it lasts a lifetime.
Single Life Annuities
Pay a fixed amount at regular intervals during an annuitant’s life, ending on his or her death.
Joint & Survivor Annuities
Pay a fixed amount to the first annuitant at regular intervals for his or her life. After he or she dies, a second annuitant receives a fixed amount at regular intervals. This amount, paid for the life of the second annuitant, may be the same or different from the amount paid to the first annuitant.
Qualified Employee Annuities
A retirement annuity purchased by an employer for an employee under a plan that meets certain Internal Revenue Code requirements.
Tax-Sheltered Annuities
A special annuity plan or contract purchased for an employee of a public school or tax-exempt organization.
Immediate Annuity
You are guaranteed an income stream ranging from a specific period of time to your entire life. An immediate annuity offers a solution to the problem of outliving your money.
Using Life Insurance to Help with Retirement Planning
Are you concerned about the financial security of your family today should something happen to you? Are you also uneasy about the future and falling short of retirement income? It may be time to consider life insurance. Take a moment to view our video about using life insurance to help with retirement planning.
Why Life Insurance for Retirement Planning
Permanent life insurance provides death benefit protection that can help you protect your loved ones in the future. Plus, it can be designed with the flexibility to address changing needs throughout your life. Life insurance can be a twofold strategy as part of your financial plan:
Death benefit protection during working years
A solid financial plan often begins with life insurance. In the event of death, the proceeds are distributed to your beneficiaries generally income tax-free.
Potential source of funds to help support a longer retirement
Your premium payments on a permanent life insurance policy may accumulate cash value on a tax-deferred basis. Through policy loans and withdrawals, the cash value may then be used to help pay for a wide variety of needs in retirement. These could be planned distributions for planned expenses, or potential cash value may be used as additional funds to help protect you from outliving other retirement income sources or unplanned expenses. You may also access a portion of this death benefit during your lifetime in case of an unexpected illness. Cash value from your policy may be used for anything, from monthly cell phone bills to out-of-pocket co-pays to a favorite travel destination.
Many people understand the benefits of diversifying investments among asset classes to help manage the risk and return of a retirement plan. But diversification can also be used to help manage the tax treatment of retirement assets—resulting in the potential for higher net income during retirement years.
Tax considerations of retirement assets[1]
| When is assets growth is taxed | ||
|---|---|---|
| Taxed now | Taxed later | Taxed never |
| CDs and money markets | 401(k) / 403 (b) accounts | Roth IRAs |
| Mutual funds | Traditional IRAs | Cash value life insurance [2] |
| Savings account | ||
Feature comparison of variotus assets[1]
| Taxable asset | 401(k) / traditional IRAs | Roth IRAs | Cash value life insurance [2] | |
|---|---|---|---|---|
| Tax deductible contributions | ||||
| IRS does not limit contributions due to income | ||||
| Tax deferred growth | ||||
| No penalty for early withdrawals | ||||
| Tax free distributions | ||||
| No required minimum distributions at 70 ½ | ||||
| Will not increase social security taxation or Medicare premiums | ||||
| Includes income tax free survivor benefits |
Example of Tax Issue
PROBLEM: 401(k) withdrawals are taxed as ordinary income [3]
In addition to some rental properties and his Social Security, Brian’s retirement plan consists only of his 401(k) plans. He has maximized his contributions and has a tidy sum saved. His financial professional (FP) points out that withdrawals from his 401(k) accounts will be taxed as ordinary income. His FP also explains that Brian may be in a higher tax bracket during retirement than he is now– due to possible changes in tax law and his growing account values. At retirement, assuming a 25% tax rate, an annual withdrawal of $100,000 would result in taxes of $25,000, leaving a net income of $75,000 available for his retirement.4 They discuss tax diversification as an option and that having some tax-free income would increase the amount available.
SOLUTION: Cash-value life insurance such as Indexed Universal Life Policy can help provide tax diversification.
Working with his FP, Brian has also decided that he needs $1 million of life insurance to protect the family. The FP shows Brian how a cash value life insurance policy can help him meet both objectives – life insurance protection for his family and a ‘taxed never’ asset to increase his diversification.
RESULTS: At retirement, Brian choose to take $50,000 from his 401(k) and from his cash value life policy. He was able to increase his net income by $12,500 over the 401(k)-only plan.
- The descriptions and features of the various assets in these tables are for general information purposes and address the most typical circumstances. There are many regulations governing the taxation and operation of all assets mentioned and you should seek the advice of a tax professional before making any changes to your current or future retirement plans, accounts or assets.
- Cash value life insurance policies are subject to Modified Endowment Contract rules that discourage overfunding based on face amount, insured’s age and other factors. Cash value life insurance also contains additional mortality charges that will increase the expense of this product. Also, distributions in excess of total premiums paid are taxable unless taken as loans (which are subject to interest charges). Consult a policy illustration for more information.
- This is a not an actual case. It is a hypothetical representation for illustrative purposes, only. The individual 401(k) plan and life insurance policy withdrawals are aggregated in the illustration for convenience. It is not a comprehensive analysis of the subject matter and you should work with a tax professional before making changes to your circumstances.
- Withdrawals are subject to federal tax of 25% and may be subject to state income taxes. A 10% federal early withdrawal tax penalty may apply if taken before age 59 1/2.
- Withdrawals in excess of total premiums paid are taxable unless taken as loans (which are subject to interest charges).