| Index Annuities-Popular but Watch for these Features Index annuities offer features attractive to many retirees: Guarantee of original deposit Increasing value based on stock market index In short, you have your cake and eat it too. But let’s look closer to help you discern good from not so good. Every index annuity has a “participation rate.” This is the percentage that you share in an increase in the stock market. For example, a hypothetical index annuity based on the S&P 500 index with a 50% participation rate would provide a return of 5% if the S&P index rose 10%. Why would an investor give up half of the return from the market? Because if the market declines, you do not lose money as your original principal is guaranteed. So this arrangement is quite attractive for investors seeking to protect their principal in return for a higher interest rate. But you need to make sure that the annuity has a guaranteed, fixed participation rate for the entire term of the annuity. If the company can lower or raise the rate (they have little incentive to raise it), do you want to take the risk? The other issue to look out for is “averaging” of the S&P index. Many index annuities provide a participation rate based on the “average” increase in the S&P 500 index. This typically means that the S&P 500 index is measured once per month. These figures are summed and divided by 12 to produce an average closing figure. The gain for the year is measured based on this averaged figure. My study of 30 years of index annuity returns shows that averaging reduces the investor’s return. So all else being equal, you would prefer no averaging in your index annuity (past performance is not an indication of future results). There are other features to consider, including an annual reset feature, deductions or fees, forced annuitization and potential surrender charges. Like most investments that seem simple on the surface, index annuities have important features that you must understand. Check off on the coupon for a short brochure to understand how you could profit from stock market increases while having your original principal protected. -------------------------------------------------------------------------- New IRA Rules Meant To Simplify But Costs Of Mistakes Could Be Higher Than Ever On January 1, 2002, new IRA distributions rules went into effect. The good part is that the rules allow you to take smaller mandatory distributions (and pay less tax during your lifetime) and also to spread your IRA over 2 more generations. But the new law also places the burden of taking the right actions on your heirs, which may be an unsettling thought. (You may be similar to retirees who have told me that they do not find their heirs financial judgment to be exemplary, to put it nicely). As to your own distributions, most everyone is forced to use the same IRS tables so your bank or securities firm will hopefully calculate this for you. That part is easy. The other issue is to change your beneficiaries because of the new law. The new law allows the beneficiaries of your plan until December 31 of the year after your death to decide on the distribution among those beneficiaries you have named. Let’s take an example. Say you name your three sons as equal beneficiaries. One is very financially successful and does not need any inheritance. The one with a good heart is raising 3 foster children and does not have much income. The third son passes away due to illness. In light of this hypothetical scenario, would you still want to divide the IRA equally? Maybe now, you would have wanted to give 2/3 of the funds to the son with foster children and the other 1/3 to the surviving grandchildren of the deceased father. But this cannot be done because you did not name your grandchildren as a potential beneficiary! If you had, then your IRA could have been divided based on need. So please add all possible beneficiaries to your beneficiary designation form if you would like the funds to be distributed based on beneficiary situations at the time of distributions. What happens when you leave your IRA to heirs? There are a number of ways they can really mess it up. For example: They need to know that they should not take the money out all at once (they will need to pat taxes on all of it). Rather, they are entitled to spread out the distributions over their lifetime and pay a little tax each year. They need to know that your IRA should be divided up into a separate IRAs for each beneficiary before distributions start. Failure to do so will force all beneficiaries to withdraw their portion as quickly as the beneficiary who by law must withdraw most quickly. For example, if you had a 60 year-old son and a 45 year-old son, the 45 year-old would be forced to withdraw money as fast as his older brother, even though his life expectancy is longer than his brother’s life expectancy. Every beneficiary gets to use their own distribution schedule if they get separate IRAs. They need to know that if estate tax was paid on your IRA, they can take a credit against the taxes they pay. To get a more detailed description of steps you should take and printed instructions for your beneficiaries to keep, check off on the coupon for a guide to IRA owners and beneficiaries.” -------------------------------------------------------------------------- How IRS Picks Up 80% Of Your Gifts To Charity For some taxpayers, IRS makes a donation very painless. In the example below, we use a hypothetical taxpayer with an estate above $1 million, an estate tax rate of 45% and a 35% combined federal and state tax bracket. Our investor owns some shares he bought 30 years ago. He paid $10,000. The shares are now worth $100,000. He won’t sell the shares because of the high capital gains tax. So he looks at the numbers of simply donating the shares to his favorite charity: Charitable tax deduction $100,000 x 35% tax bracket = $35,000 Estate Tax Reduction $100,000 x 45% bracket = $45,000 Total Tax Savings = $80,000 Therefore, by giving $100,000 of appreciated stock, our investor and his beneficiaries get from IRS $80,000 in tax savings. So the gift really costs only $20,000 ($100,000-$80,000). If you have any desires to make charitable gifts soon or in the future through your will or trust, we can show you how to get the best tax savings advantage now. Just check off on the coupon. ----------------------------------------------------------------------------------- Your Retirement Funds and Creditors It’s well known that lawyers are overly abundant in the US. That leads to the problem of too many frivolous lawsuits (what else is a lawyer to do)? As a result, it’s no surprise that someone could sue you for falling on the sidewalk in front of your house or claiming that when your dog barked, they got frightened and pulled a muscle in their back. It’s important for you to learn about asset protection devices such as irrevocable trusts and family partnerships. But in this article, we focus on protecting your retirement assets. Your IRA is treated differently than money you have in a qualified plan (401k, pension, profit sharing, etc). Qualified plans are protected under federal statute so that someone who sues for falling on the sidewalk cannot attach your qualified plan assets. IRAs are another matter. IRAs are handled under state law and as you might imagine, the laws differ. Your IRA funds may not be protected. Is there anything you can do? One option is to roll your IRA funds back to a qualified plan. If you have earned income, you could set up a Keogh plan and roll your IRA into the Keogh. It’s hazy (based on inconsistent court decisions) whether a one-person Keogh has the same protection as a plan that also covers employees. So including an employee or checking with a local estate attorney is advised. The other option is to liquidate the IRA account, pay the tax (which gets paid at some point in any case) and put the assets in a creditor-protected vehicle as mentioned in the second paragraph. What about creditor protection of annuities? Only 14 states offer complete protection for cash values and death proceeds; another 20 states have partial safeguarding, and the remaining 16 jurisdictions offer little, if any, shelter. If your state offers better creditor protection on annuities than on IRAs, it could make sense to buy an annuity in your IRA. Again, check with a local estate attorney. |
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| © 2001, 2002 Strictly Business Magazine All Rights Reserved. A division of S&S Enterprises, a Floyd Snyder Production. Santa Maria, California, 93454 Feedback. |
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| Senior Finances Specializing in Investment Management and Asset Preservation For Mature Investors Published by: |
| Trent J. Benedetti, C.P.A., C.F.P. |
| Benedetti & Associates Certified Public Accountant,Inc. 2151 S. College Drive, Suite 101 P.O.Box 5958 Santa Maria Ca. 93456 Tele: (805) 922-4881 Fax: (805) 922-7953 Email Mr. Benedetti |
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| Four articles this page: Index Annuities-Popular but Watch for these Features New IRA Rules Meant To Simplify But Costs Of Mistakes Could Be Higher Than Ever How IRS Picks Up 80% Of Your Gifts To Charity Your Retirement Funds and Creditors |
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