Monthly Archives: February 2013

A Roth IRA’s Many Benefits. Why do so many people choose them over traditional IRAs?

A Roth IRA’s Many Benefits
Why do so many people choose them over traditional IRAs?


The IRA that changed the whole retirement savings perspective. Since the Roth IRA was introduced in 1998, its popularity has soared. It has become a fixture in many retirement planning strategies, because it offers savers so many potential advantages.

The key argument for going Roth can be summed up in a sentence: Paying taxes on your retirement contributions today is better than paying taxes on your retirement savings tomorrow.

Think about it. All other variables aside, would you like to pay more taxes in retirement or less?

What if federal tax rates are higher in the future than they are today? Would you like to see a) your retirement savings taxed at those higher rates tomorrow, when you may have medical bills or other emergency expenses to contend with, or b) have the dollars you are saving for retirement today taxed at possibly lower rates?

Here is a closer look at the trade-off you make when you open and contribute to a Roth IRA – a trade-off many savers are happy to make.

You contribute after-tax dollars. You have already paid federal income tax on the dollars going into the account. But in exchange for paying taxes on your retirement savings contributions today, you could potentially realize great benefits tomorrow.1

You position the money for tax-deferred growth. Roth IRA earnings aren’t taxed as they grow and compound. If, say, your account grows 6% a year, that growth will be even greater when you factor in compounding. The earlier in life that you open a Roth IRA, the greater compounding potential you have.2

You can arrange tax-free retirement income. Roth IRA earnings can be withdrawn tax-free as long as you are age 59½ or older and have owned the IRA for at least 5 years. (That 5-year clock starts on January 1 of the tax year in which you make your initial Roth IRA contribution.)3

The IRS calls such tax-free withdrawals qualified distributions. They may be made to you, to your estate after you are deceased, and/or to a beneficiary. (If you die before the Roth IRA meets the 5-year rule, your IRA beneficiary will see the IRA earnings taxed until it is met.)4

If you withdraw money from a Roth IRA before you reach age 59½, it is called a nonqualified distribution. If you do this, you can still withdraw an amount equivalent to your total IRA contributions to that point tax-free and penalty-free. If you withdraw more than that amount, though, the rest of the withdrawal may be fully taxable and subject to a 10% IRS penalty as well. (If you are younger than 59½ and have owned a Roth IRA for at least 5 years, you are allowed to withdraw 100% of your contributions and up to $10,000 of IRA earnings tax- and penalty-free to buy a principal residence, assuming the buyer has not owned a home within the past 2 years.)1,3

You never have to make a withdrawal. When you own a traditional IRA, you must start pulling money out of it in your in your seventies. These withdrawals are called Required Minimum Distributions (RMDs), and the amount is calculated for you using an IRS formula. These forced withdrawals saddle some traditional IRA owners with tax problems. In contrast, Roth IRA owners never have to take RMDs. They are never required to take a penny out of their IRAs.1

Withdrawals don’t affect taxation of Social Security benefits. If your total taxable income exceeds a certain threshold – $25,000 for single filers, $32,000 for joint filers – then your Social Security benefits may be taxed. (These limits are not adjusted for inflation, incidentally.) An RMD from a traditional IRA represents taxable income, and may push retirees over the threshold – but a qualified distribution from a Roth IRA isn’t taxable income, and doesn’t count toward it.5

You can direct Roth IRA assets into many different kinds of investments. Invest them as aggressively or as conservatively as you wish – but remember to practice diversification. The range of investment choices is often broader than that offered in a typical workplace retirement plan.1

You can shift dividend-producing investments into a Roth IRA from a taxable account. As dividends are being taxed at higher rates in 2013, keeping dividend-producing stocks out of a taxable account has definite virtues.

You can potentially “stretch” the assets. If an original Roth IRA owner passes away after owning the IRA for at least five years, then its earnings can be withdrawn tax-free by its beneficiaries. (Relevant estate taxes may need to be paid, of course.) If a Roth IRA beneficiary is not a spouse, then other factors come into play: that beneficiary cannot contribute to the inherited Roth IRA, or combine it with an IRA he or she owns. The non-spouse beneficiary can decide to a) receive a distribution of 100% of the inherited Roth IRA assets by December 31st of the fifth year following the year of the IRA owner’s death, or b) receive periodic payments from the IRA over the course of his or her life, an option which may potentially be “stretched” (given proper planning) and extended to subsequent beneficiaries.6

You have 16 months to make a Roth IRA contribution for a given tax year. For example, IRA contributions for the 2012 tax year may be made up until April 15, 2013. While April 15 is the annual deadline, many IRA owners who make lump sum contributions for a given tax year make them as soon as that year begins, not in the following year. Making your Roth IRA contributions earlier gives the funds in the account more time to grow and compound with tax deferral.1

Who can open a Roth IRA? Anyone with earned income (and that includes a minor).1

How much can you contribute to a Roth IRA annually? The 2013 contribution limit is $5,500, with an additional $1,000 “catch-up” contribution allowed for those 50 and older. (The annual contribution limit is adjusted periodically for inflation.)7

You can keep making annual Roth IRA contributions all your life. You can’t make annual contributions to a traditional IRA once you reach age 70½.7

Does a Roth IRA have any drawbacks? Actually, yes. One, you will generally be hit with a 10% penalty by the IRS if you withdraw Roth IRA funds before age 59½ or you haven’t owned the IRA for at least five years. (This is in addition to the regular income tax you will pay on the funds withdrawn, of course.) Two, you can’t deduct Roth IRA contributions on your 1040 form as you can do with contributions to a traditional IRA or the typical workplace retirement plan. Three, you might not be able to contribute to a Roth IRA as a consequence of your filing status and income; if you earn a great deal of money, you may be able to make only a partial contribution or none at all.3,7

Rollovers are permitted if you make too much to contribute. Even if your income prevents you from funding a Roth IRA, you can still roll traditional IRA assets into a Roth with the help of a financial professional. While this is a taxable event, you may realize significant long-term financial benefits as a result of it – tax-free retirement income withdrawals, and the potential for some of the Roth IRA assets to pass tax-free to your heirs with further growth and compounding. You also will gain the relief of never having to take an RMD each year.8

All this may have you thinking about opening up a Roth IRA or creating one from existing IRA assets. A chat with the financial professional you know and trust will help you evaluate whether a Roth IRA is right for you given your particular tax situation and retirement horizon.

1 – [4/5/12]
2 – [1/21/13]
3 – [12/29/10]
4 – [1/2/13]
5 – [12/16/12]
6 – [1/8/13]
7 –,-Employee/Retirement-Topics-IRA-Contribution-Limits [11/28/12]
8 – [5/20/12]

Smarter Ways to Manage Your 401k

FAST NOTE : Do your employees have a company retirement plan? If they do, then you have a fiduciary responsibility to them.
> You have to provide plan participants with a detailed breakdown of plan fees and expenses pertaining to their accounts, and disseminate investment instructions to them per updated Department of Labor regulations.

> You must document the plan’s investment processes and see that they follow the procedures and the Investment Policy Statement (IPS) in the plan document.

> You must develop an employee education program to meet fiduciary requirements and help your employees adequately utilize the plan.
> In addition, most plan administrators are required to file a Form 5500 Annual Return/Report with the federal government.
Don’t risk lawsuits or five- or six-figure settlements. Don’t open the door to liability. Do the right thing, do the smart thing – turn to an experienced, professional third-party fiduciary for assistance.

Sneak peek at The Sequester

The Sequester Looms
If federal budget cuts occur March 1, how might they be felt economically?


On March 1, $85 billion in federal budget cuts are supposed to take place – and it doesn’t look like they will be delayed any longer. Congress went on recess last week, so there was no concerted legislative effort to stave them off (in the manner of the fiscal cliff deal).1

At this point, the cuts seem inescapable. How might they impact Main Street and Wall Street?

Is Main Street all that worried about the cuts? A February Pew Research Center poll found that 29% of Americans didn’t even know about the sequester, while 40% said that they should be allowed to happen. Eyeing the poll results a bit more, a big picture emerges – 70% of those polled indicated that legislation to significantly reduce the deficit should be a federal priority.2

Will the cuts damage the economy as deeply as some fear? In the White House Budget Office projection, defense programs will take a 13% cut, with $34 billion in belt-tightening by the Army, Navy and Air Force resulting in layoffs or furloughs for at least 450,000 people. USA TODAY research forecasts nearly 35,000 jobs being lost in Texas, and Maryland, Virginia and Alabama each suffering between 20,000-30,000 job losses.3,4

In addition, the White House projects a 9% reduction in spending for other federal programs, with job cuts or furloughs anticipated for INS, FDA, TSA and FAA employees (and myriad other federal workers), reduced jobless benefits for the long-term unemployed, and layoffs of 10,000 teachers and school employees, including some with the Head Start program.1,3

Less abstractly, what could this hit to growth mean for the business and housing sectors? In a February 21 New York Times article, George Mason University School of Public Policy professor Stephen Fuller estimated that 1.4 million private sector jobs might disappear in the wake of the cuts. Fuller, who testified before the House Small Business Committee on the possible effects of the sequester, thinks that small businesses could let over 700,000 employees go and absorb 34% of the job losses projected for federal contractors. He reminded the Times that suppliers and vendors to those contractors could also be hit hard.5

HUD Secretary Shaun Donovan believes the sequester would be “deeply destructive” to the real estate market. If FHA staff is reduced by 9%, that could hurt the agency’s ability to originate loans, process refis and sell foreclosed homes in its possession. (By the way, the average interest rate on a conventional home loan was 3.78% last week, according to the Mortgage Bankers Association. That’s a high unseen since August 2012.)6

Or will the cuts have less economic impact than commonly believed? Some analysts think the fear is overblown. As CNBC columnist Larry Kudlow recently pointed out, the $85 billion haircut slated for March 1 is to budget authority, not budget outlays. Actual federal budget outlays, according to the Congressional Budget Office, will only shrink by $44 billion – which is but 0.25% of GDP and 1.25% of the $3.6 trillion federal budget.7

Kudlow notes that while the sequester would trim the growth of federal spending, “it’s clear that it won’t result in economic Armageddon.” He argues that the sequester might actually have positive effects, for as “the government spending share of GDP declines, so does the true tax burden on the economy. As a result, more resources are left in the free-market private sector, which will promote real growth.”7

As for the markets, opinion varies. If the cuts occur, Nomura thinks that they will be undone by Congress within weeks. A Wells Fargo analysis concludes that “in the end we are not looking for a significant cut in government spending this year.” On the other hand, Credit Suisse sees a 0.5% reduction in U.S. GDP to 1.5%, and Macroeconomic Advisors thinks the jobless rate will creep up to 7.9% by the end of 2013 – a projection matching that of many economists, who see unemployment rising 0.2-0.3% this year with payrolls slimming by about 500,000 jobs.8

March 1 could be a very big day on Wall Street. If the sequestration happens as scheduled Friday, it won’t be the only major economic news item on tap: the February jobs report, February’s ISM manufacturing index, the January consumer spending report and the final February consumer sentiment index from the University of Michigan will all be out that day. If some of these reports surprise to the upside (or downside), there is a chance that they may pull focus from the (assumed) budget cuts. Or, if the cuts occur as slated, perhaps the market will price them in more than some analysts believe.

If the sequester delivers a serious economic punch, it could deter the Federal Reserve from any notions of phasing out QE3 this year or tinkering with interest rates in 2014. We shall see how the drama plays out in March and the months that follow.

1 – [2/20/13]
2 – [2/21/13]
3 – [2/20/13]
4 – [2/19/13]
5 – [2/21/13]
6 – [2/20/13]
7 – [2/21/13]
8 – [2/20/13]

Essentially, a Medicaid Compliant Annuity is a single premium immediate annuity with an added restrictions endorsement. The added endorsement makes the annuity irrevocable and non-assignable.

I get this ???????????????? all the time….

From the desk of GREG OLIVER
Medicaid Compliant Annuities
RE : What is a Medicaid Compliant Annuity?

A Medicaid Compliant Annuity is a planning tool offered by a limited number of insurance companies. The Medicaid Compliant Annuity was designed to convert a spend-down amount into an income stream. With the spend-down amount eliminated, the nursing home resident/Medicaid applicant becomes eligible for Medicaid benefits.

Essentially, a Medicaid Compliant Annuity is a single premium immediate annuity with an added restrictions endorsement. The added endorsement makes the annuity irrevocable and non-assignable.
What is the history behind a Medicaid Compliant Annuity?

The history behind a Medicaid Compliant Annuity first began with the Omnibus Budget Reconciliation Act of 1993 wherein Congress delegated the Medicaid treatment of annuities to the Secretary of Health and Human Services. As a result, in November 1994, the Secretary of Health Care Financing Administration issued Transmittal 64, which was the Secretary’s determination as to when an annuity purchase involved a transfer of assets for less than fair market value:

“Annuities, although usually purchased in order to provide a source of income for retirement, are occasionally used to shelter assets so that individuals purchasing them can become eligible for Medicaid. In order to avoid penalizing annuities validly purchased as part of a retirement plan but to capture those annuities which abusively shelter assets, a determination must be made with regard to the ultimate purchase of the annuity (i.e., whether the purchase of the annuity constitutes a transfer of assets for less than fair market value). If the expected return on the annuity is commensurate with a reasonable estimate of the life expectancy of the beneficiary, the annuity can be deemed actuarially sound.”

The result of Transmittal 64 is that in order for an annuity to be Medicaid compliant it must be “actuarially sound.” The actuarially sound test is easily satisfied by showing that the individual who purchased the annuity will receive back his or her entire investment within his or her Medicaid life expectancy.

With implementation of the Deficit Reduction Act of 2005 (“DRA”) in February of 2006 the actuarially sound test outlined in Transmittal 64 was continued, subject to several modifications:

* It clarified and codified the rules regarding when an annuity transaction is to be treated as a transfer for less than fair market value.
* It required that the state be named as remainder beneficiary (subject to the preferred interest of the community spouse and minor and disabled children) to the extent of benefits paid.
* It required that applicants for Medicaid funded long-term care disclose their interest in annuities.

Generally speaking, the DRA rules now require that if an annuity is to be deemed “Medicaid compliant,” it must:

* be irrevocable and non-assignable;
* be actuarially sound;
* provide for payments in equal amounts, with no deferral and no balloon payments; and
* name the state Medicaid program as the primary beneficiary to the extent that medical assistance benefits were provided to the institutionalized individual (certain exceptions may apply).

Finally, to assist those individuals in determining whether an annuity is Medicaid compliant, in July 2006 the Centers for Medicare and Medicaid Services (“CMS”) issued a letter to the state Medicaid Directors which provided guidance regarding CMS interpretation of the transfer and annuity provisions of DRA.
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Social Security Says Goodbye …

Social Security Says Goodbye to Paper Checks
If you get Social Security payments by mail, what are your options?


In March, Social Security will stop mailing checks to all but a small percentage of retirees. About 5 million seniors still get their benefits in the form of a check – and if you are one of them, what alternatives do you have for the future?1

The new options: direct deposit or a Direct Express debit card. Most Social Security recipients receive their benefits by direct deposit – that is, the Treasury Department sends an electronic message to a bank or credit union crediting the retiree’s account with the amount of the payment.2

Since 2008, about 3 million Social Security recipients have opted to use the Direct Express MasterCard, a Treasury-recommended prepaid debit card. On payment day each month, the amount of the Social Security payment is automatically credited to the card. About two-thirds of Direct Express card users were “unbanked” when they signed up for the card – that is, they had no bank account of any kind.1,2

The debit card has some drawbacks. While it carries no monthly fees or overdraft charges, you get one fee-free ATM withdrawal a month with it – provided you make that withdrawal at one of the 50,000 ATMs in the network for the card. Additional withdrawals within the ATM network have 90-cent fees attached, and you will incur the usual $1.50-3.00 ATM fee per withdrawal at banks outside the network. On the other hand, retirees can save a bit of money – maybe as much as $5 a month or $60 a year in checking fees – if they simply go the direct deposit route.1,3

The change will be encouraged, not demanded. While the Treasury Department’s Go Direct website ( gives the impression that Social Security will abruptly stop sending out checks on March 1, this is not exactly the case.2

“We will not interrupt payments if a person does not comply nor will we switch a payment method automatically,” Walt Henderson, director of the GoDirect program, told the Detroit Free Press. By March, seniors getting checks from the program may get a letter offering assistance to help them change over to the debit card or direct deposit option. “You will still get a paper check,” Henderson stated to the Washington Post, “but you will be hearing from us in a more personal way.”1,3

What if you still want a check in the mail? Call the Treasury Department’s Go Direct hotline at 800-333-1795 and request a waiver. Waivers may be granted if a retiree lives in a rural area, or if certain mental impairments make the electronic deposit or debit card options too confusing.2

Some seniors will continue to get checks. If you were born on or before May 1, 1921, you get an automatic waiver – you will still get your Social Security income by check unless you want to change to one of the other options.1

Why is this move being made? The federal government can save some money this way. It costs 92 cents more to print and mail a check to a Social Security recipient compared to electronic payment methods. By ending the printing of Social Security checks, about $1 billion in federal savings can be realized over the next decade.3

In addition to Social Security payments, other kinds of federal payments will also be converted to electronic delivery starting March 1 – paper checks are on the way out this spring for Supplemental Security Income payments, Veterans Affairs benefits, Railroad Retirement Board or Office of Personnel Management benefits, and other assorted non-tax federal payments as well.3

1 – [1/24/13]
2 – [2/12/13]
3 – [1/12/13]