Long Beach Financial Planner - Pete Mitchell » Internal Revenue Service

The DBk Plan Presented by Pete Mitchell

Pete Mitchell — Fri, 26 Mar 2010 15:00:10 +0000

The DB(k)

In 2010, companies have a whole new retirement plan option.

www.youtube.com/watch?v=qdmDandRL84

What is a DB(k)? Basically, a DB(k) combines a pension plan with a matching 401(k) plan. As the name implies, it is a defined benefit retirement plan with some of the features of a 401(k).

DB(k)s could become great recruiting tools. These hybrid retirement plans will be very attractive to employees looking to restore pre-bear market retirement savings levels – not to mention workers who want to retire with a pension-style income like the one Mom and Dad had. In the coming years, firms in especially competitive industries may be prompted to offer DB(k)s as perks.

Won’t it cost a lot for a company to fund one? Not necessarily. It is likely that the companies that do create them will have sizable cash reserves and profit margins. However, it isn’t as if a business is funding two retirement plans at once. In fact, any businesses that offer both defined benefit plans and 401(k) plans may unite them in this new option.¹

A DB(k) could save a business paperwork & money. These plans are exempt from “top-heavy” rules, and a company can put one in place with just one Form 5500 and one plan document. Principal Financial Group vice-president Chris Mayer, whose firm helped to develop the DB(k), told the Washington Post that the cost of providing a DB(k) will probably work out to 6-8% percent of payroll for most companies. This is certainly beneath the administrative costs of having both a 401(k) and a pension plan. Companies with 2-500 employees are eligible to have DB(k)s.^2,3,4

What do employees get? An income stream, an employer match and a really neat tool to save for retirement. In brief, the DB(k) has four compelling attributes:

An arrangement for lifelong monthly income. The income stream won’t replace an employee’s end salary, but it certainly will help. Loyalty is rewarded: the pension income equals either a) 1% of final average pay times the number of years of service, or b) 20% of that worker’s average salary during his or her five consecutive highest-earning years.⁵
Employees are automatically enrolled in the 401(k) portion. (They can choose to opt out.)²
The company automatically directs 4% of a worker’s salary into his or her 401(k) account. The company also has to match 50% of that amount, which is vested upon the match. (Employees do have the choice to alter the contribution level up or down from 4%.)³
It only takes three years for an employee to become fully vested in a DB(k) pension plan. So even if they leave the company, the money is theirs.⁴

The best of both worlds? Maybe. The DB(k) is shaping up as an intriguing 401(k) alternative, a new IRS-sanctioned way to offer valued employees something more than the usual voluntary retirement savings program. If you are saving for retirement, ask your company about it. If you own a business in a very competitive field, it may help you recruit, impress and retain the caliber of employees you really want.

Citations.

¹irs.gov/irb/2009-35_IRB/ar09.html [8/31/09]

² kiplinger.com/businessresource/forecast/archive/DBk_pension_of_future_090819.html [8/19/09]

³ investopedia.com/articles/retirement/10/dbk-plan.asp [3/19/10]

⁴ washingtonpost.com/wp-dyn/content/article/2009/11/13/AR2009111304651_2.html [11/15/09]

⁵ bankrate.com/finance/retirement/where-to-find-income-for-retirement-1.aspx [3/9/10]

Pete Mitchell’s- What To Do If You’re Laid Off

Pete Mitchell — Fri, 26 Feb 2010 16:00:35 +0000

WHAT TO DO IF YOU ARE LAID OFF

www.youtube.com/watch?v=oSeAfqm6sac

If you’re laid off, what happens to your retirement money? Well, you have three basic choices with your 401(k). One gives you more freedom and control than the other two.

You could just leave your 401(k) alone. The money will remain invested, and the financial firm handling your 401(k) will keep mailing you quarterly statements telling you how it is doing. Any future growth will be tax-deferred.¹

But this passive choice comes with an opportunity cost. If you just leave the 401(k) assets in the plan, you’re giving up control and flexibility. Your investment choices may be limited, the plan fees may be high, and you may not be able to quickly access your money or do what you want with it. If you have a trail of old 401(k)s left with a bunch of former employers, things can get really complicated when you retire – especially when you have to take Required Minimum Distributions (RMDs). Leaving the money in the plan may not be the wisest choice.

You could withdraw the money. This is a terrible choice – a last resort. It comes with a severe financial penalty. You will not get all the money you have invested back – far from it. You will lose 20% of your 401(k) assets to withholding taxes, and if you are under 55, the IRS will levy an additional 10% penalty for early withdrawal of the assets. By the way, distributions from a 401(k) are considered taxable income – so expect a big tax bill in the year you cash out.¹ The federal government does not want to see you wipe out your retirement savings. Neither does your financial advisor. (If you really need money, you could consider borrowing from your 401(k). The problem here is that most companies want the loan balance paid off when you leave – whether you leave work by choice or not.)

You could roll it over into an IRA. This is the choice that usually makes the most sense. You can move the money into an IRA through a rollover or trustee-to-trustee transfer. Or, you could direct the money into a so-called “conduit IRA,” a traditional IRA created to hold your old 401(k) assets until you move the money into another qualified retirement plan. (You can’t contribute to a conduit IRA.)² There’s no tax penalty when you do an IRA rollover or trustee-to-trustee transfer.After you do it, you have total control of the money, continued tax-deferred growth, expanded investment choices, and possibly lower management fees.¹

Rolling over the money into a Roth IRA might be a great move, provided you can meet two conditions. First, your adjusted gross income has to be less than $100,000 for the year in which you make the rollover. Second, you’ll have to pay taxes on the assets you convert.¹The upside is considerable: you get tax-free compounding, tax-free withdrawals if you are older than age 59½ and have owned your account for at least five years, and the potential to make contributions to your IRA after age 70½ without having to take RMDs. Contributions to a Roth IRA are not tax-deductible, but there are fewer restrictions on withdrawals.^3,4

In 2009, you can fund a Roth IRA with after-tax contributions to a 401(k), 403(b) or 457 retirement savings plan – you can take those contributions and convert them to a Roth IRA tax-free, provided your AGI is $100,000 or lower. There is no limit on the conversion amount. Incidentally, in 2010, anyone can convert a traditional IRA to a Roth IRA – the AGI restriction on such conversions disappears.⁵

What if you have to shiver through a 401(k) freeze? A “freeze” is when your employer reduces or suspends matching contributions to your retirement plan. FedEx, General Motors and Motorola have all recently chosen to do this.⁶ The answer: don’t let up on your personal contributions. If you can manage it, adjust your 401(k) contribution to a level where you effectively replace what your employer contributed. Saving for retirement should remain one of your highest priorities.

How is your money positioned? How are you invested today? Are you doing things designed to preserve and enhance your retirement money? You may want to talk with me about your options. If you’d like to, call me at 800-990-2734 or email me at Pete@PeteMitchellinc.com.

Citations.

¹articles.moneycentral.msn.com/RetirementandWills/InvestForRetirement/jobless-what-to-do-with-your-401kk.aspx [2/13/09]

² investopedia.com/terms/c/conduitira.asp [2/13/09]

³ fool.com/Money/AllAboutIRAs/allaboutiras03.htm [11/19/08]

⁴ irs.gov/publications/p590/ch02.html#d0e9236 [11/19/08]

⁵ kiplinger.com/magazine/archives/2009/01/sweet-deal-on-roth-ira-conversion.html [1/09]

⁶ biz.yahoo.com/ibd/090102/funds.html?.v=1 [1/2/09]

Pete Mitchell’s Immediate Annuties

Pete Mitchell — Thu, 25 Feb 2010 16:00:08 +0000

IS IT TIME TO ANNUITIZE?

It just might be. Here’s why baby boomers are choosing immediate annuities.

www.youtube.com/watch?v=Uhicx0y43ho

Nobody wants to outlive their money. In fact, somebody recently asked me, “How do I organize my money so that I spend my last dollar on my last day of life?”

Since neither of us knew when that day would occur, we selected an immediate annuity as the solution.

An immediate annuity is a good component of any retirement plan. Immediate annuities are issued by insurance companies, and they are one of the few retirement income sources that guarantee an income until death (like Social Security does).

As long as my client lives, the insurance company must send him income payments resulting from his annuity investment. Upon his death, payments will cease.

Immediate annuities provide “immediate” income. There are two phases to an annuity: the accumulation phase and the income phase.

With a deferred annuity, assets grow during the accumulation phase. Then, at a certain date, the income phase begins – and payments are made to the annuity holder out of the accumulated principal.

With an immediate annuity, you don’t have to wait years for income payments to start. You put a lump sum of money into the annuity, and the payments begin – usually about a month after you set up the annuity contract. (Some “immediate” annuities let you defer income payments for up to one year.)

As owner of an immediate annuity, you have different payout options. A life-only option gives you an income for the remainder of your life. Select a joint and survivor option, and you can add a second life to the contract – that is, payments will continue to be issued to your surviving spouse for the rest of his or her life after you pass away. Or, you can simply structure an annuity payout to last a set number of years.

Longevity has its rewards. If you know a little about the insurance industry, you know insurance policies and annuities are structured around projections of life expectancy. With an annuity, if you die sooner than expected, the insurance company won’t have to pay you as much income as projected. If you outlive their projections, they will have to pay you more. So the healthier you are, the more attractive immediate annuities are.

If your immediate annuity is a life annuity (income payments for life), the older you get, the greater those payments will be. (Life expectancy for annuity payout purposes is determined by insurance company experience and not as a result of a physical examination. If you have a joint and survivor annuity, two lives are used in the calculation and the amount of the payout is smaller than with a single life contract.)

Immediate annuity income can also be affected by insurer assumptions. That is, it may be assumed that the balance of the annuity will earn __% interest or a ___% return annually. Lower interest rates or investment assumptions will lead to a lower income stream.

The after-tax advantage. If an annuity is purchased with after-tax money, the income stream comes with significant tax advantages.

Let’s compare and contrast here. In a deferred annuity, all earnings and investment results grow tax-deferred during the deferral phase. But when income phase starts and the tax-deferred earnings are paid out, the tax collector wants his fair share.

Since an immediate annuity is paying back both principal and tax-deferred earnings, a portion of each payment is considered to be income, and a portion is considered to be tax-free return of principal. The shorter the payout period, the greater the amount that can be excluded from tax.

Immediate annuities can be used in IRAs that require minimum distributions beginning at age 70 ½. These minimum distribution rates are designed to distribute out the entire balance of an IRA over a person’s lifetime. With longer lifespans, the tables the IRS uses for this calculation are fast becoming obsolete – and that raises the very real threat of outliving your IRA assets. However, if those assets are invested in an immediate annuity, a lifetime income stream can be assured and the IRS will accept that income stream amount as an acceptable minimum distribution.¹

So, does it make sense to annuitize? If you’re healthy, active and mature, an immediate annuity can potentially be a great income source for you. Before you arrange an annuity contract, talk to a financial advisor or insurance agent who understands these investments thoroughly, one who can explain your options.

Citations. ¹ irs.gov/publications/p590/ch01.html#d0e1252

How To Know If An Indexed Annuity is Good For You – Presented by Pete Mitchell

Pete Mitchell — Tue, 09 Feb 2010 16:00:08 +0000

FIXED INDEXED ANNUITIES

These conservative investments have become a popular alternative to bonds.

www.youtube.com/watch?v=zrupQKSW5VE

Fixed indexed annuities can be very useful investments. As the name implies, FIAs are fixed annuities linked to the performance of a stock market index (often the S&P 500). Because of this stock market exposure, they can sometimes bring conservative investors very nice returns – often, considerably better returns than CDs, bonds, or money market accounts. They really aren’t designed to outperform the stock markets; they are designed to outperform the fixed markets.

During the accumulation phase of an FIA, you have the opportunity to benefit from stock market gains while your principal is protected against stock market losses. The annuity contract usually guarantees you a minimum rate of interest on your purchase payments while the annuity is growing; the insurance company involved will credit you with either the minimum return stated in the contract or a return based on the performance of the linked index.¹

If you are skittish about stock market investment, you can potentially realize the benefits of stock market participation through this comparatively low-risk investment.

Now each FIA has a particular participation rate. The participation rate signifies the percentage of the invested assets within the annuity keyed to the linked index.

Let’s say you have an FIA linked to the S&P 500 and the participation rate is 60%. That means is the S&P finishes positive you will receive 60% of that gain. If the S&P 500 gains 10% across a year, this means your annuity gives you a 6% return for the year. Compare that 6% potential return to so many CDs and money market accounts which generate a pittance of interest.

Some FIAs measure an index’s gain on an annual basis, others over the entire term of the annuity. Sometimes there are “ceilings” on just how high a return you can realize. From time to time, participation rates may be reset by the insurance company. Occasionally, a margin or “spread” determines the index-linked interest rate instead of a participation rate. In this case, if your annuity gains 10% and the spread is 2.5%, your credited gain is 7.5%.²

Most FIAs give you all the features of a fixed annuity: your earnings are not taxed, and when the distribution phase of your annuity starts, you can receive periodic (usually monthly) income payments. (Sometimes you can take the entire value of your annuity as a lump sum at the end of the contract term. It is your withdrawals of any gains that are taxed.) There is often a guaranteed minimum death benefit payable to your beneficiary when you pass away.

Another Key Feature is there is no annual contribution limit. If you need to put away more retirement savings NOW, the contribution limits on IRAs and 401(k)s can be frustrating. Would you rather have a retirement account you can only put $5,000 or $6,000 in annually, or an account to which you can contribute as much as you want? FIAs (and other types of annuities) have no contribution ceiling, and there are no IRS-imposed income limits above which you cannot contribute.³

But make no mistake, these are long-term investments. Many of these annuity contracts are 7-10 years or longer. If you need to withdraw your money from the annuity in the accumulation phase, there is usually a considerable penalty. Fixed indexed annuities do require a long-term outlook and a long-term commitment. No to mention that the IRS says that if you take a distribution from an annuity prior to age 59 ½, you face the same 10% federal tax penalty.

Would you like to learn more? If you are planning to maintain or improve your quality of life in retirement, maybe you would like to see how fixed indexed annuities can potentially help you. If that’s the case, then give me a call or send me an email and I’d be happy to look at your situation with you.

Citations.

¹ sec.gov/answers/annuity.htm [7/19/05]

² newsobserver.com/293/story/222312.html [10/23/05]

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice.