MYTH #1 – It’s All Yours…

• One extremely common misconception about the IRA is that you own 100% of it. The reality that all too often many overlook, is that you have a partnership with the IRS, aka Uncle Sam. Let’s say for instance that you have an IRA valued at $500,000 and you are in a 33% federal income tax bracket, the IRS has a future ownership of roughly $165,000 of your IRA! Sounds harsh right? Well, this is the contractual agreement you made with the IRS when you tax-deducted your contributions. In plain language, you agreed to save taxes early on, but now you owe taxes on the yield when you take it out. At a certain point, your partner the IRS will determine when you’ll pay up the big tax bill and how much of it you owe  as time goes on. If your tax bracket jumps to 50%, now Uncle Sam owns HALF of your Retirement Account! The same principles are applied to 401(k)s, 403(b)s, 457s and all other qualified retirement accounts.

MYTH #2 – You Can Dodge Taxes…

• Another fairy tale. The only way your money can come out of the vault is through the armed guard, the IRS, and believe me there is no negotiating your way out of this contract! Everyone with IRAs are required by the 1st of April of the year after you turn 70 1/2 to take taxable distributions. If you experience an untimely death while owning an IRA, wait for it…Your HEIRS will inherit the tax bill. Either way the taxes must be dealt with exactly how the IRS says and all who do not comply will suffer the consequences, which unfortunately is a horrific increase in your tax bill. Thankfully, there are strategies out there that help put the IRA owner take more control of their accounts so they can cut how much tax will be paid.

MYTH #3 – You’re Powerless…

• Lucky for you this is the largest myth of the three. Even though you don’t own the entirety of your IRA(s) and there is no way to dodge to dodge the taxes on IRA distributions, account holders can still strategically increase their income while minimizing the burden of taxation. This type of planning is where a Retirement Advisor plays a crucial role in leading you through the intimidation of regulations, penalties, and deadlines, while getting you the most out of your IRAs 401(k)s, and other retirement accounts.

• February 15, 2025

▪ People’s decisions to buy and sell move stock and bond prices. People might buy or sell in response to external events; however, it is an individual’s decision to buy/sell, and not the actual event, that contributes to the price of a security.
▪ We cannot know what will happen in the future; we cannot know the decisions other people are going to make.

As such, risk as the possibility that other people will make decisions that lead to outcomes different from what we desire, i.e., markets and/or individual securities will move against our positions.

Tools exist to hedge against such movements. Absolute return investing uses those tools. Properly used, those hedging tools can remove the market from the equation and lead to consistent, positive returns regardless of market movements.

Once hedged, investors are free to make decisions whenever they see value or opportunity. Hedging releases us from the fear — the risk – of being highly dependent on others’ actions and decisions. It frees us to act in the moment, to creatively access and choose from among the vast number of solutions that are available for any situation.

Source: Investment CPR, Investing for Consistent Positive Returns

• February 15, 2025

The Concept of stretching out an IRA to beneficiaries is often not addressed in the financial services community. When one sees how the IRA is taxed to beneficiaries as ordinary income, you can see how this can be a very significant tax that the IRA owner may have never really considered. For this discussion, we will assume that a person has rolled over their existing 401k’s or 403b’s to IRA.

If a spouse dies first, the remaining spouse can simply elect a spousal continuation, and take over the existing IRA’s with no tax consequence. But what happens when both parents die and the kids are now in line to receive the funds? Because this money has never been taxed, every dollar of the IRA is taxable to the beneficiaries.

Unfortunately, the majority of IRA’s are taken as a lump sum by the beneficiaries, and it is taxed to them as ordinary income in the year that they receive it!! Usually the beneficiaries are still employed, with many at the peak of their earning years, so they are already in higher tax brackets. When the beneficiary has to claim the inherited IRA amount in addition to their earned income, it can cause the inherited IRA to be taxed at levels well above 25%, usually nearing 30 to 40%, depending upon state and federal taxes.

When the IRA owner sees the possibility of their hard-earned money losing such a significant amount in taxes at distribution, it is very disheartening. The majority of IRA owners don’t realize this, and for many this fact is a real eye opener! Also for many IRA owners they don’t want to see their kids or grandkids spend all the money at once, when it could be used to help them with their retirement.

The Stretch IRA to the Rescue

Fortunately, in the tax code, there is another option available, which is known as the Inherited IRA, also known as the Stretch or Multi-Generational IRA.

If planned properly, an IRA can become one of the greatest family wealth building opportunities under the current tax laws.  A beneficiary can keep the account as in “Inherited IRA” and allow the account to stay intact and still retain its tax deferred status. An Inherited IRA or Stretch IRA has a much lower minimum distribution table. With a reasonable growth rate within the account the account may not start to be depleted until one is in their 80’s.

So, if someone is in their 40’s when they inherit an IRA they can stretch the account out for 40 or more years and for grandchildren the account may grow for over 70 years!  By being able to compound the account without paying taxes the results can truly be amazing and therefor it is one of the most powerful family wealth vehicles available today!

So this sounds really good in concept but unfortunately many IRA accounts are depleted very quickly because of poor planning and not avoiding the many pitfalls that can destroy a plan.  

• February 15, 2025

Why The Inherited Or Stretch IRA Usually Does Not Happen

Unfortunately, most beneficiaries do not always take advantage of the IRA stretch out after the IRA owner’s death. In fact, often the reality is that beneficiaries will withdraw funds from the IRA much earlier and destroy what for many could be their greatest wealth building vehicle.

This occurs for a number of reasons. Sometimes, beneficiaries are not aware of the tax rules and their choices. As soon as they find out that they have been named as IRA beneficiaries, they immediately cash out the account, before they even consult with any professional advisors. 

Another mistake is sometimes, beneficiaries wrongfully believe they can rollover the inherited IRA tax-free to an IRA in their own names when, actually, this is deemed a taxable distribution of the entire inherited IRA.

When a beneficiary prematurely takes out the IRA, this results in the “blowout” rather than a  stretchout! The distributions are immediately taxed and the great opportunity for future tax-deferred wealth compounding is lost. 

Even with  Roth IRA distributions although the funds are not taxed,  the missed opportunity may be greater—the loss of tax-free wealth compounding inside the IRA!

The result of the “blowout” can be devastating causing an entire account to be depleted significantly by income taxes.

Clearly, IRA owners want to help assure that, when their accounts are inherited, the beneficiaries do not mistakenly or intentionally withdraw them too quickly and lose the tremendous potential tax-deferred compounding of family wealth. This may be even more crucial with a Roth IRA that grows tax free for the beneficiaries for their lifetime!

Many IRA owners assume their beneficiaries will have the good common sense, knowledge or proper professional advice to avoid this “blowout” and properly utilize the “stretch out”. This assumption is dangerously naïve. But even if this assumption proves correct, there are other lurking threats to the potential family wealth represented by the inherited IRA.

• February 15, 2025

Asset Protection for the inherited IRA

Asset protection for IRAs is often overlooked. IRA beneficiaries may be exposed to the potential loss of some or all of their inherited IRAs, for many reasons:

Loss of the IRA to lawsuits and creditors. State statutes vary on how much they exempt IRAs from lawsuitsand creditors’ judgments. Recent Rulings on a federal level have deemed IRAs to not be creditor proof.  So in the event of any type of lawsuit the IRA is not protected.

Losing The IRA Due to Divorce. Although inherited property is usually in theory separate and not marital property, beneficiaries can lose this protection by withdrawing the IRA and commingling the funds with marital property (“transmutation”). In addition, even if the inherited IRA is not deemed to be marital property, it definitely is “on the table” when a settlement negotiation takes place, which occurs far more frequently than a full court trial and judge decision. Considering the high incidence of divorce (now over 50 percent in many states), this is a real life threat to the long-term enjoyment of the IRA by the owner’s family.

Spendthrift habits by the beneficiaries.  Needless wasting of the IRA because of the beneficiary’s spendthrift habits (or the spendthrift habits of the beneficiary’s spouse or of some other third party influencing the beneficiary). There is a great temptation to withdraw the IRA immediately because permissible IRA investments typically can be liquidated into cash within a matter of days, whereas other assets inherited outside the IRA, such as real estate, may be more illiquid.

Poor Money Management Skills by the Beneficiary. Even if, at the time of the owner’s death, the account investments were being handled properly by a financial advisor, each of the beneficiaries may simply move theirshare of the account to another custodian and manage it independently. They also may take the advice of a poorly educated financial advisor. Even a helpful and well-meaning financial advisor can easily make a mistake when re-titling the account after the owner’s death, thereby losing the stretch-out.

There are many more situations that can cause an IRA to be withdrawn early therefore losing the powerful strechout. With this is mind what should an IRA owner do to make sure the IRA is protected from the many land mines that can blow up the IRA?

This can vary greatly depending upon each person’s situation.  Let us know your situation and we can help you develop a plan to protect what may be your family’s most important asset.

• February 15, 2025

Company retirement plans such as 401k’s, 403b’s, and 457 plans are tax deferred accounts that act just like an IRA when it comes to taxation.  At age 70 1/2, unless one is still working and contributing to a retirement plan, you have to start taking distributions.  But what about making sure the beneficiaries stretch out the account as an Inherited IRA?  You will see the company plan in most cases does not accommodate this powerful planning strategy.

So what happens if the plan participant passes away while funds are still in their company retirement plan and they have not rolled the funds over to their own IRA?  Here’s another question: What happens if the plan participant has not yet reached retirement age and is not permitted to do an inservice withdrawal? If there is a spouse, a majority of company plans allow a spousal continuation and they can either continue to keep the account within the company plan or roll it over to their own IRA.

But what happens if there is no spouse, or they have already passed away? Even though the Pension Protection Act of 2006 allows a beneficiary to do a trustee to trustee rollover into an inherited IRA by December 31 of the year the participant dies, the company plan is not required to do so.

Even if the plan does allow the inherited rollover now or in the future, it can be very tricky for the beneficiary do this properly.  They have to swim upstream and instead of taking the normal beneficiary payouts, they need to do a trustee to trustee rollover to another custodian and set up the Inherited IRA. In most cases this will be unknown to them and also doing this correctly without making any mistakes that can trigger a taxation of the account can be a difficult task.

So instead of keeping your funds in a company retirement plan, in most cases it is better to roll the account over into your own IRA and set up  planning ahead of time to insure the beneficiaries will take advantage of one the most important planning strategies to increase the family wealth over time.

• February 15, 2025

Many people will reach the earliest age that they can take Social Security and wonder, “Should I take it now or should I wait?” What is the right answer? Everyone is different and has a their own situation so let’s take a look at a few of these

Before we get started let’s look at a few facts…

1. Your Social Security increases between 5 to 7% for every year you wait to take it from age 62 to your full retirement age, andbetween 7 to 8% a year after that until age 70, depending upon your year of birth.
2. The breakeven for taking income at age 62 and receiving the money early vs. waiting until full retirement age is right around age 78. Every year you live past age 78 that is more money you will receive by waiting until full retirement age.
3. If your planning on going back to work, you may not want to file because for every dollar you earn over the 2017 limit of $16,920 you lose one dollar of your Social Security.  This number increases slightly each year. This applies to your earning until the year you reach full retirement, then they allow you to earn $44,880 for 2017.

Let’s look at some instances when you may want to take it early…

I’m retiring early or I got laid off..now what?  This is in most cases the most obvious times that it makes sense to take your Social Security early, you need the money to live!  Go down and file as soon as you can.

You need to enjoy life! Here’s a very valid one that makes a lot of sense for early retirees.  I want to travel and really enjoy my early retirement and having the extra money will allow us to do more.  In our experience working with retirees you are most active in your earlier years of retirement.  Your health is better, you have more energy and many of you are like a kid that just got out of class for summer vacation rearing to go and tons to do!  You are in the GO GO phase of your retirement.  So what if you will have more money later while you sit in your rocking chair in the NO GO Phase of your retirement. Any extra will just go to the kids or get eaten up with Long Term care costs.  Go File and have a great time, plan all your trips, get the motor home and have a blast!!

My health isn’t very good and there’s a good chance I wont live past age 78. or  what if none of my family has lived that long? Unfortunately, this is the case for some retirees, and by all means take the funds now so you can enjoy it!  One caution on that note is what does your spouses’ social security look like because they will receive the higher of yours or theirs if you pass first.  (See article on When you should take Social Security later.)  If there is a green light with spousal income you might as well get the money while you can..go file!

You’re drawing too much income from your portfolio. Your planning to wait until full retirement age to take your Social Security. You need income either because of early retirement, lower wages, job loss, divorce, etc.  You have a portfolio that you are drawing from, but it’s eating up the principle.  If you’re taking more than about a 7 to 8 percent withdrawal rate for the few years until your Social Security kicks in, then you may find yourself eating up your capital too quickly.  It is always important to have some type of an investment portfolio for the future.   By filing early you keep your portfolio in tact.  Go file.. it will probably be worth it in the long run.  IF your not sure if this fits you or your concerned about your portfolio, drop us an email we will help you figure it out.

I just don’t think the funds will be there in the future and I don’t trust the Government?  According to statistics the Social Security Fund is solvent through year 2032 so do the math..if you feel they will be cutting it sooner go file!

I have a large net worth and concerned they will tax me more on my Social Security.  This is a very valid concern for folks who will have a lot of income in retirement, and with Social Security dwindling in the future there is a good chance higher income earners may see a reduction in their payments due to some type of means test.  No one knows the right answer to this but if your convinced of it, Go File!

You’re a widow or widower or your ex passed and your not married yet.  In this particular case you should take the widow’s benefit at an earlier age and you can still take yours at full retirement age but you just won’t get both.  This certainly helps to bring in more income.  You do want to make sure your taking the benefit at full retirement age that will pay you the higher amount, either the widow’s or yours. Go file and take the additional income.

Conclusion

Even though all of the in-depth software that is out today will always tell you to wait until later to claim benefits, these are just numbers they are not real life situations.  There is no right answer for every person, each situation needs to be closely analyzed and then a solid decision can be made.  If you feel you need help with this just drop us an email and we would be glad to discuss this with you ..we love to help!

See the next article..When you should wait until Full Retirement Age to Take Social Security.

• February 15, 2025

Here is a helpful assessment to determine the need for a Roth Conversion…

• February 15, 2025

How Are Social Security Benefits Calculated and What Can I Do To Increase Benefits?”

There are a minimum number of years to qualify. To qualify for any Social Security benefits, you must have at least 40 credits. To receive a credit in 2017, you need to earn $1,300 per credit (this number adjusts each year), with a maximum of four credits per year. So to receive the 40 credits you have to work for at least 10 years earning enough income to qualify for the four credits each year.

How much you receive depends on how long you worked and how much you earned before retirement. 

When Social Security calculates your benefits they first look at your annual earnings over your entire lifetime and then index the amounts for inflation to calculate the values in todays dollars. Next, the 35 highest years’ earnings are added up and divided by 35 to come up the average. This is known as the AIME (Average Index Monthly Earnings). If you don’t have 35 years of earnings, the missing years will be filled in with zeroes.

Next they determine your Primary Insurance Amount (PIA) that will be payable at your Full Retirement Age (FRA). It’s a bit complicated, but just so you know, here’s how it’s calculated. After determining your average earnings over 35 years, then 90% of the first $885 is allowed, then 32% of the amount between $885 and $5336, and finally 15% of the amount above $5336. The three values are added up to determine your PIA.

Many people may wonder what is the maximum amount that they can receive?

Assuming they had maximum earnings for all 35 years, in 2017, a 62 year old would receive $2,153, a 66 year old would receive $2,687, and a 70 year old would receive $3,538.

What about a minimum benefit?

If a worker has had low wages throughout their lifetime, and has worked 35 years the least one can receive is $832.20 which is 20% below the federal poverty level. This is known as the Special Minimum Primary Insurance Amount. For workers with fewer years of work history the amount decreases.

What is My Full Retirement Age?

It has to do with your year of birth. Social Security has determined an exact age down to the month. Here is the breakdown:

Year of Birth Full Retirement Age

1943-54                                         66
1955                                               66 and 2 months
1956                                               66 and 4 months
1957                                               66 and 6 months
1958                                              66 and 8 months
1959                                              66 and 10 months
1960 and after                              67

It’s Important to Have 35 Years of Earnings. If you have less then 35 years of earnings then zeros are added into the formula. When averaging over 35 years this of course will have the affect of reducing your Social Security income. So the bottom line if you still have the opportunity to work more years to offset the zero years, then by all means do so, as this can have a significant affect on your payments that you receive.

Don’t Forget Spousal Benefits. Keep in mind that at the least, a husband or wife is entitled to 50% of their spouse’s Social Security, so if you don’t have a enough work history and even if you decided to work to offset the zeros, it may not matter if it is still less then 50% of your spouse’s. This was originally enacted to offset the fact that many spouses stayed home to raise children.

What if you are divorced or a widow? Read What About Spousal Benefits for Social Security for a more detailed explanation as there are many important facts to consider

A Raise In Pay. Each year, annual COLAs are calculated and applied to your benefit to help you keep up with the cost of living. Although recently the increases have been small, over time you should see incremental increases to help adjust for inflation.

So this Article should help to give you a better picture of how your Social Security benefits are calculated.

IF you have any questions on the details of your Social Security drop us a note and we will try to help!

• February 15, 2025

A Fixed Index Annuity provides you with all of the features of a traditional Fixed Annuity, plus interest credits linked to a stock market index.

• Safety of premium
• Safe potential of stock market-linked growth
• Potential to avoid probate
• Minimum Guaranteed Interest Rate on money in the Fixed Account
• Interest Credit locked in annually
• An option for guaranteed lifetime income
• Annuity Values Grow Tax-Deferred

• February 15, 2025