by TheProAdvisor on October 22, 2009
Planning for retirement requires different strategies before and during retirement. Unfortunately, this simple fact is not understood by many financial advisors. That is why it is important for you to work with a “Financial Professional” who understands retirement planning if you are retired or nearing retirement.
Shifting Concerns in Retirement
Prior to retirement, your main financial concern should be accumulating as much wealth as possible. You want the greatest growth on your assets. Growth is more important than income, especial when taxation is considered. The risks you are willing to take with investments for retirement should be based on how far away your retirement is.
During retirement, your investment objectives shift from accumulation to preserving principal and maximizing income. Unfortunately many advisors plan their client’s retirement as if it were a single stage of life. Nothing could be further from the truth. Retirement can last for more than 30 years. Your lifestyle, needs, and the risks you face will certainly change during those three decades.
The Four Stages of Retirement
It is helpful to think of retirement in four basic stages. They are:
- Pre-retirement – the 10-15 year period leading up to your retirement.
- Initial retirement – this normally lasts 5-10 years and is often marked with reconnecting with family, travel, starting a new business venture, or devoting time to hobbies .
- Seasoned retirement – typically lasts between 10 and 30 years. Although some of the novelty of retirement may have worn off, many retirees experience an increasing level of contentment during these years.
- Mature retirement – This is normally the last few years of retirement and may require things like long-term care or nursing home care, assisted living, or the loss of independence due to disability or illness.
Financial Risks in Retirement
Today’s retiree faces multiple risks to their long-term financial security. While these risks are varied, the following challenges are the most common:
- Inflation – or the changing value of money.
- Investments – or whether or not your invested funds are both secure as well as earning at the level you need
- Loss of a spouse - or whether your retirement income will continue to provide adequate support for a surviving spouse
- Health and frailty – or your ability to pay for health care, long-term care, or nursing home costs – either planned or unexpected
- Longevity – or your ability to ensure your retirement plan provides you an income stream that lasts a lifetime…no matter how long life may be.
Meeting these challenges requires planning and action. A “Financial Professional” who understands retirement income and retirement planning can help you manage these risks.
Working with a Financial Professional
With the help of a dedicated “Financial Professional” you can effectively manage your retirement. Several topics that you will want to discuss with your advisors include:
Keep in mind, with financial planning, time is your best friend or greatest enemy. The longer you wait the further away your retirement goals and objectives become. And remember, there is never a good reason to wait on improving your financial future.
Tagged as:
Income Planning,
Retirement,
Retirement Income,
Retirement Planning
by TheProAdvisor on October 2, 2009
Annuity owners and those with cash value life insurance definitely need to pay attention to this one. The Internal Revenue Service (IRS) recently issued a revenue ruling that affects the tax-exempt status of some 1035 exchanges. It specifically relates to how the IRS will categorize partial 1035 exchanges that result in cash being removed from an existing or new annuity or life insurance policy within 12 months following a 1035 exchange.
In simple terms – if you withdraw money from your annuity or life insurance policy within 12 months of moving it to a new policy or company, you may have to pay taxes. Normally a 1035 exchange protects you from paying taxes on any gains when you change companies or get a new policy, but under these new more stringent guidelines, that may not be the case.
So why is the IRS making this change? It is an attempt to regulate individuals trying to avoid taxes through a common practice of separating the post-tax or principal contributions made to a life insurance or annuity policy from the tax-deferred growth in the policy by completing a 1035 exchange to a new account. These exchanges are technically classified as “partial exchanges”, because only a portion of the total policy value is moved to a new company or account. The portion moved is often only the growth or gains earned in the account over time from interest.
The new policy is, effectively, still classified as a non-qualified account, even though it is made up completely of tax-deferred gains and is now in essence a qualified account. The advantages to the individual involved in such a transaction are that the new policy remains exempt from Required Minimum Distributions (RMD’s). This allows the individuals involved to benefit from the growth of the account without suffering the tax consequences normally associated with RMD’s or being restricted by the early withdrawal penalties of a qualified investment.
While there are some legitimate reasons for using this partial 1035 exchange strategy, especially as it related to variable annuities with a death benefit component, most are simply a tax dodge. This tax dodge or loophole was addressed once before by the IRS through a process called “Boot”, but the restrictions imposed by “Boot” only scrutinized money being taken from a policy for a period of 30 days prior to and after an exchange.
Going forward, all partial 1035 exchanges from an existing annuity or cash value life insurance contract to a new annuity or life insurance policy will not be taxable unless certain conditions are met. The exchange will remain tax-exempt if:
- No surrenders or distributions occur on either contract in the 12-month period following the exchange;
or
- The only distribution taken from the contract is because one of the following occurred during the 12-month period following the partial exchange:
- Attained age 59 ½
- Death
- Disability
- The distribution is associated with premiums contributed before August 14, 1982.
- A life event (such as divorce or loss of employment) occurs between the date of transfer and the date of the distribution.
Bottom line, if you make a partial 1035 exchange and then take a distribution from or surrender any portion of the old or new contract within the first 12 months following the exchange, and do not meet one of the conditions listed above, the exchange will be considered a taxable event and will be reported to the IRS.
This is a complicated topic and it should be thoroughly discussed with your “Financial Professional” and CPA or tax-preparer prior to completing a partial 1035 exchange. Remember, there is never a good reason to delay making your financial future better.
Tagged as:
1035 exchange,
Financial Professional,
IRS,
partial 1035 exchange,
Retirement,
Tax
