Pension Protection Act
The Pension Protection Act of 2006 was recently signed into law by President Bush. The act contains
numerous provisions that benefit individuals including:
The Estate Plan For Your IRA
Assets can transfer to your heirs in one of two ways when you die. They can transfer by will, which includes
probate court and public filing of related documents, or they can transfer by contract.
The advantages of having your assets transfer by contract include:
Examples of assets that transfer by contract include accounts or assets titled Joint Tenants with Right of
Survivorship, Transfer on Death and Pay on Death accounts, Life Insurance and Annuity contracts, Trusts,
and your IRA and 401k accounts if you complete the beneficiary forms correctly.
When you first establish an IRA or 401k, an annuity or life insurance contract, you are provided a form to
name beneficiaries. If you fail to complete these forms the assets will usually pass back into your estate and
become part of the probate process. By naming a beneficiary or beneficiaries you can let these assets
transfer by contract. You should also name contingent beneficiaries and choose whether you want the
assets to transfer per stirpes or per capita. By filling out these beneficiary forms you are insuring that your
wishes are honored after your death.
Many people name only a spouse as a beneficiary. If the couple have children or grand children they wish
to provide for they should consider making them contingent beneficiaries to preserve the tax benefits of an
IRA (however if the children or grandchildren are minors be sure a guardian has been named or the funds
will be encumbered until the courts name a guardian).
Currently only surviving spouses can transfer assets from their deceased spouse's 401k to their own IRA,
but the recently enacted Pension Protection Act of 2006 will extend that privilege to any beneficiary after
2007.
The bottom line is beneficiary forms are an integral and important part of your estate plan. Choosing the
right way to transfer these assets can save time and money, but can also be confusing. If you are unsure
how to proceed choose a professional to help you, but don't delay.
Delayed Gratification
According to the Social Security Administration about 50% of retirees claim social security benefits as soon
as they become eligible. Yet benefits are reduced from 5.5% to 6.5% for each year you take benefits before
your normal retirement age, which is currently between age 65 and 67 depending on your date of birth.
For anyone who is still working it makes little sense to begin collecting benefits early. Working claimants will
loose $1 of benefit for every $2 earned above $12,960. In many cases this could wipe out the benefits
altogether. So if you continue to work you should think twice about taking benefits at age 62.
Because social security benefits are based on age but ignore gender, and women tend to have longer life
expectancies than men, it normally would make sense for females to claim benefits as soon as possible, but
again if you plan to work beyond 62 you should carefully examine if delaying benefits will result in higher net
income.
At age 70 social security benefits reach their maximum so there is no point in delaying beyond that point. So
the real question for those who continue to work is whether to claim benefits between normal retirement and
age 70. A good way to judge when to claim benefits is to compare the cost of buying an immediate annuity
to provide this same income over a single life expectancy. Insurance companies are great actuaries, so this
method can show you the present value of future benefits at various ages. Many web sites can provide
immediate quotes for this type of annuity, allowing you to make a comparison of benefits quickly and
privately.
No Load Annuities - Build Your Own Benefits
Annuities have received a lot of bad press the past few years. High expenses and high sales charges in the
form of contingent deferred sales charges (penalties) along with questions of suitablity for older investors
has lead to increased scrutiny by both regulators and the press. Yet sales of deferred annuities continues
to grow.
Why? Investors must like some of the features that annuities offer. One of the features often describes the
ability to invest your money aggressively in the mutual funds offered in the annuity, while knowing your heirs
will receive no less than the amount you originally invested less withdrawals when you die. Some offer a
step up in the death benefit to the highest value on the annuity contract's anniversary date. Investors seem
to like these guarantees, and are willing to pay extra for them.
However with the advent of no-load annuities you may be able to duplicate many of these benefits at a
much lower cost than agent sold policies offer.
Take the basic benefit that pays your heirs the higher of the current contract value or the amount of your
initial investment. While most annuity contracts charge 1.25% per year in Mortality expenses the Schwab
Signature annuity offers this benefit for only .85% per year in Mortality charges, and Ameritas offers this
benefit with only a .55% mortality charge.
To get a death benefit that steps up to the highest anniversary value many companies charge an extra .
30% annually. But you can approximate this guarantee yourself at no cost by using two no load annuity
companies and the 1035 exchange rules. The way this would work is you choose a no load annuity with for
example Schwab. If your annuity appreciates in value and you decide to lock in a new higher death benefit
for your heirs you simply complete an exchange to say Ameritas. Neither company charges you a penalty or
fee for withdrawal so you have effectively stepped up your death benefit without paying anything extra.
By combining immediate annuities with deferred annuities you can also duplicate many of the living income
benefits and principle return benefits offered by variable annuity companies. Again with lower cost to you.
If you have variable annuity contracts that you would like analyzed seek guidance from a fee only advisor
that will have no conflicts of interest in helping you make the decision that is best for you.
The ABC's of Reverse Mortgages
Reverse mortgages have been around for a decade but their popularity remains low. The primary reason
seems to be home owner's reluctance to take any chance when it comes to their abode. Reverse
mortgages are also confusing, complex, and expensive, making them an option of last resort in the minds of
homeowners.
How they work.
A reverse mortgage is like a home equity loan with no payback schedule. Instead of having a mortgage you
make payments on you have a mortgage that provides income to you. You can choose to take a lump sum
payment, a credit line to draw on, or set up a payout schedule much like an annuity. No payments are due
as long as you live in your home, however, interest accrues as you access the funds.
Contrary to common perception, the lender doesn't take your home automatically when the loan comes due.
Heirs may refinance or sell the home to pay off the balance, life insurance benefits could provide funds to
pay off the balance, or the heirs could just use cash to repay the balance if they want to keep the property.
If the house is worth less than the amount due, you or your heirs will only owe the lender what the house
can sell for.
Costs
Reverse mortgages are expensive. You can expect to pay 6% to 8% of your homes value at the time of loan
origination to cover HUD insuring the mortgage, closing costs, and lender fees. Fees are usually rolled into
the mortgage so you do not see an out of pocket expense, but it does increase you borrowing costs and
decrease the money available for you to access.
For more information see AARP and this item from the Federal Trade Commission.
Oak Street Advisors
1902 Oak St
Myrtle Beach, SC 29577
843.946.9868
The Pension Protection Act of 2006 was recently signed into law by President Bush. The act contains
numerous provisions that benefit individuals including:
- Made permanent the increased IRA contribution limits that were set to expire in 2010 and provides for
indexing contributions to inflation after 2008. - Made permanent the tax free withdrawal status for qualified distributions from 529 college savings
plans that were scheduled to expire in 2010. - Allows non-spouse beneficiaries of qualifies plan assets to rollover the proceeds to their own IRA.
- Allows for automatic enrollment in 401k plans, requiring workers to opt out rather than opt in.
- Allows employers to pay advisors to counsel participants in qualified plans without becoming liable for
the advise given to participants as long as the company performs due diligence when hiring advisors
and the advisor is a fiduciary accepting person liability for the advise provided. - Allows members of the military called to active duty to take penalty free distributions from IRA, 401k,
and similar qualified plans. - Permanently allow for Roth 401k and 403b plans.
- Made permanent the Savers Credit under which low and moderate income tax payers can receive a
non refundable credit for contributions to retirement savings plans and IRAs based on income and
filing status.
The Estate Plan For Your IRA
Assets can transfer to your heirs in one of two ways when you die. They can transfer by will, which includes
probate court and public filing of related documents, or they can transfer by contract.
The advantages of having your assets transfer by contract include:
- Privacy - The details of a contract are private and not subject to the public scrutiny of your will and
the probate system. - Speed - Contractual agreements transfer outside of the probate process and so are not subject to
the delays that often arise during probate. - Expense - By transferring assets outside of the probate process you and your heirs could save
significant money in probate fees (these fees vary from state to state).
Examples of assets that transfer by contract include accounts or assets titled Joint Tenants with Right of
Survivorship, Transfer on Death and Pay on Death accounts, Life Insurance and Annuity contracts, Trusts,
and your IRA and 401k accounts if you complete the beneficiary forms correctly.
When you first establish an IRA or 401k, an annuity or life insurance contract, you are provided a form to
name beneficiaries. If you fail to complete these forms the assets will usually pass back into your estate and
become part of the probate process. By naming a beneficiary or beneficiaries you can let these assets
transfer by contract. You should also name contingent beneficiaries and choose whether you want the
assets to transfer per stirpes or per capita. By filling out these beneficiary forms you are insuring that your
wishes are honored after your death.
Many people name only a spouse as a beneficiary. If the couple have children or grand children they wish
to provide for they should consider making them contingent beneficiaries to preserve the tax benefits of an
IRA (however if the children or grandchildren are minors be sure a guardian has been named or the funds
will be encumbered until the courts name a guardian).
Currently only surviving spouses can transfer assets from their deceased spouse's 401k to their own IRA,
but the recently enacted Pension Protection Act of 2006 will extend that privilege to any beneficiary after
2007.
The bottom line is beneficiary forms are an integral and important part of your estate plan. Choosing the
right way to transfer these assets can save time and money, but can also be confusing. If you are unsure
how to proceed choose a professional to help you, but don't delay.
Delayed Gratification
According to the Social Security Administration about 50% of retirees claim social security benefits as soon
as they become eligible. Yet benefits are reduced from 5.5% to 6.5% for each year you take benefits before
your normal retirement age, which is currently between age 65 and 67 depending on your date of birth.
For anyone who is still working it makes little sense to begin collecting benefits early. Working claimants will
loose $1 of benefit for every $2 earned above $12,960. In many cases this could wipe out the benefits
altogether. So if you continue to work you should think twice about taking benefits at age 62.
Because social security benefits are based on age but ignore gender, and women tend to have longer life
expectancies than men, it normally would make sense for females to claim benefits as soon as possible, but
again if you plan to work beyond 62 you should carefully examine if delaying benefits will result in higher net
income.
At age 70 social security benefits reach their maximum so there is no point in delaying beyond that point. So
the real question for those who continue to work is whether to claim benefits between normal retirement and
age 70. A good way to judge when to claim benefits is to compare the cost of buying an immediate annuity
to provide this same income over a single life expectancy. Insurance companies are great actuaries, so this
method can show you the present value of future benefits at various ages. Many web sites can provide
immediate quotes for this type of annuity, allowing you to make a comparison of benefits quickly and
privately.
No Load Annuities - Build Your Own Benefits
Annuities have received a lot of bad press the past few years. High expenses and high sales charges in the
form of contingent deferred sales charges (penalties) along with questions of suitablity for older investors
has lead to increased scrutiny by both regulators and the press. Yet sales of deferred annuities continues
to grow.
Why? Investors must like some of the features that annuities offer. One of the features often describes the
ability to invest your money aggressively in the mutual funds offered in the annuity, while knowing your heirs
will receive no less than the amount you originally invested less withdrawals when you die. Some offer a
step up in the death benefit to the highest value on the annuity contract's anniversary date. Investors seem
to like these guarantees, and are willing to pay extra for them.
However with the advent of no-load annuities you may be able to duplicate many of these benefits at a
much lower cost than agent sold policies offer.
Take the basic benefit that pays your heirs the higher of the current contract value or the amount of your
initial investment. While most annuity contracts charge 1.25% per year in Mortality expenses the Schwab
Signature annuity offers this benefit for only .85% per year in Mortality charges, and Ameritas offers this
benefit with only a .55% mortality charge.
To get a death benefit that steps up to the highest anniversary value many companies charge an extra .
30% annually. But you can approximate this guarantee yourself at no cost by using two no load annuity
companies and the 1035 exchange rules. The way this would work is you choose a no load annuity with for
example Schwab. If your annuity appreciates in value and you decide to lock in a new higher death benefit
for your heirs you simply complete an exchange to say Ameritas. Neither company charges you a penalty or
fee for withdrawal so you have effectively stepped up your death benefit without paying anything extra.
By combining immediate annuities with deferred annuities you can also duplicate many of the living income
benefits and principle return benefits offered by variable annuity companies. Again with lower cost to you.
If you have variable annuity contracts that you would like analyzed seek guidance from a fee only advisor
that will have no conflicts of interest in helping you make the decision that is best for you.
The ABC's of Reverse Mortgages
Reverse mortgages have been around for a decade but their popularity remains low. The primary reason
seems to be home owner's reluctance to take any chance when it comes to their abode. Reverse
mortgages are also confusing, complex, and expensive, making them an option of last resort in the minds of
homeowners.
How they work.
A reverse mortgage is like a home equity loan with no payback schedule. Instead of having a mortgage you
make payments on you have a mortgage that provides income to you. You can choose to take a lump sum
payment, a credit line to draw on, or set up a payout schedule much like an annuity. No payments are due
as long as you live in your home, however, interest accrues as you access the funds.
Contrary to common perception, the lender doesn't take your home automatically when the loan comes due.
Heirs may refinance or sell the home to pay off the balance, life insurance benefits could provide funds to
pay off the balance, or the heirs could just use cash to repay the balance if they want to keep the property.
If the house is worth less than the amount due, you or your heirs will only owe the lender what the house
can sell for.
Costs
Reverse mortgages are expensive. You can expect to pay 6% to 8% of your homes value at the time of loan
origination to cover HUD insuring the mortgage, closing costs, and lender fees. Fees are usually rolled into
the mortgage so you do not see an out of pocket expense, but it does increase you borrowing costs and
decrease the money available for you to access.
For more information see AARP and this item from the Federal Trade Commission.
Oak Street Advisors
1902 Oak St
Myrtle Beach, SC 29577
843.946.9868
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