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Modified endowment contract update

By Keith Singer | February 4, 2019 | 0 Comments

Over the past few years, many of you have taken advantage of liquid modified endowment contracts as a way to safely grow your money without stock market or interest rate risk. These insurance contracts, which have similar properties to deferred annuities, can be designed without upfront loads or back-end surrender charges and with full liquidity. However, unlike deferred annuities, modified endowment contracts provide an income-tax-free death benefit.

 

Certain modified endowment contracts provide a sizable tax-free long-term-care benefit if the insured is unable to perform two out of six activities of daily living. This is an extremely valuable benefit as the population is living longer and the future need for long-term care is expected to increase along with longevity.

 

On the growth side, the contracts earn interest (currently up to 9 percent) in the years the S&P 500 is up but does not lose in the down years and all gains are locked in annually. Historically, the S&P 500 is up about 70 percent of the time. After insurance costs are deducted, the net expected return is about 4.5 percent to 5 percent. However, those insurance costs, as noted previously, provide the owner with a large, tax-free life insurance benefit.

 

This vehicle is very attractive for those looking to get full access to their money, high-risk adjusted returns, cover potential long-term-care expenses, and leave their heirs a larger inheritance. However, the insurance companies I have been working with have indicated that they will be phasing out the full liquidity features on contracts issued after June of 2019.

 

Therefore, if you like the many features of the modified endowment contract, but also want full liquidity, you should take advantage of the liquidity feature while it is still available.

Are Qualified Retirement Plans a Bad Deal for Business Owners?

By Keith Singer | January 27, 2019 | 0 Comments
I recently met with two owners of a manufacturing business, who were each contributing approximately $30,000 into their company’s 401(k) plan. They indicated one of the main reasons for setting up their company’s retirement plan was to fund their own retirement on a tax favored basis. Although the owners were each saving almost $10,000 annually in taxes, federal pension laws required them to contribute about $30,000 per year on behalf of their employees to maximize their own contributions. Therefore, they were paying more to their employees than they were saving in taxes.

 

When the owners reach retirement age and start taking income, they will have no idea how much they are going to owe to the government; it will be dependent upon the prevailing tax rates at the time. Due to the 2017 tax law changes, these business owners, as well as many others, are now in a reduced bracket for at least the next several years.

 

401(k) plans and profit-sharing plans can be a nice employee benefit. However, for many business owners, non-qualified retirement plans may provide a bigger overall tax benefit than traditional qualified retirement plans such as a 401(k) or profit sharing plan. In fact, approximately 72 percent of Fortune 500 companies use non-qualified plans as a way to compensate their executives and highly paid employees*.

 

Non-qualified plans don’t provide a tax deduction on contributions, but they can be designed to grow tax-free and provide tax-free income. These plans have no contribution limits and no discrimination testing. This means business owners and other high income earners can create these plans just for themselves without having to fund them for any employees. Since tax rates are currently low and will likely rise in the future, it is probably wise to pay taxes now at low rates and have nontaxable income during retirement when rates may be much higher.

*Mercer

Protecting your Most Valuable Asset

By Keith Singer | January 20, 2019 | 0 Comments

For those who are working full time trying to accumulate wealth, their ability to work and make money is often their most valuable asset. For instance, someone who is 35 and earning $150,000 per year will typically earn almost $10 million dollars by the time they are age 65. This statistic assumes an annual 5 percent raise but it also assumes the worker remains healthy and able to work full time until retirement age.

 

This is a big assumption because 30 percent of workers will become disabled before age 65.* Most people mistakenly believe that accidents are the most common cause of disabilities. However, 95 percent of disabilities are caused by illness, not injuries. In fact, cancer is the second-leading cause of disabilities.**

 

One of the most universally accepted principles of financial planning is anyone who relies on their income to support themselves and/or their family, should insure that income through a disability income policy. Unfortunately, only about one-third of consumers, including small business owners, have disability policies to protect their earning potential.*

 

Those who work for large corporations may be covered by a group plan. However, if the employee switches jobs, they may no longer be covered by their new employer and even while they are covered by a group plan, the group benefit alone is typically not enough to replace a majority of their income.

 

The inability to work for even a year or two and the corresponding loss of income can have devastating financial consequences to a family. More than half of all personal bankruptcies and mortgage foreclosures are a result of a disability.

 

Variable Annuity policies can vary widely with many different features like own occupation and cost of living adjustments. A knowledgeable advisor can assist in designing the appropriate plan and can potentially get the insured policy discounts if they are aware of how to select the appropriate insurer and properly complete the application.

 

*Limra
** disabilitycanhappen.org

Should you do a partial Roth IRA conversion?

By Keith Singer | January 13, 2019 | 0 Comments

Almost everyone who I meet with has at least some money in an Individual Retirement Account. Conventional wisdom encourages people to save as much as they can into retirement accounts because contributions get a tax deduction and grow tax deferred. However, despite these great tax benefits, ordinary income tax is due on all funds when withdrawn from these accounts, yet we don’t know what tax rates will be at that time. The amount of tax due will be predicated on the prevailing marginal tax rates at the time of withdrawal and the overall income level of account owner.

 

The advantage of converting all or part of one’s IRA to a Roth IRA is twofold. First, the converter is eliminating all future tax liability at current rates that are relatively low. Second, Roth IRAs do not have required minimum distributions and, as such, are an excellent family wealth transfer tool.

 

The real question is who is the best candidate for a Roth conversion? The answer is very simple. If you believe tax rates are historically low (they are) and that rates will eventually rise in the future the next time Democrats take control of Congress and the executive branch, then it’s probably wise to start converting sooner rather than later. Moreover, if your IRA beneficiaries (your children) are in higher tax brackets than you are, Roth conversions will likely result in a substantial reduction in your family’s tax liability. In any case — whether you like it or not — the government is your family’s silent partner in your IRA. It’s up to you to proactively make the smartest possible choices to efficiently dissolve that partnership. Simply choosing to defer that tax for as long as possible is probably not the most optimal strategy.

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