Retirement Plans for Small Businesses

If you’re self-employed or own a small business and you haven’t established a retirement savings plan, what are you waiting for? A retirement plan can help you and your employees save for the future.

Tax advantages

A retirement plan can have significant tax advantages:

  • Your contributions are deductible when made
  • Your contributions aren’t taxed to an employee until distributed from the plan
  • Money in the retirement program grows tax deferred (or, in the case of Roth accounts, potentially tax free)

Types of plans

Retirement plans are usually either IRA-based (like SEPs and SIMPLE IRAs) or “qualified” (like 401(k)s, profit-sharing plans, and defined benefit plans). Qualified plans are generally more complicated and expensive to maintain than IRA-based plans because they have to comply with specific Internal Revenue Code and ERISA (the Employee Retirement Income Security Act of 1974) requirements in order to qualify for their tax benefits. Also, qualified plan assets must be held either in trust or by an insurance company. With IRA-based plans, your employees own (i.e., “vest” in) your contributions immediately. With qualified plans, you can generally require that your employees work a certain numbers of years before they vest.

Which plan is right for you?

With a dizzying array of retirement plans to choose from, each with unique advantages and disadvantages, you’ll need to clearly define your goals before attempting to choose a plan. For example, do you want:

  • To maximize the amount you can save for your own retirement?
  • A plan funded by employer contributions? By employee contributions? Both?
  • A plan that allows you and your employees to make pretax and/or Roth contributions?
  • The flexibility to skip employer contributions in some years?
  • A plan with lowest costs? Easiest administration?

The answers to these questions can help guide you and your retirement professional to the plan (or combination of plans) most appropriate for you.

SEPs

A SEP allows you to set up an IRA (a “SEP-IRA”) for yourself and each of your eligible employees. You contribute a uniform percentage of pay for each employee, although you don’t have to make contributions every year, offering you some flexibility when business conditions vary. For 2015, your contributions for each employee are limited to the lesser of 25% of pay or $53,000. Most employers, including those who are self-employed, can establish a SEP.

SEPs have low start-up and operating costs and can be established using an easy two-page form. The plan must cover any employee aged 21 or older who has worked for you for three of the last five years and who earns $600 or more.

SIMPLE IRA plan

The SIMPLE IRA plan is available if you have 100 or fewer employees. Employees can elect to make pretax contributions in 2015 of up to $12,500 ($15,500 if age 50 or older). You must either match your employees’ contributions dollar for dollar–up to 3% of each employee’s compensation–or make a fixed contribution of 2% of compensation for each eligible employee. (The 3% match can be reduced to 1% in any two of five years.) Each employee who earned $5,000 or more in any two prior years, and who is expected to earn at least $5,000 in the current year, must be allowed to participate in the plan. SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs are set up for each employee. A financial institution can do much of the paperwork. Additionally, administrative costs are low.

Profit-sharing plan

Typically, only you, not your employees, contribute to a qualified profit-sharing plan. Your contributions are discretionary–there’s usually no set amount you need to contribute each year, and you have the flexibility to contribute nothing at all in a given year if you so choose (although your contributions must be nondiscriminatory, and “substantial and recurring,” for your plan to remain qualified). The plan must contain a formula for determining how your contributions are allocated among plan participants. A separate account is established for each participant that holds your contributions and any investment gains or losses. Generally, each employee with a year of service is eligible to participate (although you can require two years of service if your contributions are immediately vested). Contributions for any employee in 2015 can’t exceed the lesser of $53,000 or 100% of the employee’s compensation.

401(k) plan

The 401(k) plan (technically, a qualified profit-sharing plan with a cash or deferred feature) has become a hugely popular retirement savings vehicle for small businesses. According to the Investment Company Institute, 401(k) plans held $4.3 trillion of assets as of March 2014, and covered 52 million active participants. (Source: http://www.ici.org/401(k), accessed February 5, 2015.) With a 401(k) plan, employees can make pretax and/or Roth contributions in 2015 of up to $18,000 of pay ($24,000 if age 50 or older). These deferrals go into a separate account for each employee and aren’t taxed until distributed. Generally, each employee with a year of service must be allowed to contribute to the plan.

You can also make employer contributions to your 401(k) plan–either matching contributions or discretionary profit-sharing contributions. Combined employer and employee contributions for any employee in 2015 can’t exceed the lesser of $53,000 (plus catch-up contributions of up to $6,000 if your employee is age 50 or older) or 100% of the employee’s compensation. In general, each employee with a year of service is eligible to receive employer contributions, but you can require two years of service if your contributions are immediately vested.

401(k) plans are required to perform somewhat complicated testing each year to make sure benefits aren’t disproportionately weighted toward higher paid employees. However, you don’t have to perform discrimination testing if you adopt a “safe harbor” 401(k) plan. With a safe harbor 401(k) plan, you generally have to either match your employees’ contributions (100% of employee deferrals up to 3% of compensation, and 50% of deferrals between 3 and 5% of compensation), or make a fixed contribution of 3% of compensation for all eligible employees, regardless of whether they contribute to the plan. Your contributions must be fully vested.

Another way to avoid discrimination testing is by adopting a SIMPLE 401(k) plan. These plans are similar to SIMPLE IRAs, but can also allow loans and Roth contributions. Because they’re still qualified plans (and therefore more complicated than SIMPLE IRAs), and allow less deferrals than traditional 401(k)s, SIMPLE 401(k)s haven’t become popular.

Defined benefit plan

A defined benefit plan is a qualified retirement plan that guarantees your employees a specified level of benefits at retirement (for example, an annual benefit equal to 30% of final average pay). As the name suggests, it’s the retirement benefit that’s defined, not the level of contributions to the plan. In 2015, a defined benefit plan can provide an annual benefit of up to $210,000 (or 100% of pay if less). The services of an actuary are generally needed to determine the annual contributions that you must make to the plan to fund the promised benefit. Your contributions may vary from year to year, depending on the performance of plan investments and other factors.

In general, defined benefit plans are too costly and too complex for most small businesses. However, because they can provide the largest benefit of any retirement plan, and therefore allow the largest deductible employer contribution, defined benefit plans can be attractive to businesses that have a small group of highly compensated owners who are seeking to contribute as much money as possible on a tax-deferred basis.

As an employer, you have an important role to play in helping America’s workers save. Now is the time to look into retirement plan programs for you and your employees.

 

 

 

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by Qwest, fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Chevron, Hughes, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent, Northrop Grumman or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

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Medicare Prescription Drug Coverage

If you’re covered by Medicare, here’s some welcome news–Medicare drug coverage can help you handle the rising cost of prescriptions. If you’re covered by original Medicare, you can sign up for a drug plan offered in your area by a private company or insurer that has been approved by Medicare. Many Medicare Advantage plans will also offer prescription drug coverage in addition to the comprehensive health coverage they already offer. Although prescription drug plans vary, all provide a standard amount of coverage set by Medicare. Every plan offers a broad choice of brand name and generic drugs at local pharmacies or through the mail. However, some plans cover more drugs or offer a wider selection of pharmacies (for a higher premium) than others, so you’ll want to choose the plan that best meets your needs and budget.

How much will it cost?

What you’ll pay for Medicare drug coverage depends on which plan you choose. But here’s a look at how the cost of Medicare drug coverage is generally structured in 2015:

A monthly premium: Most plans charge a monthly premium. Premiums vary, but average $33.13. (Source: Centers for Medicare and Medicaid Services.) This is in addition to the premium you pay for Medicare Part B. You can have the premium deducted from your Social Security check, or you can pay your Medicare drug plan company directly.

An annual deductible: Plans may require you to satisfy an annual deductible of up to $320. Deductibles vary widely, so make sure you compare deductibles when choosing a plan.

A share of your prescription costs: Once you’ve satisfied the annual deductible, if any, you’ll generally need to pay 25% of the next $2,640 of your prescription costs (i.e., up to $660 out-of-pocket) and Medicare will pay 75% (i.e., up to $1,980). After that, there’s a coverage gap; you’ll need to pay 100% of your prescription costs until you’ve spent an additional $3,720. (Some plans offer coverage for this gap.) However, once your prescription costs total $6,680 (i.e., your out-of-pocket costs equal $4,700–you’ve paid a $320 deductible + $660 + $3,720 in drug costs–and Medicare has paid $1,980), your Medicare drug plan will generally cover 95% of any further prescription costs. For the rest of the year, you’ll pay either a coinsurance amount (e.g., 5% of the prescription cost) or a small co-payment for each prescription.

Again, keep in mind that all figures are for 2015 only–costs and limits may change each year, and vary among plans.

Note: Health-care legislation passed in 2010 gradually closes the prescription drug coverage gap. In 2015, if you have spending in the coverage gap, you’ll receive a 55% discount on covered brand-name drugs, and a 35% discount on generic drugs. Other changes will take effect in future years.

 Total prescription costs in 2015 What you pay What Medicare pays
$0 to $320 You pay deductible of $320 (some plans may offer lower deductibles) Medicare pays nothing until deductible is satisfied
$320 to $2,960 You pay 25% of costs Medicare pays 75% of costs
$2,960 to $6,680 You pay 100% of costs Medicare pays nothing
Over $6,680 You pay 5% of costs Medicare pays 95% of costs

 

What if you can’t afford coverage? Extra help with Medicare drug plan costs is available to people who have limited income and resources. Medicare will pay all or most of the drug plan costs of seniors who qualify for help. If you haven’t already received an application for help, you can get one at your local pharmacy or order one from Medicare.

When can you join?

Seniors new to Medicare have seven months to enroll in a drug plan (three months before, the month of, and three months after becoming eligible for Medicare). Current Medicare beneficiaries can generally enroll in a drug plan or change drug plans during the annual election period that occurs between October 15 and December 7 of each year, and their Medicare prescription drug coverage will become effective on January 1 of the following year. If you qualify for special help, you can enroll in a drug plan at anytime during the year. Certain other events may qualify you for a Special Enrollment Period outside of the annual election period when you can enroll in a plan or switch plans.

If you already have Medicare drug coverage, remember to review your plan each fall to make sure it still meets your needs. Before the start of the annual election period, you should receive a notice from your current plan letting you know of any important plan modifications or additional plan options. Unless you decide to make a change, you’ll automatically be re-enrolled in the same drug plan for the upcoming year.

Do you have to join?

No. The Medicare prescription drug benefit is voluntary. However, when deciding whether or not to enroll, keep in mind that if you don’t join when you’re first eligible, but decide to join in a future year, you’ll pay a premium penalty that will permanently increase the cost of your coverage. There’s an exception to this premium penalty, though, if the reason you didn’t join sooner was because you already had prescription drug coverage that was at least as good as the coverage available through Medicare.

What if you already have prescription drug coverage?

Like many people, you may already have prescription drug coverage through the Medicare Advantage program, private health insurance such as Medigap, or your employer or former employer’s health plan. You can generally opt either to keep that coverage or join a Medicare prescription drug plan instead. If you already have other prescription drug coverage, you’ll receive a notice from your current provider explaining your options.

What happens after you join?

Once you join a plan, you’ll receive a prescription drug card and detailed information about the plan. In order to receive drug coverage, you’ll generally have to fill your prescription at a pharmacy that is in your drug plan’s network or through a mail-order service in that network. When you fill a prescription, show the card to the pharmacist (or provide the card number through the mail) even if you haven’t satisfied your annual deductible, so that your purchase counts toward the deductible and benefit limits.

What if you have questions?

If you have questions about the Medicare prescription drug benefit, you can get help by calling 1-800-MEDICARE (1-800-633-4227) or by visiting the Medicare website at http://www.medicare.gov. Look for information in the mail from Medicare and the Social Security Administration (SSA), including a copy of this year’s “Medicare and You” publication that will give you details about the prescription drug plans available in your area.

Choosing a Medicare Prescription Drug Plan

  • Start by making a list of all the prescription drugs you currently take and the price you pay for them to see how much you’re spending on prescription drugs.
  • Next, compare plans. Does each plan cover all of the drugs you currently take?
  • What deductible and co-payments does each plan require?
  • What monthly premium will you pay?
  • What pharmacies are included in each plan’s network?
  • Finally, ask for help if you need it. A family member or friend can help you find information, or you can call a Medicare customer representative at 1-800-MEDICARE.

 

 

 

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, Qwest, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Merck, Pfizer, Verizon, Glaxosmithkline, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Indexed Annuities

An indexed annuity (IA) is a contract between you and an insurance company. You pay premiums in a lump sum or periodically, and the issuer promises* to pay you some amount in the future. The IA issuer also provides a minimum guaranteed* interest rate on your premiums paid.

With an IA, the interest earnings are tied to the performance of an equity index such as the S&P 500 or the Dow Jones Industrial Average.

With an IA, your interest earnings may increase if the market performs well, but if the market performs poorly, your principal is not reduced by market losses. Indexed annuities are generally subject to a lengthy surrender charge period. Most IAs pay a minimum guaranteed* interest rate (e.g., 3%) on a percentage of premium (e.g., 87.5%). However, if the IA doesn’t earn interest greater than the minimum, cashing in the account prior to the end of the surrender period may cause the investor to lose money.

Note, however, that any return, whether guaranteed or not, is only as good as the insurance company that offers it. Both the IA’s principal and its earnings are entirely dependent on the insurer’s ability to meet its financial obligations.

Also, be aware that buyers of IAs are not directly invested in the index or the equities comprising the index. The index is merely the instrument used to measure the gain or loss in the market, and that measurement is used to calculate the interest rate.

*Annuity guarantees are subject to the claims-paying ability of the annuity issuer.

Basics

The first IAs that were introduced worked very simply; the interest rate was determined by computing the difference between the value of the index to which the annuity was linked on the annuity’s issue date and the value of the same index on the annuity’s maturity date. If the difference was negative (i.e., the market performed poorly and the value of the index decreased), interest was calculated using the minimum interest rate. If the difference was positive (i.e., the market performed well and the value of the index increased), the interest rate used was a percentage of the difference–but usually not the entire difference.

Participation rates

The participation rate determines how much of the gain in an index will be imparted to your annuity. For example, if the difference (i.e., gain) in the index is 7% and the participation rate is 90%, then the interest rate is 6.3% (90% of 7%). Participation rates of 70% to 90% are typical. Obviously, the higher the participation rate, the higher the potential return. Participation rates are set and limited by the insurance company.

Indexing methods

The indexing method is the approach used to measure the change in an index. The original method, which measures index values at the beginning and end of the term, is known as the point-to-point or European method. The point-to-point method is the simplest approach, but it fails to consider market fluctuations that occur in between the issue and maturity dates. This can result in unsatisfactory returns if the market declines at the end of the term.

Another approach, known as the high-water-mark or look-back method, looks at the value of the index at certain points during the term, such as annual anniversaries. The highest value of these points is then compared to the date-of-issue value to determine any gain to be credited to the IA.

A third approach, the averaging method, also looks at the value of the index at certain points during the annuity’s term, then uses the average value of these points to compute the difference from either the date-of-issue value or the date-of-maturity value.

The fourth main indexing method is known as the reset or ratcheting method. With this method, start-of-year values are compared to end-of-year values for each year of the annuity’s term. Decreases in the index are ignored, and increases are locked in every year.

How interest is credited to an IA

With some IAs, no interest is credited until the end of the term. With others, a percentage of the interest is vested or credited annually or periodically, which gradually increases as the end of the term nears. Further, some IAs pay simple interest while others pay compound interest. These features are important not only because they affect the amount of your return, but also because having interest vested or credited to your IA periodically instead of at the end of the term increases the likelihood that you’ll receive at least some interest if the market thereafter declines.

Caution: Many IAs have surrender charges, which can be a percentage of the amount withdrawn or a reduction in the interest rate. Further, withdrawals from tax-deferred annuities before age 59½ may be subject to a 10% penalty.

Interest rate cap

Some IAs put an upper limit on the interest rate the annuity will earn. Say, for example, that an IA has an interest rate cap of 6%. If the gain in the index is 7% and the participation rate is 90%, the interest rate will be 6%–not 6.3%.

Asset fee/spread/margin

Some IAs charge an asset fee, also known as spread or margin, which is a percentage that is deducted from the interest rate. The asset fee may replace the participation rate or it may be added to it. For example, if the gain in the index is 7%, the interest rate on an IA with an asset fee of 2% will be 5%. If there is also a 90% participation rate, the interest rate will be 4.5%.

Questions to ask about an IA

  • What is the minimum guaranteed* interest rate?
  • What is the participation rate?
  • What is the indexing method? How does it work? Is there an interest rate cap?
  • Is there an asset fee/spread/margin? Is it in addition to or instead of a participation rate?
  • What is the term?
  • When is interest credited or vested? Is interest compounded?
  • What are the surrender charges? Are there penalties for partial withdrawals?

*Annuity guarantees are subject to the financial strength and claims-paying ability of the annuity issuer.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Net Unrealized Appreciation: The Untold Story

If you participate in a 401(k), ESOP, or other qualified retirement plan that lets you invest in your employer’s stock, you need to know about net unrealized appreciation–a simple tax deferral opportunity with an unfortunately complicated name.

When you receive a distribution from your employer’s retirement plan, the distribution is generally taxable to you at ordinary income tax rates. A common way of avoiding immediate taxation is to make a tax-free rollover to a traditional IRA. However, when you ultimately receive distributions from the IRA, they’ll also be taxed at ordinary income tax rates. (Special rules apply to Roth and other after-tax contributions that are generally tax free when distributed.)

But if your distribution includes employer stock (or other employer securities), you may have another option–you may be able to defer paying tax on the portion of your distribution that represents net unrealized appreciation (NUA). You won’t be taxed on the NUA until you sell the stock. What’s more, the NUA will be taxed at long-term capital gains rates–typically much lower than ordinary income tax rates. This strategy can often result in significant tax savings.

What is net unrealized appreciation?

A distribution of employer stock consists of two parts: (1) the cost basis (that is, the value of the stock when it was contributed to, or purchased by, your plan), and (2) any increase in value over the cost basis until the date the stock is distributed to you. This increase in value over basis, fixed at the time the stock is distributed in-kind to you, is the NUA. For example, assume you retire and receive a distribution of employer stock worth $500,000 from your 401(k) plan, and that the cost basis in the stock is $50,000. The $450,000 gain is NUA.

How does it work?

At the time you receive a lump-sum distribution that includes employer stock, you’ll pay ordinary income tax only on the cost basis in the employer securities.

You won’t pay any tax on the NUA until you sell the securities. At that time the NUA is taxed at long-term capital gain rates, no matter how long you’ve held the securities outside of the plan (even if only for a single day). Any appreciation at the time of sale in excess of your NUA is taxed as either short-term or long-term capital gain, depending on how long you’ve held the stock outside the plan.

Using the example above, you would pay ordinary income tax on $50,000, the cost basis, when you receive your distribution. (You may also be subject to a 10% early distribution penalty if you’re not age 55 or totally disabled.) Let’s say you sell the stock after ten years, when it’s worth $750,000. At that time, you’ll pay long-term capital gains tax on your NUA ($450,000). You’ll also pay long-term capital gains tax on the additional appreciation ($250,000), since you held the stock for more than one year. Note that since you’ve already paid tax on the $50,000 cost basis, you won’t pay tax on that amount again when you sell the stock.

If your distribution includes cash in addition to the stock, you can either roll the cash over to an IRA or take it as a taxable distribution. And you don’t have to use the NUA strategy for all of your employer stock–you can roll a portion over to an IRA and apply NUA tax treatment to the rest.

What is a lump-sum distribution?

In general, you’re allowed to use these favorable NUA tax rules only if you receive the employer securities as part of a lump-sum distribution. To qualify as a lump-sum distribution, both of the following conditions must be satisfied:

  • It must be a distribution of your entire balance, within a single tax year, from all of your employer’s qualified plans of the same type (that is, all pension plans, all profit-sharing plans, or all stock bonus plans)
  • The distribution must be paid after you reach age 59½, or as a result of your separation from service, or after your death

There is one exception: even if your distribution doesn’t qualify as a lump-sum distribution, any securities distributed from the plan that were purchased with your after-tax (non-Roth) contributions will be eligible for NUA tax treatment.

NUA at a glance
You receive a lump-sum distribution from your 401(k) plan consisting of $500,000 of employer stock. The cost basis is $50,000. You sell the stock 10 years later for $750,000.*
Tax payable at distribution–stock valued at $500,000
Cost basis–$50,000 Taxed at ordinary income rates; 10% early payment penalty tax if you’re not 55 or disabled
NUA–$450,000 Tax deferred until sale of stock
Tax payable at sale–stock valued at $750,000
Cost basis– $50,000 Already taxed at distribution; not taxed again at sale
NUA– $450,000 Taxed at long-term capital gains rates regardless of holding period
Additional appreciation-$250,000 Taxed as long- or short-term capital gain, depending on holding period outside plan (long-term in this example)
*Assumes stock is attributable to your pretax and employer contributions and not after-tax contributions

 

NUA is for beneficiaries, too

If you die while you still hold employer securities in your retirement plan, your plan beneficiary can also use the NUA tax strategy if he or she receives a lump-sum distribution from the plan. The taxation is generally the same as if you had received the distribution. (The stock doesn’t receive a step-up in basis, even though your beneficiary receives it as a result of your death.)

If you’ve already received a distribution of employer stock, elected NUA tax treatment, and die before you sell the stock, your heir will have to pay long-term capital gains tax on the NUA when he or she sells the stock. However, any appreciation as of the date of your death in excess of NUA will forever escape taxation because, in this case, the stock will receive a step-up in basis. Using our example, if you die when your employer stock is worth $750,000, your heir will receive a step-up in basis for the $250,000 appreciation in excess of NUA at the time of your death. If your heir later sells the stock for $900,000, he or she will pay long-term capital gains tax on the $450,000 of NUA, as well as capital gains tax on any appreciation since your death ($150,000). The $250,000 of appreciation in excess of NUA as of your date of death will be tax free.

Some additional considerations

  • If you want to take advantage of NUA treatment, make sure you don’t roll the stock over to an IRA. That will be irrevocable, and you’ll forever lose the NUA tax opportunity.
  • You can elect not to use the NUA option. In this case, the NUA will be subject to ordinary income tax (and a potential 10% early distribution penalty) at the time you receive the distribution.
  • Stock held in an IRA or employer plan is entitled to significant protection from your creditors. You’ll lose that protection if you hold the stock in a taxable brokerage account.
  • Holding a significant amount of employer stock may not be appropriate for everyone. In some cases, it may make sense to diversify your investments.*
  • Be sure to consider the impact of any applicable state tax laws.

When is it the best choice?

In general, the NUA strategy makes the most sense for individuals who have a large amount of NUA and a relatively small cost basis. However, whether it’s right for you depends on many variables, including your age, your estate planning goals, and anticipated tax rates. In some cases, rolling your distribution over to an IRA may be the better choice. And if you were born before 1936, other special tax rules might apply, making a taxable distribution your best option.

 

 

 

 

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, netbenefits.fidelity.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Raytheon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Concentrated Stock Positions: Considerations and Strategies

Whether you inherited a large holding, exercised options to buy your company’s stock, sold a private business, hold restricted stock, or have benefitted from repeated stock splits over the years, having a large position in a single stock carries unique challenges. Even if the stock has done well, you may want more diversification, or have new financial goals that require a shift in strategy.

When a single stock dominates your portfolio, however, selling the stock may be complicated by more than just the associated tax consequences. There also may be legal constraints on your ability to sell, contractual obligations such as lock-up agreements, or practical considerations, such as the possibility that a large sale could overwhelm the market for a thinly traded stock. The choices appropriate for you are complex and will depend on your own situation and tax considerations, but here is a brief overview of some of your options.

Sell your shares 

Selling obviously frees up funds that can be used to diversify a portfolio. However, if you have a low cost basis, you may be concerned about capital gains taxes. Or you may want to avoid any perception of market manipulation or insider trading. You might consider selling shares over time, which can help you manage the tax bite in any one year, yet allow you to participate in any future growth.

You’ll need to consider the tax consequences of any sale. The American Tax Relief Act of 2012 set the maximum tax rate on long-term capital gains at 20% for those in the 39.6% federal income tax bracket; a 15% rate will generally apply for individuals in the 25%, 28%, 33%, or 35% tax brackets, and a 0% rate will generally apply for those in the 10% and 15% brackets. Also, if your adjusted gross income exceeds $200,000 ($250,000 for married couples filing jointly), your net investment income will be subject to an additional 3.8% Medicare contribution tax. In contrast to previous years, these rates are not scheduled to expire at a certain date. That increased certainty should simplify planning.

If you hold restricted shares, you might set up a 10b5-1 plan, which spells out a predetermined schedule for selling shares over time. Such written plans specify in advance the dates, prices and amounts of each sale, and comply with SEC Rule 144, which governs the sale of restricted stock and was designed to prevent insider trading. A 10b5-1 plan demonstrates that your selling decisions were made prior to your having any insider knowledge that could influence specific transactions. (However, terminating the plan early or selling too much too quickly could raise questions about the plan’s legitimacy.)

You might also be able to avoid some of the restrictions on how much and when you can sell by selling shares privately rather than on the public market. However, you would likely have to sell at less than the market value, and would still face capital gains taxes.

Hedge your position 

You may want to try to protect yourself in the short term against the risk of a substantial drop in price. There are multiple ways to try to manage that risk by using options. However, bear in mind that the use of options is not appropriate for all investors.

Buying a protective put essentially puts a floor under the value of your shares by giving you the right to sell your shares at a predetermined price. Buying put options that can be exercised at a price below your stock’s current market value can help limit potential losses on the underlying equity while allowing you to continue to participate in any potential appreciation. However, you also would lose money on the option itself if the stock’s price remains above the put’s strike price.

Selling covered calls with a strike price above the market price can provide additional income from your holdings that could help offset potential losses if the stock’s price drops. However, the call limits the extent to which you can benefit from any price appreciation. And if the share price reaches the call’s strike price, you would have to be prepared to meet that call.

A collar involves buying protective puts and selling call options whose premiums offset the cost of buying the puts. However, as with a covered call, the upside appreciation for your holding is then limited to the call’s strike price. If that price is reached before the collar’s expiration date, you would not only lose the premium you paid for the put, but would also face capital gains on any shares you sold. Be careful about closing one side of the collar while the other side of the trade remains outstanding. For example, if you exercised the put but the shares you sell are later called away prior to the call’s expiration date, you could be left with an uncovered call. You could potentially suffer a loss if you had to repurchase the shares at a higher price to fulfill the call.

Monetize the position 

If you want immediate liquidity, you might be able to use a prepaid variable forward (PVF) agreement . With a PVF, you contract to sell your shares later at a minimum specified price. You receive most of the payment for those shares–typically 80% to 90% of their value–when the agreement is signed. However, you are not obligated to turn over the shares or pay taxes on the sale until the PVF’s maturity date, which might be years in the future. When that date is reached, you must either settle the agreement by making a cash payment, or turn over the appropriate number of shares, which will vary depending on the stock’s price at that time. In the meantime, your stock is held as collateral, and you can use the upfront payment to buy other securities that can diversify your portfolio. In addition, a PVF still allows you to benefit to some extent from any price appreciation during that time, though there may be a cap on that amount. 

Caution: PVF agreements are complicated, and the IRS warns that care must be taken when using them. Consult a tax professional before using this strategy. 

Borrow to diversify 

If you want to keep your stock but need money to build a more diversified portfolio, you could use your stock as collateral to buy other securities on margin. However, trading securities in a margin account involves risks which you should discuss with a financial professional before considering this strategy.

Exchange your shares 

Another possibility is to trade some of your stock for shares in an exchange fund (a private placement limited partnership that pools your shares with those contributed by other investors who also may have concentrated stock positions). After a set period, generally seven years, each of the exchange fund’s shareholders is entitled to a prorated portion of its portfolio. Taxes are postponed until you sell those shares; you pay taxes on the difference between the value of the stock you contributed and the price received for your exchange fund shares. Though it provides no liquidity, an exchange fund may help minimize taxes while providing greater diversification (though diversification alone does not guarantee a profit or ensure against a loss). Be sure to check on the costs involved with an exchange fund as well as what other securities it holds. At least 20% must be in nonpublicly traded assets or real estate, and the more overlap between your shares and those already in the fund, the less diversification you achieve.

Donate shares to a trust 

If you want income rather than growth from your stock, you might transfer shares to a trust. If you have highly appreciated stock, consider donating it to a charitable remainder trust (CRT). You receive a tax deduction when you make the contribution. Typically, the trust can sell the stock without paying capital gains taxes, and reinvest the proceeds to provide an income stream for you as the donor. When the trust is terminated, the charity retains the remaining assets. You can set a payout rate that meets both your financial objectives and your philanthropic goals; however, the donation is irrevocable.

Another option is a charitable lead trust (CLT), which in many ways is a mirror image of a CRT. With a typical CLT, the charity receives the income stream for a specified time; the rest goes to your beneficiaries. You receive no tax deduction for transferring assets unless you name yourself the trust’s owner, in which case you will pay taxes on the annual income. Other philanthropic options include donating directly to a charity or private foundation and taking a tax deduction.

Managing a concentrated stock position is a complex task that may involve investment, tax, and legal issues. Consult professionals who can help you navigate the maze.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, Pfizer, Verizon, Alcatel-Lucent, AT&T, Bank of America, Qwest, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Chevron, Hughes, Merck or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Will Baby Boomers Ever Truly Retire?

Many may keep working out of interest rather than need.

Baby boomers realize that their retirements may not unfold like those of their parents. New survey data from The Pew Charitable Trusts highlights how perceptions of retirement have changed for this generation. A majority of boomers expect to work in their sixties and seventies, and that expectation may reflect their desire for engagement rather than any economic desperation.

Instead of an “endless Saturday,” the future may include some 8-to-5. Pew asked heads of 7,000 U.S. households how they envisioned retirement and also added survey responses from focus groups in Phoenix, Orlando and Boston. Just 26% of respondents felt their retirements would be work-free. A slight majority (53%) told Pew they would probably work in some context in the next act of their lives, possibly at a different type of job; 21% said they had no intention to retire at all.1

Working longer may help boomers settle debts. A study published by the Employee Benefit Research Institute in January (Debt of the Elderly and Near Elderly, 1992-2013) shows a 2.0% increase in the percentage of indebted households in the U.S. headed by breadwinners 55 and older from 2010-13 (reaching 65.4% at the end of that period). EBRI says median indebtedness for such households hit $47,900 in 2013 compared to $17,879 in 1992. It notes that larger mortgage balances have been a major factor in this.1

Debts aside, some people just like to work. Those presently on the job expect to stay in the workforce longer than their parents did. Additional EBRI data affirms this – last year, 33% of U.S. workers believed that they would leave their careers after age 65. That compares to just 11% in 1991.2

How many boomers will manage to work past 65? This is one of the major unknowns in retirement planning today. We are watching a reasonably healthy generation age into seniority, one that can access more knowledge about being healthy than ever before – yet obesity rates have climbed even as advances have been made in treating so many illnesses.

Working past 65 probably means easing into part-time work – and not every employer permits such transitions for full-time employees. The federal government now has a training program in which FTEs can make such a transition while training new workers and some larger companies do allow phased retirements, but this is not exactly the norm.3

Working less than a 40-hour week may also negatively impact a worker’s retirement account and employer-sponsored health care coverage. EBRI finds that only about a third of small firms let part-time employees stay on their health plans; even fewer than half of large employers (200 or more workers) do. The Transamerica Center for Retirement Studies says part-time workers get to participate in 401(k) plans at only half of the companies that sponsor them.3

Boomers who work after 65 have to keep an eye on Medicare and Social Security. They will qualify for Medicare Part A (hospital coverage) at 65, but they should sign up for Part B (doctor visits) within the appropriate enrollment window and either a Part C plan or Medigap coverage plus Medicare Part D.3

Believe it or not, company size also influences when Medicare coverage starts for some 65-year-olds. Medicare will become the primary insurance for employees at firms with less than 20 workers when they turn 65, even if that company sponsors a health plan. At firms with 20 or more workers, the workplace health plan takes precedence over Medicare coverage, with 65-year-olds maintaining their eligibility for that employer-sponsored health coverage provided they work sufficient hours. Boomers who work for these larger employers may sign up for Part A and then enroll in Part B and optionally a Part C plan or Part D with Medigap coverage within eight months of retiring – they do not have to wait for the next open enrollment period.3

Prior to age 66, federal retirement benefits may be lessened if retirement income tops certain limits. In 2015, if you are 62-65 and receive Social Security, $1 of your benefits will be withheld for every $2 that you earn above $15,720. If you receive Social Security and turn 66, this year, then $1 of your benefits will be withheld for every $3 that you earn above $41,880.4

Social Security income may also be taxed above the program’s “combined income” threshold. (“Combined income” is defined as adjusted gross income + non-taxable interest + 50% of Social Security benefits.) Single filers with combined incomes from $25,000-34,000 may have to pay federal income tax on up to 50% of their Social Security benefits in 2015, and that also applies to joint filers with combined incomes of $32,000-44,000. Single filers with combined incomes above $34,000 and joint filers whose combined incomes top $44,000 may have to pay federal income tax on up to 85% of their Social Security benefits.5

Are boomers really the retiring type? Given the amazing accomplishments and vitality of the baby boom generation, a wave of boomers working past 65 seems more like a probability than a possibility. Life is still exciting; there is so much more to be done.

Citations.

1 – marketwatch.com/story/only-one-quarter-of-americans-plan-to-retire-2015-02-26 [2/26/15]

2 – usatoday.com/story/money/columnist/brooks/2015/02/17/baby-boomer-retire/23168003/ [2/17/15]

3 – tinyurl.com/qdm5ddq [3/4/15]

4 – forbes.com/sites/janetnovack/2014/10/22/social-security-benefits-rising-1-7-for-2015-top-tax-up-just-1-3/ [10/22/14]

5 – ssa.gov/planners/taxes.htm [3/4/15]

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Patrick Ray , and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, Hughes, AT&T, Qwest, Northrop Grumman, Chevron, Merck, Pfizer, Raytheon, ExxonMobil, Glaxosmithkline, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

The Roth 401(k)

The Roth 401(k)

Some employers offer 401(k) plan participants the opportunity to make Roth 401(k) contributions. If you’re lucky enough to work for an employer who offers this option, Roth contributions could play an important role in helping enhance your retirement income.

What is a Roth 401(k)?

A Roth 401(k) is simply a traditional 401(k) plan that accepts Roth 401(k) contributions. Roth 401(k) contributions are made on an after-tax basis, just like Roth IRA contributions. This means there’s no up-front tax benefit, but if certain conditions are met, your Roth 401(k) contributions and all accumulated investment earnings on those contributions are free from federal income tax when distributed from the plan. (403(b) and 457(b) plans can also allow Roth contributions.)

Who can contribute?

Unlike Roth IRAs, where individuals who earn more than a certain dollar amount aren’t allowed to contribute, you can make Roth contributions, regardless of your salary level, as soon as you’re eligible to participate in the plan. And while a 401(k) plan can require employees to wait up to one year before they become eligible to contribute, many plans allow you to contribute beginning with your first paycheck.

How much can I contribute?

There’s an overall cap on your combined pretax and Roth 401(k) contributions. You can contribute up to $18,000 of your pay ($24,000 if you’re age 50 or older) to a 401(k) plan in 2015. You can split your contribution any way you wish. For example, you can make $10,000 of Roth contributions and $8,000 of pretax 401(k) contributions. It’s up to you.

But keep in mind that if you also contribute to another employer’s 401(k), 403(b), SIMPLE, or SAR-SEP plan, your total contributions to all of these plans–both pretax and Roth–can’t exceed $18,000 ($24,000 if you’re age 50 or older). It’s up to you to make sure you don’t exceed these limits if you contribute to plans of more than one employer.

Can I also contribute to a Roth IRA?

Yes. Your participation in a Roth 401(k) plan has no impact on your ability to contribute to a Roth IRA. You can contribute to both if you wish (assuming you meet the Roth IRA income limits). You can contribute up to $5,500 to a Roth IRA in 2015, $6,500 if you’re age 50 or older (or, if less, 100% of your taxable compensation).1

Should I make pretax or Roth 401(k) contributions?

When you make pretax 401(k) contributions, you don’t pay current income taxes on those dollars but your contributions and investment earnings are fully taxable when you receive a distribution from the plan. In contrast, Roth 401(k) contributions are subject to income taxes up front, but qualified distributions of your contributions and earnings are entirely free from federal income tax.

Which is the better option depends upon your personal situation. If you think you’ll be in a similar or higher tax bracket when you retire, Roth 401(k) contributions may be more appealing, since you’ll effectively lock in today’s lower tax rates. However, if you think you’ll be in a lower tax bracket when you retire, pretax 401(k) contributions may be more appropriate. Your investment horizon and projected investment results are also important factors. Before you take any specific action be sure to consult with your own tax or legal counsel.

Are distributions really tax free?

Because your Roth 401(k) contributions are made on an after-tax basis, they’re always free from federal income tax when distributed from the plan. But the investment earnings on your Roth contributions are tax free only if you meet the requirements for a “qualified distribution,”

In general, a distribution is qualified only if it satisfies both of the following:

  • It’s made after the end of a five-year waiting period
  • The payment is made after you turn 59½, become disabled, or die

The five-year waiting period for qualified distributions starts with the year you make your first Roth contribution to your employer’s 401(k) plan. For example, if you make your first Roth contribution to the plan in December 2015, then the first year of your five-year waiting period is 2015, and your waiting period ends on December 31, 2019.

But if you change employers and roll over your Roth 401(k) account from your prior employer’s plan to your new employer’s plan (assuming the new plan accepts Roth rollovers), the five-year waiting period starts instead with the year you made your first contribution to the earlier plan.

If your distribution isn’t qualified (for example, if you receive a payout before the five-year waiting period has elapsed or because you terminate employment), the portion of your distribution that represents investment earnings on your Roth contributions will be taxable, and will be subject to a 10% early distribution penalty unless you are 59½ or another exception applies.

You can generally avoid taxation by rolling your distribution over into a Roth IRA or into another employer’s Roth 401(k), 403(b), or 457(b) plan, if that plan accepts Roth rollovers. (State income tax treatment of Roth 401(k) contributions may differ from the federal rules.)2

What about employer contributions?

While employers don’t have to contribute to 401(k) plans, many will match all or part of your contributions. Your employer can match your Roth contributions, your pretax contributions, or both. But your employer contributions are always made on a pretax basis, even if they match your Roth contributions. That is, your employer’s contributions, and investment earnings on those contributions, are not taxed until you receive a plan distribution.

What else do I need to know?

Like pretax 401(k) contributions, your Roth 401(k) contributions and investment earnings can be paid from the plan only after you terminate employment, incur a financial hardship, attain age 59½, become disabled, or die.

Also, unlike Roth IRAs, you must begin taking distributions from a Roth 401(k) plan after you reach age 70½ (or in some cases, after you retire). But this isn’t as significant as it might seem, since you can generally roll over your Roth 401(k) dollars (other than RMDs themselves) into a Roth IRA if you don’t need or want the lifetime distributions.

Employers aren’t required to make Roth contributions available in their 401(k) plans. So be sure to ask your employer if they are considering adding this exciting feature to your plan.

  Roth 401(k) Roth IRA
Maximum contribution (2015) Lesser of $18,000 or 100% of compensation Lesser of $5,500 or 100% of compensation
Age 50 catch-up (2015) $6,000 $1,000
Who can contribute? Any eligible employee Only if under income limit
Age 70 ½ required distributions? Yes No
Potential matching contributions? Yes No
Potential loans? Yes No
Tax-free qualified distributions? Yes, 5-year waiting period plus either 59 ½, disability, or death Same, plus first time homebuyer expenses (up to $10,000 lifetime)
Nonqualified distributions Pro-rata distribution of tax-free contributions and taxable earnings Tax-free contributions distributed first, then taxable earnings
Investment choices Limited to plan options Virtually unlimited
Banktruptcy protection Unlimited At least $1,245,475 (total of all IRAs)

 

Roth 401(k) Roth IRA Maximum contribution (2015) Lesser of $18,000 or 100% of compensation Lesser of $5,500 or 100% of compensation Age 50 catch-up (2015) $6,000 $1,000 Who can contribute? Any eligible employee Only if under income limit Age 70½ required distributions? Yes No Potential matching contributions? Yes No Potential loans? Yes No Tax-free qualified distributions? Yes, 5-year waiting period plus either 59½, disability, or death Same, plus first time homebuyer expenses (up to $10,000 lifetime) Nonqualified distributions Pro-rata distribution of tax-free contributions and taxable earnings Tax-free contributions distributed first, then taxable earnings Investment choices Limited to plan options Virtually unlimited Bankruptcy protection Unlimited At least $1,245,475 (total of all IRAs)

1 If you have both a traditional IRA and a Roth IRA, your combined contributions to both cannot exceed $5,500 ($6,500 if age 50 or older) in 2015

2 You can avoid tax on the non-Roth portion of your distribution (any pretax contributions, employer contributions, and investment earnings on these contributions) by rolling that portion over into a traditional IRA.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, AT&T, Bank of America, ING Retirement, Northrop Grumman, Raytheon, Qwest, Chevron, Hughes, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Are You Underprepared for Retirement?

A university study serves as a wake-up call.

Financially speaking, how many Americans are truly on track to retire? A recently published white paper suggests that about half of us are approaching our “third acts” with faulty assumptions.

Perception differs from reality. Researchers from the University of Alabama and Ohio State University looked at the Federal Reserve’s Survey of Consumer Finances and assessed the retirement readiness of its 2,300-odd respondents. They determined that 58% of these workers (age 35-60) were saving too little for the future, with a near-majority of that 58% failing to recognize the gravity of their situation. Only 42% of households were sufficiently prepared for retirement, but 46% of households believed they were.1,2

The researchers discovered two other interesting disconnects. One, a slight majority of those who were saving adequately for retirement believed they were not saving enough. Two, the insufficiently prepared workers who were in line to receive old-school pensions were more likely to have flawed assumptions about their retirement readiness than workers without future pensions.1

Just how much money do you really need for retirement? The answer to that question varies per household, but many households could stand to save more. One old rule of thumb says you should save the equivalent of 12 times your end salary for a comfortable retirement. If you retire earning $150,000 a year, that means $1.8 million.3

Very few IRAs or workplace retirement plan accounts contain that much – so if your retirement nest egg needs to be that large, other sources of funding for your retirement probably need to emerge.

A household with either or both spouses earning $150,000 may have those resources. A middle class household may need to dedicate 10% or more of its income to retirement savings accounts.

Saving 5% of your salary for retirement probably means saving too little. Take the case of someone who starts saving for retirement at age 30 while earning $40,000. Hypothetically, assume that this person gets a 3.8% raise annually (which may be optimistic) and gets a consistent 6% yield from his or her retirement accounts (this is a hypothetical example). What if this person works until full retirement age (67)? In 2052, 37 years from now, this worker will have, under these conditions, a retirement nest egg of $423,754. Not bad, but not fantastic.3

Another old rule of thumb says living comfortably in retirement requires 85% of your end salary. A nest egg of $423,754 is clearly too small to provide that for most of us, even with income withdrawn from it supplemented by Social Security payments.3

If you save and invest ably over 30 or 40 years, you might end up a millionaire with the help of strong yields and compounding. You may need to be a millionaire to retire.

What if interruptions mar your retirement savings effort? They may mar it, but they should never halt it. Divorce, medical issues, prolonged joblessness – these and other events may impede your progress toward your savings goals, but the effort to save must still be made as you want time on your side.

If you are able to anticipate such an interruption, there are ways to plan to possibly make up the slack. You could explore investing more aggressively during that time period – but you invite greater market risk. You could cut back on household expenses (or inessential expenses) to free up more money to sustain your pace of retirement saving. Or, you could determine potential strategies far ahead of such disruptions by sitting down with a financial professional to run some scenarios (laid off at 60, taking three years out of the workforce at age 35 or 40 to be a stay-at-home mom or dad, and so forth).

You should strive to be financially prepared for your retirement, and for the unexpected life events or financial surprises that may occur before it arrives.

Citations.

1 – time.com/money/3764455/retirement-readiness/ [4/1/15]

2 – plansponsor.com/Who-Has-a-Realistic-View-of-Retirement-Readiness/ [2/20/15]

3 – investopedia.com/articles/professionals/011215/retirement-savings-how-much-enough.asp [1/12/15]

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, Chevron, Hughes, Glaxosmithkline, Merck, AT&T, Qwest, Raytheon, ExxonMobil, Northrop Grumman, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Patrick Ray is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

Distribution Funds: Putting Income on Autopilot

As baby boomers retire, they begin to focus less on accumulating assets and more on how those assets can be converted into an ongoing stream of income. Distribution funds are one way to simplify that process.

Distribution funds are actively managed mutual funds that focus not on maximizing asset growth but on making regularly scheduled payments to investors. Distribution funds were primarily designed to give retirees an easier way to receive income. For example, early retirees might use one to provide income until they reach full retirement age. They also can be used to complement a pension or other income sources.

How distribution funds work

A distribution fund basically functions much like a systematic withdrawal plan. Its annual payout (either a percentage of assets or a specific dollar amount) is divided into equal payments that are scheduled to be made at regular intervals (typically monthly or quarterly).

As with so-called lifestyle or lifecycle funds, distribution funds typically are offered as part of a group. All funds in the group use a similar investing methodology, but each fund has a different payout target or distribution rate. For example, one fund in the group might offer a 3% annual payout. Another fund in the same group might target a 4% payout, and a third might aim for 6%.

One size doesn’t fit all

Even though funds within a given series are consistent in their approach to income distribution, methods used by various families of distribution funds to generate returns and calculate payments vary widely. For example, one series might differentiate its funds based on the annual percentage each one distributes. Another group of funds might determine annual income levels and asset allocation based on how long each fund’s portfolio is intended to last. The shorter a fund’s time horizon, the higher the targeted annual payout.

Some distribution funds are managed so that all capital is exhausted by the end of a designated time period, generally getting more conservative as that end date gets closer. Others are designed to preserve capital and make payouts primarily from earnings; these typically have no time frame attached. Regardless of how the targeted payout rate is derived for a given fund series, it’s based on what is considered a sustainable withdrawal rate given the fund’s objectives, planned asset allocation, and time frame (if applicable). Also, in some cases, the amount of the payout is adjusted to keep pace with inflation.

A distribution fund’s method of providing its targeted income is generally based on historical rates of return for various types of investments in both good and bad markets. Each fund’s strategy is intended to minimize the impact of market fluctuations on its income payout. However, there is no guarantee a fund’s payout will remain the same from year to year. Also, it’s important to remember that all investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

A distribution fund is generally structured as a fund of funds, meaning that it is comprised of other mutual funds. However, some also include other types of investments.

Distribution funds aren’t annuities

Because of their focus on income, distribution funds are designed to fill a role in retirement that is somewhat similar to that of payments from an immediate annuity. However, there are some key differences. Perhaps the most important is that distribution funds offer no guarantees of the payout levels they offer; immediate annuities generally do (subject to the claims-paying ability of the annuity’s issuer). Also, a mutual fund is not an insurance contract, as an annuity is. And immediate annuities often are designed to ensure an income that lasts throughout an individual’s lifetime, and/or that of a spouse. Though an investor can attempt to provide that with an appropriate distribution fund, no fund can guarantee income for life.

Advantages of distribution funds

A distribution fund can help simplify and streamline the process of receiving ongoing income. You don’t have to worry about constructing that diversified portfolio yourself, shifting its asset allocation over time, or rebalancing it periodically. Also, the concept of a distribution fund may be easier to understand than an insurance contract that has many riders and variables. In addition, a targeted payout rate may make it easier to estimate how long your savings will last than if you were to try to manage your portfolio on your own.

Distribution funds also offer a great deal of flexibility. Even though you receive regularly scheduled payments, you can withdraw additional amounts from your principal at any time. That means you can adjust your annual retirement income from year to year, or make withdrawals to take care of unexpected costs. Investments that guarantee a regular income stream typically restrict the use of your principal.

Because distribution funds were intended as low-cost alternatives to annuities, expense ratios tend to be comparatively low.

Tradeoffs with distribution funds

As mentioned previously, a distribution fund may strive to provide a certain level of income, but there are no guarantees that it will do so. Depending on how a fund is structured and managed, a steep or prolonged market decline could affect the amount of the scheduled payments from year to year, or how long your investment will last. If you cannot afford either possibility, a distribution fund may mean more uncertainty–either long term or short term–than you’re comfortable with.

If you are willing and able to structure and administer a systematic withdrawal program independently, you may be able to replicate many of the advantages of a distribution fund with a well-diversified portfolio. That would give you greater ability to customize payouts to your individual situation. For example, you could shift investments based on what’s happening in the financial markets or your own life, and manage your tax situation from year to year.

Distribution funds are designed for individuals who plan to stay invested in a given fund for an extended period of time. If you’re an active trader or might withdraw your money relatively quickly, you may want to think twice; in-and-out investing will undercut the very reason for choosing a distribution fund. And be aware that even though you can withdraw amounts over and above your scheduled payments, those withdrawals will reduce future earnings that would have supported distributions in later years. That could leave you vulnerable to longevity risk–the possibility of outlasting your savings.

You also may need to consider any projected distribution fund payouts in the context of other retirement income concerns, such as the tax consequences of those payouts, or required minimum distributions from a qualified retirement plan or IRA.

One of many choices

As with most investment options, a distribution fund may not fill all your retirement income needs. Don’t hesitate to get expert advice on whether one might be useful for part of your portfolio, or for a specific purpose.

Note: Past performance is no guarantee of future results and asset allocation alone can’t guarantee a profit or prevent a loss. Before investing in a distribution fund, carefully consider its investment objectives, risks, charges, and expenses, which can be found in the prospectus available from the fund. Read the prospectus carefully before investing.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, ING Retirement, AT&T, hewitt.com, resources.hewitt.com, Merck, Pfizer, Bank of America, access.att.com, Qwest, Chevron, ExxonMobil, Glaxosmithkline, Hughes, Northrop Grumman, Raytheon, Verizon, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Social Security Survivor Benefits

How do you claim them? How much can you receive?

About 5 million widowed Americans get Social Security survivor benefits. If your spouse has passed, you may be eligible to collect them. This means that you could receive as much as 100% of your late spouse’s Social Security income.1,2

Some widows and widowers aren’t aware of these additional retirement benefits. That’s a shame, because they can provide significant financial help during a period of uncertainty.

You can file for survivor benefits at age 60. In fact, you can claim them as early as age 50 if you are disabled (per Social Security’s definition of disability) and if the condition that left you disabled began before or within seven years of your husband’s or wife’s death. In contrast, you can’t put in a claim for spousal Social Security benefits until age 62.1,3

You have to call Social Security to apply for these benefits. Dial 1-800-772-1213 to do that (or 1-800-325-0778 if you are deaf or have trouble hearing). The SSA doesn’t yet permit widows and widowers to apply for survivor benefits online.1

You are actually calling to make an appointment at your local Social Security office, where you can file your survivor benefits application. The SSA says that the process will be faster if you complete its Adult Disability Report beforehand and bring it with you. You can download this form; you will find a link to it at ssa.gov/survivorplan/onyourown2.htm.1

Are you eligible to receive all of your late spouse’s Social Security income, or less? That depends on a few factors. You can apply for the survivor benefits at full retirement age (66 or 67), and receive 100% of the monthly Social Security benefit of your late spouse. If you were to apply for survivor benefits somewhere between age 60 and full retirement age, you will receive between 71.5-99% of your late spouse’s monthly benefit.2

If you are disabled and file for survivor benefits in your fifties, then you will be poised to collect 71.5% of your late spouse’s monthly Social Security income.2

Are you caring for a child who is age 15 or younger? If so, you are eligible to collect a survivor benefit equaling 75% of your late spouse’s monthly Social Security income. In fact, that child is also in line to receive a 75% survivor benefit if he or she is a) younger than 18, b) a K-12 student younger than 19, or c) disabled. (In addition, it is also possible for a surviving spouse to collect a one-time $255 death payment if the spouse has already been getting benefits on the deceased worker’s Social Security record or became eligible for benefits upon that worker’s passing.)2,4

In rare cases, even parents of deceased Social Security recipients are eligible for survivor benefits. If a deceased worker has parents who qualify as his or her dependents, those parents may receive survivor benefits if they are age 62 or older. If there is a single surviving parent, he or she can collect an 82.5% survivor benefit; if the late Social Security recipient was caring for two dependent parents, they can each collect a 75% survivor benefit.2

Social Security does cap the benefit amount that a family can receive. A household can’t get survivor benefits exceeding 150-180% of those received by the late Social Security recipient.2

Divorce is no barrier to survivor benefits. Divorced widows and widowers are eligible for them as well.2

What if you marry again? If you have been widowed and marry again after age 60 (or age 50 if you are disabled), you will still qualify for Social Security survivor benefits. If you remarry prior to age 60, however, you can’t receive survivor benefits while married.2

In certain circumstances, you can “switch out” of survivor benefits. If you remarry and your new spouse gets Social Security, you can apply for spousal benefits based on his or her earnings. If the amount of the spousal benefit would be greater than your survivor benefit, you will get benefits equal to the higher amount.2

Also, you can switch from collecting a survivor benefit to your own retirement benefit starting at age 62 (if you are eligible to collect Social Security at that time and your own benefit would be greater than the survivor benefit).2

Could a pension reduce your survivor benefits? Yes, it could. If you worked at a federal, state or local government job at which you didn’t pay Social Security taxes, the Government Pension Offset, or GPO, kicks in (with rare exemptions). Any pension you receive as a byproduct of that job will lower the amount of your survivor benefit by two-thirds of the amount of your pension. As an example, if you get $600 a month from your state government retirement fund, your $500 monthly survivor benefit would thereby be reduced by $400, or cut to $100 a month.5

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – ssa.gov/survivorplan/onyourown2.htm [2/4/15]

2 – ssa.gov/survivorplan/ifyou5.htm [2/3/15]

3 – time.com/money/3638427/social-security-survivors-benefits-details/ [12/18/14]

4 – ssa.gov/survivorplan/ifyou7.htm [2/4/15]

5 – ssa.gov/retire2/gpo.htm [2/4/15]

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Glaxosmithkline, Hughes, Northrop Grumman, Chevron, ExxonMobil, Raytheon, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Patrick Ray is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.