Counting on Your Husband’s Retirement Income? Three Things Women Should Know

Women face special challenges when planning for retirement. According to the Department of Labor,1 women are more likely than men to work in part-time jobs that don’t qualify for a retirement plan. And women are more likely to interrupt their careers (or stay out of the workforce altogether) to raise children or take care of other family members. As a result, women generally work fewer years and save less, leaving many to rely on their husbands’ savings and benefits to carry them both through retirement.

But this reliance creates risk–risk of divorce, risk that retirement funds won’t be adequate to last two lifetimes (a risk that falls disproportionately on women, who outlive men on average by five years), 2 and risk of bad retirement payout decisions. Here are three things you should know if you’re relying on your husband’s savings to carry you through retirement.


Qualified joint and survivor annuities

If your husband is covered by a traditional pension plan at work, one of the most important retirement decisions the two of you may make is whether to receive his pension benefit as a “qualified joint and survivor annuity” (QJSA). While the term sounds complicated, the concept is simple: should you elect a benefit that pays a higher amount while you’re both alive and ends when your husband dies (a single life annuity), or a benefit that pays a smaller amount during your joint lives but continues (in whole or in part) to you if your husband dies first (a QJSA)?
In order to fully understand your choices, it may help to first go over how a traditional pension plan works. Typically, you’re entitled to a “normal benefit,” payable for your lifetime and equal to a percent of your final pay, if you work for a certain number of years and retire at a certain date. A plan might say that you’ll get 50% of your final pay for life if you work 30 years and retire at age 65. If you work fewer years, your benefit will be less. If you retire earlier than age 65, your benefit will also be less, because it’s paid for a longer period of time.

For example, assume Joe is covered by a pension plan at work, and his plan contains the exact formula described above. Joe retires at age 65. He’s worked 30 years, and his final pay was $100,000. He’s entitled to a normal benefit of $50,000 per year, payable over his lifetime and ending at his death (a single life annuity).

But in order to protect spouses, federal law generally provides that if Joe is married, the plan can’t pay this benefit to Joe as a single life annuity unless his spouse, Mary, agrees. Instead, the benefit must be paid over Joe and Mary’s joint lives, with at least 50% of that benefit continuing to Mary for her remaining lifetime if she survives Joe. (That’s why it’s called a “joint and survivor annuity;” and it’s “qualified” because it meets the requirements of federal law–“QJSA” for short.)

Now, here’s where it gets a little complicated. Because the QJSA benefit is potentially paid for a longer period of time–over two lifetimes instead of one–Joe’s “normal benefit” will typically be reduced. Actuaries determine the exact amount of the reduction based on your life expectancies, but let’s assume that Joe’s benefit, if paid as a QJSA with 50% continuing to Mary after Joe’s death, is reduced to $45,000. This amount will be paid until Joe dies. And if Mary survives Joe, then $22,500 per year is paid to her until she dies. But if Mary dies first, the pension ends at Joe’s death, and nothing further is paid.
The plan will usually offer the option to have more than 50% continue to you after your spouse dies. For example, you may be able to elect a 75% or 100% QJSA. However, the larger the survivor annuity you select, the smaller the benefit you’ll receive during your joint lives. So, for example, if 100% continues after Joe’s death, then the payment to Joe might now be reduced to $40,000 (but $40,000 will continue to be paid after Joe’s death to Mary if she survives him).
You can rest assured that the QJSA option will be at least as valuable as any other optional form of benefit available to you–this is required by federal law. In some cases, it will be even more valuable than the other options, as employers often “subsidize” the QJSA. “Subsidizing” occurs when the plan doesn’t reduce the benefit payable during your joint lives (or reduces it less than actuarially allowed). For example, a plan might provide that Joe’s $50,000 normal benefit won’t be reduced at all if he and Mary elect the 50% QJSA option, and that she’ll receive the full $25,000 following Joe’s death. It’s important for you to know whether your spouse’s plan subsidizes the QJSA so that you can make an informed decision about which option to select. Other factors to consider are the health of you and your spouse, who’s likely to live longer, and how much other income you expect to have available if you survive your spouse.
You’ll receive an explanation of the QJSA from the plan prior to your spouse’s retirement, which should include a discussion of the relative values of each available payment option. Carefully read all materials the plan sends you. A QJSA may help assure that you don’t outlive your retirement income–don’t waive your rights unless you fully understand the consequences. And don’t be afraid to seek qualified professional advice, as this could be one of the most important retirement decisions you’ll make.


Qualified domestic relations orders

While we all hope our marriages will last forever, statistics tell us that about 50% of marriages in the United States will end in divorce.3 And since more men are covered by retirement plans and have larger retirement plan balances,4 the issue of how these benefits will be handled in the event of a divorce is especially critical for women who may have little or no retirement savings of their own. Under federal law, employer retirement plan benefits generally can’t be assigned to someone else. However, one important exception to this rule is for “qualified domestic relations orders,” commonly known as QDROs. If you and your spouse divorce, you can seek a state court order awarding you all or part of your spouse’s retirement plan benefit. Your spouse’s plan is required to follow the terms of any order that meets the federal QDRO requirements.
For example, you could be awarded all or part of your spouse’s 401(k) plan benefit as of a certain date, or all or part of your spouse’s pension plan benefit. There are several ways to divide benefits, so it’s very important to hire an attorney who has experience negotiating and drafting QDROs–especially for defined benefit plans where the QDRO may need to address such items as survivor benefits, benefits earned after the divorce, plan subsidies, COLAs, and other complex issues. (For example, a QDRO may provide that you will be treated as the surviving spouse for QJSA purposes, even if your spouse subsequently remarries.) The key takeaway here is that these rules exist for your benefit. Be sure your divorce attorney is aware of them.


You can have your own IRA

While it’s obviously important for women to try to contribute towards their own retirement, if you’re a nonworking spouse, your options are limited. But there is one tool you should know about. The “spousal IRA” rules may let you fund an individual retirement account even if you aren’t working and have no earnings. A spousal IRA is your own account, in your own name–one that could become an important source of retirement income with regular contributions over time.
How does it work? Normally, to contribute to an IRA, you must have compensation at least equal to your contribution. But if you’re married, file a joint federal income tax return, and earn less than your spouse (or nothing at all), the amount you can contribute to your own IRA isn’t based on your individual income, it’s based instead on the combined compensation of you and your spouse.

For example, Mary (age 50) and Joe (age 45) are married and file a joint federal income tax return for 2012. Joe earned $100,000 in 2012 and Mary, at home taking care of ill parents, earned nothing for the year. Joe contributes $5,000 to his IRA for 2012. Even though Mary has no compensation, she can contribute up to $6,000 to an IRA for 2012 (that includes a $1,000 “catch-up” contribution), because Joe and Mary’s combined compensation is at least equal to their total contributions ($11,000).

The spousal IRA rules only determine how much you can contribute to your IRA; it doesn’t matter where the money you use to fund your IRA actually comes from–you’re not required to track the source of your contributions. And you don’t need your spouse’s consent to establish or fund your spousal IRA. (The spousal IRA rules don’t change any of the other rules that generally apply to IRAs. You can contribute to a traditional IRA, a Roth IRA, or both. But you can’t make regular contributions to a traditional IRA after you turn 70½. And your ability to make annual contributions to a Roth IRA may be limited depending on the amount of your combined income.)

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, Pfizer, Verizon, Hughes, netbenefits.fidelity.com, resources.hewitt.com, Raytheon, Merck, Bank of America, hewitt.com, access.att.com, AT&T, Qwest, ING Retirement, Northrop Grumman, ExxonMobil, Chevron, Glaxosmithkline, 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.

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The Right Beneficiary

Who should inherit your IRA or 401(k)? See that they do.

 

Here’s a simple financial question: who is the beneficiary of your IRA? How about your 401(k), life insurance policy, or annuity? You may be able to answer such a question quickly and easily. Or you may be saying, “You know … I’m not totally sure.” Whatever your answer, it is smart to periodically review your beneficiary designations.

Your choices may need to change with the times. When did you open your first IRA? When did you buy your life insurance policy? Was it back in the Eighties? Are you still living in the same home and working at the same job as you did back then? Have your priorities changed a bit – perhaps more than a bit?

While your beneficiary choices may seem obvious and rock-solid when you initially make them, time has a way of altering things. In a stretch of five or ten years, some major changes can occur in your life – and they may warrant changes in your beneficiary decisions.

In fact, you might want to review them annually. Here’s why: companies frequently change custodians when it comes to retirement plans and insurance policies. When a new custodian comes on board, a beneficiary designation can get lost in the paper shuffle. (It has happened.) If you don’t have a designated beneficiary on your 401(k), the assets may go to the “default” beneficiary when you pass away, which might throw a wrench into your estate planning.

How your choices affect your loved ones. The beneficiary of your IRA, annuity, 401(k) or life insurance policy may be your spouse, your child, maybe another loved one or maybe even an institution. Naming a beneficiary helps to keep these assets out of probate when you pass away.

Beneficiary designations commonly take priority over bequests made in a will or living trust. For example, if you long ago named a son or daughter who is now estranged from you as the beneficiary of your life insurance policy, he or she is in line to receive the death benefit when you die, regardless of what your will states. Beneficiary designations allow life insurance proceeds to transfer automatically to heirs; these assets do not have go through probate.1,2

You may have even chosen the “smartest financial mind” in your family as your beneficiary, thinking that he or she has the knowledge to carry out your financial wishes in the event of your death. But what if this person passes away before you do? What if you change your mind about the way you want your assets distributed, and are unable to communicate your intentions in time? And what if he or she inherits tax problems as a result of receiving your assets? (See below.)

How your choices affect your estate. Virtually any inheritance carries a tax consequence. (Of course, through careful estate planning, you can try to defer or even eliminate that consequence.)

If you are simply naming your spouse as your beneficiary, the tax consequences are less thorny. Assets you inherit from your spouse aren’t subject to estate tax, as long as you are a U.S. citizen.

When the beneficiary isn’t your spouse, things get a little more complicated for your estate, and for your beneficiary’s estate. If you name, for example, your son or your sister as the beneficiary of your retirement plan assets, the amount of those assets will be included in the value of your taxable estate. (This might mean a higher estate tax bill for your heirs.) And the problem will persist: when your non-spouse beneficiary inherits those retirement plan assets, those assets become part of his or her taxable estate, and his or her heirs might face higher estate taxes. Your non-spouse heir might also have to take required income distributions from that retirement plan someday, and pay the required taxes on that income.4

If you designate a charity or other 501(c)(3) non-profit organization as a beneficiary, the assets involved can pass to the charity without being taxed, and your estate can qualify for a charitable deduction.5

Are your beneficiary designations up to date? Don’t assume. Don’t guess. Make sure your assets are set to transfer to the people or institutions you prefer. Let’s check up and make sure your beneficiary choices make sense for the future. Just give me a call or send me an e-mail – I’m happy to help you.

This material was prepared by MarketingLibrary.Net 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 – smartmoney.com/taxes/estate/how-to-choose-a-beneficiary-1304670957977/ [6/10/11]

2 – http://www.dummies.com/how-to/content/bypassing-probate-with-beneficiary-designations.html [1/30/13]

3 – http://www.nolo.com/legal-encyclopedia/estate-planning-when-you-re-married-noncitizen.html [1/30/13]

4 – individual.troweprice.com/staticFiles/Retail/Shared/PDFs/beneGuide.pdf [9/10]

5 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Estate-Taxes [8/1/12]

 

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of John Jastremski, 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, Chevron,  AT&T, Qwest,  Hughes, Northrop Grumman, Raytheon, ExxonMobil,  Verizon, Bank of America, Glaxosmithkline, Merck, Pfizer, 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.

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

How to Build an Emergency Fund

How would you respond to sudden financial demands? We all define “emergencies” differently, but we are not immune to them. How can we plan to stay afloat financially when they occur?  Most households are not financially prepared for an emergency – not even close. A recent study from the National Foundation for Credit Counseling found that 64% of Americans had less than $1,000 in funds earmarked for a crisis.1  While the recession did its part to siphon emergency funds from families, attention must be paid to rebuilding those funds. It may be difficult; it may be inconvenient. That doesn’t make it any less of a priority.

Emergencies tend to be linked to long-term debt. Having a designated emergency fund can help you attack that debt. When most people think of financial emergencies, they think of medical problems and burdensome costs that their insurance won’t fully absorb – but there are other paths to long-term debt, such as a sudden layoff, a natural disaster, a family issue with financial underpinnings or even an abrupt need to move to another metro area, for whatever reason.

How large should the fund be? You decide. An old rule of thumb is six months of net income or six months of expenses. If you are snickering or laughing out loud at your chances of saving that much, you aren’t alone. If your prospects of building a five-figure emergency fund seem remote, try to create one equivalent to two or three months of net income. Any amount is better than none.

How do you do it without hurting your standard of living? Few of us have a lump sum we can just reassign for emergencies. So consider these subtle savings opportunities.

> You could pay cash whenever possible, opening the door to incremental savings that credit card companies would otherwise take from you. A few dozen bucks can become a few hundred bucks, then a few thousand bucks over time. Incidentally, in a nationwide survey conducted by Chase Blueprint and LearnVest, 31% of people polled cited credit card debt as a major barrier to achieving financial objectives. The credit card debt carried by this 31% averaged about $5,000. Clearly, living on credit cards will thwart your effort to build a rainy day fund.2

> You could vow not to spend frivolously, thereby retaining money you might be tempted to throw away on impulse.

 

> You could sell stuff – stuff somebody else, maybe down the street or across the country, might want. Incidental shipping and handling costs could seem irrelevant next to the cash you generate.

 

> You could arrange direct deposit or start a seasonal savings account. The psychology behind both moves is simple: you are less likely to spend money if it doesn’t pass through your wallet.

 

Here’s how not to do it. Try to avoid building a crisis fund through self-defeating methods. For example:

> Don’t start an emergency fund with a loan. Do it with your own accumulated savings, bonus money from your job performance, royalties – whatever the origin, use money you have made or and/or saved yourself, not money you have borrowed from lenders or relatives.

> Don’t do it using payday loans or cash advances. High-interest short-term loans and cash advances on credit cards are often pitched as rescues to struggling households. Thanks to their absurd interest rates, payday loans are not financial “life rafts” by any means. Cash advances on credit and debit cards come with disproportionately high fees. Sadly, people who go in for these loans and advances once commonly go in for them again.

Don’t refrain from paying certain bills. Let’s say that you have eight debts you have to pay per month. If you only pay three of them each month and carefully alternate which debts get paid down, can you create an emergency fund with the money you avoid paying? Well, yes – but you may imperil your credit rating in the process.

If you don’t have a designated emergency fund, you can build it up in the same way that you probably invest: a little at a time, with relatively little impact on your lifestyle. It can be done. It should be done.

This material was prepared by MarketingLibrary.Net 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 – http://www.learnvest.com/knowledge-center/5-ways-to-start-an-emergency-fund/ [8/14/12]

2 – http://www.foxbusiness.com/personal-finance/2012/11/01/seven-reasons-why-need-to-create-emergency-fund-now/ [11/1/12]

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, ING Retirement, Bank of America, netbenefits.fidelity.com, MerckVerizon, access.att.com, AT&T, Qwest, Pfizer, Chevron, Northrop Grumman, ExxonMobil, Hughes, Raytheon, hewitt.com, resources.hewitt.com, Glaxosmithkline, 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.

Health Savings Accounts: Are They Just What the Doctor Ordered?

Are health insurance premiums taking too big of a bite out of your budget? Do you wish you had better control over how you spend your health-care dollars? If so, you may be interested in an alternative to traditional health insurance called a health savings account (HSA).

How does this health-care option work?

An HSA is a tax-advantaged account that’s paired with a high-deductible health plan (HDHP). Let’s look at how an HSA works with an HDHP to enable you to cover your current health-care costs and also save for your future needs.

Before opening an HSA, you must first enroll in an HDHP, either on your own or through your employer. An HDHP is “catastrophic” health coverage that pays benefits only after you’ve satisfied a high annual deductible. (Some preventative care, such as routine physicals, may be covered without being subject to the deductible). For 2016, the annual deductible for an HSA-qualified HDHP must be at least $1,300 for individual coverage and $2,600 for family coverage. However, your deductible may be higher, depending on the plan.

Once you’ve satisfied your deductible, the HDHP will provide comprehensive coverage for your medical expenses (though you may continue to owe co-payments or coinsurance costs until you reach your plan’s annual out-of-pocket limit). A qualifying HDHP must limit annual out-of-pocket expenses (including the deductible) to no more than $6,550 for individual coverage and $13,100 for family coverage for 2016. Once this limit is reached, the HDHP will cover 100% of your costs, as outlined in your policy. Because you’re shouldering a greater portion of your health-care costs, you’ll usually pay a much lower premium for an HDHP than for traditional health insurance, allowing you to contribute the premium dollars you’re saving to your HSA. Your employer may also contribute to your HSA, or pay part of your HDHP premium. Then, when you need medical care, you can withdraw HSA funds to cover your expenses, or opt to pay your costs out-of-pocket if you want to save your account funds.

An HSA can be a powerful savings tool. Because there’s no “use it or lose it” provision, funds roll over from year to year. And the account is yours, so you can keep it even if you change employers or lose your job. If your health expenses are relatively low, you may be able to build up a significant balance in your HSA over time. You can even let your money grow until retirement, when your health expenses are likely to be substantial. However, HSAs aren’t foolproof. If you have relatively high health expenses (especially within the first year or two of opening your account, before you’ve built up a balance), you could deplete your HSA or even face a shortfall.

How can an HSA help you save on taxes?

HSAs offer several valuable tax benefits:

  • You may be able to make pretax contributions via payroll deduction through your employer, reducing your current income tax.
  • If you make contributions on your own using after-tax dollars, they’re deductible from your federal income tax (and perhaps from your state income tax) whether you itemize or not. You can also deduct contributions made on your behalf by family members.
  • Contributions to your HSA, and any interest or earnings, grow tax deferred.
  • Contributions and any earnings you withdraw will be tax free if they’re used to pay qualified medical expenses.

Consult a tax professional if you have questions about the tax advantages offered by an HSA

Can anyone open an HSA?

Any individual with qualifying HDHP coverage can open an HSA. However, you won’t be eligible to open an HSA if you’re already covered by another health plan (although some specialized health plans are exempt from this provision). You’re also out of luck if you’re 65 and enrolled in Medicare or if you can be claimed as a dependent on someone else’s tax return.

How much can you contribute to an HSA?

For 2016, you can contribute up to $3,350 for individual coverage and $6,750 for family coverage. This annual limit applies to all contributions, whether they’re made by you, your employer, or your family members. You can make contributions up to April 15th of the following year (i.e., you can make 2015 contributions up to April 15, 2016). If you’re 55 or older, you may also be eligible to make “catch-up contributions” to your HSA, but you can’t contribute anything once you reach age 65 and enroll in Medicare.

Can you invest your HSA funds?

HSAs typically offer several savings and investment options. These may include interest-earning savings, checking, and money market accounts, or investments such as stocks, bonds, and mutual funds that offer the potential to earn higher returns but carry more risk (including the risk of loss of principal). Make sure that you carefully consider the investment objectives, risks, charges, and expenses associated with each option before investing. A financial professional can help you decide which savings or investment options are appropriate.

How can you use your HSA funds?

You can use your HSA funds for many types of health-care expenses, including prescription drugs, eyeglasses, deductibles, and co-payments. Although you can’t use funds to pay regular health insurance premiums, you can withdraw money to pay for specialized types of insurance such as long-term care or disability insurance. IRS Publication 502 contains a list of allowable expenses.

There’s no rule against using your HSA funds for expenses that aren’t health-care related, but watch out–you’ll pay a 20% penalty if you withdraw money and use it for nonqualified expenses, and you’ll owe income taxes as well. Once you reach age 65, however, this penalty no longer applies, though you’ll owe income taxes on any money you withdraw that isn’t used for qualified medical expenses.

Questions to consider

  • How much will you save on your health insurance premium by enrolling in an HDHP? If you’re currently paying a high premium for individual health insurance (perhaps because you’re self-employed), your savings will be greater than if you currently have group coverage and your employer is paying a substantial portion of the premium.
  • What will your annual out-of-pocket costs be under the HDHP you’re considering? Estimate these based on your current health expenses. The lower your costs, the easier it may be to accumulate HSA funds.
  • How much can you afford to contribute to your HSA every year? Contributing as much as you can on a regular basis is key to building up a cushion against future expenses.
  • Will your employer contribute to your HSA? Employer contributions can help offset the increased financial risk that you’re assuming by enrolling in an HDHP rather than traditional employer-sponsored health insurance.
  • Are you willing to take on more responsibility for your own health care? For example, to achieve the maximum cost savings, you may need to research costs and negotiate fees with health providers when paying out-of-pocket.
  • How does the coverage provided by the HDHP compare with your current health plan? Don’t sacrifice coverage to save money. Read all plan materials to make sure you understand benefits, exclusions, and all costs.
  • What tax savings might you expect? Tax savings will be greatest for individuals in higher income tax brackets. Ask your tax advisor or financial professional for help in determining how HSA contributions will impact your taxes.

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, Alcatel-Lucent, AT&T, Bank of America, Qwest, Chevron, Hughes, ExxonMobil, Glaxosmithkline, Merck, Northrop Grumman, Pfizer, Raytheon, Verizon 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.

Common Annuity Riders

An annuity is a contract between you (the purchaser or owner) and the issuer (an insurance company). In its simplest form, you pay money to the annuity issuer, the issuer invests the money for you, and then the issuer pays out the principal and earnings back to you or to a named beneficiary.

An immediate annuity is a contract between you and an insurance company in which you pay a single sum of money to the company in exchange for its promise to make payments to you for a fixed period of time or for the rest of your life.

Annuity riders are optional features that provide added benefits to a basic annuity contract. For example, some riders focus on offering greater access to the annuity’s principal, or providing long-term income.

Annuity riders usually come with an annual cost, generally ranging from.1% to 1.0% or more of the annuity’s value. Review the annuity sales materials and prospectus for a description of applicable fees and charges. The availability of a specific annuity rider usually depends on the annuity issuer and the type of annuity you are considering. 

Cost-of-living adjustment rider

The cost-of-living adjustment rider, available on some immediate annuities, increases immediate annuity payments by a stated annual percentage to offset the effects of inflation. However, due to the added cost of this rider to the issuer, the first few payments from an annuity with this rider are typically less than they would be without the rider. It usually takes several years before cost-of-living immediate annuity payments equal or exceed immediate annuity payments without this rider. 

Cash/installment refund rider

Available on some immediate annuities, the cash refund rider provides that if the total of all immediate annuity payments received by the time of your death is less than the investment (the premium) you paid into the immediate annuity, the difference is paid in a lump sum to your annuity beneficiary. The installment refund rider is similar to the cash refund rider, except that your beneficiary receives the balance of the immediate annuity premium in installment payments instead of a lump sum. 

Impaired risk (medically underwritten) rider

This rider may be added to an immediate annuity. Ordinarily, an insurance company bases the amount of immediate annuity payments on the amount of premium you pay, your age at the time payments begin, and how long you are expected to live if payments are to be made for the rest of your life. If you have a medical condition that reduces your life expectancy, the impaired risk rider bases your annuity payments on your shortened life expectancy. This results in payments being greater than they would be for a person in good health, or the payments can be the same but for a smaller premium.

Commuted payout rider

This immediate annuity rider allows you to withdraw a lump-sum amount from your immediate annuity in addition to the regular payments you are receiving. Usually, this option is available for a limited period of time, and may be limited to a maximum dollar amount or a maximum percentage of your premium.

Guaranteed minimum accumulation benefit rider (GMAB)

The GMAB rider, available with some variable annuities, restores your annuity’s accumulation value to the amount of your total premiums paid if, after a prescribed number of years (usually 5 to 10), the annuity’s accumulation value is less than the premiums you paid (excluding your withdrawals). Some issuers offer this rider with the ability to lock in any gains in the accumulation value. Thereafter, your guaranteed minimum accumulation value will equal your total premiums paid, plus locked-in gains, less withdrawals.

Guaranteed minimum withdrawal benefit rider (GMWB) 

The GMWB rider provides you with a minimum income by allowing you to take withdrawals from your annuity up to an amount at least equal to the premiums you paid. Annual withdrawals are usually limited to a percentage of the total premiums paid (5% to 12% per year). Both the GMAB rider and the GMWB rider provide you with the opportunity to secure the return of your investment (the premium) in the annuity, even if the annuity’s accumulation value decreases due to poor subaccount performance. 

Guaranteed minimum income benefit rider (GMIB)

The GMIB rider, included with some variable annuities, offers a minimum income regardless of your actual accumulation value. The annuity issuer adds a growth rate to your premiums (usually 5% to 7% per year) that becomes your guaranteed minimum account value. After a minimum number of years (often 5 to 10), the rider allows you to convert the variable annuity to an immediate annuity and receive payments based on the greater of the minimum account value or the annuity’s accumulation value. 

Guaranteed lifetime withdrawal benefit rider (GLWB)

The GLWB rider may be added to some annuity contracts. It allows you to receive an annual income for the rest of your life without having to convert to an immediate annuity. And you can usually access the remaining accumulation value in addition to the income payments received. Income payments and withdrawals are subtracted from the annuity’s cash value.  

Long-term care rider

The long-term care rider is available with many fixed deferred annuities. If you become confined to a nursing home, or are unable to take care of yourself, this rider allows you to access more of your annuity’s accumulation value, possibly up to 100%, without the imposition of surrender charges or distribution costs otherwise applicable. 

Disability/unemployment rider

These riders are offered with fixed and variable annuities. If you become disabled for an extended period of time (usually from 60 days to 1 year), or if you are unemployed for a similar length of time and are eligible for unemployment benefits, these riders allow you to access a portion or all of your annuity’s accumulation value without the imposition of surrender charges. 

Terminal illness rider

This rider, available with both fixed and variable annuities, waives surrender charges otherwise applicable for a portion or all of your annuity’s accumulation value if you suffer from a terminal illness with a medical life expectancy of one year or less. 

Immediate Variable Fixed
Cost-of-Living GMAB LTC
Cash/Installment GMWB Disability
Impaired Risk GMIB Terminal Illness
Commuted Payout GLWB GLWB
Disability Disability

 

Terminal Illness

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, Bank of America, Northrop Grumman, Raytheon, Alcatel-Lucent, Qwest, Chevron, Hughes, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon 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.

Signs of Elder Abuse

Physical, mental & financial warning signals.

Is someone taking advantage of someone you love? June 15 is World Elder Abuse Prevention Day, a day to call attention to a crisis that may become even more common as baby boomers enter the “third acts” of their lives.1

Every year, more than half a million American elders are abused or neglected. That estimate comes from the Centers for Disease Control, and the frequency of elder abuse may be greater as so many elders are afraid or simply unable to speak out about what is happening to them. In some cases, the abuse is limited to financial exploitation. In other cases, it may encompass neglect and physical or emotional cruelty.1

What should you watch out for? Different varieties of elder abuse have different signals, some less obvious than others.

Neglect. This is commonly defined as withholding or failing to supply necessities of daily living to an elder, from food, water and appropriate clothing to necessary hygiene and medicines. Signals are easily detectable and include physical signs such as bedsores, malnutrition and dehydration and flawed living conditions (i.e., faulty electrical wiring, fleas or cockroaches, inadequate heat or air conditioning).

Self-neglect also surfaces, stemming from the declining physical or mental capacity of an elder. If he or she foregoes proper hygiene, disdains needed medications or medical aids, or persists in living in an insect-ridden, filthy or fire-hazardous dwelling, intervene to try and change their environment for the better, for their health and safety.

Finally, neglect may also take financial form. If someone who has assumed a fiduciary duty to pay for assisted living, nursing home care or at-home health care fails to do so, that is a form of neglect which may be defined as elder abuse. The same goes for an in-home eldercare service provider that fails to provide an adequate degree or frequency of care.2

Abandonment. This occurs when a caregiver or responsible party flat-out deserts an elder – dropping him or her off at a nursing home, a hospital, or even a bus or train station with no plans to return. Hopefully, the elder has the presence of mind to call for help, but if not, a tragic situation will quickly worsen. When an elderly person seems to stay in one place for hours and appears confused or deserted, it is time to get to the bottom of what just happened for his or her safety.

Physical abuse. Bruises and lacerations are evident signals, but other indicators are less evident: sprains and dislocations, cracked eyeglass lenses, impressions on the arms or legs from restraints, too much or too little medication, or a strange reticence, silence or fearfulness or other behavioral changes in the individual.

Emotional or psychological abuse. How do you know if an elder has been verbally degraded, tormented, or threatened in your absence, or left in isolation? If the elder is not willing or able to let you know about such wrongdoing, watch for signals such as withdrawal from conversation or communication, agitation or distress, and repetitive or obsessive-compulsive actions linked to dementia such as rocking, biting or sucking.2

Financial abuse. When an unscrupulous relative, friend or other party uses an elder’s funds, property, or assets illegally or dishonestly, this is financial exploitation of the elderly. This runs all the way from withdrawing an elder’s savings with his or her ATM card to forgery to improperly assuming conservatorship or power of attorney.2

How do you spot it? Delve into the elder’s financial life and see if you detect things like strange ATM withdrawals or account activity, additional names on a bank signature card, changes to beneficiary forms, or the sudden absence of collectibles or valuables.

Examine signatures on financial transactions – on closer examination, do they appear to be authentic, or studied forgeries? Have assets been inexplicably transferred to long-uninvolved heirs or relatives, or worse yet apparent strangers? Have eldercare bills gone unpaid recently? Is the level of eldercare being provided oddly slipshod given the financial resources being devoted to it?

Respect your elders; protect your elders. Some people aim to exploit senior citizens. Others simply don’t recognize or respect the responsibilities that come with eldercare. Whether the abuse is intentional or not, the emotional, physical or financial harm done can be reprehensible. Talk to or check in on your parents, grandparents, siblings or other elders you know and care for to see that they are free from such abuse.

Citations.

1 – cdc.gov/features/elderabuse/ [6/9/14]

2 – ncea.aoa.gov/FAQ/Type_Abuse/index.aspx [2/10/15]

The Retirement Group is not affiliated with nor endorsed by Bank of America, Raytheon, ExxonMobil, fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, Hughes, Northrop Grumman, Qwest, Chevron, ING Retirement, AT&T, Verizon, Glaxosmithkline, Merck, Pfizer, 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.

The Right Beneficiary

Who should inherit your IRA or 401(k)? See that they do.

 

Here’s a simple financial question: who is the beneficiary of your IRA? How about your 401(k), life insurance policy, or annuity? You may be able to answer such a question quickly and easily. Or you may be saying, “You know … I’m not totally sure.” Whatever your answer, it is smart to periodically review your beneficiary designations.

Your choices may need to change with the times. When did you open your first IRA? When did you buy your life insurance policy? Was it back in the Eighties? Are you still living in the same home and working at the same job as you did back then? Have your priorities changed a bit – perhaps more than a bit?

While your beneficiary choices may seem obvious and rock-solid when you initially make them, time has a way of altering things. In a stretch of five or ten years, some major changes can occur in your life – and they may warrant changes in your beneficiary decisions.

In fact, you might want to review them annually. Here’s why: companies frequently change custodians when it comes to retirement plans and insurance policies. When a new custodian comes on board, a beneficiary designation can get lost in the paper shuffle. (It has happened.) If you don’t have a designated beneficiary on your 401(k), the assets may go to the “default” beneficiary when you pass away, which might throw a wrench into your estate planning.

How your choices affect your loved ones. The beneficiary of your IRA, annuity, 401(k) or life insurance policy may be your spouse, your child, maybe another loved one or maybe even an institution. Naming a beneficiary helps to keep these assets out of probate when you pass away.

Beneficiary designations commonly take priority over bequests made in a will or living trust. For example, if you long ago named a son or daughter who is now estranged from you as the beneficiary of your life insurance policy, he or she is in line to receive the death benefit when you die, regardless of what your will states. Beneficiary designations allow life insurance proceeds to transfer automatically to heirs; these assets do not have go through probate.1,2

You may have even chosen the “smartest financial mind” in your family as your beneficiary, thinking that he or she has the knowledge to carry out your financial wishes in the event of your death. But what if this person passes away before you do? What if you change your mind about the way you want your assets distributed, and are unable to communicate your intentions in time? And what if he or she inherits tax problems as a result of receiving your assets? (See below.)

How your choices affect your estate. Virtually any inheritance carries a tax consequence. (Of course, through careful estate planning, you can try to defer or even eliminate that consequence.)

If you are simply naming your spouse as your beneficiary, the tax consequences are less thorny. Assets you inherit from your spouse aren’t subject to estate tax, as long as you are a U.S. citizen.3

When the beneficiary isn’t your spouse, things get a little more complicated for your estate, and for your beneficiary’s estate. If you name, for example, your son or your sister as the beneficiary of your retirement plan assets, the amount of those assets will be included in the value of your taxable estate. (This might mean a higher estate tax bill for your heirs.) And the problem will persist: when your non-spouse beneficiary inherits those retirement plan assets, those assets become part of his or her taxable estate, and his or her heirs might face higher estate taxes. Your non-spouse heir might also have to take required income distributions from that retirement plan someday, and pay the required taxes on that income.4

If you designate a charity or other 501(c)(3) non-profit organization as a beneficiary, the assets involved can pass to the charity without being taxed, and your estate can qualify for a charitable deduction.5

Are your beneficiary designations up to date? Don’t assume. Don’t guess. Make sure your assets are set to transfer to the people or institutions you prefer. Let’s check up and make sure your beneficiary choices make sense for the future. Just give me a call or send me an e-mail – I’m happy to help you.

This material was prepared by MarketingLibrary.Net 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 – smartmoney.com/taxes/estate/how-to-choose-a-beneficiary-1304670957977/ [6/10/11]

2 – http://www.dummies.com/how-to/content/bypassing-probate-with-beneficiary-designations.html [1/30/13]

3 – http://www.nolo.com/legal-encyclopedia/estate-planning-when-you-re-married-noncitizen.html [1/30/13]

4 – individual.troweprice.com/staticFiles/Retail/Shared/PDFs/beneGuide.pdf [9/10]

5 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Estate-Taxes [8/1/12]

The Retirement Group is not affiliated with nor endorsed by fidelity.com, resources.hewitt.com, Glaxosmithkline, Northrop Grumman, Merck, Hughes, Bank of AmericaQwestExxonMobil, ING Retirement, Verizon, netbenefits.fidelity.com, hewitt.com, Pfizer, Raytheon, access.att.com, AT&T, Chevron, 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.

Medical Professionals: A Prescription for Your Financial Health

The demands on medical practitioners today can seem overwhelming. It’s no secret that health-care delivery is changing, and those changes are reflected in the financial issues that health-care professionals face every day. You must continually educate yourself about new research in your chosen specialty, stay current on the latest technology that is transforming health care, and pay attention to business considerations, including ever-changing state and federal insurance regulations.

Like many, you may have transitioned from medical school and residency to being on your own with little formal preparation for the substantial financial issues you now face. Even the day-to-day concerns that affect most people–paying college tuition bills or student loans, planning for retirement, buying a home, insuring yourself and your business–may be complicated by the challenges and rewards of a medical practice. It’s no wonder that many medical practitioners look forward to the day when they can relax and enjoy the fruits of their labors.

Unfortunately, substantial demands on your time can make it difficult for you to accurately evaluate your financial plan, or monitor changes that can affect it. That’s especially true given ongoing health care reform efforts that will affect the future of the industry as a whole. Just as patients need periodic checkups, you may need to work with a financial professional to make sure your finances receive the proper care.

Maximizing your personal assets

Much like medicine, the field of finance has been the subject of much scientific research and data, and should be approached with the same level of discipline and thoughtfulness. Making the most of your earning years requires a plan for addressing the following issues.

Retirement

Your years of advanced training and perhaps the additional costs of launching and building a practice may have put you behind your peers outside the health-care field by a decade or more in starting to save and invest for retirement. You may have found yourself struggling with debt from years of college, internship, and residency; later, there’s the ongoing juggling act between making mortgage payments, caring for your parents, paying for weddings and tuition for your children, and maybe trying to squeeze in a vacation here and there. Because starting to save early is such a powerful ally when it comes to building a nest egg, you may face a real challenge in assuring your own retirement. A solid financial plan can help.

Investments

Getting a late start on saving for retirement can create other problems. For example, you might be tempted to try to make up for lost time by making investment choices that carry an inappropriate level or type of risk for you. Speculating with money you will need in the next year or two could leave you short when you need that money. And once your earnings improve, you may be tempted to overspend on luxuries you were denied during the lean years. One of the benefits of a long-range financial plan is that it can help you protect your assets–and your future–from inappropriate choices.

Tuition

Many medical professionals not only must pay off student loans, but also have a strong desire to help their children with college costs, precisely because they began their own careers saddled with large debts.

Tax considerations

Once the lean years are behind you, your success means you probably need to pay more attention to tax-aware investing strategies that help you keep more of what you earn.

Using preventive care

The nature of your profession requires that you pay special attention to making sure you are protected both personally and professionally from the financial consequences of legal action, a medical emergency of your own, and business difficulties. Having a well-defined protection plan can give you confidence that you can practice your chosen profession without putting your family or future in jeopardy.

Liability insurance

Medical professionals are caught financially between rising premiums for malpractice insurance and fixed reimbursements from managed-care programs, and you may find yourself evaluating a variety of approaches to providing that protection. Some physicians also carry insurance that protects them against unintentional billing errors or omissions. Remember that in addition to potential malpractice claims, you also face the same potential liabilities as other business owners. You might consider an umbrella policy as well as coverage that protects you against business-related exposures such as fire, theft, employee dishonesty, or business interruption.

Disability insurance

Your income depends on your ability to function, especially if you’re a solo practitioner, and you may have fixed overhead costs that would need to be covered if your ability to work were impaired. One choice you’ll face is how early in your career to purchase disability insurance. Age plays a role in determining premiums, and you may qualify for lower premiums if you are relatively young. When evaluating disability income policies, medical professionals should pay special attention to how the policy defines disability. Look for a liberal definition such as “own occupation,” which can help ensure that you’re covered in case you can’t practice in your chosen specialty.

To protect your business if you become disabled, consider business overhead expense insurance that will cover routine expenses such as payroll, utilities, and equipment rental. An insurance professional can help evaluate your needs.

Practice management and business planning

Is a group practice more advantageous than operating solo, taking in a junior colleague, or working for a managed-care network? If you have an independent practice, should you own or rent your office space? What are the pros and cons of taking over an existing practice compared to starting one from scratch? If you’re part of a group practice, is the practice structured financially to accommodate the needs of all partners? Does running a “concierge” or retainer practice appeal to you? If you’re considering expansion, how should you finance it?

Questions like these are rarely simple and should be done in the context of an overall financial plan that takes into account both your personal and professional goals.

Many physicians have created processes and products for their own practices, and have then licensed their creations to a corporation. If you are among them, you may need help with legal and financial concerns related to patents, royalties, and the like. And if you have your own practice, you may find that cash flow management, maximizing return on working capital, hiring and managing employees, and financing equipment purchases and maintenance become increasingly complex issues as your practice develops.

Practice valuation

You may have to make tradeoffs between maximizing current income from your practice and maximizing its value as an asset for eventual sale. Also, timing the sale of a practice and minimizing taxes on its proceeds can be complex. If you’re planning a business succession, or considering changing practices or even careers, you might benefit from help with evaluating the financial consequences of those decisions.

Estate planning

Estate planning, which can both minimize taxes and further your personal and philanthropic goals, probably will become important to you at some point. Options you might consider include:

  • Life insurance
  • Buy-sell agreements for your practice
  • Charitable trusts

You’ve spent a long time acquiring and maintaining expertise in your field, and your patients rely on your specialized knowledge. Doesn’t it make sense to treat your finances with the same level of care?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, Glaxosmithkline, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Merck, Raytheon, ExxonMobil, 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.

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.

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.