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Retirement |
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General Information Individual Retirement Accounts (IRAs) Annuities Business Retirement Plans
This section deals specifically with retirement products which assist individuals and small to mid-sized businesses in saving for themselves and their employees for retirement. It is important to know the general terminology associated with retirement programs.
“Tax qualified” or “Qualified” plans means that the IRS allows contributions to be made on a “pre-tax” basis, and the growth on the funds in the accounts grow income tax-free until they are withdrawn for retirement. The tax advantages of retirement accounts, of any kind, are intended to supplement one’s income during the retirement years. If tax-qualified retirement account funds are withdrawn prior to age 59 ½, there will be a tax penalty in addition to being subject to ordinary income tax. Insurance companies may also impose “surrender charges” on certain contracts. Surrender charges are fees for withdrawing or canceling a contract prior to a contractual date (for example, 3-15 years from the initial policy date). Surrender charges vary by insurance company and by contract type.
“Non-qualified” long-term savings contracts are those that are purchased with “after tax” dollars. The growth on these funds also usually grow income tax-free until they are withdrawn for retirement and are subject to many of the same pre-mature withdrawal penalties as tax-qualified plans.
At Tidewater Benefits, we are insurance professionals who sell and service the products to fund qualified retirement plans. All retirement plans we set up are funded with annuity products. We do not give tax or legal advice. As always, we encourage you to consult with your accounting or legal advisors to address your specific situation and needs. If desired, we will be glad to work with your other consultants to be sure your program is set up as advised.
Both tax-qualified and non-qualified savings contracts funded with annuities enjoy tax-preferred treatment on the growth because they are intended to encourage long-term savings. Every insurance company and each contract will have specific wording regarding withdrawals and surrender charges. Because the rules regarding the type of plan for which you may be eligible depends on your age, your income and whether you have a retirement plan at work, we will only provide generic information below. We would be glad to discuss more specific options and contract provisions with you to tailor a program that meets your immediate and long-term goals. Please feel free to contact us.
“Tax-Qualified” Individual Retirement Accounts (IRAs): For the tax year 2007, employed individuals may set aside up to $4,000 for himself/herself (and an additional amount of for a non-working spouse) if you are age 49 or younger, and up to $4,500 if you are age 50 and older. This amount may be reduced or you may not qualify for a tax-qualified IRA if you have a qualified retirement program through your employer.
You may establish a new IRA or contribute to an existing IRA for the 2007 tax year until you file your 2007 federal taxes, but no later than 4/15/2008 (whichever date comes earlier). We suggest you not wait until the last minute to complete your IRA application as paperwork needs to be completed, the money needs to be collected and everything must be postmarked no later than 4/15/2008. The sooner you get started, the more tax-deferred growth will be available to you when you are ready to retire.
Contributions to a qualified IRA are deductible from your taxable income and the growth on your account is tax deferred. Tax penalties will apply for pre-mature withdrawals (before age 59 ½). The principal and growth are both fully taxable as ordinary income when withdrawn at any age. In addition, insurance company surrender charges may apply depending on your contract. You must begin taking withdrawals as required by the IRS by age 70 ½.
Rollover IRAs: If you have left employment or retired from an employer where there was a 401(k) plan or other retirement program that has individual vested accounts that are portable, you have the option to move those monies into a qualified rollover IRA. Because the rules for moving qualified money without incurring current taxation are very specific, contact us before you do anything to discuss your options.
Roth IRAs: The Roth IRA is a newer alternative to the traditional IRA:
How are traditional IRAs and Roth IRAs similar? --Growth in the contract is tax-deferred until withdrawn --The same withdrawal, surrender and tax penalties apply to withdrawals made before age 59 ½.
How are traditional IRAs and Roth IRAs different? -- Contributions to a Roth IRA are made with after tax dollars, that is, you do not receive a current year tax deduction --Withdrawals of principal and growth after age 59 ½ are tax-free --You do not have to begin withdrawing income by age 70 ½
For the tax year 2007, employed individuals may set aside up to $4,000 for himself/herself (and an additional amount of for a non-working spouse) if you are under age 50, and up to $4,500 if you are age 50 and older. This amount may be reduced or you may not qualify for a Roth IRA if you have a qualified retirement program through your employer.
You may establish a new Roth IRA or contribute to an existing Roth IRA for the 2007 tax year until you file your 2007 federal taxes, but no later than 4/15/2008 (whichever date comes earlier). We suggest you not wait until the last minute to complete your Roth IRA application as paperwork needs to be completed, the money needs to be collected and everything must be postmarked no later than 4/15/2008. Of course, you can make your 2007 Roth IRA contributions anytime during 2007 or until you file your 2007 federal taxes, but no later than 4/15/2008 (whichever date comes earlier). The sooner you get started, the more tax-deferred growth will be available to you when you are ready to retire.
How do you decide which IRA option is the best for you? Picking which plan (or combination of plans) is right for you will depend on your age, your current tax bracket and how you feel about future tax rates. Also, keep in mind that there is no guarantee that rules regarding either IRA option will not be amended by the IRS in the future. As always, we suggest you discuss your qualified retirement options with your tax or legal counsel. If desired, we will gladly talk to your financial advisors to be sure your contracts are set up according to their plan.
Annuities are a good alternative to bank CD’s, money market accounts and other low-yield taxable savings vehicles. The growth within the annuity contract is tax-deferred and the return will generally be higher than those listed above. Annuities can be used to fund “tax-qualified” traditional IRAs and Roth IRAs. They can also be established with after-tax contributions to supplement your retirement income. The following are special features of annuities:
Lifetime Income -- The number one feature that distinguishes annuities from all other long-term savings plans is that once you are ready to retire, you have the option of setting up a distribution arrangement to produce an income stream that you will never outlive!
Your Principal is Guaranteed -- The principal you deposit into an annuity is always guaranteed. This is one of the safe-guards built into this tax-deferred growth vehicle that makes them an attractive addition to an overall retirement strategy.
Flexible Payment & Distribution Schedules -- Today’s annuities are very flexible. They can be purchased with periodic payments made on a regular basis or you can establish one with a single deposit. Likewise, you can choose to make withdrawals after age 59 ½ in lump sums as needed, or you can arrange to receive a lifetime income, or you can take distributions over a certain number of years or you can start taking your income stream right away with an “immediate annuity”. The choice is yours and you don’t have to purchase a new contract to accomplish the retirement arrangement that is best suited for you.
Fund Allocation Choices -- You can select to have your principal accumulate at a fixed interest rate that is adjusted annually, or you can have your accumulation follow the growth in certain markets, such as the Dow, NASDAQ or the S&P. Some contracts allow you to split your fund allocation between both types, with the annual option of changing your allocation. While both types of annuities are considered to be “Fixed Annuities”, the later type is called an “Equity Indexed Annuity (EIAs)”. Different insurance companies calculate the growth in the markets they follow in many different ways, but the best news is that you only share in the up-side of the market. If the market falls, your principal is always guaranteed. In addition, earnings from previous years, once credited to your contract, are also guaranteed.
Tax-deferred Growth -- No matter which type of fixed annuity you choose, all of the growth will accumulate on a tax-deferred basis. This means that, unlike CD’s and money markets, you will only pay income tax once you begin withdrawing funds from your annuity. Because annuities receive this tax-favored status, you will be subject to tax penalties and ordinary income tax on the growth should you withdraw your funds prior to age 59 ½. If the annuity is part of a tax-qualified Individual Retirement Account, the IRS will impose tax penalties and ordinary income tax on the entire amount withdrawn.
Surrender Charges -- Insurance companies are able to credit higher interest rates than are generally available with CD’s because they have an expectation that you will leave your funds with them for a guaranteed period of time, usually anywhere from 3 – 15 years. This length of time is contractual and will differ from company to company, contract to contract. Remember, annuities are intended for long-term savings. Insurance companies will impose “surrender charges” if funds are withdrawn before the contractual surrender period has expired. You will generally be rewarded for purchasing contracts with longer surrender periods with a higher rate of return.
Annuity Exchanges -- Once the surrender charge period has expired, it may be in your best interest to move your annuity to another contract. The IRS allows you to move your money from one annuity contract to another without incurring current income tax or penalties, so long as you make a direct exchange from one company to another and the funds never pass through your hands. This exchange has to be handled properly to avoid taxation, so contact us if you have an underperforming account(s) before withdrawing any funds.
At Tidewater Benefits, we are insurance professionals who sell and service the products to fund qualified retirement plans. All retirement plans we set up are funded with insurance company annuity products. We do not give tax or legal advice. As always, we encourage you to consult with your accounting or legal advisors to address your specific situation and needs, and if desired, we will be glad to work with your other consultants to be sure your program is set up as advised.
Simplified Employee Pensions (SEPs): These retirement plans were established with the smaller employer and the self-employed in mind. They allow employers to set up tax-qualified Individual Retirement Accounts (IRAs) for themselves and their employees.
These plans are popular because: --They are easy to set up (less paperwork and reporting) --They are less costly for the employer to administer --Have higher contribution levels than private IRAs.
401(k) Plans: These plans are designed for mid-sized and larger corporate employers, and allow employees to set aside a certain percentage of their salary for retirement, subject to IRS maximums. Contributions are pre-tax and are invested at the employee’s choice in a selection of funds pre-selected by the employer. Employers generally match a portion of the employee contribution to encourage participation in the program.
Profit Sharing Plans: Corporate employers may share a percentage of their business profits with their employees in a Profit Sharing Plan. Discretionary contributions to this type of plan can be re-evaluated annually based on earnings and corporate profits.
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