AGT The Safe Money People
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In the past, employer-sponsored pensions were much more common, and employees were encouraged to save more thanks to contribution matches. Now, 401(k)s are the leading retirement savings vehicle in the workplace, and self-directed savings, with varying degrees of employer matches, leave retirees’ financial futures all over the board.
As a result, more people lack the savings to last a lifetime when they leave the workforce. According to John Huff, the 2016 President of the National Association of Insurance Commissioners, four out of 10 baby boomers have no retirement savings. None at all.
As you can imagine, this poses a challenge for financial professionals working with clients who have little to no assets but still need retirement income solutions. And it’s not just an issue for people who didn’t save. Others may have experienced losses in the securities markets or had to make substantial withdrawals during the recession.
To find a retirement income strategy that may be successful, financial professionals have gotten resourceful. Some financial professionals who once eschewed annuities are now taking a second look.
Just because people don’t have a lot of money saved for retirement doesn’t necessarily mean they have no assets. For example, some boomers may be out of cash but living in an oversized house they no longer need. In this scenario, homeowners who downsize before retirement could use some of the proceeds to purchase an annuity that will provide a guaranteed stream of income during retirement.
Others may have either received, or expect to receive, a modest inheritance and can use an annuity to convert that fixed amount into a lifetime of retirement income.
While it’s becoming more common for financial professionals to recommend annuities, employers are still warming up to the idea. Eight in 10 U.S. employees say they’d like to have a guaranteed income option in their defined contribution plan, but only 50 percent of employers understand this — and less than 1 percent offer it.
The appeal of pensions was that they did more for retirees than just provide retirement income; they provided peace of mind. The same can be said of annuities. In fact, nine out of 10 affluent households with annuities say they’re confident in their retirement.
Most retirement plan participants use pretax assets to fund their employer-sponsored plans such as 401(k) and 403(b) accounts, or they claim a tax deduction for amounts contributed to their Traditional IRAs. In both cases, these contributions can help to reduce the individual’s taxable income for the year to which the contribution applies. However, it is also possible to contribute amounts to employer-sponsored plans on an after-tax basis, and for IRAs, contributions can be non-deductible. The advantage of accumulating after-tax assets in a retirement account is that when they are distributed, the amounts will be tax- and penalty-free. However, this benefit is realized only if the necessary steps are taken.
Keeping Track of Your After-Tax Assets
Reaping the benefits of this strategy starts with good record-keeping and clear communication with your plan administrator and the IRS.
Your Qualified Plan Account
The administrator for your qualified plan is responsible for keeping track of which portion of your balance is attributed to after-tax assets and pretax assets. However, it helps if you check your statements periodically to ensure that the tabulations match what you think they should be. This will allow you to clarify possible discrepancies with the plan administrator.
Your IRA custodian is not required to keep track of the after-tax balance in your IRA, and most, if not all, do not. As the owner of the IRA, you are responsible for keeping track of such balances, and this can be accomplished by filing IRS Form 8606.
If you make a non-deductible contribution to your Traditional IRA, or roll over after-tax assets from your qualified plan account to your IRA, you must file IRS Form 8606 for the year the amount is contributed to the IRA. While the IRS does not currently require Form 8606 to be filed for rollover of after-tax amounts, it may be a good idea to record such amounts for your records. Form 8606 lets the IRS know that the amount represents after-tax assets, and it helps you keep track of the balance of your IRA that should be tax-free when distributed. Form 8606 must also be filed for any year in which distributions occur from any of your Traditional, SEP or SIMPLE IRAs and you have accumulated after-tax amounts in any of these accounts. Make sure you read the important filing instructions that accompany Form 8606 – they provide details on the sections of the form that must be completed.
Tax Treatment of After-Tax Assets
Generally, your plan administrator will indicate the taxable portion of amounts distributed from your qualified plan account on the Form 1099-R that you receive for the year. If the amount is not properly indicated on the 1099-R, you may want to request written confirmation from the plan administrator of the portion of the distribution that is attributable to after-tax assets. This will help to ensure you include the correct amount in your taxable income for the year.
With the exception of ‘return of excess contributions,’ your IRA custodian is not required to make a distinction between the taxable and non-taxable portion of amounts distributed from your Traditional IRA. You must provide that information on your income tax return by indicating the entire amount of the distribution versus the amount that is taxable. For more information, see the instructions for line 15a of IRS Form 1040. The aforementioned Form 8606 will help you determine the taxable and non-taxable portions of amounts distributed from your Traditional IRA.
Pro-Rata Treatment of Distributions
If your qualified plan or 403(b) account or Traditional IRA includes after-tax amounts, distributions usually include a pro-rata amount of your pretax and after-tax balance. For this purpose, all of your Traditional, SEP and SIMPLE IRAs are treated as one account. For instance, assume that you made an average of $20,000 in after-tax contributions to your Traditional IRA over the years and your Traditional IRA also includes pretax assets of $180,000, attributed to rollover of pretax assets and deductible contributions. Distributions from your IRA will include a pro-rata amount of pretax and after-tax assets. Let’s look at an example using these numbers.
John has several IRAs, which consist of the following balances:
- Traditional IRA No. 1, which includes his non-deductible (after-tax) contributions of $20,000
- Traditional IRA No. 2, which includes a rollover from his 401(k) plan in the amount of $150,000
- Traditional IRA No. 3, which is really a SEP IRA, which includes SEP contributions of $30,000
In 2013, John withdraws $20,000 from IRA No. 1. John must include $18,000 as taxable income from the $20,000 he withdrew. This is because all of John’s Traditional, SEP and SIMPLE IRAs are treated as one IRA for the purposes of determining the tax treatment of distributions, when John has basis (after-tax assets) in any of his Traditional, SEP or SIMPLE IRAs.
The following formula can be used to determine the amount of a distribution that will be treated as non-taxable:
Basis / Account Balance x Distribution Amount = Amount Not Subject To Tax
Using the figures in the example above, the formula would work as follows:
$20,000 / $200,000 x $20,000 = $2,000
Since IRS Form 8606 includes a built-in formula to determine the taxable amount of distributions from your Traditional IRAs, you may not need to use this formula for distributions from your IRA.
For qualified plan accounts that include a balance of after-tax amounts, distributions are usually pro-rated to include amounts from pretax and after-tax balance. This means that, similar to IRAs, you can’t choose to distribute only your after-tax balance. However, certain exceptions apply. For instance, if your account includes after-tax balances accrued before 1986, these amounts may be distributed in full, resulting in the entire amounts being non-taxable, rather than being pro-rated.
Rollover of After-Tax Balance
If your retirement account balance includes after-tax amounts, whether these amounts can be rolled over depends on the type of plan to which the rollover is being made.
The following is a summary of the rollover rules for these amounts:
- IRA to IRA: All rollover eligible amounts can be rolled over to an IRA. This includes after-tax amounts.
- IRA to Qualified Plan/403(b): All rollover eligible amounts can be rolled over to a qualified plan/403(b), provided the plan allows it. However, this does not include after-tax amounts – such amounts cannot be rolled from an IRA to a qualified plan/403(b).
- Qualified Plan/403(b) to Traditional IRA: All rollover eligible amounts can be rolled over to a Traditional IRA. This includes after-tax amounts.
- Qualified Plan/403(b) to Qualified Plan/403(b): All rollover eligible amounts can be rolled over to another qualified plan/403(b), provided the plan allows it. This includes after-tax amounts, provided these amounts are transacted as direct rollovers.
The Bottom Line
Bear in mind, this is just an overview of the rules that apply to your after-tax balance in your retirement account. Having a thorough understanding of the rules will ensure that you include the right amount in your taxable income for the year you receive a distribution from your retirement account, thereby not paying taxes on amounts that should be tax-free. As always, be sure to consult your tax professional for assistance to make sure that your after-tax assets are treated correctly on your tax return, and so that you know what tax forms to file each year.
This fall, young people aren’t the only ones who are going back to school. Many colleges and universities have made it easier for older folks to get a degree, and retirees across the country are taking advantage.
People aged 65 and older currently make up a little more than 13 percent of the U.S. population and as the Baby Boomers age into senior-dom, that number will surely rise.
While retirement may bring the promise of a warmer climate and all-day golf outings, many seniors are opting to go back to school either for their own personal enrichment or to work towards a degree.
According to an article recently published in the Chicago Tribune, Shimer College, is opening up it’s classrooms to people over the age of 60 for free. A small liberal arts school in Chicago, the hundred or so students at Shimer have the option to participate in a Great Books program that includes the works of Shakespeare, Kafka, Marx, Einstein, and Nietzsche.
“One of the things that is important to make that happen is to have a lot of different perspectives in the classroom,” said Shimer spokeswoman Isabella Winkler. “It is always valuable to have generational differences. We wanted to open the classes to senior residents who might have a desire to get involved in this sort of conversation. It would benefit our students as well.”
Shimer isn’t the only college that sees the benefit in class discussions having generational differences. All of the public universities and colleges in Texas now offer a tuition reduction program for people 55 or older. And the Texas Higher Education Coordinating Board provides a tuition exemption for Texas residents who are older than 65 years of age and want to audit classes at a public university. Aside from having to be a Texas resident and enroll at a participating university, this program requires that seniors “enroll in a class that is not already filled with students who are paying full price for their courses. (If the class is too small to accommodate both regular students and senior citizens, the regular students must be given priority.)”
A similar program is offered at on both campuses of Florida Atlantic University (Boca Raton and Jupiter) called the Lifelong Learning Society. The program was created in 1980 in Boca Raton and then extended to the Jupiter campus in 1997. The LLS program is offered from October through June and FAU professors teach all the courses, which range in subjects from foreign policy, music, art, philosophy, current events, and more.
According to the FAU website, “This community of learners with no age threshold enjoys a diverse and creative curriculum, along with concerts and entertainment. In establishing this program, FAU recognized the still unfulfilled demand for educational and intellectual stimulation for adults who are beyond the traditional university years.”
And in the entire state of California, you can attend one of the 23 state universities for free, regardless of income, through their Over 60 Program. Of the roughly 433,000 students who attend a public university in California, only about 1000 of them are participants in the Over 60 Program.
In a blog post on the San Jose State University website, Timothy Fitzgerald, 67, who, while living on Social Security and disability benefits has completed five degrees and three Master’s degrees at SJSU, was quoted as saying:
“I see it as a benefit that the state can offer older citizens, helping us pursue a life of the mind. I never would have had an opportunity to go to school unless there was support for tuition. I do not want to sit on the sidelines.”
And thanks to the many public programs that promote education for older adults, no one has to sit on the sidelines during their post-retirement years.
To see what your state might have to offer check out the Senior Citizen Guide for College blog.
If you’re a Baby Boomer within sight of age 65, you’re probably thinking about your next move—and it may well be a career change instead of a traditional kick-back-and-relax retirement. Among 1,005 Boomers who haven’t yet left their full-time careers, 60% expect to keep working at least part-time after they “retire,” says a study from Bankers Life’s Center for a Secure Retirement.
The job market is ready for them. Of the 2,293 Boomers in the study who have already retired but have found other work, 80% reported it was “easy” to find the jobs they have now.
“As the next wave of Boomers retires, the competition is likely to intensify,” says Bankers Life president Scott Goldberg. “But, with part-time and freelance roles becoming more prevalent in the overall job market, there is good evidence to suggest that future retirees will have an even greater number of positions to consider, even if the competition for those roles gets more intense.”
Great, but anyone contemplating what lies ahead might want to consider two of the study’s less cheerful findings. First, it seems that most people overestimate their ability to choose when they retire. Nearly seven in ten (69%) of middle-income retirees would have liked to have stayed longer in their old careers, but had to leave earlier than they planned for “reasons beyond their control,” the report says—most commonly because of health problems (39%), being laid off (19%), or to care for a loved one (9%).
Second, Boomers’ expectations about what they’ll be able to earn in their post-retirement careers seem overly optimistic. Only about one in five (21%) of the people in the survey who are still working in their primary careers say they’d be “willing to take a pay cut” when they move on to another job in retirement. That doesn’t jibe with the experience of current retirees who are working, almost three-quarters (72%) of whom report earning less on an hourly basis now than they did in their old roles. More than half (53%) say they make “much less.”
That doesn’t mean they’re unhappy. About 80% of the people who retired and then found new jobs say they like their current careers better than their old ones. They also report less stress and “better relationships” than the Boomers surveyed who haven’t retired yet.
Even so, the study’s message is clear. Given your druthers, you might stay in your pre-retirement career until you’re 65, 70, or beyond, and then move on to something that pays equally well. But, just in case that doesn’t work out, it’s smart to have a Plan B.
AGT is here to help plan that option B
Ten thousand Americans a day are turning 65, including a couple we’ll call Stu and Helen. In excellent health, Stu and Helen could be facing a retirement of 30 years — or even longer. One of their biggest fears about their impending retirement is their potential longevity — and running out of money to not only pay their bills, but enjoy their free time.
Stu and Helen participated in their companies’ 401(k) plans. Like many workers, neither has a traditional pension, so they are solely responsible for their own retirement security.
Fortunately, couples like Stu and Helen have options for creating a “personal pension.” By using some of their savings to purchase an annuity, they can guarantee a steady stream of income for life.
With an immediate annuity, they can make a lump-sum payment to a life insurance company, and the company will send them their choice of monthly, quarterly or annual payments. They can choose to receive the income payments over a specified number of years or as a guaranteed stream of income they can never outlive.
They could also consider purchasing a deferred annuity, which allows savings to grow tax-deferred during an accumulation phase until they decide when payouts begin. People who are years away from retirement — or who are retired but don’t need income right away — might choose this type of annuity.
With a deferred annuity they decide how their money grows during the accumulation phase. A fixed annuity earns interest at a guaranteed rate. An index annuity is tied to a market index like the S&P 500 stock price index.
Surveys show that 90 percent of annuity owners think annuities are an effective way to save for retirement. And annuities are among the most regulated financial products in the marketplace. From product development to advertising to sales, life insurers must comply with state and federal laws and rules that help prevent fraud and protect consumers. In addition, most states provide a “free look” period allowing customers to return annuities to the insurance company for a full or partial refund.
Planning for retirement can be stressful. But for retirees like Stu and Helen, the guaranteed income from annuities can provide peace-of-mind for a lifetime.
As boomers retire from their jobs at unprecedented rates in the U.S., you’d think they’d be spending their free time with friends, lingering over the morning newspaper and coffee or taking January vacations in a warm place. But many seniors are finding themselves in a predicament that few anticipate in retirement: parenting for a second time. Census reports indicate that 2.7 million grandparents are responsible for their grandchildren. Their added duties may be fulfilling, but they may be stressful, too.
In fact, many things can trigger stress among retired adults — paying bills on a fixed income, failing health, caring for ill parents or spouses, or even grandparenting. Excessive stress can lead to serious health problems.
“When stressed, the body releases substances such as cortisol and adrenaline that affect every organ and can cause muscle tension, insulin secretion and increased heart rate,” said Arthur Hayward, M.D., a geriatrician and the clinical lead physician for elder care with Kaiser Permanente’s Care Management Institute.
“You can’t avoid stress, but managing it can help preserve your health and well-being,” Dr. Hayward added. He recommends identifying and understanding the cause of your stress and finding ways to relieve it, such as these eight tips:
Pace yourself. Don’t take on too much. Be aware of your limitations.
Set realistic goals and expectations, and don’t be afraid to ask for help.
Plan time for yourself. Recharge your batteries.
Exercise and eat a balanced diet. Get plenty of fruits, vegetables and whole grains.
Try relaxation techniques such as meditation or yoga.
Get enough sleep. If you have problems sleeping, talk to your doctor. Drinking caffeinated beverages and alcohol can affect your ability to get a good night’s sleep.
Talk with a loved one or write in a journal.
Stay positive. Positive thoughts can make a difference, such as “I am hopeful” or “Things will be better.”
For more information, go tokp.org/healthyaging. For questions or advice about a specific condition, talk to your physician.