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Successful Retirement Secrets™

My Comments: I have just now joined the ranks of internet publishers!

Almost four years in the making, it’s an internet course to help you process retirement information leading to a SUCCESSFUL RETIREMENT.

Among other things, it’s about investment skills and getting the most from Social Security.


An enrolled student will develop a system that works in the background, helping someone retire with more money and not less money.

To the first 100 people who enroll before November 1, 2018, I’m offering 50% off the published price.

Click on the link below or the image above, and watch a FREE PREVIEW. Then decide if it would help to have a system to build your road map to a SUCCESSFUL RETIREMENT…


5 questions you should ask before buying an annuity policy

My Comments: Here are five questions about annuities that are adequately answered by Craig Hawley. However, as someone with 42 plus years as a financial professional in financial services, I can say there are more than five questions to be posed before you purchase an annuity.

Deciding whether to buy or not buy an annuity is what I refer to in Successful Retirement Secrets as a strategic decision. Once you get comfortable with a ‘yes’ or ‘no’ answer with respect to buying or not buying, you then move into the arena of tactical decisions, ie what kind of annuity to buy.

And this is where it gets even more complicated. You are confronted with literally thousands of choices, and it’s sometimes hard for even professionals like me to make intelligent recommendations. But we try and sometimes we get it right.  Caveat Emptor…  (Check out my ebook, Your Future Retirement as referenced on the right side of this web page. Email me for a coupon to get a free copy…)

Oct 3, 2018 by Craig Hawley

It’s been 10 years since the 2008 financial crisis, and discussions between advisers and investors are more likely to focus on when—not if—the next market downturn will happen. As you sit down with your adviser to explore how you can better prepare for and live in retirement in the face of this challenge, annuities might be part of the conversation.

Whether you are between the ages of 45 and 55 and looking to maximize the benefits of tax-deferred accumulation, or in your 60s and ready to begin generating an immediate stream of protected retirement income, there are annuities that may fit your investing needs.

You may be hearing more about annuities lately. And that could include some warnings — that annuities are expensive and complicated. But there are many types of annuities, and they can be an essential part of a comprehensive retirement plan.

If you’ve been thinking about an annuity, or your adviser suggests investing in one, there are five questions you should ask—and important answers that you need—to determine if it is the right solution to help you reach your financial goals.

How does an annuity help me in retirement?

Many investors say that running out of income in retirement is their No. 1 fear. Tax-deferred qualified retirement accounts such as a 401(k) or IRA allow investors to accumulate assets that they will then draw down in retirement. But those assets—and that income stream—can be subject to market risk. An annuity, on the other hand, is like an insurance policy for your retirement, that can convert your investment into a guaranteed stream of protected income for specific period of time, or even income for life.
There are so many options. How do I determine what is right for me?

For starters, you can control when you will receive income from your annuity by choosing between deferred or immediate annuities. Deferred annuities allow investors to grow assets tax-deferred, over years or decades, before choosing how to generate an income stream. Immediate annuities, such as a single premium immediate annuity (SPIA), will begin income payments soon after making an initial lump sum investment, and typically are a better fit for individuals when they are ready to begin their retirement.

You can also choose from annuities based on the growth potential of the assets that you’ll be investing. There are variable annuities, where returns are tied to market performance for greater growth potential—but with more risk as the contract value fluctuates based on the market’s ups and downs.

Indexed annuities can provide some upside potential when markets rise, but also offer protection from market downturns. There are fixed annuities, which provide a guaranteed interest rate, regardless of what may happen in the market. In recent years, many advisers have been recommending fixed index annuities (FIA) as a better bond alternative.

What are some fees I may be charged?

Just like other retirement accounts, such as a 401(k) or IRA, there are also expenses associated with annuities. Fees for variable annuities can easily total 3% a year or more. The industry average for five typical fees include:
1) mortality and expense fees (M&E): 1.35%
2) administrative fees: 0.10% – 0.30%
3) investment management fees charged for the underlying funds inside the annuity: 1.00%
4) fees for optional riders or insurance guarantees: 1.00%
5) surrender fees which may be charged for withdrawing funds from an annuity too soon: as much as 8.00%.

There may also be commissions that an insurance company pays to the broker or agent who sells the annuity, typically ranging from 5% to 9% of the amount you invest. This may lead directly to the size of the surrender fee, as well as impacting the overall cost. Your adviser can explain all of the fees associated with an annuity, and help you evaluate them.

If fees are a concern, consider low cost and no-load annuities when determining which annuity will fit best into your overall financial plan. These low cost, no-load annuities often charge an M&E that is one-half to one-fourth of the industry average, or even a flat subscription fee, eliminating commissions and other insurance fees. The tradeoff may be limited access to insurance guarantees and limited downside protection.

Is the income truly guaranteed?

Annuities can offer many choices for guaranteed income, from the simplicity of an immediate annuity, to a range of different optional living benefit riders that are designed to protect portfolio assets or income payments when markets decline. Some of these living benefits provide guaranteed income even if the underlying investments lose value. As another solution to protect against market risk, investors may be able to purchase an optional Return of Premium rider (ROP) to guarantee their initial investment.

Because the annuity is a contract with an insurance company, the guarantee of future payments is based on the financial strength of the insurer. Insurance companies are highly regulated, with strict requirements related to their investments and capital reserves. Their financial strength is regularly reviewed and rated by five independent firms: A.M. Best, Fitch, Kroll Bond Rating Agency (KBRA), Moody’s and Standard & Poor’s, each with their own rating scale and rating standards.

In addition, each state has a Guaranty Association to protect policyholders in the unlikely event that the insurance company is unable to meet their financial obligations. A study by the U.S. Government Accountability Office determined that even following the profound effects of the 2008 financial crisis, the impact on the majority of insurance companies and their policyholders was limited, with a few exceptions.

Are there other ways I can use my annuity?

Advisers can recommend many ways that annuities can be an effective financial planning tool to meet a range of investing needs at all different stages of the financial lifecycle. For example, investment-only variable annuities (IOVAs) are built specifically to maximize the power of tax-deferred accumulation—with lower costs, more fund choices and sophisticated portfolio management platforms.

IOVAs can be beneficial for high earners and those with high net worth, who can easily max out qualified plans, such as 401(k)s and IRAs, and are looking for another tax-advantaged investment vehicle. With virtually unlimited contributions, IOVAs can also be used to shelter a large cash infusion, such as the proceeds from selling a business. And tax-inefficient asset classes, such as fixed income, commodities, dividend-yielding stock and liquid alternatives, can be “located” in IOVAs to increase returns—without increasing risk.

Annuities can also be used for tax-efficient legacy planning. Many offer a range of optional death benefits, from a lump-sum payment to a guaranteed income stream for heirs.

These proceeds typically receive favorable tax treatment, and can be transferred to heirs without the hassle of probate and legal fees. Some annuities offer a restricted stretch provision, to minimize the tax burden of a large inheritance by spreading taxes over a beneficiary’s lifetime, while controlling distributions to heirs with less complexity and expense. Advisers can also help clients with a tax-efficient strategy to fund trusts in a low-cost IOVA, allowing the assets to accumulate and grow tax-free.

Remember that annuities are long-term investments and should be considered carefully. They might not make sense for investors who want immediate and unrestricted access to their capital, because the tax-deferred structure means certain kinds of withdrawals may incur tax consequences. But for other investors who don’t have immediate liquidity needs, especially high earners and the high net worth, annuities might fit within their financial plan.

Before investing in an annuity, work with your advisers to determine your retirement income needs, evaluate liquidity needs and create a holistic picture of your existing retirement income sources, including qualified retirement plans. Then ask your adviser the right questions, including if they operate under a fiduciary standard, and get the answers you need, to determine if an annuity might fit within your holistic financial plan.

Craig Hawley is head of Nationwide Advisory Solutions, which works with registered investment advisers and fee-based advisers.

Source article:

How to Prepare for Costs Medicare Won’t Cover

My Comments: Health issues in retirement are a given for those of us not already passed. Whether they end up costing an arm and a leg depends to some extent on how prepared we are before they happen.

Both my wife and I are covered by Medicare and each of us has a ‘medigap’ insurance policy, designed to cover most of what Medicare does not cover. But make no mistake, between the Medicare Part B premiums and the ‘medigap’ policy, it still represents a significant monthly outlay if you don’t think of yourself as financially comfortable.

And then there is Medicare Part D which covers prescription drugs. My wife is a diabetic, and that too can be very expensive. She and I both elected to purchase a Part D plan. All this assumes you have the resources to pay the extra premiums.

As for Medicare Part C coverage, or Advantage Plans, I have a bias against them so we didn’t go that route. But that’s a personal preference.

The real benefit to me for having what we have is that when we decide we need to speak to one of our many physicians, the out-of-pocket expense is not a deterrant. Being able to deal with health issues as they surface provides real peace of mind as the years flow by.

Katie Brockman Aug 19, 2018

When you think about how you’ll spend your retirement savings, you probably imagine traveling the world, getting more involved in your hobbies, or spoiling your grandchildren. What you probably don’t envision is spending every spare dime on healthcare expenses.

Unfortunately, that’s the ugly reality some retirees face.

The average 65-year-old couple retiring today can expect to spend roughly $280,000 on healthcare during retirement, according to a recent report from Fidelity Investments. That includes costs like premiums, deductibles, and other out-of-pocket expenses.

This may come as a shock to some, as many people mistakenly believe that Medicare will cover all their healthcare expenses during retirement. The truth is that while Medicare can offer significant financial assistance, it doesn’t cover everything. And some of the costs it doesn’t cover can put a serious crack in your nest egg.

What Medicare does (and doesn’t) cover

First, it’s important to understand what Medicare does cover and how much you’re paying for it. Original Medicare consists of Part A and Part B. Part A covers hospital visits, visits to skilled-nursing facilities, and in-home healthcare services. As long as you’ve been working and paying taxes for at least 10 years, you generally don’t need to pay a premium for Part A coverage. You do have a deductible for each benefit period, though, and for 2018, that deductible is $1,340. Also, if you have to spend an extended period of time in a hospital or skilled-nursing facility (typically longer than 60 days for hospital stays and 20 days for visits to a skilled-nursing facility), you may have to make coinsurance payments, which range from $167 to $670 per day — or Medicare may not cover your stay at all.

Part B covers more routine care, like doctor visits and flu shots, and the amount each person pays varies based on their income. Those earning less than $85,000 per year (or $170,000 for married couples filing jointly) pay $134 per month for Part B premiums. You also have to pay a yearly deductible, which for 2018 is $183. After you meet that deductible, you pay 20% of the remaining expenses.

You also have the option of enrolling in Part D, which covers prescription drugs. This coverage is provided by private insurance companies, though, so the amount you pay will vary widely depending on which plan you have.

Even considering all that Medicare Part A and Part B cover, there’s a variety of expenses that basic Medicare won’t touch. For example, you still need to pay for all copayments, deductibles, and coinsurance out of pocket, and those costs can add up quickly. You’re also not even eligible to enroll in Medicare until you turn 65, so if you retire before that and lose your health insurance when you leave your job, you’ll need to find coverage outside of Medicare.

Then there are healthcare expenses that most people don’t realize aren’t covered. Most dental care, for example, isn’t covered by Medicare, and neither are eye exams, hearing aids and exams, dentures, or long-term care.

These aren’t necessarily hard rules, because there are always exceptions. Expenses that are considered medically necessary are often covered by Medicare, while routine care is not. So if, for example, you have a dental emergency, then Medicare may pick up the tab, but if you simply get your teeth cleaned or have a cavity filled, then you’ll likely need to pay for that out of pocket. And even routine care can cost hundreds of dollars per visit. If you’re not prepared for those expenses, they can drain your savings quickly.

Don’t let healthcare costs catch you off guard

The best way to avoid paying tens (or hundreds) of thousands of dollars in healthcare costs is to do your research, understand what Medicare does and doesn’t cover, and figure out how to pay for uncovered medical care before you retire.

One option is to enroll in a Medicare Advantage Plan (also known as Medicare Part C). A Medicare Advantage Plan is a health plan offered through private insurance companies that includes all the benefits of Medicare Part A and Part B, as well as some additional coverage for vision, hearing, and dental. Advantage Plans are similar to the insurance plans you likely enrolled in while you were working: You have to visit a doctor within your plan’s network or risk not being covered, and the premiums and deductibles vary by plan and provider.

Although prices vary, you typically get more coverage with an Advantage Plan. Depending on the type of care you need, it could be worth it to pay more for an Advantage Plan in order to pay much less out of pocket for routine care.

Another option is to use a health savings account (HSA) to cover some of your medical expenses. An HSA is essentially a retirement savings account just for healthcare costs. You’re eligible for an HSA if you have a high-deductible health insurance plan, and for 2018, that means you have a deductible of $1,350 for an individual or $2,700 for a family, as well as maximum out-of-pocket costs of $6,650 or $13,300 for an individual or family, respectively.

If you’re eligible to open an HSA, you can contribute up to $3,450 per year (or $6,850 for family health plans) in pre-tax dollars. Those aged 50 and over can contribute an extra $1,000 per year. When you withdraw the funds, so long as you spend them on qualified medical expenses, you don’t need to pay taxes on withdrawals either.

Regardless of which route you choose, it’s crucial to have a plan in place. If you go into retirement assuming you won’t need to pay a dime more in medical expenses than you used to, you’ll be in for a rude awakening. But if you prepare yourself and come up with a plan before you make the leap into retirement, your wallet will thank you.


Your Retirement Money

My Comments: If you’ve read my blog posts these past few months and years, you know that I have no idea what is coming next.

What I do know, however, is that anyone who says “it’s different this time” is full of s**t. It’s the nature of the beast for there to be corrections, and it’s just a matter of time for one to appear. On the other hand, telling everyone ‘the sky is falling’ soon gets old, and essentially useless.

My entire focus these days is helping people retire with more money, the opposite of which is to retire with less money. Personally, I’d rather have more money.

If you have any money fully exposed to what I call downside risk, and are uncomfortable with simply ‘staying the course’, here are three articles that appeared in my inbox in the past few days.

You should be interested in preserving your nest egg from a potential downturn, one that will make it harder to pay your bills in the future.

Making informed decisions about your money starts with paying attention and being able to tuck in your tail before the door slams shut.

I make no apologies for any political implications associated with the three articles.

Economics are never 100% divorced from politics. It doesn’t matter who is pulling the strings.

What matters is that the strings are being pulled, and how that pulling will affect you and your bank accounts. These three articles are worth reading if you have any doubts about having enough money when you retire…

The Albatross of Debt: a $67T Nightmare

6 Reasons For Another $6 Trillion Stock Market Correction

Enjoy The Final Ride, Because The Expansion Is Nearing An End

10 Financial Services That Are A Waste of Money

My Comments: This comes from Britain, so a little translation may be required, but the message is useful here.

Last month, I had a conversation with an widowed client (81 y/o) who was sent  an ‘encouraging’ letter, urging her to buy an extended warranty for her 7 year old car. It caused her to be fearful on two fronts: one, the cost of the coverage and two, that her owning a car is now an existential threat to her finances. It has about 25,000 miles on the odometer.

After 30 minutes of back and forth, she decided she would to sell the car, stop paying for insurance, gasoline, etc., and tell the warranty company to kiss her a**. If she needs to go to the grocery store, or somewhere else where her friends cannot easily pick her up, she’ll call UBER. She already has the app on her phone.

By Amelia Murray 15 February 2018

The financial services industry can be a nightmare: from extended warranties to credit reports, everyone is trying to sell you something they claim is “essential”.

Must-have offers flood our inboxes, come through the door and are pitched over the phone during unwanted calls.

But how do you spot the rip-off from the essential? Which?, the consumer organization, has put together a list of the top 10 financial products you don’t need to pay for – either because you don’t need them or because you can get them free elsewhere.

Credit score subscriptions

Why pay for a credit score subscription when a number of firms offer reports free of charge? Experian charges £14.99 a month, or around £180 a year, for a “CreditExpert” subscription, which offers fraud alerts in addition to a daily credit report. An Equifax subscription costs £14.95 a month.

Noddle, Clearscore and MoneySavingExpert all offer free credit reports and if you keep a close eye on them you’ll be able to spot any suspicious activity yourself without paying a premium.

PPI claims management firms

Banks began aggressively selling payment protection insurance alongside loans, mortgages and credit cards in the Nineties after discovering that they were highly profitable.

Millions of people were mis-sold the policies and ended up paying thousands of pounds for insurance they were led to believe was essential. But many didn’t need it or couldn’t use it because they were self-employed, for example.

The City regulator started to investigate the problem in 2005 and began to crack down on firms that sold PPI in 2006, imposing fines and penalties. It recently launched a multi-million pound campaign to encourage people to claim compensation for mis-sold PPI.

The PPI scandal fueled the rise of firms that offer to manage claims on a “no-win, no-fee” basis. These companies can take up to 40pc of any compensation paid and many consumers don’t realize they can make the claim themselves without charge.

The deadline for PPI claims is August 2019 but many people were contacted by their banks between 2013 and 2015 and given a three-year deadline. Which? has a free online tool that takes you through the claims process.

Overs-50s life insurance

While these policies offer a guaranteed lump sum on death in exchange for a monthly premium, the risk is that the payout will be less than what the policyholder pays in.

The big draw is cover without the need for a medical – so anyone can get a plan – but the longer you live the more it will cost you. If you stop paying you’ll get nothing and will lose everything you’ve already contributed.

For example, a 56-year-old who pays £11 a month to Royal London will get a lump sum of £3,012 when they die. They’ll be ahead financially if they die before the age of 79 but if they live longer they will pay more than they get back.

Many people take out these policies to pay for their funeral. But the cost of dying is outpacing the cost of living so the lump sum guaranteed may end up not being enough. Funeral costs have risen by 112pc since 2004 to stand at £4,079, according to SunLife, the insurer.

If you’re in good health it may be better idea to “self-insure” by putting aside money in a savings account.

‘Packaged’ bank accounts

A number of banks offer accounts that come with add-ons such as travel, mobile and motor insurance for a monthly fee. The cost is typically between £10 and £15 a month, although NatWest’s Black current account costs £28 a month.

But the costs can’t always be justified and the value of the extras can vary widely. Analysis by Which? found that some accounts offered benefits worth £346 a year while others added up to just £102.

As with PPI, some banks have been accused of miss-selling packaged accounts. For example, if you were told by the bank that you had to have one of these accounts or later discovered that you were too old to be covered by the travel insurance, you may be able to claim your money back.

Lifetime trusts

“Lifetime trusts” are supposed to protect your property and assets from being used to pay care home fees. If you need care, the idea is that the trust will cause your assets to be disregarded when you are assessed for state funding.

However, you could find that after spending thousands of pounds setting up a trust the local authority decides that you have deliberately deprived yourself of your assets. In this case the trust will make no difference and your assets will be taken into account anyway.

Which? suggested setting up a “will trust” instead, which is more reliable and cheaper. This will mean half the value of the house is disregarded if the surviving spouse needs financial assessment for care.

Extended warranties

Paying to cover your household appliances can prove costly. A three-year warranty for a £550 washing machine could cost around £199, or 36pc of the sale price, according to Which?

But if you invest in a good-quality machine you’re unlikely to need a warranty. Which? said the majority of white goods it recommended didn’t break down in the first five-years.

Instead of buying a pricey warranty the organization suggested setting aside money yourself to pay for any repairs.

Boiler insurance

Unless you’ve got an especially dodgy boiler, you could end up paying much too much to cover it.

The average cost of a servicing contract is £242 a year and the average cost of a repair is £194, while an annual service costs around £75. But you’re probably not going to need to get the boiler fixed every year. Which? said it would be cheaper to self-insure and pay for repairs yourself.

Funeral plans

Most pre-paid funeral plans cost between £3,000 and £5,000 but don’t include everything you might expect, such as burial plots, headstones, flowers or doctor’s fees. You also don’t know what will happen to the funeral provider in the future.

James Daley from Fairer Finance, the campaign group, said he was concerned that funeral plan providers might not put enough aside to fulfil the promises they had made to their customers, who wouldn’t be around to hold them to account when a claim is made on the plan. He also highlighted a lack of transparency and regulation in the industry.

Some providers also cap the contribution towards burials. For example, a Dignity funeral plan can cost up to £4,035 but it will put just £1,220 towards the burial costs. This will rise in line with inflation.

As with over-50s life insurance, it may be a better idea simply to save up the cash yourself.
We explain what’s covered with life insurance and funeral plans here.

Mobile phone insurance

Avoid buying mobile phone insurance from a network provider because it’s expensive and you may have to pay a compulsory excess if you need to claim. Which? suggested that insurance could cost as much as £160 a year for an iPhone with an excess of £125.

A better option is to add “possessions away from home” cover to your home insurance for around £16 a year.

Car hire excess waiver

Expect the hard sell when you rent a car. Sales staff will offer you expensive add-ons such as satnavs, baby seats and “super collision damage waiver”.

This covers the first part of any claim that drivers need to pay if the car is damaged or stolen, typically between £500 and £2,000.

At-desk excess cover typically costs £20 per day, but sometimes more. Hertz, for instance, charges up to £35 a day. But if you buy stand-alone excess insurance before you go, you can get it for a few pounds a day.

Which? estimated that you could pay £173 more if you bought a super collision damage waiver from a car hire company than if you bought it directly from an insurance firm.

Bull Market Heading for Major Correction in 2018, Bank of America Says

My Comments: If I sound like a broken record, you have my apologies.

In these days of supposedly good cheer and optimism, no less an institution than Bank of America/Merrill Lynch says to be cautious. That’s good advice.

As I continue working on my book/course on retirement planning, I have one eye watching what’s happening in the world. I consider myself lucky that I still have two good eyes.

Watch for a publication announcement in the next few weeks. Happy Holidays!

By Bradley Keoun | Dec 6, 2017

Bank of America Corp. says signs are growing that the eight-year-old bull market in stocks and risky assets could soon come to an end.

And, as with all late-stage bull markets, the trick for investors is in getting the timing right.

The Standard & Poor’s 500 Index, a key benchmark for U.S. stocks, could peak at 2,863 during the first half of 2018, Bank of America analysts predicted in a report. That’s 8% above current levels.

But the second half could bring mostly gloom for investors, as the Federal Reserve tightens financial conditions by raising interest rates and shrinking its balance sheet.

Volatility — a measure of the size of daily price swings — could rise from this year’s unusually low levels. Inflation is likely to increase. Yields on corporate bonds could widen relative to those of U.S. Treasuries — an indicator of fading investor confidence in companies’ ability to repay their debt.

“Signs of bubble-like behavior abound,” according to the report, which cited examples like record-high art prices, soaring Bitcoin prices and a 100-year-bond sale by Argentina, the South American nation that has defaulted on its debt eight times in the past 200 years. Next year “could represent the move toward euphoria, which typically heralds the end of a bull market.”

Wall Street firms are becoming increasingly anxious about frothy conditions in financial markets, with Goldman Sachs Group inc. warning investors last week that stocks and bonds are trading at the highest average valuations since 1900.

Bank of America noted that much of the recent gains have been fueled by central banks like the Fed, which have pumped trillions of dollars into global markets in the past decade to kindle elusive economic growth.

In fact, according to the bank, there may be little driving the stock market at this point except for bullish sentiment.

While there are ample gains are to be had by savvy investors, the risks are growing. By the end of 2018, the bank predicts, the S&P 500 could fall from its mid-year peak to about 2,800.

Signs are growing that the bull market is “nearing the end of its leash, triggering a mid-year pullback alongside potential for some of the best returns in the last gasps of the cycle,” the analysts wrote.

Yields on U.S. Treasury 10-year bonds could surge to 2.9% or 3% by the end of 2018, from about 2.37% now, the report said, a move that would lead to falling prices for the assets. According to the analysts, the tax bill could lead to $1 trillion or more of U.S. budget deficits, prompting the Treasury to issue more bonds and increase market supply of the securities even as the Fed proceeds with a plan to liquidate government securities currently held on its balance sheet.

“Balance sheet unwinding could mean a spike in net supply of Treasuries the market would have to absorb,” according to the analysts.

A key call in the report is that China’s bond and foreign-exchange markets could face a reckoning after officials for more than a decade encouraged heavy borrowing and spending to fuel economic growth. President Xi Jinping’s efforts to reduce debt in the country’s financial system could become “messy,” the Bank of America analysts wrote.

Investor fears of a Chinese currency devaluation sent markets reeling in early 2016, until officials managed to stabilize the exchange rate through strict capital controls.

So — proceed with caution.

Roll Your 401k (or 403b) Into an IRA While You’re Still Working

My Comments: The prevailing wisdom is that if you have money inside a 401k, or a 403b (University and other not-for-profit employees), you are stuck there until you terminate your employment. This article says you can move it.

Being stuck means you can’t always make changes to insure your pile of money against a market correction. If you are young, it may not matter. But if you are really starting to think about your retirement, it could be seriously serious.

This chart shows the S&P500 over the past 20 years. To me it suggests there will be another downturn. You might want to be thinking about repositioning some of your retirement money…

Greg Soren, November 9, 2017

A client recently walked into my office and placed his 401(k) statement on my desk. He looked at me, pointed to the document and asked, “Can I bombproof my 401(k)?” We reviewed his statement, investment options and expenses, then considered his ability to lower risk inside the 401(k).

Unimpressed, his next question was, “Is there anything else I can do?” I hesitated for a moment, then asked him if he’d ever considered an In-Service Distribution. He looked at me with a blank stare that immediately let me know he had no idea what I was talking about.

Many employees diligently focus their energy on accumulating assets into their Employee Retirement Income Security Act 401(k) or 403(b) employer plans. But, they don’t take the time to understand all the associated rules; specifically, in-service distributions and other options those plans may afford to them as they approach retirement age.

Most employees are aware they have the option to roll their employer plan over to an Individual Retirement Arrangement (IRA) when they retire. However, very few know that they can take a distribution from the plan while they’re still employed with the company. The employee must be over the age of 59.5 to access the majority of their funds, and the fact that the Employee Retirement Income Security Act of 1974 (ERISA) may allow for such a distribution doesn’t necessarily mean your employer’s plan permits it.

Rollover while you are still employed
The In-Service Distribution allows you to initiate a tax-free, trustee-to-trustee rollover into an IRA while you’re still employed, offering advantages heading into retirement. The rollover can be made from a traditional employer plan, a Roth employer plan or a combination plan. (If you’re completing an In-Service Distribution for a Roth portion of your plan, you must be sure it rolls over to a Roth IRA.)

For Example
John Doe has been employed with ABC Widgets, Inc. for 35 years. At age 62, John is three years away from retirement and wants to decrease risk in his 401(k). John’s 401(k) plan does allow for In-Service Distributions, so he decides to diversify and take advantage of this option. John and his adviser determine to allocate 35% of his 401(k) to an outside investment. They agree upon and choose a lower-cost, lower-risk fixed indexed annuity and rebalance the 401(k) in order to accomplish this goal.

Advantages and Disadvantages of In-Service Distributions

• Unlimited Control: Once you roll employer plan dollars over to your IRA, you have total control and ownership of that investment. You can choose the investment strategy and the custodian without any restrictions, including unlimited withdrawal options. Under your employer’s plan, you’re restricted to the investments they select and also face potential blackout periods, related fees and limited distribution options.

• Investment Diversification: If you opt to roll over your employer plan dollars, you’ll be able to choose the investments you want in your IRA without being subject to the limited options of an employer plan. Or, you can use the In-Service Distribution to enjoy the best of both worlds by leaving some dollars in the employer plan and also transferring some to your IRA.

• Beneficiary Options: With employer plans, ERISA requires a spouse to be the primary beneficiary unless he/she signs paperwork to recuse himself/herself. With an IRA, you can name anyone as a beneficiary with no approval or additional signatures required. Your IRA beneficiary can be updated and changed as frequently as you like, just remember to always name a primary and a contingent beneficiary.

• Federal Tax Withholding: When you withdraw dollars from an employer plan, 20% federal withholding is required. If dollars are transferred to a rollover IRA and then withdrawn, there is no federal withholding requirement. The owner determines the federal and state withholding amounts needed, if any.

• Fees: IRA owners are able to shop and compare competitive fee pricing, which can result in savings compared to employer plan fees. My clients often say, “Oh, there are no fees in my 401(k),” but we know this isn’t true. Under ERISA, Code sections 408(b) (2) and 404(a) (5) require all plan participants receive a full disclosure of fees related to their company plan, including indirect and direct compensation and services. This information helps employees make the most informed decisions.

• Bankruptcy Protection: IRA owners maintain bankruptcy protection for their IRAs up to $1,283,025. However, like the ERISA plan, the amount of IRA dollars protected in bankruptcy is unlimited if dollars are rolled over to an IRA. Creditor protection in the IRA varies from state to state; some states have unlimited creditor protection while others are limited. Make sure to research the state in which you live.

• Prefund Your Retirement IRA: Once a rollover IRA is opened, it’s ready to house any additional plan dollars you contribute prior to retirement, making the transition that much easier.

• Net Unrealized Appreciation (NUA): Transferring plan assets to an IRA can disqualify an opportunity to benefit from Net Unrealized Appreciation (NUA), an option to tax gains from highly appreciated company stock at the more favorable long-term capital gains tax levels as opposed to ordinary income tax. Company stock is transferred from the company plan to a non-qualified account. Ordinary income tax is paid on the basis of the company stock, and the gain of this stock will be taxed at long-term capital gains rates when sold in the future. The ability to pay tax at the long-term rate on a portion of the plan dollars benefits the account owner.

• After-tax Dollars: Some qualified plans allow you to contribute after-tax dollars. Just be sure these monies are distributed to a Roth IRA or non-qualified account, as you don’t want to co-mingle after-tax dollars with pre-tax dollars. If this happens, your CPA will be required to complete IRS tax form 8606 every year thereafter on your federal taxes to inform the IRS what amount of after-tax money is in your pre-tax IRA. It’s much easier to segregate the two balances and have 100% access to your after-tax dollars.

• No Required Minimum Distributions (RMDs): Individuals are required to start taking their Required Minimum Distributions (RMDs) the year they turn 70½, or by April 1 the year following. The amount of money they must withdraw is based on the Single Life expectancy table or Joint Life expectancy table. If individuals do not take the appropriate distribution, the IRS can penalize them up to 50% of the RMD. Employees who remain working for the employer that houses their company plan do not have to take dollars out of the plan at age 70½ , and are allowed to waive the RMD until April 1 the year after they retire. Exceptions also exist for pre-1987 403B plan dollars; check your company plan for more information.

• Borrowing Availability: You may be able to take a loan from your company plan if the plan allows. You are not allowed to borrow money from a rollover IRA or contributory IRA.