An Alternative to Long Term Care
Posted on 24. Feb, 2010 by Cindy in Absolute Returns, Blog, Financial News, Retirement Planning
Think shelling-out for your own home-health services, an assisted-living facility or nursing-home care may be in your future? Finally, an option that allows you to get your money back if you don’t need long term care. And with a new tax law effective this year, these services can be yours tax-free.
Like so many of our clients, we dread the thought that some day one of us or our spouses may need some form of Long Term Care. But for many, the alternative seems even worse. As a result, many people choose to “self-insure,” i.e., pay for long term care out of their savings if and when the need arises. And yet, reports point out that for a 65-year-old couple, the odds of at least one spouse requiring Long Term Care in their lifetime is nearly 70%. Self-insuring may put the family’s existing assets at risk. If care becomes necessary, the family may have to spend some or most of their assets.
Good news! There is now a strategy called Asset Based Long Term Care that can be a great alternative for those who want to self-insure. This specifically designed policy is available to maximize the benefit for potential long-term care expenses by offering the flex appeal of having long term care coverage, but, if you don’t need it, you get your money back. In regular long term care insurance policies, payments are forfeited to insurance companies even if services aren’t utilized. But with this type of account, unspent funds belong solely to you, the account holder, and can eventually be withdrawn.
Great news! Thanks to the Pension Protection Act of 2006, starting Jan. 1, 2010, you’ll no longer have to pay federal income tax on this type of account — if you use those proceeds to pay for long-term-care coverage. That means that the chronically ill or disabled will no longer have to rely solely on a regular long-term-care insurance policy or Medicaid to fund their medical and non-medical care.
Important Considerations:
- Unspent funds belong solely to the account holder and can eventually be withdrawn as income if not used for medical needs.
- If the funds are not used and you pass away, the policy acts as life insurance. Your family gets a death benefit – tax free.
- Typically there are NO medical exams for Asset Based Long Term Care.
- Asset Based Long Term Care can also provide the ability to generate tax-deferred gains. This is a benefit particularly for those currently in high tax brackets who plan to be in lower brackets when they begin drawing down their accounts.
- The account may not be enough to pay for all your long-term care expenses. If you don’t deposit enough upfront, your coverage may not last during an extended long-term-care situation.
- When considering this option as part of your comprehensive plan for retirement, be sure that you have the assets available to generate the income you need for the rest of your life. (Income planning was discussed in our December Newsletter insert: The Asset Cycle Plan).
- Careful planning of the use of qualified and non-qualified assets needs to be considered to take full advantage of the tax-free distributions.
Asset Based Long Term Care is just one way to manage potential medical and non-medical care. During your retirement planning process, it is important to be aware of your choices and then make a decision that best fits your situation. If you would like to know more, please call us at 425-558-3700 to make an appointment.
*Asset Based Long Term Care are annuities that are primarily designed to meet the long term needs for retirement income. They provide guarantees against the loss of principal and credited interest along with the reassurance of a death benefit for beneficiaries. These guarantees are backed by the financial strength and claims paying ability of the insurance company. Annuities are not FDIC insured. Early withdrawals may impact annuity cash values and death benefits. There is typically a waiting period from the time the annuity is purchased before long term care benefits can be activated and an “elimination period” once a claim is filed. As with any investment, investors should consider the investment objectives, risks, charges and expenses carefully before investing in an annuity.
SmartIRA planning may save you money in the long run
Posted on 25. Nov, 2009 by Cindy in Blog, Retirement Planning
If you own an IRA or have another retirement account, the words that follow may ring a bell, especially if you’ve been contributing to a retirement account for a long period of time.
Think back to when you first started investing in the account. Remember what you were told? See if this sounds familiar:
1- Put money away today in a retirement account and you’ll be able to use your contribution as a tax deduction against your other income.
2- Invest the contribution that you made to the retirement account wherever you want and the growth on that contribution will grow tax deferred.
3- When you retire, and begin to take withdrawals from your retirement account, you’ll be in a lower tax bracket since you’ll be retired which means that you’ll be able to put money away on a tax deductible basis when you’re in a higher tax bracket and take money out during retirement when you’re in a lower tax bracket.
Assuming that you were told all three of these things when you started to contribute to a retirement plan, my question for you is this: Were all three things true?
My experience working with clients tells me that in many cases only 2 of these 3 things were proven true – number 3 above, for many clients, was not.
Don’t get me wrong, IRAs and retirement accounts are useful products, but many folks who put money away in one tax bracket while they were working are now retired and drawing money from these retirement accounts only to find that they’re actually in a higher tax bracket now than they were when they were putting the money away.
Why did that happen?
It could be a number of reasons, but in many cases the culprit is the fact that the Internal Revenue Code, the rules that the tax ‘game’ is played by, changed.
In fact, under today’s tax code, if your estate is large enough, up to 67% of your IRA could be lost to tax at death, unless you do the appropriate planning.
That’s where the SmartIRA planning strategy may come in. The SmartIRA planning process is designed to reduce, or in some cases, even eliminate taxes on a client’s IRA. However, the outcome of the strategy is dependent upon the circumstances of your individual situation, so results will vary.
If you have an IRA, you may want to get more information about the SmartIRA planning process. Please contact our offices for more information.
Special Note: With Traditional IRAs early withdrawals may be subject to a surrender charge. In addition, distributions prior to age 59 ½ may be subject to a 10% tax penalty.
* Assumes maximum federal estate and income tax and no state income tax. If your state has income tax, your tax may be higher. Eg. $500,000 IRA @ 45% Estate Tax. Remaining taxed at 35% Federal Income Tax Rate. Total tax of $322,500 which is approximately 65% of $500,000.
Investment advisory services offered through
Absolute Return Solutions, a Registered Investment Advisor.
Should I convert my Roth IRA to a Traditional IRA?
Posted on 20. Oct, 2009 by admin in Blog, Retirement Planning
When it comes to talking about IRA’s, one of the big topics of conversation today is whether a client with a traditional IRA should convert to a Roth IRA. In this Financial Strategy of the month we’ll investigate the differences between the two retirement accounts and the option to convert from one type of account to another.
Let’s begin by discussing the basic differences between the two accounts. Contributions to a traditional IRA are tax deductible, while contributions to a Roth IRA are not tax deductible. Roth IRAs require that your income must be below certain levels to qualify to make contributions. Traditional IRAs may not be fully tax deductible if your income is above certain levels.
While either type of retirement account will allow an investor to invest where he or she would like, the tax implications on the growth is dramatically different from the traditional IRA to the Roth IRA. Growth within a traditional IRA occurs on a tax deferred basis, while growth within a Roth IRA occurs on a tax free basis.
Then, at retirement, when funds are withdrawn from the retirement accounts, the differences are even more obvious. Withdrawals at retirement from a traditional retirement account are taxable while qualified withdrawals from a Roth account are completely tax free.
Here’s the interesting part. A client that has a traditional IRA may elect to convert their account from a traditional account status to a Roth account status. In order to convert, in addition to certain criteria being met, a client needs to pay the tax due on the traditional retirement account.
For example, if I’m eligible to convert from a traditional IRA to a Roth IRA, and my current traditional IRA account balance is $100,000, I’m required to pay tax on the entire $100,000 traditional IRA account balance.
However, once I pay that tax, the retirement account is converted from a traditional account to a Roth account, meaning that all future growth on the account is tax free rather than tax deferred, provided I follow all the rules relating to maintaining a Roth IRA.
A Roth IRA conversion can be a great alternative for many traditional IRA account holders. To learn more, attend one of our upcoming informational seminars or come to our office for a Roth conversion analysis. Please contact our offices for more information.
Special Note: With Traditional IRAs early withdrawals may be subject to a surrender charge. In addition, distributions prior to age 59 ½ may be subject to a 10% tax penalty.
Investment advisory services offered through Absolute Return Solutions, a Registered Investment Advisor.
What will happen to my pension and health benefit if…?
Posted on 01. Sep, 2009 by admin in Absolute Returns, Blog, Retirement Planning
For those of us who are lucky enough to have a pension…
For those of us who are lucky enough to have a pension, here are some things to think about! In today’s tough economic climate, companies are cutting benefits and closing their doors!
If your former employer goes bankrupt what happens to your pension? The Pension Benefit Guarantee Corporation (PBGC) picks it up!
What is the PBGC?
The PBGC is a federal corporation created by the Employee Retirement Income Security Act of 1974 (ERISA). It currently protects the pensions of nearly 44 million American workers and retirees in 30,000 private single-employer and multiemployer defined benefit pension plans. The PBGC only becomes involved if a terminated pension plan does not have sufficient assets to cover all vested benefits.
What does the PBGC guarantee?
Generally, the PBGC guarantees most vested normal retirement benefits, early retirement benefits and certain survivors’ benefits at the level in effect on the date of a pension plan’s termination. However, the PBGC does not guarantee all types of benefits under covered plans. Also, the amount of benefit protection is subject to certain limitations so you might receive a monthly payment that is less than what you’re currently receiving.
If your former employer goes bankrupt what happens to your health benefit?
Your retiree health benefits may be terminated! ERISA law protects pensions, but not retiree health benefits. If your retiree health benefits are terminated, you need to find out what other health coverage is available to you as soon as possible.
If you are 65 or over, you are covered by Medicare
You should consider purchasing Medicare supplemental insurance to help you pay for prescriptions and expenses not covered under Medicare. (If you are under age 65, you are not yet covered by Medicare.)
Action Items
• Check if you are eligible for coverage under a spouse’s plan.
• Check out other health insurance options. Because group insurance plans usually cost less, see if any other group you belong to – such as a fraternal or professional organization– offers a group health plan.
• Check out Medicaid. If you are under 65 and disabled, with low income and few resources, you may be eligible for Medicaid. (Source AARP)