Well, it's a new year. But will it be a better year?
I talked with the CFO of Sierra Vista Bank and she told me that the local economy won't get any worse. But it also won't get any better either... at least not until the end of the year.
So what does that mean? Well, for one, many of the financial writers are "re-inventing" the idea of whole life insurance as an asset and as an "investment." While I don't go so far as to say that any life insurance is an "investment" I do say that looking at the safety and the returns that are available, everyone should have a WL plan as an asset in their financial portfolio.
For years the financial wizards of the news media have said whole life cash values are a poor investment. From a short-term perspective, they may be right (depending on how you define "short term.) However their tune is changing. Now they are telling us that life insurance isn’t an investment per se. It’s a counterbalance to investment risk in a broad portfolio of assets.
Consider the recent financial environment. Interest rates have declined for the past 25 years, to near zero in 2009. The stock market delivered a -2.22 percent annualized yield from mid-1999 to mid-2009. Real estate plunged off a cliff in 2008 and took the economy – and most people’s stock and retirement portfolios – along with it.
Enter the concept of GUARANTEES!
In the circumstances above, the guarantees of whole life insurance are more compelling than ever. No whole life policyholder lost a dollar of cash value or death benefit protection in the market debacle of 2008-2009. In fact, guaranteed cash values went up.
Another recent development that makes whole life cash value more valuable is the tighter market for credit. Households and businesses are finding it much more difficult to get financing for major purchases. Whole life cash value, however, is an instant and guaranteed “line of credit” for the policyholder, who can take policy loans (with the cash value as collateral) for any purpose – even to pay premiums if necessary.
There is a terrific booklet that was just put out by Ohio National called Debunking Myths About the Original Permanent Life Insurance. It's only eight pages but it is super. If you want to see it, CLICK HERE.
-Al
The recent economic crisis has everyone concerned about finanancial survival during retirement, especially with the prospect of looming tax increases. With pensions disappearing and reductions in employer match programs, it is important for you to consider financial planning tools that address long-term retirement and tax situations
You are going to hear a lot about Roth converstions of IRAs and other retirement vehicles, so perhpas the following will serve as a quick introduction.
The Roth conversion is a powerful tool that provides tax-free retirement income and growth potential for estate planning purposes, when applied appropriately. Thanks to the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005, on Jan. 1 the $100,000 income conversion limit are permanently eliminated. Now everyone has the opportunity to eliminate future income taxes from some or all of their IRAs
Bottom line, you can convert you "old" IRA which will require you to take distribuitons AND pay back taxes... to a Roth IRA which eliminates both. However... the catch is that you have to pay the tax NOW. Is that a good thing? Read on.
Why Consider a Roth Conversion Now?
Although many people are upset by the recent market performance, the decline provides some of them with unique opportunities to consider when converting some or all of their traditional IRAs to Roth IRAs. Investors will pay less in taxes for conversions as compared to several years ago when their IRA accounts may have been 30-40 percent higher. Future gains in the next bull market will grow income tax free. Historically low income tax rates are likely to remain at current levels through 2010, and out-of-work people may be in even lower tax brackets. And here is a special deal! For conversions occurring in 2010, half the income can be "declared" in 2011 and half can in 2012, for tax purposes. Distributions from the Roth IRA could remain tax free for life. In addition, Roth IRAs have no required minimum distributions (RMDs) while the account owner is alive
Determining if a Roth Conversion Is Right for You
Several key factors should be considered when determining if a Roth conversion is best. A conversion makes sense if you have a long horizon until you need access to the funds, ensuring a greater tax advantage and potential for investments to accumulate tax free. If you expect tax rates to stay the same or increase or if you expect to be in a higher tax bracket in retirement, a conversion might fit your plans. For those of you age 70 and beyond, a Roth conversion can reduce or eliminate distribution requirements. In addition, your beneficiaries may receive assets income tax free and set up lifetime tax-free distributions.
Of course, it is very important to determine what assets are available to cover the conversion tax liability. It is typically best to pay taxes from assets outside of the IRA.
Creative planning opportunities to consider
Spousal beneficiaries:
- Convert inherited IRA to a Roth IRA if rolled over into the surviving spouse’s own account, continuing for life tax-free income, accumulation and no RMD. Inherited Roth IRAs may be rolled over to their own accounts as well. (Because nonspouse beneficiaries must take RMD on an inherited Roth IRA, the benefits are more limited for non-spouse beneficiaries converting an inherited traditional IRA to an inherited Roth IRA.)
Restore 401(k)s affected by investment losses, protecting future retirement income:
- Determine the desired level of target retirement income and the target retirement date
- Initiate a rollover of plan assets after a triggering event, or through in-service withdrawals, with a Roth conversion
Roth 401(k) or Roth 403(b) planning:
- The new law made the Roth 401(k) and Roth 403(b) permanent. Those funds can be rolled into an existing Roth IRA upon separation from service or at retirement. The five-year clock associated with a Roth 401(k) or Roth 403(b) does not carry over when rolled over into a new Roth IRA account; an established Roth IRA’s five-year period is measured from the earliest contribution
Fund Roth IRAs as a hedge against future tax increases:
- People over age 70, not requiring distributions from their IRAs, may consider Roth conversions, allowing assets to compound for life, income tax free
- Minimize Social Security benefit taxation. Retirement income drawn from a Roth IRA cannot be included in the combined Adjusted Gross Income limits for determining taxability of Social Security benefits
Estate and legacy planning:
- Gifting -- If a child has earned income, clients may consider gifting amounts each year to open and fund a Roth IRA
- Wealth transfer -- For clients with large estates, Roth conversions eliminate RMD, providing the potential for assets to grow and pass on to their heirs income tax free. Variable annuities with guaranteed death benefits can help provide a hedge against market downturns, guaranteeing accumulation that passes on income tax free for heirs
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