Things to Consider if You Plan to Retire Before 60

Financially speaking, what moves might you want to make?

                       

By choice or by chance, some people wrap up their careers before turning 60. If you sense this will prove true for you, what could you do to potentially make your retirement transition easier? As a start, you may need to withdraw your retirement funds strategically.

  

The I.R.S. wants you to leave your retirement accounts alone until your sixties. To encourage this, it assesses a 10% early withdrawal penalty for most savers who take money out of traditional retirement accounts prior to certain ages. For a traditional IRA, the penalty applies if you withdraw funds prior to age 59½; for a workplace retirement plan, the penalty may apply as early as age 55.¹

You may be able to avoid that 10% penalty by planning 72(t) distributions. Under a provision in the Internal Revenue Code, you can withdraw funds from a traditional IRA prior to age 59½ in the form of substantially equal periodic payments (SEPPs) over the course of your lifetime. The schedule of payments must last for at least five years or until you reach age 59½, whichever period is longer. Once the schedule of periodic payments is established, it cannot be revised – if the payments are not taken according to schedule, you will be hit with the 10% early withdrawal penalty. All 72(t) distributions represent taxable income.^1,2

 

You can also take 72(t) distributions, in the form of SEPPs, from many employee retirement plans. To do this, you must “separate from service” with your employer, i.e., leave or lose your job. Should that happen in the year you turn 55 (or in subsequent years), you can take a lump sum out of the plan without any early withdrawal penalty. If you quit or leave before age 55, you may arrange SEPPs over your lifetime or prior to age 59½, as per the above paragraph.³

 

If you have a Roth IRA or Roth employer-sponsored retirement account, things get easier. You can withdraw your contributions to these accounts at any time without incurring taxes or tax penalties. At age 59½ or older, both account contributions and account earnings can be distributed tax free and penalty free if you have held the account for at least five years.³

In addition to your retirement funds, you will need health coverage. A decade may pass before you are eligible for Medicare, so what are your options past 18 months of COBRA?

    

The health insurance exchanges may be your best resource to find coverage at a decent cost. In fact, you may qualify for health insurance subsidies because your income will drop when you leave work. Retirement (and the loss of employer health coverage) counts as a “qualifying life event,” giving you a special 60-day enrollment window outside the usual November-December enrollment period.⁴

 

In the best-case scenario, your employer keeps you on its group plan for a few years after your retirement. (If you have paid for your own health insurance for years, you can keep doing so.) 

    

You may appreciate having a health savings account. Contributions to HSAs are tax deductible, and the assets within them grow tax-free. HSAs are sometimes called “backdoor IRAs” because you can use the money within them for any reason without penalty once you turn 65, not just for qualified health care expenses. (All HSA withdrawals are taxable.)⁵

  

Think about a conservative retirement income withdrawal rate. The standard 4% baseline may be too optimistic; 3% or 3.5% may be more realistic if you feel you will be retired for 30 years or longer.

 

Should you claim Social Security at 62? You can, as long as you are prepared for the trade-off: the probability of proportionately smaller monthly benefits over the rest of your life compared with larger monthly benefits you could receive by claiming later.

Any early retirement decision should prompt a consultation with a qualified financial or tax professional. This is a critical financial juncture in your life, and whether you find yourself at it by choice or by chance, your decisions could have lifelong impact.

We may be reached at 800-916-9860.

www.wenadvisory.com

This material does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - cnbc.com/2017/07/05/three-retirement-savings-strategies-to-use-if-you-plan-to-retire-early.html [7/5/17]

2 - forbes.com/sites/greatspeculations/2017/08/28/the-basics-of-taking-hardship-distributions-from-self-directed-iras/ [8/28/17]

3 - schwab.com/resource-center/insights/content/thinking-of-taking-an-early-401-k-withdrawal-think-again [8/2/17]

4 - investopedia.com/articles/personal-finance/080516/top-3-health-insurance-options-if-you-retire-early.asp [9/9/17]

5 - investopedia.com/articles/retirement/060116/early-retirement-strategies-make-your-wealth-last.asp [8/23/17]

Ways to Fund Special Needs Trusts

A look at the different options & strategies.

If you have a child with special needs, a trust may be a financial priority. There are many crucial goods and services that Medicaid and Supplemental Security Income will not pay for, and a special needs trust may be used to address that financial challenge.

In planning a special needs trust, a pressing question must be answered. When it comes to funding the trust, what are the options?

There are four basic ways to build up a third-party special needs trust. One method is simply to pour in personal assets, perhaps from extended family as well as immediate family. Another possibility is to fund the trust with permanent life insurance. Proceeds from a settlement or lawsuit can also serve as the core of the trust assets. Lastly, an inheritance can provide the financial footing for this kind of trust.

   

Families choosing the personal asset route may put a few thousand dollars of cash or other assets into the trust to start, with the intention that the initial investment will be augmented by later contributions from grandparents, siblings, or other relatives. Those subsequent contributions can be willed to the trust, or the trust may be named as a beneficiary of a retirement or investment account.¹

When life insurance is used, the trustor makes the trust the beneficiary of a life insurance policy. When the trustor dies, the policy’s death benefit is left, tax free, to the trust.²

A lump-sum settlement or inheritance can be invested while within the trust, inviting the possibility of growth and compounding. With a worthy trustee in place, there is less likelihood of mismanagement, and funds may come out of the trust to support the beneficiary in a measured way that does not risk threatening government benefits.

 

The trust may also be funded with tangible, non-cash assets. Examples include real estate, securities, collections of cars or art or antiques, even a business. These assets (and others like them) can be left to the trustee of the special needs trust via a revocable living trust or will. Just remember that the goal of the trust is to provide the trust beneficiary with cash. Those tangible assets will need to be sold or liquidated to meet that objective.¹

    

Currently, it costs about $2,000 to design a basic special needs trust. Given that initial expense and ongoing administrative costs, most families aim to place at least $100,000 inside these vehicles. The typical trustee is a bank – or more precisely, a bank’s trust division – and annual administration fees commonly range from 0.5%-1.5%. If the trustee is a relative of the child or a close friend of the family, administration may be done for free or at minimal cost.³ 

     

Care must be taken not only in the setup of a special needs trust, but in the management of it as well. This should be a team effort. The family members involved should seek out legal and financial professionals well versed in this field, and the resulting trust should be a product of close collaboration.

We may be reached at 800-916-9860.

www.wenadvisory.com

This material does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - nolo.com/legal-encyclopedia/how-special-needs-trusts-work.html [12/6/17]

2 - specialneedsanswers.com/how-life-insurance-can-be-used-to-fund-a-special-needs-trust-15968 [6/21/17]

3 - cnbc.com/2017/10/25/how-to-set-up-a-special-needs-trust.html [10/25/17]

The Risk of Being a Suddenly Single Woman

Contending with the possibility of widowhood.

      

On average, women outlive their husbands. According to the Social Security Administration’s estimate, the average 65-year-old woman will outlive the average 65-year-old man by more than two years, dying at age 86½. Averages aside, it also estimates that about a quarter of today’s 65-year-olds will live into their nineties. Around 10% will live to age 95 or beyond.¹

   

Eyeing these figures, it is easy to deduce that some women may outlive their spouses by five years or longer and contend with complex financial issues after age 85. There is one detail, however, that all these facts and figures leave out.

The average age of widowhood in the U.S. is 59. A widow might spend 30 or more years managing her finances. Is she prepared for this possibility?²

   

Too often, conversations about money are male driven. A recent Key Private Bank survey confirms this. The wealth management firm polled financial professionals, and the advisors responding said that women took the lead in just 3% of their talks with married couples. More than 80% of these advisors said that most of their female clients had no contingency plan to respond to the risk of being widowed.²

 

Women need to plan for the probability of someday managing their finances. Given the above statistics, “probability” is not too strong a word. What steps should be taken?

Both spouses should be financially literate. Some women are extremely well versed in investing, retirement planning, and personal finance matters.

A successive investment policy can be determined. A widow may want (or need) to take a different investment approach than the one stated in a couple’s investment policy statement (IPS). This approach needs to be one she is comfortable with, but it must not be so risk averse that it jeopardizes her potential to sustain her standard of living in the face of inflation.

Sufficient insurance and a thoughtful estate plan need to be in place. If a spouse dies, the death benefit from a permanent life insurance policy may ease some of the financial pressures that follow. Up-to-date beneficiary designations, trusts, and other estate planning mechanisms may help assets transfer from spouse to spouse and within the family without contention or undue delay. A good estate plan clearly defines the steps of the asset transfer process for a surviving spouse and other heirs.

  

An asset map should be prepared for a surviving spouse. Some widows must search for vital financial documents because a deceased spouse left them in an obscure location. Other times, a widow is left with only a hazy understanding of how many accounts there are, how they are titled, and how to address the requirements of asset distribution or transfer. Each spouse should have a copy of a document (or access to an online or brick-and-mortar vault) where this information is kept. This is the information from which much of a widow’s financial future may be planned.

  

With a clear understanding of where she stands, financially, a widow may evaluate her investment and wealth management options and take steps toward the next phase of life with some confidence.

We may be reached at 800-916-9860.

www.wenadvisory.com

This material does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - ssa.gov/planners/lifeexpectancy.html [12/18/17]

2 - cnbc.com/2017/09/05/how-to-prepare-for-being-suddenly-single.html [9/5/17]

The Many Benefits of a Roth IRA

Why do so many people choose it rather than a traditional IRA?

The Roth IRA changed the whole retirement savings perspective. Since its introduction, it has become a fixture in many retirement planning strategies. Here is a closer look at the trade-off you make when you open and contribute to a Roth IRA – a trade-off many savers are happy to make.

You contribute after-tax dollars. You have already paid income tax on the dollars going into the account, but in exchange for paying taxes on your retirement savings contributions today, you could potentially realize greater benefits tomorrow.¹

 

You position the money for tax-deferred growth. Roth IRA earnings aren’t taxed as they grow and compound. If, say, your account grows 6% a year, that growth will be even greater when you factor in compounding. The earlier in life that you open a Roth IRA, the greater compounding potential you have.²

  

You can arrange tax-free retirement income. Roth IRA earnings can be withdrawn tax-free as long as you are age 59½ or older and have owned the IRA for at least five tax years. The IRS calls such tax-free withdrawals qualified distributions. They may be made to you during your lifetime or to a beneficiary after you die. (If you happen to die before your Roth IRA meets the 5-year rule, your beneficiary will see the Roth IRA earnings taxed until it is met.)^1,3

 

If you withdraw money from a Roth IRA before you reach age 59½ or have owned the IRA for five tax years, that is a nonqualified distribution. In this circumstance, you can still withdraw an amount equivalent to your total IRA contributions to that point, tax-free and penalty-free. If you withdraw more than that amount, though, the rest of the withdrawal may be fully taxable and subject to a 10% IRS early withdrawal penalty as well.^2,3

 

Withdrawals don’t affect taxation of Social Security benefits. If your total taxable income exceeds a certain threshold – $25,000 for single filers, $32,000 for joint filers – then your Social Security benefits may be taxed. An RMD from a traditional IRA represents taxable income, and may push retirees over the threshold – but a qualified distribution from a Roth IRA isn’t taxable income and doesn’t count toward it.⁴  

You can direct Roth IRA assets into many different kinds of investments. Invest them as aggressively or as conservatively as you wish – but remember to practice diversification.

 

Inheriting a Roth IRA means you don’t pay taxes on distributions. While you will need to take distributions from an inherited Roth IRA within 5 years of the original owner’s passing, those distributions won’t be taxed as long as the IRA is at least five years old (five tax years, that is).³

You have nearly 16 months to make a Roth IRA contribution for a given tax year. Roth and traditional IRA contributions for a tax year that has passed may be made up until the federal tax deadline of the succeeding year. The deadline for a 2017 Roth IRA contribution is April 17, 2018. Making your Roth IRA contribution as soon as a tax year begins, however, gives that money more time to potentially grow and compound with tax deferral.⁵

 

How much can you contribute to a Roth IRA annually? The 2018 contribution limit is $5,500, with an additional $1,000 “catch-up” contribution allowed for those 50 and older. (That $5,500 limit applies across all your IRAs, incidentally, should you happen to own more than one.)⁵

 

You can keep making annual Roth IRA contributions all your life. You can’t make annual contributions to a traditional IRA once you reach age 70½.¹

Does a Roth IRA have any drawbacks? Actually, yes. One, you will generally be hit with a 10% penalty by the IRS if you withdraw Roth IRA funds before age 59½ or you haven’t owned the IRA for at least five years. (This is in addition to the regular income tax you will pay on any Roth IRA earnings withdrawn prior to age 59½, of course.) Two, you can’t deduct Roth IRA contributions on your 1040 form as you can do with contributions to a traditional IRA or the typical workplace retirement plan. Three, you might not be able to contribute to a Roth IRA as a consequence of your filing status and income; if you earn a great deal of money, you may be able to make only a partial contribution or none at all.^1,3

These asterisks aside, a Roth IRA has remarkable potential as a retirement savings vehicle. Now that you have read about all of a Roth IRA’s possible advantages, you may want to open up a Roth IRA or create one from existing traditional IRA assets. A chat with the financial professional you know and trust will help you evaluate whether a Roth IRA is right for you, given your particular tax situation and retirement horizon.

We may be reached at 800-916-9860.

www.wenadvisory.com

This material does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - forbes.com/sites/jamiehopkins/2017/12/21/4-reasons-to-start-using-a-roth-ira-in-2018/ [12/21/17]

2 - tinyurl.com/ydevpofd [12/18/17]

3 - hrblock.com/get-answers/taxes/taxes-and-penalties/early-withdrawal-penalties-10768 [12/22/17]

4 - investopedia.com/ask/answers/013015/how-can-i-avoid-paying-taxes-my-social-security-income.asp [6/29/17]

5 - tickertape.tdameritrade.com/retirement/2017/12/financial-start-new-year-81999 [12/13/17]