"Stretch IRA" concept has advantages for Beneficiaries

How The "Stretch Concept Works"
As we just stated, the stretch concept allows an IRA to be passed on from generation to generation. However, in doing so, the beneficiary must follow certain rules to ensure he or she doesn't owe the IRS excess-accumulation penalties, which are caused by failing to withdraw the minimum amount each year.

Primary Benefits of the Stretch Concept

Tax Deferral
The primary benefit of the stretch provision is that it allows the beneficiaries to defer paying taxes on the account balance and to continue enjoying tax-deferred and/or tax-free growth as long as possible. Without the stretch provision, beneficiaries may be required to distribute the full account balance in a period much shorter than the beneficiary's life expectancy, possibly causing them to be in a higher tax bracket and/or resulting in significant taxes on the withdrawn amount.

Flexibility
Generally, the stretch option is not a binding provision, which means the beneficiary may choose to discontinue it at anytime by distributing the entire balance of the inherited IRA. This allows the beneficiary some flexibility should he or she need to distribute more than the minimum required amount.

Benefits for Spouses
A spouse beneficiary is allowed to treat the inherited IRA as his or her own. When the spouse elects to do this, the stretch concept is not an issue, as the spouse beneficiary is given the same status and options as the original IRA owner. However, should the spouse choose to treat the IRA as an inherited IRA, then the stretch rule could apply.

Conclusion
If you are interested in having the stretch concept apply to your IRA, consult your current IRA provider or financial institution. If they seem unfamiliar with the term, ask specific questions: will the beneficiary be allowed to take distributions over a life-expectancy period? Will the beneficiary be allowed to designate second- and subsequent-generation beneficiaries? If the answer to these questions is yes, then you are able to use the stretch concept with the IRA.

If the answer is no, then you may want to discuss the possibility of making such allowances with your IRA provider. Most IRA providers would rather make such allowances than have their customer transfer his or her IRA to another financial institution that can accommodate his or her needs. Finally, be sure to consult with your tax and financial professional for assistance with making beneficiary designations that suit your financial profile and your wealth-management goals.

This article is an excerpt from a public post that should not be construed as giving, tax or legal advice..

by Denise Appleby,CISP, CRC, CRPS, CRSP, APA

CNBC News Panel Discusses Safety of Indexed Annuity Retirement Idea

Check this video recorded by CNBC News panel which discusses the safety and yield potential of indexed annuity savings accounts:  

CNBC Indexed Annuites

www.youtube.com

Indexed Annuities Offer the Following Key Benefits to Consumers:
Income tax deferral on interest earned.
Safety of Principal in any market if held for the term chosen.
A guaranteed income option available for a low fee of approximately 1/2%
Probate Avoidance at Death.
Call the author of this blog below for specific contract provisions and details.
1(916) 601-5270
This blog entry is not meant to give tax or investment advice. Consult with your CPA, attorney, or
other financial professional before purchasing any retirement savings products.

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Keeping Your Financial Advisor Honest #3: Variable Life as an Investment

Variable Universal Life Insurance Plans:  A tax deferred blessing, or a risky time bomb?

( The purpose of this article is obvious: I am seeing a trend recently from marketing agencies and financial advisors recommending indexed or variable universal life insurance policies where they not suitable.)

Question:  " I have a permanent life insurance need and my insurance agent recommended a Variable Universal to me stressing the following advantages: Income tax deferral growth, and tax free loans?  What is the catch?  Should I consider this in lieu of an IRA account or other long term investments? "

The answer: This may not be the best alternative for you as an investment vehicle due to internal fees and mortality charges; even though permanent life insurance still has value as a cornerstone of any financial portfolio.

Negatives to consider:  What you may not know about policy loans: 

1.) If you need to take tax free policy loans  they reduce your beneficiaries death benefit proportionately. Every loan not repaid reduces the life insurance.

2.) The interest on policy loans is reasonable; but it compounds yearly until repaid and reduces the cash value available for retirement income. It is not repaid if your goal is income.

3.) If your policy investment sub accounts do not perform as expected or the insurance company raises the internal cost for the insurance benefit  (They can do that) ; you can run out of cash values and be faced with a SERIOUS dilemma:  income taxes on the prior loans (Those used for income and not paid back)  will be due immediately in the year that the policy lapses.

What you may not have been told about expenses and fees:

Before you can realize a net gain in any given year you must first earn enough interest to cover yearly fees and the basic cost of the insurance inside the policy. This can easily be from 3% to 5%. in addition to the insurance cost. When you factor in that the cost of the insurance can be raised; your premium and cash values cannot be projected accurately.  F.I.N.R.A,  the police dog for these types of policies,  requires that the agents and companies show how the policy will perform at both current, midpoint, and zero percent rates. 

What are other options if I still plan to keep my life insurance for a lifetime?

First of all, An objective advisor will be looking at your entire financial picture based on your goals; in order to determine whether you need a permanent or temporary life insurance solution. 

Permanent Life insurance with guaranteed level premiums.

1.) No lapse universal life:  These plans are low cost permanent solutions; stripped of their cash values for the most part but feature: Guaranteed level premiums and guaranteed level insurance for up to your age of 120; should you live that long.  These are very suitable in most cases; but not designed to build cash values.

2.) Traditional Whole Life Policies. The premiums and insurance are guaranteed to be level for life with dividends being credited to the policy in years when the insurance company declares them.  They have safe guards that universal life plans do not offer but require very high minimum premiums.

3.)  Indexed Universal Life Plans: You have a potential for tax deferred growth based on index choices such as the S&P 500; but as with all universal  life plans; the internal basic life insurance cost can be raised in the future; which would reduced your yields  proportionately. They have some internal safeguards and flexibility within; but have several moving parts; so a consultations with an advisor is needed.

In summary,  There is no type of life insurance that is best for all.  Please see my Jan. 4, 2011 blog entry for a layman's summary of different insurance types. If you need  life insurance for permanent needs and not as a temporary solution; consider the fact that the computer projections for life insurance cash  are based on history which is no guarantee of future performance. Also consider that fees in most permanent life insurance are higher than other investments which might be suitable for you.  Permanent life insurance often makes more sense than a temporary 10 or 20 year, plain vanilla, level term insurance policy; but you are best advised to consider a guaranteed, no lapse universal life plan for permanent needs unless you have a clear need for additional tax deferral in addition to your other savings vehicles.

I also recommend that regardless of the plan chosen you ask for a comparison spreadsheet of the top 5 companies for product performance and also for financial strength ratings. Demand a vital signs report which would be free.

I have advised both consumers and financial advisors for over 27 years. Feel free to contact me directly for more information. This is not offered as direct investment advice. Please contact your CPA, attorney, or other professionals for advice regarding your specific situation.

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