Annuities Part I:  The Accumulation Phase

Glenn J. Downing, MBA, CFP®

An annuity is a complex financial animal.  It can be used as a tool to accumulate funds on a tax-advantaged basis.  It can also be used efficiently to distribute funds in later years.  Here in Part I I’m focusing on the accumulation phase.  In Part II I’ll cover distribution and tax issues.

An annuity, in its strictest sense, is a stream of payments that one cannot outlive.  The term annuity is often used synonymously with the word pension.  A stream of payments describes a distribution of principal, however.  How do I get the annuity in the first place?

Purchase it

You can purchase this stream of income just as you’d purchase a new suit or a car.  It pays to shop around, because different annuity companies (i.e. life insurance companies; they are one and the same) use different mortality tables and interest rate assumptions which affect the payments they offer to you.  

Accumulate...

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Need Some Fast Cash? Part II: Look at a 401(K) Withdrawal. 

By Glenn J. Downing, MBA, CFP®

Q:  I’m in financial trouble.  Should I take out a 401k withdrawal?

This is a tough question, and the answer is generally, Not unless you truly need it.  A direct withdrawal from a 401(K) before age 59 ½ is a last-resort option, with a big taxable event. 

I want to distinguish clearly between 401K loans and 401K withdrawals.  In this piece I’m discussing withdrawals. You can read about loans here. 

Tax Advantaged Savings

Think about what happens in the 401(K).  The IRS “lets” you defer salary into your account without taxation. Your employer may make matching or discretionary contributions to the account on your behalf, which he deducts from his income.  Lots of tax advantages here, and the IRS wants you to keep the funds invested for their purpose:  funding your retirement.  Consequently, if you need to put your hands on some fast cash, the IRS doesn’t...

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Need Some Fast Cash? Part I: Look at a 401(K) Loan. 

By Glenn J. Downing, MBA, CFP®

Q:  I have a lot of high interest credit card debt.  Should I take out a 401k loan?

This is a question we come across not uncommonly.  There is a lot to like about doing this, but a big potential tax trap as well. 

I want to distinguish clearly between 401K loans and 401K withdrawals.  In this piece I’m discussion the loans; you can read about withdrawals here.

What are the Rules?

First of all, your 401k plan has to have loan provisions in place.  No loan provisions, no loan.  An employer can always go to his third-party administrator to have the plan documents amended if he would like to make loans available to the employees. 

The loaned amount can be 50% of the vested account balance up to $50,000.  A special rule allows participants with smaller balances to borrow up to $10,000 without the percentage restriction.  

How Do I Obtain the Loan?

From what we’ve seen, plan...

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165 Eaton Place

By Glenn J. Downing, MBA, CFP®

Last year (2019) I watched the entire Upstairs Downstairs series on Britbox. Easily sixty episodes in all. My viewing interests are usually limited to either WWII or British crime stories, so this was a bit of a departure for me, and one I thoroughly enjoyed. As the name suggests, it is sort of a Downtown Abbey Lite. The time spanned goes from before WWI to the New York Stock exchange crash. It is the story of all the residents of 165 Eaton Place in London – the home of a member of Parliament who married a titled lady (the upstairs folks) and their household staff (the downstairs folks).

Richard Bellamy, MP, had two children – a married daughter in New York, and a son at home – James Bellamy. James was up at Cambridge, though no mention of a degree. He worked at a job he hated because it was, well, work, and then joined his regiment as an officer during the Great War. This is a fellow whose newspapers and shoelaces were ironed for...

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Hurricane Financial Preparedness: Top 6 Priorities Before A Storm Hits

by Jonathan G. Cameron, CFP®

When I originally wrote this, the Carolinas were experiencing the worst of Hurricane Florence.  As a native Floridian I've ridden out half a dozen hurricanes myself . The aftermath of a hurricane is not only about the damage to life and property, but for many it can take a serious personal financial toll. As you stock up on canned food, batteries, and bottled water, don’t neglect to address these top 6 financial priorities before a storm makes landfall.

1. Review Your Homeowners Insurance Policy for Windstorm Coverage

Odds are your home is your most valuable asset. Why roll the dice on this? Not having homeowners insurance coverage is a mistake. Having a homeowners policy with little hurricane windstorm coverage could become a catastrophe. Typically, your policy will have a windstorm deductible for hurricane damage claims in addition to your All Other Perils deductible for everything else. The deductible for hurricane damage can...

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Financial Windfalls: Money Changes, Life Changes

by Jonathan G. Cameron, CFP®

A few months ago I heard Susan Bradley from the Sudden Money® Institute say something quite profound regarding our relationship with money and financial windfalls:

When life changes, money changes.
When money changes, life changes.

The order in which change happens makes a big difference. The latter statement, referring specifically to financial windfalls, turns out to be much harder to handle for most people than the former statement. Let me explain.

Life Changes

Life changes are a constant: marriage, babies, a new home, family milestones, divorce, promotions, demotions, getting fired, moving to a new city, kids going to college, changes in health status (ourselves or in a loved one), growing old, and death.  As with any change, anticipated or otherwise, we regroup; we make budget adjustments; and move forward.  Whatever the life change, you hopefully take wise counsel and update your financial plan accordingly.

Money Changes

By ...

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Everybody Needs Estate Planning – That Means You!

 

By Glenn J. Downing, MBA, CFP®

Usually when we think of estate planning we have in mind the orderly transition of assets at death. Death is something that you have a 100% chance of experiencing – we just don’t know when. Tomorrow isn’t promised to us – and neither is this afternoon, for that matter. Consequently it is prudent to plan for this eventuality.

What Documents Do You Need?

A valid will

A basic will is the foundational document of estate planning. You need that once you own real property or begin to accumulate assets. Typically, at the earlier stages of life, most of what you have is going to pass by operation of a beneficiary arrangement – by contract, in other words. Think life insurance or IRA and 401(K) beneficiaries. What won’t pass by operation of contract? everything else that you own. This would be real property, or your car, for example – assets that cannot have a beneficiary attached to them.

Guardianship for your...

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I Can't Wait to Pay My Mortgage Off!

By Glenn J. Downing, MBA, CFP®

Should I Pay my Mortgage Off Early? This is actually a FAQ – a frequently asked question, so I thought I’d spend a little time on it here. Some other mortgage-related topics we’ve addressed are these:

A Mortgage Example

Let’s use a sample mortgage. $400,000 borrowed, at 4.5%, over 30 years. The monthly payment is $2026.74. That means over the life of the mortgage you will have paid $729,626.85 in principal and interest payments to repay that $400,000 loan – and, of course, $329,626.85 of that amount is interest.

You pay interest each month on the unpaid balance. In early years your payment is mostly interest, with very little principal repayment. In later years, situation reverses: you pay mostly principal, with much of...

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529 College Savings Plans Just Got Better!

 By Glenn J. Downing, MBA, CFP®

 529 College Savings accounts just got better! 

A 529 college savings account is one in which money is invested for a beneficiary’s future college expenses.  The account grows without taxation, and funds are eventually distributed with no federal taxation for the beneficiary’s qualified education expenses.  The growth never gets taxed!*  This is a huge benefit. 

 The states each sponsor a 529 plan.  Florida’s is the Florida Pre-Paid.  A parent goes online during open enrollment in the autumn and chooses an option:  tuition only, or tuition and housing.  Once enrolled, the parent pays a monthly fee.  The benefit is that the child goes off to college with all tuition paid for!  Fees and expenses are not covered, and those can be considerable.  The prepaid plan is best suited for a conservative investor.

 Most states 529 plans are of the mutual fund...

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What is a Stretch IRA?

by Glenn J. Downing, MBA, CFP®

The Secure Act of 2019 changed the rules for non-spouse beneficiaries of inherited IRAs.  The rules now are simply that the beneficiary of such an IRA has 10 years to distribute it in its entirety.  No required minimum distributions are necessary during this time. 

This is a big change from previous rules.  Prior to the Secure Act, the non-spouse beneficiary could "stretch" the IRA out of his own life expectancy.  Say granddad left an IRA to the grandson.  The grandson's life expectancy (from an IRS table) was 70 years.   The year after death the grandson would take the beginning of year balance and divide it by 70.  The following year he'd take the beginning of year balance and divide it by (70-1).  And so on.  The result was that the IRA could grow enormously during this time.  

If You are a Non-Spouse IRA Beneficiary, You Have Some Choices.

You can simply sell the assets and...

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