Annuities can be confusing and especially when you hear people telling you, “they are bad” or “You should hate annuities” as Ken Fisher advises with his advertising.

The important point you have to understand is what annuity should you hate and why. The logic they are proposing is one annuity is bad so all annuities are bad. So let’s get to the bottom of this and take a deeper dive into annuities.

What is important to realize is there are four types of annuities that are commonly used today. Let’s take a look at each and go over the pro’s and con’s to determine if they are a good fit in retirement planning.

Immediate Annuities

An immediate annuity is where a lump sum has been turned into an income stream. The lump sum is no longer available, but instead a guaranteed income is being received that can payout over a person’s life expectancy. Overall the returns credited to an immediate annuity are very low, but the income guarantee is the real benefit.

The immediate annuity has its place in income planning, such as providing a window of guaranteed income maybe before a pension or social security starts, or it can also serve as a guaranteed lifetime income as well. It pays to shop before choosing an immediate annuity, as some companies will offer higher payouts than others.

Fixed Annuities

A fixed annuity is the simplest annuity for consumers to understand. You simply receive a rate of return determined ahead of time. Many present the fixed annuity as a CD alternative.  It is in the guaranteed principle category of investments, and is one of the safest investments for consumers available today.

With bank rates so low today a fixed annuity is a good alternative with higher rates, and it also builds tax deferred until funds are withdrawn. Depending upon one’s tax bracket, this can be  very beneficial to the client, unlike a CD that is taxable each year even if the interest isn’t withdrawn.

Fixed Index Annuities

A fixed index annuity is really just a variation of a fixed annuity, so it has all of the same safety features. What the insurance company is doing is instead of offering a fixed rate, they use those funds to purchase call options on various stock indexes, with the S&P 500 being the most common.

Each anniversary date the annuity will either capture a gain if the index it is tracking is positive, or a zero return if the index is negative. If any gains are captured they are “locked in” and added to the account value.

The returns within an index annuity will vary dramatically depending upon the design, and it is very important to make sure it is a competitive product that has solid growth potential. Working with a skilled advisor that understands index annuities is extremely important.

The FIA is a safe investment that helps to bring balance to an overall portfolio. It has been one of the best performing safe investments over the past decade and has proven itself as a solid choice for the right investor.

Variable Annuities

The variable annuity is really just an option to use mutual fund type of investments within an annuity. Depending upon the choices used within the annuity, the account value can be very risky, if stock mutual funds are used or fairly conservative if bonds funds are used.

There is no doubt variable annuities (VA’s) can have high fees and this has raised a lot of red flags throughout the financial services industry today. When you hear annuities have high fees this is the annuity they are referring to. Normally all VA’s have an annuity fee that ranges from 1 to 1.5% per year, with around 1.25% being the average.

Also the majority of VA’s will also add riders of some type, either death benefit or income riders, which can add an additional .75% to 1.5% per year as well.  Add the typical mutual fund fee of 1% or more, and you can see that a VA fee can very quickly run 3 to 4% per year. This can really diminish the growth potential of a Variable Annuity.

The VA really doesn’t have a lot to offer for the investor. If they want maximum growth, mutual funds will save the investor a significant amount with much lower fees.

The post The 4 Types of Annuities first appeared on West Coast Financial Services.

THE WALL STREET JOURNAL by. Yuka Hayashi (January 24th, 2019)

U.S. banks reported a record 24,454 suspected cases of elder financial abuse to the Treasury Department last year. Furthermore, This is more than double the amount five years earlier, according to government data. The increase occurred as new federal and state laws are prompting banks to take a more active role in trying to address frauds and scams that target older customers. For their part, banks are beefing up training programs for employees on how to detect, stop, and report issues. Also, They’ve managed to accomplish this without violating a customer’s privacy. Employees are even learning to recognize early signs of cognitive decline.

The post Financial Abuse of Seniors Hits Record first appeared on West Coast Financial Services.

Grandchildren represent the future. The grandparent/grandchild bond is extremely unique and one that is steeped in legacy, heritage and unconditional love. By sharing stories of the past, the bond between these 2 generations is solidified as the older generation looks to pass on their knowledge and life experiences with the newer generation.

When parenting is left to the actual parents, grandparents can benefit from the special time that they spend with their grandchildren. And, in many families, grandparents play a pivotal role in the caregiving as dual working families or single-parent households may rely on them as a much-needed resource. Many of today’s grandparents take a very active role in the lives of their grandchildren. Those who have the financial means are also able to offer a safety net to families whose net worth may not be as substantial. One of the largest expenses in child rearing is paying for college. According to a fairly recent Fidelity Study, 72% of grandparents think it’s important to help pay for their grandchildren’s college and about 53% said they are currently contributing or are planning to do so.

Why would grandparents help?  The answer is two-fold. One, college is so expensive. The average cost of college for a public university is about $30,000 per year and a private university could cost a family over $70,000 per year.  Now multiply that number by 4 years of school and that number begins to look extremely steep. And for families with multiple children, the cost of secondary education could completely wipe out their life savings. Second, many grandparents realize the importance of studying and learning and, if they have the financial means, want to help jump-start their grandchildren’s education.

There are 4 ways that grandparents if they desire, can contribute to their grandchildren’s education:

    1. 529 Plans

These plans can be funded by the grandparents where the money grows tax-free and as long as it is spent on education, the money is not taxed when it is taken out. An additional benefit of the 529 account is that if the grandchild decides he or she wants to pursue another path in life, then the plan can be assigned to another grandchild or even a niece or nephew.

    2. UGMA/UTMA – Uniform Gift to Minor’s Act or the Uniform Transfer to Minor’s  Act

These are custodial accounts which are used to hold and protect assets for minors until they reach the age of 18 – 21 depending upon the state. A portion of the account, because assigned to a minor, will go untaxed while part of the account will be taxed at the child’s rate and not the grandparent’s rate.

   3. Coverdell Education Savings Account (ESA)

Grandparents who open a Coverdell ESA can contribute up to $2,000 per year. The account grows on a tax-deferred basis and upon distribution is tax-free provided all the monies are used to cover qualified education expenses.

  4. Pay student loans or pay tuition directly

This is an option for many grandparents and is a very simple transaction. Funds are sent directly to the school which eliminates excess paperwork and opening up various accounts.

Since there are various tax implications in the above-mentioned options, it is often necessary to work with a financial planner or advisor to help develop the plan that works best for your family and your financial situation. In addition, some of the guidelines differ by state and therefore speaking with someone who is well versed in this arena may be well worth the investment.  Grandparents play such a vital role within the family dynamics and helping their grandchildren achieve a higher education is just an added bonus for some families.

This article was written by Joel Johnson from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network. 

The post How Grandparents Can Help Contribute To Their Grandchildren’s Education first appeared on West Coast Financial Services.

Avoid these Five Inherited IRA TRAPS to avoid ruining your inheritance. Photo: Shutterstock

 Some retirement account mistakes can be fixed. On the other hand, if you make a mistake with an inherited IRA, it will be an extremely expensive lesson to learn. Likely, there will be no way to correct these mistakes or take the sting out of the sky-high cost from the tax man. Mistakes like these are most likely to happen when an IRA owner passes away and leaves his or her IRA to someone other than a spouse or a non-profit organization. In cases like these, we are talking about beneficiaries like a child, grandchild, sibling or just someone they really liked.

Let’s look at some of the most common, non-spouse IRA beneficiary errors.

Ineligible Inherited IRA Rollovers

If you are a non-spouse beneficiary, you are not allowed to do an indirect rollover.  What exactly is an indirect rollover, you ask? This type of rollover takes place when the account holder transfers assets from one qualified retirement account to another.  In this situation, the account holder is responsible for ensuring that the money is transferred from one account to another within a 60-day window.  If more than 60 days pass from the withdrawal then taxes will be due on the distribution along with an early withdrawal penalty of 10% if the account holder is younger than 59 ½. Again, a spouse inheriting an IRA can also do this but a non-spouse beneficiary CANNOT do this type of rollover.

As a non-spouse IRA beneficiary, you are only allowed to do a direct transfer to a properly title Inherited IRA without being taxed. If you make the mistake of withdrawing the funds, they will be taxable, and the ability to create a stretch IRA will be lost. This potentially hugely expensive mistake cannot be reversed. The IRS has no ability to provide relief here. If inherited IRA funds are to be transferred or moved, the funds must be transferred directly between the two accounts without you ever having to take hold of the money.

Stretching the IRA allows you to make withdrawals over time. In essence this allows you to stretch the taxation over several years, thereby ideally lowering the overall taxes paid on your inheritance. At the same time, it gives you the ability to enjoy tax deferral for a longer period of time on the IRA account balance.

Not Titling the New Accounts Properly

How you title an Inherited IRA is more complicated than setting up a traditional IRA for yourself. The decedent must appear in the account title and it should also indicate that it is an inherited or beneficiary IRA. A titling sample might read “Rich Uncle (Deceased 2/25/2018), IRA, FBO Lucky Niece, Beneficiary.”  Improper titling could result in mistakes with the account or you could get confused and treat it as your own IRA. These types of mistakes could nullify the entire Inherited IRA and result in a whopping tax bill. Picture the entire balance being taxable in a single year, on top of your regular income. Great for the IRS, terrible for your finances.

Contributing to an Inherited IRA

People are busy, get confused and send money to the wrong accounts. It happens. Remember, you cannot contribute to an Inherited IRA. Once this happens, it will no longer be considered an Inherited IRA.  It will be treated as the beneficiary’s IRA and all of the inherited money will become taxable.  Picture it: You inherit a million-dollar IRA. You are feeling flush and want to lower your own tax bill with say a $5,500 contribution to your personal IRA. Instead, the money is mistakenly deposited into your Inherited IRA. If your investment firm doesn’t catch the mistake, and I wouldn’t count on them to catch the mistake, you just voided your Inherited IRA and the entire $1,000,000 balance would become taxable. A mistake like this would push you into the highest tax brackets and could easily cost you $370,000 in federal taxes not to mention state taxes. OUCH.

Forgetting to Take Required Minimum Distribution

You might think, I’m in my forties so I don’t need to think about the Required Minimum Distribution (RMD). For your own retirement accounts, you would be correct. But the rules are different for Inherited IRAs.

RMDs on an Inherited IRA and an Inherited ROTH IRA generally begin in the year after the death of the original IRA owner. All the time I hear, “Someone told me I didn’t have to take money out until I was 70.5.” Because of this, people also assume the RMD requirement for Inherited ROTH IRAs are the same as non-inherited ROTH IRAs – sadly they are not.

Stretch IRA mistakes

To be eligible for a Stretch IRA you must be the designated beneficiary of a retirement account. This is the person who was actually named on the beneficiary form of the account. Not every non-spouse beneficiary will be able to do the Stretch IRA. If you ended up with the account via will, or some provision in the IRA custodial agreement when no beneficiary was expressly named – you will not have the option to take withdrawals over your full lifetime.

If you are the inheriting beneficiary through the estate, you will not necessarily be requited to take a lump sum. You may have options. The RMDSs will be based on when the original IRA owner passed away. If the decedent passed away before RMDs were required to begin (April 1^st of the year after attaining age 70 ½), then the entire IRA would have to be paid out by the end of the fifth year after the decedent’s passing. This is often called the Five-Year rule.  If the IRA owner dies after RMDs had begun, however, the beneficiary would need to take RMDs based on the IRA owner’s remaining life expectancy as if the decedent had not died.

Take a deep breath. These mistakes are common but with a little help are easily avoided. Take your time, double-check what you are doing and don’t be afraid to reach out for help. The costs are too high to risk a costly mistake, especially because they can’t be reversed. Work with your CPA and financial planner to make sure you are maximizing your windfall and minimizing your tax bill.

Live for today, plan for tomorrow.

This article was written by David Rae from Forbes and was legally licensed by AdvisorStream through the NewsCredpublisher network. 

The post The 5 Inherited IRA Mistakes That Will Destroy Your Inheritance first appeared on West Coast Financial Services.