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Tax Treatment of The Four Phases of Retirement Planning

2011/06/07 By Leave a Comment

A well compensated professional got a little anxious the other day talking about his retirement plan and his future.  I’d asked him if he knew what tax bracket he’d be in when he retired and if he knew how much of his retirement savings were his and how much were Uncle Sam’s.  (You might want to visit that discussion HERE, when you’re done with this page.)

He was under the impression that his 401(k) retirement savings were his and was incensed to learn that it wasn’t.  To compound matters, he also believes that tax rates in the future are highly likely to be higher than they are today, so even if he hoped to be in a lower tax bracket when he retires, he expects tax rate increases will have him in the same tax bracket he’s in today – if not higher.

Here’s what he wished his 401(k) plan administrated would have told him:

There are 4 phases to retirement planning and they don’t all get the same tax treatment.

During the Contribution Phase, you get tax favored treatment – you get to defer a portion of your contribution to your retirement plan based on your income tax rate.

You also get tax favored treatment during the Accumulation Phase – as your contributions compound tax deferred.

When you’re advised to save money in a 401(k) or tax deferred Individual or SEP IRA, the ‘tax favored’ treatment during the Contribution and Accumulation phases are presented as justification for funding these plans.

Unfortunately, many people don’t realize they’ll pay taxes during the Withdrawal Phase, when they withdraw their money from their retirement plans in the future and during the Transfer Phase when those funds pass to their heirs after they die.  They don’t go through any hypothetical exercises to get an understanding of what that might cost in the future and how that might impact lifestyle.

You not only defer/postpone the taxes, you postpone the tax rate, as well.

If you believe, like the professional above, that tax rates will be higher in the future, is postponing taxes like this really a good idea?

Here’s a demonstration of how to calculate the costs and impact on your lifestyle.

To protect against overpaying taxes during the Withdrawal and Transfer Phases, make sure you’re funding the right options during the Contribution Phases.  Your 401(k) might cost you more than you realize.  Call Scott Scholz, independent Registered Financial Consultant, 425-829-4110

Filed Under: Avoid the 401(k) IRA Tax Deferral Trap, Avoid the IRA/401(k) Tax Deferral Trap, Build Tax Advantaged Wealth & Tax Free Income, Financial Planning Articles, Financial Planning for Retirement, Financial Planning Videos, Investment Consulting, Planning for Retirement

Financial Planning Today

2011/03/15 By Leave a Comment

While discussing financial planning the other day, an associate commented, “Money doesn’t come with an instruction manual.  Virtually everything else we have comes with an instruction manual.  But not money.”

I think he was right on the money with his comment, too.

Financial planning is a process that should be engaged and understood, not delegated.

It reminded me of another analogy.  Do you remember when you played Tic-Tac-Toe the first time when you were a youngster?  How many times did you play before you won?  Usually, the person who introduced the game to you enjoyed beating you several times before you learned the strategies to play the game.  In fact, until you learned the strategies to play the game to WIN, you lost.Financial Planning Strategies

The same is true when it comes to your finances.  Until you learn the strategies to play and win the money game, you’ll lose.  And the chance of increasing your circle of wealth and ever becoming financially independent is extremely small.

Banks, lenders, Wall Street and the government, itself, all need and want you to play the money game.  But do they tell you how to play the game to make money and win the way they do?

Conventional wisdom favors institutions

Banks invite you to deposit your hard earned money into their safe accounts where they’ll pay you interest on your money.  These days, we know that’s a pittance.  Are banks out earning those pathetic rates of return for themselves?

Wall Street encourages you to step up and roll the dice for a better rate of return by buying stocks, mutual funds and other enticing opportunities.  How well has subjecting yourself to market risks worked for you over the past 10 to 12 years?

Lending institutions encourage you to use their money to get what you want now and they’ll only charge you a small interest rate for the convenience of using their funds.  But do they show you techniques to pay back the money you’ve borrowed faster so you don’t have to pay an excessive percentage of your hard-earned money to them in interest payments?

Our government gives you a tax break today on the money you set aside in tax-deferred retirement savings accounts, like 401(k)s or IRA’s, to encourage you to be responsible and save for your future.  But do you know what percentage of those retirement dollars you’ll be paying to them in the future for the privilege of avoiding paying today?  (Hint: The old Fram oil filter commercial communicated the bad news – “You can pay me now or you can pay me later.” The implication was it would much more expensive to pay later.  It will likely be the same with your favorite Uncle.)

If the game seems rigged it’s because it is.  But that doesn’t mean you have to lose.  Learn the ropes.  It isn’t the rocket science some industry mavens would like you to believe.  Educate yourself.  But do so with good counsel and teachers.  Ben Franklin said, “He who is self taught has a fool for a master.”  Seek several disparate and credible sources and work with them. Take responsibility and control.  It’s your money, after all.

Learn to think like a banker, not a borrower.

Albert Einstein said, ‘Those who understand interest earn it.  Those who don’t , pay it.”  He also said, “Compound interest is the 8th wonder of the world.”

Learn the 4 marvels of finance and the strategies to play the money game and WIN.  You don’t need to avoid any of the aforementioned esteemed institutions.  Engage them to your advantage.

Implement “Common Sense Strategies to Optimize Your Assets” and secure your financial independence.

Scott Scholz – Independent Financial Consultant

Filed Under: Avoid the 401(k) IRA Tax Deferral Trap, Build Tax Advantaged Wealth & Tax Free Income, Financial Planning Articles, Financial Planning for Retirement, Planning for Retirement

Financial Strategies For Business

2010/02/12 By Leave a Comment

The Blueprints For Tomorrow Program gets you to start working ON your business at the strategic level eliminating the ”what ifs” that keep you awake at night rather than IN your business at the tactical level on tasks you should delegate.   Blueprints for Tomorrow

If you own a business, do you ever ask yourself…

  • What if I don’t want to do this anymore?
  • What if I were to sell my business?
  • What if I don’t improve cash flow?
  • What if I were to lose a key person, or two?
  • Do I really have the right financial strategies for my small business?

There are a dozen more ‘what ifs’ that can keep you awake at 2 o’clock in the morning staring at the bedroom ceiling.  Eliminate them and achieve the security, freedom and peace of mind you want with our Blueprints For Tomorrow program.

The Blueprints For Tomorrow™ Program is a series of blueprints that help you deal with the “what-ifs” that keep you lying awake at two o’clock in the morning staring at the bedroom ceiling. The Blueprints For Tomorrow™ Program will help you protect what you’ve worked so hard to create, increase the financial potential of your business, and sleep soundly at night.

Many business owners only work in their business, and never on their business. They take on too many responsibilities and waste a lot of time on activities they should delegate. They take care of everyone else first, before considering themselves and their future. They feel they are not running businesses, they are running adult daycare centers. They may have too much of their wealth tied up in their business and they have no exit plan. As well, they may be unnecessarily exposed to many risks such as death, disability, adverse tax consequences, loss of key employees, and lawsuits.

By leaving these important issues unresolved they are jeopardizing their future and the security of the people they care about. There will be disharmony among key relationships in their family and business. They are overwhelmed by worry and concerns and have nowhere to turn for help, and as a result, they lie awake at night worrying about the “what-ifs.” This is why we created The Blueprints For Tomorrow™ Program: to provide a series of blueprints that help you deal with the “what-ifs” and to help you not only make a living, but make a life.  It’s a series of real financial strategies for small businesses.

The Blueprints For Tomorrow™ Program is a step-by-step process. In phase one, we have a one-on-one Starter Session to assess if we are the right fit for each other. If we both agree we are the right fit for each other, you join The Blueprints For Tomorrow™ Program. In phase two, we help you choose and implement the blueprints required for your personal situation. In phase three, you take advantage of The Blueprints For Tomorrow™ Toolbox, our full suite of resources and capabilities.

This unique series of blueprints was developed while working with our clients. We help you understand your current situation and create clarity for your future. Then we look at the roadblocks standing in your way and use the blueprints that will work best for your situation. As a result, we don’t leave any stone unturned. We make sure that you’ve covered all of the issues that are important to you.

The Blueprints For Tomorrow™ Program is not for everyone. It is designed specifically for business owners who are willing to invest to better their businesses and their lives. To benefit from the program, you must have strong business sense and recognize the value of working with outside professionals.

As a member of our program, you work through a series of blueprints that help you take care of the what-ifs and enjoy a better life. You can focus on what you do best and delegate non-profitable activities to others. You can create and document a succession and exit plan. You could have written a contingency plan and a clear estate plan. Your assets and wealth can be protected and could be channeled into wealth diversification vehicles. The adverse consequences of potential litigation and a poor economy will be minimized. Your family will be protected and you will enjoy greater family and employee harmony. You will have more free time, and worry less about the details. And, most importantly, you will protect what’s important to you, increase the financial potential of your business, and enjoy a better life.

For information about The Blueprints For Tomorrow™ Program call 425-829-4110

Filed Under: Financial Advisor, Financial Management, Financial Planning for Retirement, Financial Planning Software, Financial Planning Tools, Financial Planning Videos, Independent Financial Adviser, Wealth Creation, Wealth Manager Tagged With: , , , , , , , , , ,

The Characteristics of an Ideal Investment

2010/02/04 By Leave a Comment

CHARACTERISTICS OF AN IDEAL INVESTMENT

The Problem:

When it comes to mainstream investments these days, viable options are few and far between. The stock market has been in flux over the last several years by virtue of looming inflation, spiraling oil prices and the constant threat of terrorism. Every government bureaucrat, newsletter author, financial expert, and private investor has a different take on the market’s future. All, if they’re ruthful, will agree that the market’s direction is uncertain.

Another stalwart of mainstream investment has taken a turn for the worse as well. Unsustainable appreciation in the housing sector has cast doubt in the minds of many investors, who once viewed real estate as a safe harbor for their investment dollars.

Even seasoned investors, with no place to turn, are accepting big losses and taking cash positions with little to no profits. They’ve acquiesced to market and economic forces beyond their control to avoid uncertainties and risks. Regardless of their market prowess, no investor can time the next act of terror.

While money markets, annuities and government treasuries offer safety, the return is miniscule after inflation. Conversely, riskier investments with higher yields require impeccable market timing [read: down right luck] to keep from losing not only profits, but principal as well!

So it goes. If investors are to enjoy the double digit returns of years gone by, then they must accept enormous risks, right?

The Proposition:

If there were such a thing as the ideal investment, how would it be quantified?

Recently, a panel of individual investors with diverse goals defined characteristics that would produce such an investment. All the panelists agreed that the ideal investment would possess the following traits:

Safety & Security                    Diversification                         No Management Fees

Mainstream                              Liquidity                                  Performance

Clear Exit Event                       Win//Win Investment

The Product:

Fortunately, there is an investment product that not only possesses these traits, but excels at each.

The product is called Life Settlements. Life Settlements are purchased by life settlement companies like Life Partners Holdings, Inc. (LPHI). LPHI is the oldest and only publicly traded life settlement company in the United States (NASDAQ symbol LPHI). For many years now, financial institutions including Warren Buffet’s investment arm Berkshire Hathaway, ABN AMRO, Merrill Lynch, Credit Suisse First Boston, and Deutsche Bank have invested HUNDREDS of MILLIONS in life settlement companies for one simple reason: Life Settlements are not subject to any stock market or economic conditions…none!

Statistically, approximately 90 percent of life insurance policies never pay the death benefit because they are allowed to lapse. When they lapse, the insured loses all the money they’ve invested into premiums and their beneficiaries receive nothing. In times past, the only other alternative for the insured was to take a very small cash surrender value amounting to only pennies on the dollar of their original investment.

LPHI offers new hope to these policy holders who no longer need their policies. LPHI will scrutinize each policy closely and will only purchase B+ or better policies as rated by A.M. Best. LPHI only deals with trusted legal reserve insurance companies. Incidentally, since 1845, there has never been a single case where a legal reserve insurance company has not paid a death benefit.

After LPHI elects to underwrite a policy, it will determine its acquisition costs and make a lump sum offer to the insured. Once the offer is accepted, LPHI will divide the policy on the market for multiple investors to buy. The good news is, now, individuals can reap the same rewards the institutional investors mentioned above have enjoyed for years! If an investor buys 10% of the acquisition cost, the investor owns 10% of the policy’s face value. Once the investor’s money is placed into a policy, the investor will know his or her Absolute Payout.

Since 1991, LPHI has a proven track record of greater than double digit annualized ROI; even during crisis abroad and in the wake of 9/11. Why? Again, Life Settlements are completely uncorrelated to the securities markets or economic events.

The Payoff:

So how do Life Settlements from LPHI measure up to our panels’ characteristics of the ideal investment? Let’s review:

SAFETY: On the risk continuum, Life Settlements offer the equivalent safety somewhere between money markets and investment grade bonds.

SECURITY: LPHI and its escrow affiliate, Dunnam & Dunnam are regulated by the SEC and operate under the oversight of the Texas Board of Banking, national banking laws, and Texas Department of Insurance. They are audited by Murrell, Hall, McIntosh & Co., PLLP and KPMG, PLLP respectively. LPHI maintains an “arms length” policy for its investors so all policies and funds are held in trust. LPHI does not touch the investor’s money.

PERFORMANCE: Since inception Life Settlements as structured by LPHI has produced historic double digit returns. Past performance does not guarantee future results. This financial product has a battle tested track record through both bull and bear markets.

DIVERSIFICATION: Life Settlements are the ultimate diversification tool due to the fact that they are uncorrelated to the stock market, oil prices, interest rates and even terrorism. Life Settlements, as the cornerstone of any diversified portfolio, offer a hedge during economic downturns as well as during periods of market stability. Life Settlements serve as a better uncorrelated hedge than bonds and have the potential to generate double digit returns. They should be part of the FOUNDATION of every investor’s portfolio

MAINSTREAM: For many years Life Settlements were only available to institutional investors. Financial icons including Berkshire Hathaway, ABN AMRO, Credit Suisse First Boston, and Deutsche Bank, etc, have invested hundreds of millions in life settlements with the understanding that the return of their principal and return on their principal are the Contractual obligations of highly rated insurance companies. Their pursuit of this market is related to the degree of PROTECTION and the AVOIDANCE of Market and Economic Risk. These institutions involvement provide immense credibility because of the level of due diligence they require of any investment before actually committing their own dollars. Life Settlements presents the rare opportunity for an accredited investor to invest on a level playing field with major institutions.

WIN/WIN INVESTMENT: LPHI provides viable options through the secondary insurance market where none existed before. Senior citizens are released from the burden of high premiums and are provided lump sum payments. In many instances, this much needed capital infusion allows them to live out their remaining years in dignity. We allow seniors the ability to turn a death benefit into a LIFE BENEFIT.

NO MANAGEMENT FEES: All fees associated with Life Settlements are built into the acquisition costs and therefore 100% of the investor’s money goes to work for them. All your money is invested without paying any management fees or underlying fund expenses in cash or IRA investments. Qualified funds are subject of Custodial fees; typically around $100 to $200 annually.

LIQUIDITY: Life Settlements should be viewed as a medium to long term investment. They are perfect for retirement dollars, college savings funds and cash investments.

CLEAR EXIT EVENT: While at certain points in time the DOW has yielded double digit returns, even the best exit strategies are formulated on speculation and conjecture. To enjoy increasing returns, one must accept the ever increasing risk of losing principal along with profits. The investor, at his or her discretion, may exit at every policy maturity. The vast majority of investors however, elect to roll over returns into additional policies. Unlike the securities markets, decisions to exit or reinvest in Life Settlements are never predicated on speculation or mere conjecture. Life Settlements are the ultimate AUTO PILOT INVESTMENT.

Summary

It is exceptionally difficult to find an investment that meets all eight of the Characteristics of an Ideal Investment.  Fractionalized Life Settlements hits a solid 7 out of 8 for most investors.  For the investor with a timeline of 5 years or more, Life Settlements meets 8 out of 8 and warrants serious consideration for a portion of your investment portfolio.  Call 425-829-4110 so we can help you determine what that portion might be for you.

Filed Under: Build Tax Advantaged Wealth & Tax Free Income, financial advice, Financial Advisor, Financial Planning Articles, Financial Planning for Retirement, How to plan for retirement, Independent Financial Adviser, Investment Consulting, Self Directed IRA, Wealth Creation Tagged With: , , , , ,

Use a Self-Directed IRA to Diversify

2010/02/04 By 2 Comments

As people experience the current state of the economy with the sub-prime mortgage debacle, near collapses by banking and insurance giants, as well as a plummeting stock market and shrinking retirement accounts, they want to take back control of their investments.

Many are also disenchanted with the traditional investments available through typical retirement plans like an IRA or their company’s 401(K) plan.  The range of investment options via an employer’s retirement plan is generally restricted to a limited number of mutual funds and/or company stock.

These funds do not provide protection of principal against downward market risks, which can be found among numerous prudent alternatives available today.  Furthermore, mutual funds provide limited opportunity for true diversification beyond stocks or bonds.

Additionally, a Harvard University study in 2006 proved that performance of mutual funds managed by investors working on their own is 6.626% and funds provided by financial advisors averaged 2.924%, net of all expenses (Morningstar.com and Harvard Business School website), bringing advisor recommendations under question.

More and more investors are moving away from mutual fund managers and the volatile stock market and making their own decisions using Self-Directed IRAs to invest in traditional and non-traditional assets.

An investment portfolio constructed of uncorrelated assets can achieve an overall stronger rate of return with a lower level of risk, mitigate the volatility of the equity markets and conquer the eroding impact of inflation on purchasing power and long term investment performance.  There is a mountain of statistical evidence and Nobel Prize winning research that supports this approach.  However, it’s extremely difficult to achieve these results if you invest mainly in one asset class, for example, stocks via the mutual funds offered in an employer’s 401(K).

So what can you do with a Self Directed IRA?

“Everyday Americans are fed up with the failures of so-called financial wizards,” Provident Group Board noted. “People want to be accountable for and control their own investment destinies. With self-directed retirement accounts they can do just that.”

It is a little known fact that Self-Directed IRAs have been available since the creation of traditional IRAs by the Employee Retirement Income Act of 1974.  Also, typical traditional and Roth IRAs allow for $5000 to $6000 annual contributions.  However, Self-Directed IRAs and Solo 401(K) and Solo 401(K) Roth programs allow for contributions up to $49,000 annually, depending upon age.

In the past, over 97% of retirement accounts have been dictated by the traditional investments available in the market.  This has been largely controlled by fear of the unknown.  Traditional custodians and brokers have falsely claimed that self-directed IRAs are complicated, risky and illegal.  Due to economic concerns gripping America today, people are educating themselves, taking back control and are no longer depending on traditional methods to invest in IRAs.

Investment News (Sept 2007) reported a projection of a 10-12% increase in IRA rollovers from 2007-2010.  The trend will likely increase with the collapse of the traditional markets in 2008 and 2009 and as investors look to other means to recover losses and achieve greater financial success and security.

Many people are turning their attention to the variety of investment options available within the self-directed IRA including:

  • Residential and Commercial Real Estate
  • Life Settlements
  • TICs (Tenants in Common)
  • Tax Liens, Tax Deeds
  • Mortgages, Loans, Notes
  • Real Estate Options
  • Small Businesses, Franchises
  • Private and Publicly Listed Stock
  • Limited Liability Companies
  • Limited Partnerships

IRA investment regulations are largely regulated by what you can’t do with them rather than what you can.  This is what makes self-directed IRAs of non-traditional investments possible.  There are very few prohibited transactions:

  • life insurance for yourself
  • collectibles
  • metal, gems, and stamps
  • rugs and antiques
  • coins
  • artwork
  • alcoholic beverages
  • Sub Chapter S Corporations.

Setting up a self-directed IRA:

The IRS requires a custodian to administer the retirement funds.  After the funds are moved to a non-traditional custodian, you direct your funds to the investment of your choosing.  The custodian will facilitate the investment purchase as required by IRS code.  If setting up legal services, such as an LLC is necessary, they can also assist with that.  Once investments are made the custodian will administer the account and hold the investment documents for safe-keeping.  Any profit or income from the investment goes directly back to your IRA account.

Two categories to consider for a Self-Directed IRA:

Life Settlements

A life settlement is simply the sale, or transfer of ownership, of an existing life insurance policy to another party. Typically, the individual selling the policy no longer wants or needs or can afford it, and desires to sell it to a third party via a secondary market.

Historically, larger institutions have been the primary purchasers of these policies.  Now, fractions of policies may be purchased by accredited retail purchasers. These investors purchase the policy at a discount to its face value, keeping the policy in force until maturity. Upon maturity, the investors receive the full face value of the policy as their return on investment. These funds return to your self-directed IRA and grow tax-deferred in a traditional IRA or tax-free if using a Roth IRA.

The typical policy is purchased from someone over 78 years of age with a definable life expectancy. The owner has decided that the policy is either no longer affordable or necessary, and thus chooses to sell the policy rather than let it lapse, thereby converting the death benefit into a life benefit for their use. These special use policies might be for Estate Planning, Key-Man or Large-Loan policies. Typically, these policies are $1 million – $20 million in face value.

Life settlements provide contractual guarantee of principal and are completely uncorrelated to any other markets.  The return on investment is not impacted by the equity, bond or commodity markets, interest rates, oil prices or other economic events.  A life settlements investment represents true diversification, principal protection and has delivered a strong double digit rate of return each and every year for over 18 years.

Real Estate

The first thing to remember when your IRA purchases real estate is that the property is for investment purposes only. Your IRA must take title to the property. For example: Custodian Name FBO (for the benefit of) John Smith IRA. Your IRA may purchase property from an unrelated party (anyone who is not disqualified). Any income from the property such as rent goes back into the IRA. Likewise, any expenses, such as property management fees, maintenance etc., are paid from your IRA. It is advisable to use a property management company to avoid any prohibited transactions. When the property is sold, funds also go back into the IRA and remain tax-deferred or tax-free if using a Roth IRA.

There are various ways to purchase real estate. You may form an LLC and pool different funds together to purchase. For instance, you may use your IRA funds together with personal funds, a non-recourse loan, or with other investors. These different entities all own a part of the LLC, percentages being based on the amount of money invested.

Below are just some of the types of real estate you can invest in with your IRA:

  • Residential homes, condominiums, duplexes, four-plexes
  • Commercial retail, apartment complexes, office condominiums, homes
  • Industrial manufacturing, warehouses
  • Land

A non-recourse loan may also be secured to purchase investment real estate with your IRA. Typically the down payment for these loans is 30% to 40%. Guidelines for these loans do not normally use credit scores or income for loan qualifications.  These loans enable diversification across several properties within an IRA.

Truly Self Directed IRAs:

Where you open your IRA usually determines your available investment options.  You may be comfortable with your bank or financial institution, but your investment opportunities may be limited by their own self-interest.  A truly self-directed IRA custodian acts as a passive partner in your transactions.  They will be able to answer any administrative and legal questions pertaining to your IRA, but the power is in your hands when it comes to investment options and decisions.

Many major employers allow employees to re-position funds they’ve placed in their company’s qualified plans into a self-directed IRA that they can manage themselves.  You should observe the prescribed process pertaining to the chosen investment to preserve the tax advantages and avoid any penalties.  The process is not complicated and can produce net benefits that make the exercise worthwhile.  This enables the individual to have access to a wider range of investment options than may be available via an employer’s qualified plan.  Investors can achieve greater safety and performance of his entire investment portfolio with a prudently executed and managed strategy.

Filed Under: Early Retirement, Financial Planning Articles, Financial Planning for Retirement, How to plan for retirement, Planning for Retirement, Retirement Planning Software, Seattle Financial Consultant, Self Directed IRA, Wealth Creation, Wealth Manager Tagged With: , , , , , , , ,