Kestler Financial Bloghttp://www.kestlerfinancial.com/®2010 Kestler Financial Group.http://www.rssboard.org/rss-specificationIngen.NukePress (www.nukepress.net)en-USIs Manhattan Still Only Worth $24?http://www.kestlerfinancial.com/Blog/PostID/253Kestler Financial Group253Mon, 04 Feb 2013 00:00:00 GMTLife/LTCSales/ProspectingSecuritiesEnjoy a great piece from our guest blogger, Rex Voegtlin...

In 1626, Dutch West Indian Company official Pieter Schagen wrote a letter to his directors that Governor Peter Minuit purchased Manhattan Island from the Indians for "goods worth sixty Dutch guilders." Historians have concluded that the "sixty Dutch gilders" was worth approximately $24.

Many well-intentioned cynics have used this transaction as evidence of how the unscrupulous white man took advantage of the uninformed red man. However, I am not convinced that this business deal was not a fair arm’s length transaction. Let’s do the math, howbeit with some unsubstantiated assumptions.

The purchase of Manhattan Island took place in 1626, 379 years ago. Assuming a 3 percent inflation factor, $24 inflated at 3 percent per year equals a current value of $1,760,027. Manhattan consists of 14,478 acres. Through division we discover that the current value of the original per acre purchase price is $122.

I’ve been to Manhattan. Trust me; in my opinion, it’s not worth $122 an acre. However, what is important to note from our history lesson is that an assumed 3 percent inflation factor grew $24 into more than $1.7 million.

If anything, history has taught us that we must take inflation into account in our retirement planning. The following bread example may be more relevant to us than the purchase of Manhattan for $24. In 1970 $1 bought 3 loaves of bread. Today the same $1 buys about a half loaf. In other words, someone retiring in 1970 on an adequate fixed income is now struggling to survive on 17 percent of her original purchasing power.

Many retirees purchase certificates of deposit from banks, "because CDs are a safe investment." Let’s take a closer look. Assuming a $10,000 CD is paying 4 percent interest, this would presumably mean that after one year the value of our CD would be $10,400. Wrong.

Assuming a combined state and federal tax bracket of 33 percent, we would need to deduct $132 for taxes. We also need to think about purchasing power, that is, how much bread can we buy?

Our current inflation rate is 3 percent. We now need to reduce our CD by not only taxes, but by inflation as well. One year’s inflation reduction on $10,400 is $312. Therefore, our $10,000 CD grew

to $10,400, but after subtracting $132 for taxes and $312 for inflation, we are left with $9,956. A loss.

As one man recently put it, "investing in CDs simply means that you are safely going broke." As we invest through our retirement years, we need to remember that a loss is not a safe investment. We must take into account inflation and taxation, as well as safety, when evaluating where we invest our retirement monies.

 

Securities and Advisory Services offered through SII Investments Inc.®, Member FINRA, SIPC and a Registered Investment Advisor. SII does not provide tax or legal advice.

  Rex Voegtlin, MS, CFP, CASL, CAP has over 25 years of experience in the financial services industry, providing nationally sponsored continuing education for over 6,500 CPAs, Attorneys, and Financial Planners in advanced estate and retirement planning techniques. In addition he works directly with wealthy clientele, developing and implementing sophisticated estate and retirement strategies.


 

 

]]>American Taxpayer Relief Act of 2012 Summaryhttp://www.kestlerfinancial.com/Blog/PostID/248Kestler Financial Group248Thu, 17 Jan 2013 00:00:00 GMTSales/Prospecting In order to avert (or delay) the "Fiscal Cliff," Congress passed the American Taxpayer Relief Act (ARTA) of 2012. The new law extends a majority of the Bush-era tax cuts in the same form as they have existed since 2001 or 2003 when initially enacted.

Major exceptions include a rise in income rates, including rates on capital gains and qualifying dividends, on higher-income individuals and a slight increase in the estate tax rate. In addition to a general extension of the tax rates, many other tax provisions were affected by this legislation.


American Taxpayer Relief Act (ATRA) of 2012 Summary


Individual Tax Rates
Taxpayers with taxable income above $400,000 ($450,000 for married taxpayers) will be taxed at 39.6% (Up from 35%).

All other taxpayers with taxable income below $400,000 will be taxed at the same marginal rates as during the Bush Era Tax Cut (0 to 33%).
 

Capital Gains/ Dividends

The top rate for capital gains and dividends increased to 20% from the Bush-era maximum rate of 15%. The 20% rate will apply to the extent that the taxpayer's income exceeds the thresholds set for the 39.6% rate.

All other taxpayers with income below the 39.6% threshold will continue to have their capital gains and dividends taxed at 15%.
 

Alternative Minimum Tax

The act also permanently "patches" the alternative minimum tax (AMT) for 2012 and subsequent years by increasing the exemption amounts with an annual inflation adjustment.

The AMT exemption for 2013 increases to $51,900 for individuals ($80,750 for married filing jointly).
 

"Pease" Limitation on itemized deductions

It revives the limitation on itemized deductions but with slightly higher thresholds than before.

$300,000 for married filing jointly

$250,000 for unmarried taxpayers

Certain items such as medical expenses and investment interest are excluded from the limitation.

 
Personal Exemption Phase-out

It revives the exemption phase-out rules but with slightly higher thresholds than before.

$300,000 for married filing jointly

$250,000 for unmarried taxpayers


Federal Estate & Gift

The act provides for a maximum estate tax of 40 percent with a $5 million exclusion (adjusted annually for inflation) for estates of decedents dying after December 31, 2012.

It also permits "portability" between spouses.

The act provides a 40 percent tax rate and a unified estate and gift tax exemption of $5 million, adjusted annually, for gifts made after 2012.
 

Tax Credit Extenders

The act extends the Child Tax credit, Earned-Income credit, Child and Dependent care credit, and other child and education type tax credits.

The Research Tax Credit and Work Opportunity Tax Credit were also extended through 2013.

 
Section 179 & Bonus Depreciation

The Section 179 dollar limitation for the 2013 tax year is $500,000 with a $2 million investment limit.

The act also extended the 50 percent bonus depreciation through 2013.

A reminder of other changes to the tax law that have become effective for 2013 and were left untouched by the ATRA of 2013:

Expiration of the 2% payroll tax holiday

The payroll tax holiday was not extended into 2013.

The social security portion of your payroll tax will rise from 4.2% to 6.2%.
 

3.8% tax on Net Investment Income

This new tax was enacted as part of the Healthcare Reform

]]>BREAKING NEWS!!! - Earthquake Rocks Kestler Financial Grouphttp://www.kestlerfinancial.com/Blog/PostID/103Kestler Financial Group103Tue, 23 Aug 2011 00:00:00 GMTAnnuitiesSales/ProspectingLEESBURG, VA - This afternoon there was a Magnitude 5.9 earthquake on the east coast. Contrary to news reports, the epicenter was in Leesburg, Virginia directly under the offices of Kestler Financial Group.

According to anonymous sources at the U. S. Geological Survey, the quake was triggered by the delivery of a UPS package filled with annuity applications. "Today was a one of the largest submitted premium days in recent history," said Nikki Toledo, Case Manager at KFG.

According to Jason Kestler, the recent tsunami of business is likely to continue. "We believe there are three things driving the current influx:

  1. Market volatility is off the charts driving consumers to safe-money havens,
  2. The recent increase (from 4% to 5%) on the guaranteed minimum death benefit (GMDB) rider, and
  3. The prospect of lower rates in the near future as a result of continued low bond rates and high volatility."
If you would like to download an executable version of our new RMD Solution presentation-including the new 5% rider-click here. We also have an executable brochure that actually teaches you how to make the sale. (These are large files so please be patient while they download).

Good selling - And watch out for aftershocks!]]>Cocktails & Annuity Traininghttp://www.kestlerfinancial.com/Blog/PostID/100Tom Kestler100Thu, 18 Aug 2011 00:00:00 GMTSales/Prospecting
Now that I've got that off my chest, I want to bring you up to speed on something that directly affects your livelihood. If you sell annuities, you've probably heard rumblings about NAIC and product training. Although I don't think it's remotely possible to make the subject clear, I'll try to at least give you a place to start.

First of all, this discussion just refers to insurance licensed annuity producers. If you are also securities licensed, the same rules apply but with overlying FINRA and broker/dealer requirements.

The National Association of Insurance Commissioners (NAIC) has adopted "model" regulations in many areas over the years - replacement, suitability, etc. The most recent model regulation regards annuity product training. Under this model, all carriers who do business in states who have adopted the model law will be required to provide and verify that an agent has completed this training prior to soliciting an application. Be aware that:

  • Not all states have adopted the model regulation. Those that have (referred to as NAIC states) each have their own guidelines and requirements for producers. To check the current status of your state, follow this link to a national map.
  • Be aware that continuing education and product training are two completely different issues. Also, if you are an Annexus producer, the webinar product training you completed as part of your contracting process does not waive your requirement for Aviva sponsored product training. To complete this, login to the Aviva agent web site and click on the link in the upper left corner:


  • You should find similar links on every carrier web site.
  • Product training must be completed for every annuity product you sell prior to making the sale. Carriers are required to return applications taken prior to completed training.
  • If a new product is released new training is required.
  • If you do business in multiple states, you will probably be required to repeat the process for each state in which you do business.
  • A good resource is the National Association for Fixed Annuities (NAFA) website - www.nafa.com.
Carriers are scrambling to comply with the moving target and as of now there are still a lot of questions. What should you do now?

  1. Determine all the states in which you do business and which ones require product specific training.
  2. Log in to each carrier web site and follow the directions to complete training. Some states require the training today - others have a grace period to complete the training.
  3. Talk with your carriers. Be sure you know what is required.
  4. Stay tuned. New states are coming on line regularly. Know your requirements or risk having business returned.
]]>Improve Your Sales Vocabularyhttp://www.kestlerfinancial.com/Blog/PostID/78Kestler Financial Group78Mon, 20 Jun 2011 00:00:00 GMTSales/Prospecting
  • The Tie-Down Questioning Strategy – A question at the end of a sentence that demands a “yes.”
    • “John, you would like to be financially secure in your retirement, wouldn’t you?”
  • The Alternate Choice Questioning Strategy – A question with two answers. Either answer is a minor agreement leading towards the major decision.
    • “Mary, I have Wednesday at 2 PM or Thursday at 10 AM available to meet with you. Which would be better for you?”
  • The Involvement Questioning Strategy – A question your clients must ask themselves, and answer, after they own your products.
    • “John and Mary, what are some of the things you plan to enjoy during your retirement years?”
Tom also suggests replacing some of the words in your vocabulary:

Replace
 With
Price
 Total Investment
Buy
 Own
Sell or Sold
 Get Involved
Deal
 Opportunity
Contract
 Paperwork or Agreement
Sign
 Approve or Authorize
]]>An Inherited IRA: Some Things to Considerhttp://www.kestlerfinancial.com/Blog/PostID/57Kestler Financial Group57Thu, 31 Mar 2011 00:00:00 GMTSales/ProspectingBe sure you understand your options. When the owner of an IRA passes away, his or her heirs must be aware of the rules and regulations affecting the inherited IRA. Ignorance could lead you straight toward a tax disaster.

Please note that this is simply an overview. Rather than use this article as a guide, use it as a prelude before you talk to a financial services professional well-versed in IRA rules and regulations.

First, make sure you have actually inherited the IRA. Your spouse, parent or grandparent may have left their traditional or Roth IRA to you in a will, but that doesn’t mean you have inherited it. In all but rare cases, an IRA beneficiary designation form takes precedence over any bequest made in a will or living trust. (The same thing applies with annuities and life insurance policies.)1

So your first financial task is to find that beneficiary form.

  • What if I can’t find the form? The financial firm serving as the custodian of the IRA assets will usually have a copy. (If the IRA was opened decades ago, it may not.)
  • What if there is no beneficiary designated on the form? Then the financial firm supervising the IRA will choose a beneficiary according to its rules and/or IRS guidelines. It may decide that the decedent’s estate will be the beneficiary of the IRA, which is often the poorest outcome in terms of taxation.1
  • What if I’m not the beneficiary named on the form? The IRA assets are destined to go to whoever the named beneficiary is. If the named beneficiary is deceased, the IRA assets will be inherited by the contingent beneficiary (if one has been named).
Ideally, the original IRA owner has told you where (or left instructions where) to find the form.

Understand the rules for spousal and non-spousal heirs. If your husband or wife has passed and you are the named beneficiary of his or her Roth or traditional IRA, you have three options.

  • You can roll over the assets into a beneficiary IRA. This enables you to withdraw money from the IRA based upon your own life expectancy – and you can wait until the year in which the original IRA owner would have turned 70½ to start taking required withdrawals from the IRA.2
  • You can convert the inherited IRA into your own IRA. If you don’t have an IRA, you can create one for this purpose. This gives you the ability to name your own beneficiary, and it also allows you to keep contributing to the account and put off required minimum distributions (RMDs) until you turn 70½.2
  • You can “disclaim” all or some of the inherited IRA assets. If you don’t want or need the money from the inherited IRA, here is another option. By doing this, the income distribution off the IRA can go to the contingent (or successor) beneficiary. Spousal IRA heirs sometimes do this with the goal of reducing income and estate taxes.3
  • If the inherited IRA is a Roth IRA, the surviving spouse may not have to wait so long to get tax-free income distributions off the earnings. While the original contributions to a Roth IRA can always be withdrawn tax-free and penalty-free, a Roth IRA owner must wait 5 years to avoid income tax on any earnings withdrawn from the account. However, a surviving spouse who inherits a Roth IRA can receive “credit” toward this 5-year waiting period for the years that the deceased spouse owned the IRA. The waiting period ends either a) 5 years after the deceased spouse opened the account or b) 5 years after the surviving spouse has opened his or her own Roth IRA.4
Non-spousal heirs often get little or no guidance when it comes to inherited IRAs. Too often, the financial firm overseeing the IRA just asks, “What do you want to do?” Often the IRA heir doesn’t know what to do.

  • Ask the financial firm to help you retitle the inherited IRA. This will enable you to arrange a direct rollover of the inherited IRA assets from the original IRA owner’s financial custodian to the financial firm that serves as the custodian of your investments. This has to be done by September 30 of the year following the year in which the original IRA owner passed away. This is also a necessary move to “stretch” the IRA assets. Usually the new title for the IRA is something like “Mary Jones IRA/Deceased 4/8/2010/ FBO (for the benefit of) Thomas Jones as beneficiary.” This retitling signifies to the IRS that this is an inherited IRA.5
  • You should be made aware of the consequences if you don’t retitle the inherited IRA. Let’s say you don’t retitle the inherited IRA as above. Instead, you just withdraw the assets from the inherited IRA and deposit them an IRA you have held for some years now. If you do this, the entire inherited IRA balance will be treated as taxable income and your federal tax bill could be huge.5
  • You should be made aware that you can name a beneficiary. All IRA owners and IRA heirs have a right to do this. No named beneficiary, no stretch IRA.
  • If you weren’t married to the original IRA owner, you should be told some inherited IRA basics. Non-spousal heirs of IRAs can’t contribute to an inherited IRA and can’t put off required minimum withdrawals from an inherited IRA.5
  • You don’t necessarily have to take a lump sum when it comes to withdrawing the IRA assets. This is one way inherited IRAs are quickly depleted. A beneficiary can arrange to make smaller required minimum distributions (RMDs) from the inherited IRA according to his or her life expectancy. These withdrawals must start by the end of the year following the year in which the original IRA owner passed away. If you don’t start taking these required withdrawals by December 31 of the following year, you will pay a penalty. Taking smaller withdrawals allows some of the IRA assets to stay invested with tax deferral, and it spreads the income tax liability on the inherited IRA money over a multi-year period.4,5
  • You may be eligible for a big tax deduction related to income distribution off the IRA. Income from an inherited IRA is what the IRS terms “income in respect of a decedent”. This means you can take an income tax deduction for the portion of the estate tax attributable to the inherited IRA (this is detailed in IRS Publication 590).6
  • If multiple beneficiaries are inheriting the IRA, you should be informed that you might be able to split the IRA up. When multiple beneficiaries inherited an IRA years ago, they had to share it and make joint investment and withdrawal decisions. Now it is possible to divide an inherited Roth or traditional IRA into multiple IRAs, one for each beneficiary. (Ask the IRA custodian if it will allow this.)4
So if you inherit an IRA, read up on the rules. Knowledge is truly an asset when you inherit sizable funds from any kind of retirement account. The more informed you are and the more guidance you have, the better the potential outcome.

Tom Kestler may be reached at 800-699-0299 or tkestler@cfiemail.com or www.kestlerfinancial.com

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations.
1. investopedia.com/articles/pf/07/beneficiary_form.asp [3/23/11]
2. jhrollover.com/article_beneficiary_basics_final.shtml [3/23/11]
3. investopedia.com/articles/retirement/03/041603.asp [4/16/03]
4. online.wsj.com/article/SB125634328917505043.html [10/24/09]
5. online.wsj.com/article/SB125512471450876777.html [10/10/09]
6. irs.gov/publications/p590/ch01.html [2011]
7. montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [3/27/11]]]>Fact Sheet: Supporting Middle Class Familieshttp://www.kestlerfinancial.com/Blog/PostID/54Kestler Financial Group54Mon, 14 Mar 2011 00:00:00 GMTSales/Prospecting
  • Help Families with Soaring Child Care Costs: The administration proposes to nearly double the Child Care Tax Credit for families making under $85,000 a year; with families earning up to $115,000 a year seeing at least some increase in their credit.
  • Helping Families Pay for Care for Elderly Relatives: At the same time, middle class families in the “sandwich generation” – struggling to care for both their children and their parents – will also benefit from new initiatives to support elder care for seniors, and respite for their caregivers.
  • Cap Payments on Student Loans: To avoid squeezing recent college graduates entering a tough job market, we will ensure that payments on federal student loans are never more than 10 percent of the borrower’s discretionary income.
  • Save for Retirement: The initiatives make it easier to save for retirement with voluntary Automatic IRAs for workers without access to existing retirement plans through their jobs, larger tax credits to match retirement savings for millions of additional workers, and new safeguards to protect retirement savings.

HELPING FAMILIES BALANCE WORK AND CAREGIVING OBLIGATIONS

Expanding the Child and Dependent Care Tax Credit for Middle Class Families: Two-thirds of families with children are headed by two working parents or a single working parent. But child care costs have grown twice as fast as the median income of families with children since 2000. Full-time care for an infant often costs more than $10,000, and monthly child care fees for two children at any age are higher than the median cost of rent. Meanwhile, the Child and Dependent Care Tax Credit has only increased once in 28 years and is not indexed for inflation.

The Obama-Biden Administration will nearly double the credit for middle-class families making under $85,000 a year by increasing their credit rate from 20 percent to 35 percent of child care expenses. Nearly all eligible families making under $115,000 a year would see a larger credit. Families could claim up to $3,000 in expenses for one child or $6,000 for two children. The maximum credit for a family with two children making $80,000 a year would increase by $900 from $1,200 to $2,100.

Expanding Child Care Funding for Working Parents: Child care costs are especially challenging for working families that struggle to make ends meet and lift their families into the middle class. Between 2001 and 2008, the number of children served by the Child Care Development Fund declined by about 200,000. The Obama-Biden Administration will provide an additional $1.6 billion in child care funding in 2011, the largest one-year increase in 20 years, to serve an additional 235,000 children. The Administration will also work with Congress to improve the quality of care for all children through changes in the CCDF program and a new Early Learning Challenge Fund.

Helping Middle Class Families Care for Aging Relatives. An estimated 38 million Americans provide unpaid care to an aging relative, including approximately 23 million caregivers with jobs and 12 million who are also caring for their own children. The $102.5 million Caregiver Initiative will ease the burden on families with elder care responsibilities and allow seniors to live in the community for as long as possible. The Initiative adds $52.5 million in funding to Department of Health and Human Services caregiver support programs that provide temporary respite care, counseling, training, and referrals to critical services. The extra funding will allow nearly 200,000 additional caregivers to be served and 3 million more hours of respite care to be provided. It also adds $50 million to programs that provide transportation help, adult day care, and in-home services, such as aides to help seniors bathe and cook, help which eases the burden for family members and helps seniors stay in their homes.

COLLEGE AFFORDABILITY

Limiting Student Loan Payments to 10 Percent of Discretionary Income. Over the past three decades, college tuition has grown ten times faster than real median incomes for families with children. About two-thirds of graduates took out loans to pay for college and their average student debt is over $23,000. Debt is particularly burdensome for workers in low-paying public service careers, as well as those who lose their jobs or who did not complete their degree.

The Obama-Biden Administration will expand make student loans more affordable by limiting a borrower’s payments to 10 percent of his or her income above a basic living allowance. It will also keep the total cost of loan repayment manageable by forgiving all remaining debt after 10 years of payments for those in public service work and 20 years for all others. The monthly payment for a single borrower earning $30,000 who owes $20,000 in loans would be $115 a month, compared to $228 a month under the standard 10-year repayment plan. These steps – which build on the Income-Based Repayment plan implemented last summer -- will help with the staggering burden of student loan debt and allow a generation of young adults to enter public service and other careers with historically low pay.

The additional flexibility in repaying student loans will complement the Administration’s ambitious agenda to make higher education more affordable, including increasing Pell grants, reforming the student loan program, makjng permanent the new $2,500 American Opportunity Tax Credit for college costs, expanding low-cost Perkins loans, strengthening community colleges and increasing graduation rates at both two- and four-year institutions.

RETIREMENT SECURITY

Establishing Automatic IRAs. Currently, 78 million working Americans—roughly half the workforce—lack employer-based retirement plans. Fewer than 60 percent of working heads of families were eligible to participate in any type of job-related pension or retirement plan in 2007. The Obama-Biden Administration will promote the establishment of a system of automatic IRAs in the workplace by requiring employers who do not currently offer a retirement plan to enroll their employees in a direct-deposit IRA unless the employee opts out. The contributions will be voluntary and matched by the Savers Tax Credit for eligible families. The Administration is also streamlining the process for employers to automatically enroll workers in 401(k) plans, which has been shown to boost participation, especially for low- and middle-income workers. New tax credits would help pay employer administrative costs and the smallest firms would be exempt.

Simplifying and Expanding the Saver’s Credit. The struggle to save enough to ensure a secure retirement became particularly pronounced in the wake of the recent financial crisis, which delivered a major hit to the savings on which workers rely for their retirement security. The Administration proposes to help working families save for retirement by expanding and simplifying the Saver’s Credit to match 50 percent of the first $1,000 of contributions by families earning up to $65,000 and providing a partial credit to families earning up to $85,000. The Administration will also make this tax credit refundable to ensure that millions of additional middle-income families can take advantage of it even though they have no income tax liability.

Updating 401(k) Regulations to Improve Transparency and Reliability. A majority of American workers rely on 401(k)-style plans to finance their retirements, making it critical that the 401(k) system be safe, transparent, and well-regulated. Even workers who save significant amounts may see their returns eaten away by fees and expenses. We need to do more to give families better choices to reach a secure retirement. The Administration is:

  • Improving the transparency of 401(k) fees to help workers and plan sponsors make sure they are getting investment, record-keeping, and other services at a fair price.
  • Encouraging plan sponsors to make unbiased investment advice available to workers, helping workers avoid common errors that undermine retirement security, while providing strong protections against conflicts of interest.
  • Promoting the availability of annuities and other forms of guaranteed lifetime income, which transform savings into guaranteed future income, reducing the risks that retirees will outlive their savings or that their retirees’ living standards will be eroded by investment losses or inflation.
  • Reviewing and requiring clear disclosure regarding target-date funds, which automatically shift assets among a mix of stocks, bonds, and other investments over the course of an
  • individual's lifetime. Due to their rapidly growing popularity, these funds should be closely reviewed to help ensure that employers that offer them as part of 401(k) plans can better evaluate their suitability for their workforce and that workers have access to good choices in saving for retirement and receive clear disclosures about the risk of loss.
You can find more great resources like this at NAFA.com]]>2011 Key Numbershttp://www.kestlerfinancial.com/Blog/PostID/47Kestler Financial Group47Mon, 14 Feb 2011 00:00:00 GMTSales/Prospecting
Kestler Financial Group is pleased to again provide the Key Numbers Report for 2011. This valuable, 20-page tool contains just about every tax rate, income limit, and deduction you can imagine. And, just like everything else at KFG, it’s free. Just click on the link below to download your copy.

2011 Key Numbers

If you’d like to learn more about the marketing systems and tools available from KFG, just reply to this e-mail or call your marketing partner at 800-699-0299.]]>Retiring in the 21st Century: What It Takeshttp://www.kestlerfinancial.com/Blog/PostID/33Kestler Financial Group33Wed, 09 Feb 2011 00:00:00 GMTSales/Prospecting
A recent survey by the FINRA Investor Education Foundation found that these are the major sources of income of today’s retirees:



Notice that 63% of today’s retirees are counting on pension plan payments to cover their living expenses, but only 21% of today’s workers are covered by a traditional pension plan, and the percentage is dropping every year.

At the same time, Social Security is under tremendous financial pressure due to the impending retirement of the Baby Boom generation. Thanks to the recession, 2010 is the first year in history that Social Security will pay more in benefits than it collects in taxes, and the Social Security Trust Fund is forecasted to be exhausted in just over 25 years.

Thus, it is clear that to have a financially secure retirement, today’s workers are going to need to save more on their own for retirement than did today’s retirees. As they enter retirement, they are going to need to figure out the best way to turn that retirement savings into a reliable retirement income.

Fixed annuities are a wonderful product for people to consider using. They are the only products that allow individuals to accumulate retirement savings, protect those savings from market losses, and turn those savings into a guaranteed income for life.

More on this and other topics at http://fixedannuityfacts.com/]]>Heat up your sales this winter with pensionshttp://www.kestlerfinancial.com/Blog/PostID/29Kestler Financial Group29Fri, 04 Feb 2011 00:00:00 GMTSales/Prospecting
   1. What are they?
   2. What are the advantages of a 412(e) plan?
   3. How does life insurance increase the plan's deductible contribution?
   4. Who is a prospect for a 412(e) plan?

All this plus additional questions and answers. Don't miss out on this great opportunity to expand your market and increase your earnings in 2011!

To register for this informational webinar on February 8, 2011 at 11:00 AM EST, click here.]]>Tax-free charitable contributions from IRAs extended once againhttp://www.kestlerfinancial.com/Blog/PostID/26Kestler Financial Group26Fri, 04 Feb 2011 00:00:00 GMTSales/Prospecting
Read more...]]>New rules offer easier cost basis reportinghttp://www.kestlerfinancial.com/Blog/PostID/18Kestler Financial Group18Sat, 22 Jan 2011 00:00:00 GMTSales/Prospecting
Your cost basis represents the original purchase price of a security plus any commissions or other fees; your adjusted cost basis is that cost basis adjusted for a variety of factors such as stock splits, corporate acquisitions or spinoffs, and reinvested dividends. Until now, reporting the gain or loss from your investments has been your responsibility, and could be very challenging for the average investor. The new regulations should make it easier to record your capital losses or gains accurately on your federal income tax form.

The Emergency Economic Stabilization Act of 2008 requires that, as of January 1, 2011, U.S. broker-dealers and other financial intermediaries must not only track the adjusted cost basis of their investors' accounts, but also report that basis to investor clients on their 1099 forms and to the Internal Revenue Service. The rules will be implemented over time. They'll apply to shares of individual stocks you buy after January 1, 2011, to investments in mutual funds and dividend reinvestment plans after January 1, 2012, and to bonds, options and other securities bought after January 1, 2013. Shares acquired before January 1, 2011 are exempt from the new rules, as are securities held in retirement accounts.

You can tailor your reporting method to suit your tax situation

The new regulations allow you to determine in advance what accounting method you wish to use for each sale of stock after January 1, 2011. Most broker-dealers will designate a default option to use if you do not specify a method. That default will typically be the so-called FIFO method (an acronym for "first in, first out"), which means that the first shares of a security purchased are considered the first shares sold. However, your broker might also allow you to specify LIFO ("last in, first out") or designate specific shares as the ones sold. In some cases, such as shares bought through a direct reinvestment program, using an average cost basis for all shares may be most convenient (most mutual fund companies already employ this method of calculating cost basis).

You may be able to put in a standing order specifying the method you want to use for all trades, or choose on a case-by-case basis; you may also authorize your financial professional to make that decision for you. The rules permit investors to change the designated method for a given trade until the settlement date (the date on which money actually changes hands, which for a typical stock sale is three days after execution of the trade). After the trade settles, you cannot change your mind about the method used. Brokers also will be required to report losses that are disallowed as a result of a wash sale (which occurs when shares are sold and then repurchased within 30 days).

Because the new regulations don't apply to investments purchased before January 1, 2011, you'll still need to do your own calculations on those transactions. The cost basis information will be included on the 1099 form you receive from your broker for tax year 2011.]]>New e-Pocket Tax Tables Availablehttp://www.kestlerfinancial.com/Blog/PostID/17Kestler Financial Group17Fri, 21 Jan 2011 00:00:00 GMTSales/Prospecting
Now you can review and share tax information with producers, clients and advisors who need up-to-date tax information on the following:

  • 2010/2011 Income Tax Rates
  • 2010/2011Payroll Tax Rates
  • Corporate Tax Rates
  • Alternative Minimum Tax
  • Kiddie Tax
  • Capital Gains and Dividends
  • Personal Exemption
  • Standard Deduction
  • Itemized Deductions
  • Deductions for Contributions to Public Charities
  • Dollar Limits for Qualified Retirement Plans
  • Estate & Gift Tax Rates
We have made the e-Pocket Tax Table easily available for you here.]]>The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010http://www.kestlerfinancial.com/Blog/PostID/7Kestler Financial Group7Thu, 30 Dec 2010 00:00:00 GMTSales/Prospecting

Income tax rates

The Act extends existing federal income tax rates for 2 additional years. As in 2010, the federal tax bracket rates for 2011 and 2012 will be 10%, 15%, 25%, 28%, 33%, and 35%. (Without this legislation, federal income tax rates would have increased beginning in 2011--the current 10% federal income tax bracket would have disappeared, and the five remaining tax brackets would have been 15%, 28%, 31%, 36%, and 39.6%.)

Tax rates for long-term capital gain and qualifying dividends

Existing tax rates for long-term capital gains and qualifying dividends are also extended through 2012. As a result, long-term capital gain and qualifying dividends will continue to be taxed at a maximum rate of 15%. For individuals in the 10% or 15% marginal income tax bracket, a special 0% rate will generally continue to apply.

Alternative minimum tax (AMT)

The Act includes another temporary "patch" for the AMT--this one good for 2010 and 2011. AMT exemption amounts are slightly increased, and personal nonrefundable tax credits will be allowed to offset AMT liability through 2011.

 AMT Exemption Amounts
  2010 2011
 Married filing jointly
  $72,450 $74,450
 Single or head of household
  $47,450 $48,450
 Married filing separately
  $36,225 $37,225

Estate tax

The Act makes several major-- though temporary-- changes to the federal estate tax, including:

  • For 2011 and 2012, the estate tax exemption amount (the applicable exclusion amount) will be $5 million per person (the $5 million will be indexed for inflation in 2012); the top estate and gift tax rate for these years will be 35%
  • The $5 million exemption amount and 35% top estate tax rate will apply retroactively to 2010 as well, but for individuals who died in 2010, an election can be made to choose the estate tax provisions effective prior to this legislation (i.e., no estate tax, but modified carryover basis rules); an extended due date is provided for individuals who died on or after January 1, 2010, but before December 17, 2010.
  • Beginning in 2011, the gift tax (reunified with the estate tax) will have a $5 million dollar exemption amount; the generation-skipping transfer tax, with a $5 million exemption effective January 1, 2010, will have a 0% tax rate for 2010, and a 35% rate for 2011 and 2012
  • For 2011 and 2012, when one spouse dies, any unused portion of that spouse's estate tax exemption amount may be transferred to the surviving spouse

One-year reduction in employee payroll tax

For the 2011 year, the employee portion of the Social Security retirement component of FICA employment tax is reduced by 2%. Normally equal to 6.2% of covered wages up to the taxable wage base ($106,800 in 2011), for 2011 this rate will be reduced to 4.2%. Self-employed individuals, who normally pay 12.4% for the Social Security portion of their self-employment taxes, will also benefit from a 2% reduction, paying the tax at a rate of 10.4% for 2011.

"Bonus" depreciation

The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 allowed an additional 50% depreciation deduction for qualifying property placed in service during 2008 and 2009. This additional depreciation deduction was allowed for purposes of the alternative minimum tax (AMT) calculation, as well as regular tax. The Small Business Jobs Act extended the 50% additional first-year depreciation deduction for one year to apply to qualified property acquired and placed in service during 2010.

This Act increases the bonus depreciation percentage to 100% for property acquired and placed in service after September 8, 2010 and before January 1, 2012. The Act extends bonus depreciation at the 50% level through 2012 (50% bonus depreciation will apply for property placed in service after December 31, 2011, and before January 1, 2013).

IRC Section 179 expense limits

Section 179 of the Internal Revenue Code allows businesses to elect to deduct the cost of depreciable tangible personal property acquired for use in the business in the year of purchase, rather than through depreciation deductions. Since 2003, several pieces of legislation have temporarily expanded the limits that apply to Section 179.

Most recently, the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 increased the maximum amount that can be expensed to $250,000 for tax years beginning in 2008 and 2009. This amount was reduced by the amount by which the cost of qualifying property placed in service during the year exceeded $800,000. For tax years 2010 and 2011, the Small Business Jobs Act increased the maximum amount that may be expensed under Section 179 to $500,000 and increased the phase-out threshold amount to $2 million.

For 2012, the dollar limit amount and phase-out threshold level were scheduled to drop to $25,000 and $200,000, respectively. This Act sets the IRC Section 179 expense limit for 2012 at its 2007 level--$125,000, with a phase-out threshold of $500,000--indexed for inflation.

Small business stock exclusion

Non-corporate investors may generally exclude 50% of any capital gain from the sale or exchange of qualified small business stock (generally, stock issued by domestic C corporations whose assets do not exceed $50 million) issued after August 10, 1993 (if a five-year holding period requirement and other requirements are met). The Small Business Jobs Act temporarily increased the exclusion percentage for qualified small business stock acquired during 2010 to 100%, and does not treat the excluded gain as an alternative minimum tax preference. Therefore, no regular tax or alternative minimum tax is imposed on the sale of qualified small business stock issued and acquired after September 27, 2010, and before January 1, 2011, and held at least five years.

This Act extends the 100% exclusion for one year--to qualifying stock acquired before January 1, 2012, and held for more than five years.

Education provisions

  • The Act extends the American Opportunity tax credit (known as the Hope tax credit before being significantly-- though temporarily--modified by the American Recovery and Reinvestment Act of 2009). The American Opportunity Tax Credit's higher maximum credit amount, increased income limits, expanded applicability to the first four years of college, and potential refundability, available in 2009 and 2010, are extended through 2012.
  • The current rules that apply to Coverdell Education Savings Accounts (e.g., $2,000 annual contribution limit, education expenses expanded to include elementary and secondary school expenses) are also extended through 2012. Without this change, the annual contribution limit would have dropped to $500 beginning January 1, 2011.
  • For the student loan interest deduction, increased income limits and the suspension of the 60-month rule, which would have expired at the end of 2010, are extended for 2 years (the deduction was, prior to 2001, limited to interest paid in the first 60 months of repayment).
  • The deduction for qualified higher education expenses, which expired at the end of 2009, is retroactively reinstated for 2010, and extended through 2011.

Other provisions--individuals

Provisions extended through 2012 include:

  • Itemized deductions and personal and dependency exemptions will not be reduced for higher-income individuals
  • "Marriage penalty" relief in the form of an expanded 15% tax bracket and an increased standard deduction amount for married individuals filing jointly
  • Exclusion of up to $5,250 in employer-provided education assistance for undergraduate and graduate education
  • Increased earned income tax credit (EITC) for families with 3 or more children, and increased EITC income limits for married couples filing jointly
  • Increased child tax credit amount with expanded refundability (15% of earnings above $3,000)
  • Expanded credit for child and dependent care expenses (increased limit on eligible expenses and maximum credit percentage)
  • An increased adoption tax credit and employer-paid adoption assistance exclusion amount; the credit also remains refundable
Provisions retroactively reinstated for 2010 and extended through 2011 include:

  • The deduction for state and local sales tax in lieu of state and local income tax on Schedule A
  • The $250 above-the-line deduction for elementary school and secondary schoolteacher classroom expenses
  • Increased contribution limits and carry forward period for contributions of capital gain property for conservation purposes
  • Tax-free distributions to charitable organizations from IRAs by individuals age 70 1/2 or older (up to $100,000 per year); a special provision in the Act allows qualifying individuals to treat a distribution made from an IRA to a charity in January, 2011, as if it were made in 2010
Provisions extended for one year (through 2011):

  • Increased monthly exclusion amount for employer-provided transit and vanpool benefits
  • Mortgage insurance premiums deductible as qualified residence interest, subject to an adjusted gross income (AGI) limitation
The Act also reinstates the tax credit for energy-efficient improvements to existing homes for 2011, but as it applied prior to the American Recovery and Reinvestment Act of 2009 (e.g., a 10% credit rate generally applies).

Other provisions--businesses

Provisions extended through 2011 include:

  • Research and development credit
  • Indian employment credit
  • New Markets tax credit
  • Employer wage credit for activated military reservists
  • Enhanced charitable deductions for contributions of food inventory, book inventories, and computer equipment
  • Work opportunity tax credit
]]>Rolling in Rollovers - The Exclusive Marketing System Available Only to KFG Producershttp://www.kestlerfinancial.com/Blog/PostID/5Kestler Financial Group5Mon, 29 Nov 2010 00:00:00 GMTSales/Prospecting Leads – People change allegiances because of them.
Leads – They can make or break your professional career.

What is your definition of a lead? Is it a name in a phone book? Or, is it someone sitting across from you with an open checkbook? The most successful producers have multiple, consistent programs to generate a constant flow of leads. But, unlike the old paradigm of a “funnel” into which “suspects” enter the top and eventually become “prospects,” successful producers see their lead program as a “pipeline.” They maintain multiple pipelines that contain prospects from various markets and in various stages of development. The difference between a funnel and a pipeline is that every prospect in a pipeline has been specifically identified as “qualified” for a specific sales process – college planning, buy-sell, retirement planning, etc.

A key concept in economical lead generation is to know precisely what it costs to get face-to-face with each client. Let’s assume you chose to use seminars. You send out 5,000 invitations at a cost of $3,500. Follow up calls and confirmations cost you $200. Meals and room rental cost you another $1,300 for a total cost of $5,000. Assuming you confirm 100 attendees and schedule appointments with half of them, your cost per appointment is $100 ($5,000/50).

Let’s take another example. Assume you choose to market using direct mail only. You send out a 5,000 piece mailing at a cost of $3,500. If you get a 1% response (50) and you schedule appointments with half of them (25), your cost per appointment is $200 ($5,000/25). Although the expense was less, the “cost” was twice as much.

There is an important point to acknowledge here. If, after investing this money, you are not capable of actually closing a sale, all is wasted. Good leads can never overcome poor technique or lack of knowledge.

As you can see, the objective is to acquire the most qualified prospects at the least possible cost. Allow me to introduce you to what may be the largest untapped lead source in the history of our business. The first wave of baby boomers has begun to enter retirement. And, over the next 18 years, 76 million baby boomers will reach retirement age. This is the first generation in history to have had access to a 401k throughout their entire working career. With over a trillion dollars invested in retirement plans, these retiring boomers are ideal prospects.

The problem is, how do you economically find them? In Loudoun County, Virginia, alone (where our office is located), there are over 400 defined contribution plans (401k) with over $800 million in assets! That’s a big number. But, unless you are a pension expert, your chances of getting at these dollars are slim. However, those same 400 plans made payments to participants in excess of $74 million! This money goes to retirees, terminated employees and beneficiaries. And, almost all of it goes into an IRA (or new employer’s 401k) somewhere. Are you getting your fair share of the rollovers in your area? The vast majority of 401k rollovers captured by insurance agents are accidental: the person attended a seminar at the right time, they saw an advertisement in the paper, or they cruised the yellow pages.

Accidental prospecting! When asked why he robbed banks, Willie Sutton replied, “because that’s where the money is!” If you knew how much money each 401k in your area was “hemorrhaging” each year, wouldn’t it make sense to begin a “pipeline” to capture these distributions before they hit the street? We have built a database that can identify which companies are sending out the largest amount of distributions annually. In addition, we’ve developed a turn-key process to help serious producers build a pipeline of 401k rollovers.
Kestler Financial Group has developed a program for qualified producers
that provides:

  • A list of all active 401k plans in your zip code
  • A letter, ready to merge with this list, directed to the Human Resources (HR) specialist who works with each plan on a day-to-day basis
  • A series of professionally developed articles and newsletters that can be personalized and sent to this specialist on a regular basis
  • And finally, when rollover appointments occur, access to some of the most knowledgeable experts in the industry to help you with case design.
What’s the down side? You have to be willing to work the system. This is a pipeline – not magic. The upside, however, is that - over time - you become known as the rollover and retirement income expert in your area – not only with the general public but with those who will be a direct influence to rollover prospects – at the most important time.

Positioning yourself as the rollover expert in your community is not only important for the obvious reasons but there is also a more subtle benefit that is often overlooked. We and our peers have positioned ourselves well over the years as asset gatherers and asset accumulators. Very few advisors are recognized – or for that matter qualified as – distribution experts.

Now, let’s analyze the cost. Let’s assume you identify 100 employers in your area who have a regular history of distributions (Cost $0). You then begin a systematic “drip” program to educate and inform the HR specialist (Article cost $0, mailing cost $.50 each). If you only receive one referral a month, your cost per very qualified lead is $50.

Think about it. For the last 30 years, the focus of the baby boomers has been accumulation. The financial services industry has built a myriad of tools to accomplish this goal. Now, as the boomers enter their retirement years, the tools, techniques and product focus will change. And, those who have identified themselves as experts in the distribution arena are ideally
positioned to profit from this shift. It’s all about positioning. Many people have made a good living by servicing the current needs of the baby boomers. Few have become extremely wealthy by identifying the future needs of this group and being prepared to service those needs when they arise.

The successful producers of the future will not only be positioned to take advantage of the future needs of the baby boomers but they will also have several, concurrent pipelines delivering qualified prospects to their business.]]>Targeting Generation X - Part Ihttp://www.kestlerfinancial.com/Blog/PostID/4Kestler Financial Group4Mon, 29 Nov 2010 00:00:00 GMTSales/ProspectingInsurance agencies are sales organizations. Their primary function is to form relationships with consumers, and by adequately providing for their risk management and insurance needs, turn those consumers into clients. What agency would claim their key purpose is to avoid good prospects, alienate, or ignore millions of people in the hope that the agency will never have to deal with anyone other than their current client base? Yet in their everyday operations, including sales and hiring, many agencies are sending exactly that message today. To paraphrase the old no-win want ad, whether we are talking prospective clients or employees, the sign these agencies hang in the window reads, "Only those like us need apply."

Potential clients and employees excluded by such practices can be categorized by culture, location or even gender. All are worthy topics that need addressing if the agency system is to successfully transition into the new marketplace. But to attempt to cover all the issues affecting all such groups is beyond the scope of this paper. For our purposes, we are going to narrow the focus to just one such group description - age.

There are opportunities lying in wait for agency principals who are willing to take a step back and see the upcoming generation of potential future staff and prospects as the true goldmine it represents. Whether viewed from the standpoint of future sales, finding new top producers, solving those problems in IT, or developing a long-term perpetuation plan, the place to run for relief is not your college buddy, or your partner who is two years older than you, but to people who may well be the same age as your kids.

Perhaps therein lies the problem. It can sometimes be difficult to understand that a potential heir to the agency may be a person "who looks like my daughter" or worse yet "reminds me of that slacker nephew of mine." Fair or not, accurate or not (your nephew may well be a slacker), perception is reality, and it's more than possible these attitudes are causing very real damage to your agency.

After all, weren't all of us told at our high school graduations "the youth are the future of our country"? Then they just might be the future of your agency, too - if you'll let them.

Age as a Significant Market Consideration

Much has been written about the various age groups in our country, mostly by advertising and marketing experts. The need for people in those industries to refine and target their campaigns has led to an endless focus on age demographics.
The value of such demographics may be based upon various facts or assumptions. For example, it is a generally accepted fact in life insurance that the vast majority of people move through a three-phase "human life cycle" based solely upon age. In the first phase (birth to age 22), most people are "net consumers" as they grow and move through the educational system. The second phase (work years until retirement) is the "net savings" years. Upon retirement, people quit working and begin living off of their accumulated savings, becoming "net consumers" again. While clearly an oversimplification, the value of this "human life cycle" assumption is that it accurately represents the broad economic life of the vast majority of people. Many highly successful life and financial services programs have been developed based upon the inferences and assumptions made from this human life cycle as to what the majority of prospects will be interested in at a specific time in their lives.

Age as a Determinant of Buyer Perceptions and Attitudes

As marketing and sales organizations, insurance agencies should pay no less attention to age distinctions as determinants of attitudes and perceptions. This is not meant as an endorsement for the abundance of stereotypes and literature that is largely pop psychology, but an acceptance of reality. Every salesperson knows prospects make buying decisions based upon the prospect's perceptions of need and value, not those of the salesperson. The heart of every successful sales technique or system is the need to uncover those perceptions and attitudes, understand how they will determine the prospect's decisions, and tailor the sales presentation to solve those perceived needs at a price the prospect considers a value.

Yet, this simple truth that consumers make purchasing decisions based upon their value systems and worldviews is often ignored by agents and agencies who treat every prospect as if they will respond in the same way to the same sales tactics and materials. For example, it would seem obvious that a veteran of World War II will not see the world through the same eyes as a 30-year old. One 85-year-old veteran of the war in the Pacific is a constant puzzle to his children over his continuing refusal to purchase a Japanese car. "Dad, the war ended a long time ago. It's just a car!" they laugh as they drive away in their Toyota. But what they fail to understand is at a very crucial and intense time of their father's life, his entire perception of Japanese people was derived from fighting soldiers whose intent was clearly to kill him and his friends. Having personally seen and endured the violence this enemy inflicted and having seen many of his friends killed and maimed in battle, he is now expected (by a bunch of kids who clearly have no clue) to just forget about all of this? While some veterans may have been able to do so, it is not the younger generations' right to judge him for his reactions and perceptions growing out of his past experiences. This is not theory to him, it is reality.

So how can an agency expect the 30-year old to respond to a given salesperson or sales technique in the same manner as this veteran has over the years? It can't, and yet every day many agents try.

This single example is meant to illustrate the literally thousands of life events that individuals experience and the inescapable fact that those experiences and the participant's reactions and perceptions to them create in large part the worldview of each individual. Share those experiences across a large group of people of common age and you develop a "generational" worldview or mindset that colors the entire group's perceptions and behavior. Acknowledgement of these differences and the development of an agency approach to sales and hiring that takes these factors into account is the key goal of this paper.

In Part 2, we will try to define and understand the various "generations" we face every day.

]]>Beneficiary Designations for Roth IRAs - Part Ihttp://www.kestlerfinancial.com/Blog/PostID/3Kestler Financial Group3Sun, 21 Nov 2010 00:00:00 GMTSales/Prospecting
Whether you have a Roth IRA or a traditional IRA, your primary goal should be to choose beneficiaries for whom you want to provide. Because Roth IRAs are different than traditional IRAs, though, the considerations for choosing beneficiaries may differ. Unlike traditional IRAs, Roth IRAs are not subject to the lifetime required minimum distribution (RMD) rules. In addition, qualified distributions paid to your Roth IRA beneficiaries are free from income tax.

Tip:

It's important for your beneficiaries to receive professional tax advice as soon as practical after your death so that they may be informed of all of the options available to them and apprised of the time limits for making beneficiary-related decisions. You should also seek professional advice before making a Roth IRA beneficiary designation, because there may be income tax and estate tax consequences associated with your choice.

You don't have to take required minimum distributions from a Roth IRA during your lifetime

If you have a traditional IRA, federal law generally requires that you begin taking annual RMDs from your account by April 1 of the calendar year following the calendar year in which you reach age 70½ (your "required beginning date"). In some limited cases, your choice of beneficiary can affect the way these RMDs are calculated.

By contrast, Roth IRAs are not subject to the RMD rules while you're alive. Consequently, if you don't need income from your Roth IRA, or if you want to preserve the funds for your beneficiaries, you don't have to take distributions from your Roth IRA during your lifetime. If you do choose to take distributions, you need not follow a set schedule--you're free to withdraw as much (or as little) as you like, regardless of the beneficiaries you have named for your Roth IRA. With a Roth IRA, your choice of beneficiary has no impact on the distributions you take (or decide not to take) while you're alive.

Qualified Roth IRA distributions are free from income tax

Unlike traditional IRAs, certain distributions from Roth IRAs may be completely free from income tax. To be free from federal income tax, a Roth IRA distribution must be considered a qualified distribution. A distribution is qualified if a five-year holding period has been satisfied, and if at least one of the following also applies:

  • You've reached age 59½ at the time of the distribution
  • The distribution is made because of a qualifying disability
  • The distribution is made to pay qualifying first-time homebuyer expenses ($10,000 lifetime limit)
  • The distribution is made to your beneficiary or estate after your death
So, if you own a Roth IRA, distributions made after your death to a beneficiary (or to your estate) will be free from federal income tax if the five-year holding period is satisfied. The five-year period is measured in tax years, beginning with the tax year for which your first contribution was made to any Roth IRA (or, if earlier, the tax year in which you converted a traditional IRA to a Roth IRA).

For instance, if you made your first Roth IRA contribution on April 15, 2006 (for the 2005 tax year), your contribution is treated as having been made on January 1, 2005, for purposes of the five-year rule. Distributions made on or after January 1, 2010, therefore, are considered qualified distributions. (That's because they weren't made within the five-year period of January 1, 2005 to December 31, 2009.) As long as your beneficiary doesn't take distributions from the inherited Roth IRA until after the five-year period has passed, the distributions will escape federal income taxation.

Tip:

A single five-year holding period applies to all Roth IRAs you own. You don't determine a separate five-year holding period for each Roth IRA.

Caution:

A surviving spouse who treats a deceased spouse's Roth IRA as his or her own must independently satisfy the criteria for a qualified distribution. That is, the distribution must satisfy the five-year rule (see technical note below), and must be made either after the surviving spouse (not the deceased spouse) attains age 59½, dies, becomes disabled, or incurs qualifying first-time homebuyer expenses.

Technical Note:

A surviving spouse who treats a deceased spouse's Roth IRA as his or her own gets to use the earlier of the deceased spouse's Roth IRA contribution date or his or her own Roth IRA contribution date in determining the starting point of the five-year holding period, for both the inherited Roth IRA and any other Roth IRA the surviving spouse owns. See Treas. Reg. Section 1.408A-6, A-7(b).

Nonqualified distributions may (or may not) be taxable

If a beneficiary takes a distribution within the five-year holding period, the distribution is considered a nonqualified one. Special rules determine how nonqualified distributions are taxed (or not taxed) for federal income tax purposes. Because Roth IRAs are generally funded with after-tax contributions, the portion of a distribution that represents your contributions to the Roth IRA is never taxable. However, the investment earnings portion of a nonqualified distribution is subject to income tax.

Roth IRA distributions are considered to consist of contributions first and earnings last. If a beneficiary must take nonqualified distributions, therefore, he or she can withdraw all of your contributions tax free before tapping into the taxable earnings (it gets more complicated if you've converted a traditional IRA into a Roth IRA).

Example(s):

Bob contributed $3,000 to his first Roth IRA in 2005 for the 2005 tax year. In 2006, he contributes another $3,000 for the 2006 tax year. Now say Bob dies in 2007. The Roth IRA will pass to the designated beneficiary of Bob's Roth IRA, Bob's brother Al. If Al takes a $3,000 distribution from the Roth IRA in 2007, it will not be a qualified distribution since the five-year period does not end until December 31, 2009 (January 1, 2005 through December 31, 2009). However, even though it will not be a qualified distribution, Al's $3,000 distribution will be considered to consist of Bob's contributions and will therefore not be taxable. Because Bob will have contributed a total of $6,000 before his death, Al will be able to take another $3,000 distribution within the five-year period and still owe no federal income tax. Any amount distributed on or after January 1, 2010, including earnings, will be considered a qualified distribution and will be free from income tax.

Tip:

The federal 10 percent premature distribution tax that may apply to premature Roth IRA distributions (i.e., nonqualified distributions taken before age 59½) does not apply to post-death distributions, regardless of your beneficiary's age or your age at the time of your death.

Your beneficiaries must take timely post-death distributions from the Roth IRA to avoid penalties

Although you aren't required to take lifetime distributions from your Roth IRA, the beneficiaries of your IRA will generally be required to take "required minimum distributions" (RMDs) from the account after you die. The distribution methods available to your beneficiaries are similar to the options available to traditional IRA beneficiaries (using the rules that apply for deaths prior to the taxpayer's required beginning date). (Note that special rules apply to surviving spouses who are beneficiaries.)

Your nonspousal beneficiaries will have to take post-death distributions according to one of the following methods:

  • The life expectancy method
  • The five-year rule

Caution:

No matter which payout method is selected for post-death distributions, a beneficiary can choose to receive more than the required amount in any given year. However, if a beneficiary receives less than the required amount in any given year, he or she will be subject to a federal penalty tax. This penalty tax is equal to 50 percent of the difference between the required distribution and the amount actually distributed. (This is the same penalty tax that may apply to required lifetime and post-death distributions from a traditional IRA.)

Caution:

The Worker, Retiree, and Employer Recovery Act of 2008 waives required minimum distributions for the 2009 calendar year.

Life expectancy method

A designated beneficiary can generally take distributions over his or her remaining single life expectancy, beginning no later than December 31 of the year following the year of your death. If there is more than one designated beneficiary, the age of the oldest beneficiary (i.e., the one with the shortest life expectancy) must be used to calculate the distributions. (Exception: If separate accounts are established for each beneficiary, distributions will be calculated separately for each account.)

Five-year rule

A designated beneficiary can generally take distributions according to the five-year rule. Under this method, distributions are taken over a five-year period ending on December 31 of the year during which the fifth anniversary of your death occurs. The beneficiary has discretion over the timing and amount of distributions, as long as all of the funds are distributed within the applicable five-year period.

Caution:

Because RMDs are waived for 2009, the five-year period is determined without regard to calendar year 2009. For example, if the Roth IRA owner died in 2007, the five-year period ends on December 31, 2013, instead of December 31, 2012.

Four critical dates for taking action

When planning for post-death distributions, your beneficiaries must pay particular attention to four dates: (1) nine months after your death, (2) September 30 of the year following the year of your death, (3) October 31 of the year following the year of your death, and (4) December 31 of the year following the year of your death. Each of these dates may have a tax decision or requirement associated with it.

  • To be valid, a disclaimer (refusal to accept benefits) must be signed by a beneficiary and meet other requirements no later than nine months after your death. Therefore, even though the designated beneficiaries are determined on September 30 of the year following the year of your death, a disclaimer may need to be signed much earlier to meet the nine-months-after-death rule. If a beneficiary makes such a valid disclaimer, the IRA funds will generally pass to any other primary beneficiary(ies) or to the designated contingent beneficiary (if there is one).
  • September 30 of the year following your death is the day to finalize who are the "designated beneficiaries." The 2002 final IRS RMD regulations mandate that IRA beneficiary designations are final as of September 30 of the year following the year of your death. Only beneficiaries remaining on that date will be included when determining post-death distributions from the Roth IRA.
  • October 31 of the year following the year of your death is the deadline for furnishing documentation relating to a trust as a beneficiary.
  • If the life expectancy method is selected, distributions must begin by December 31 of the year following the year of your death. If the distributions don't begin by that date, your beneficiaries can't use the life expectancy method, and the five-year rule becomes the default payout method.

Caution:

Although the date for finalizing beneficiaries for distribution purposes is September 30 of the year following the year of your death, an IRA or plan account can be split into separate accounts up until December 31 of that same year. If separate accounts are established, each account is treated separately for purposes of determining post-death distributions. Due to the inconsistency between the September 30 and December 31 dates, it may be advisable to create separate accounts by September 30 rather than waiting until December 31. The rules governing separate accounts are complex. For more information, consult a tax professional.

Special options available to spousal beneficiaries

Special distribution options may be available to surviving spouse beneficiaries (discussed below).

Your options when choosing Roth IRA beneficiaries

Who can you designate as your Roth IRA beneficiary? Basically, you have the same options that the owner of a traditional IRA has. Because Roth IRAs are different from traditional IRAs, though, some special considerations may apply. Your beneficiary choices generally include the following options.

Tip:

For general information on multiple beneficiaries, primary and secondary beneficiaries, "designated" beneficiaries versus "named" beneficiaries, and other issues, see our separate topic discussion, Beneficiary Designations for IRAs and Retirement Plans.

Surviving spouse

If your surviving spouse is the sole designated beneficiary of your Roth IRA, he or she will have certain options that are not available to other types of beneficiaries. For instance, your surviving spouse can generally elect to be the new account owner of the inherited Roth IRA. Alternatively, your surviving spouse can generally elect to roll over the inherited funds to his or her new or existing Roth IRA. In either case, the inherited funds will be in a Roth IRA in your surviving spouse's own name. (Other types of beneficiaries must withdraw from the Roth IRA that is in your name.) This outcome is significant for two reasons:

  • As a Roth IRA owner, your surviving spouse can name new beneficiaries of his or her choice (your children, for example). These new beneficiaries will receive the funds remaining in the Roth IRA after the death of your surviving spouse. By having new beneficiaries, the period of time for the tax-free accumulation of earnings in your Roth IRA is extended (subject to the post-death RMD rules, of course).

Caution:

You may not be happy that your spouse has this discretion to change beneficiaries, especially if you have children from a prior marriage or you are concerned that your spouse might remarry and name the new spouse as the primary beneficiary.

  • As a Roth IRA owner, your surviving spouse will not be subject to the lifetime RMD rules. He or she can take distributions from the account if desired, but there is no requirement that he or she do so. This creates the opportunity to preserve the funds in a tax-advantaged environment for the new beneficiaries.
Of course, these are not the only options available to a surviving spouse beneficiary. Your surviving spouse can also elect to disclaim the inherited Roth IRA funds, or take post-death distributions under the life expectancy method or the five-year rule. (In most cases, though, it will be in a surviving spouse's best interest to exercise one of the unique spousal options.)

A child, grandchild, or other individual

You may want to name your child, grandchild, or other individual as the beneficiary of your Roth IRA. As mentioned, a nonspousal beneficiary must take the Roth IRA distributions in one of the following two manners:

  • By the end of the year during which the fifth anniversary of the account owner's death occurs, or
  • Over the remaining single life expectancy of the beneficiary, with the first distribution starting no later than December 31 of the year following the year that the account owner died
If you designate a grandchild or other young beneficiary for your Roth IRA, he or she may be able to take post-death distributions over a long payout period using the life expectancy method. This could maximize tax-advantaged growth opportunities by allowing some of the funds to stay in the Roth IRA for many years. And unlike a traditional IRA post-death Roth IRA distributions may be free from income tax.

Caution:

If you name your grandchild as IRA beneficiary and have a substantial estate, the generation-skipping transfer tax (GSTT) may be an issue. Before naming any beneficiary, consider consulting a tax planning or estate planning professional for more information.

A trust

You can name a qualifying trust as the beneficiary of your Roth IRA if the IRA custodian or trustee allows such a designation. If all requirements are met, the beneficiaries of the trust can be treated as the designated beneficiaries of the Roth IRA. When a qualifying trust is the beneficiary of a Roth IRA, post-death distributions are calculated based on the life expectancy of the oldest trust beneficiary, which can reduce the time that distributions can be spread out.

Suppose, for example, you name your 70-year-old brother and your 10-year-old grandchild as co-beneficiaries under a trust. For distribution purposes, your grandchild must use your 70-year-old brother's life expectancy (since your brother is the oldest beneficiary). Therefore, your grandchild will lose the deferral of payouts that could occur if his or her life expectancy were used instead. Still, a trust can be an especially useful tool if you want your children (or other individuals) to benefit from your Roth IRA but want to maintain some control over their access to the funds.

Tip:

You may be able to establish separate trusts to enable each beneficiary to use his or her life expectancy when calculating required post-death distributions. Consult an estate planning attorney.

Caution:

There are costs associated with establishing and administering a trust, including the cost of retaining an attorney for advice and to draw up the trust agreement.

A charity

You may name a charity as the beneficiary of your Roth IRA. Such a move may be especially attractive if you don't have any loved ones, or if you want to benefit your loved ones through other means. From an income tax standpoint, though, it's not always advisable to name a charity as your Roth IRA beneficiary. Because a qualified charity is a tax-exempt entity, the benefit of income-tax-free Roth IRA distributions is wasted on the charity. It may make more sense to benefit a loved one with the income-tax-free Roth IRA distributions, and leave a traditional IRA or other taxable assets to your favorite charity. (The beneficiaries of a traditional IRA usually have to pay income tax on their distributions. Because a qualified charity is tax exempt, though, the charity would receive the distributions tax free.)

With charities, the five-year rule is used for taking post-death distributions (i.e., all distributions will be taken on or before the end of the year during which the fifth anniversary of the account owner's death occurs).

Your estate

If you name your estate as the beneficiary of your Roth IRA, the money in the account first goes to your estate, and then what's left passes to your heirs according to the terms of your will (if you have one) or through the laws of intestacy. Naming your estate as beneficiary is usually not advisable. First of all, you sacrifice some planning options. Second, the Roth IRA will have to pass through the probate process instead of going directly to your loved ones; this can be costly and protracted and can unnecessarily expose your Roth IRA to creditors. Finally, you may not be able to stretch distributions out over the lifetime of an individual beneficiary. Generally, the five-year rule will apply.

Why your choices matter

There are several factors you may want to consider when selecting beneficiaries for your Roth IRA. Although your primary concern may be to provide financial security for your loved ones, you should also take into account the ages and needs of your loved ones. In addition, you should keep the Roth IRA distribution rules in mind, as well as the beneficial income tax treatment that the Roth IRA may afford.

Because choosing a Roth IRA beneficiary is an important decision, you may want to select a beneficiary with the help of a tax advisor or other qualified professional. In addition, you should review your beneficiary choices periodically to ensure that they continue to be appropriate, since your financial and personal circumstances (and those of your beneficiaries) may change over time. Fortunately, you'll generally be free to add or remove beneficiaries whenever you want (though certain restrictions may apply).

Income tax considerations

As discussed, if the five-year holding period is satisfied, your beneficiaries will not have to pay income tax on your Roth IRA funds after you die. Moreover, funds left in a Roth IRA continue to accumulate free from income tax. So, the longer the funds remain there, the more your beneficiaries may benefit from tax-free growth. This is where your choice of beneficiary can play a critical role; your beneficiary designation may determine (in part) how long the funds can remain in the Roth IRA after your death.

Estate tax considerations

Your Roth IRA beneficiary choice may also impact your federal estate tax situation. Estate taxes may be a concern if you expect the value of your estate to exceed the applicable exclusion amount ($3.5 million for 2009, $2 million for 2008). The full value of your Roth IRA will be included with your other assets to determine how much (if any) federal estate tax is due from your estate.

One potential estate-tax-saving strategy may be to name your spouse as the beneficiary of your Roth IRA and other assets. The federal marital deduction allows you to leave unlimited assets to your spouse free from estate tax.

Caution:

By leaving all of your assets to your spouse, you may waste your applicable exclusion amount. You may defer estate taxes, but when your surviving spouse dies, his or her federal estate tax liability may be higher than necessary. Consult an estate planning attorney for more information.

To take full advantage of both the unlimited marital deduction and both spouses' applicable exclusion amounts, a better strategy may be to leave some of your assets in trust for your spouse and to leave some assets to other beneficiaries (such as children or grandchildren). Having a potentially income-tax-free Roth IRA in a death-tax-saving trust may make more sense than having a taxable traditional IRA in the trust. Another possibility is to leave your Roth IRA and/or other assets to charity, allowing your estate to benefit from a charitable deduction.
Estate planning for retirement assets is complex. Consult an estate planning attorney about appropriate strategies to minimize estate taxes, and about how your Roth IRA should fit into your overall estate plan.

State law considerations

You must also consider how state law may affect your Roth IRA. Your spouse may have legal rights to your Roth IRA regardless of whether he or she is named as the primary beneficiary. In addition, if your roles are reversed (your spouse is the Roth IRA owner, and you are the primary beneficiary) and you die first, state law may prevent your surviving spouse from changing the beneficiary designation after your death regarding your interest in the assets (unless you grant your spouse the power to make these changes in a will or other document).

Caution:

States may differ in their income tax and estate tax treatment of Roth IRA distributions. You should consult an estate planning attorney for details regarding these and other state-specific issues.]]>