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If you have a specific question please contact me at:  askjanjaffin@aol.com. I will make every effort to answer the question in a prompt manner.  If I determine that the question is worthy of interest to other visitors, I will publish it on my site.  I will never divulge your last name or e-mail address.

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Questions and Answers about 401(k) and IRA

Questions and Answers about 401(k) and IRA

Questions and Answers about Social Security

Questions and Answers about Social Security

Pension Plan Question

Pension Plan Question

I am a municipal government employee in a defined benefit plan. The plan as of June 30, 2009 is 98% funded. My understanding is this is a smoothing out of years and may not be the actual value of the plan. I am very concerned with what is going on the stock market and whether I can count on my plan being there for me when I retire and during retirement. I know you can't state for sure what will happen in the years ahead, but do you see a stabilization or return to profit in the market that would keep this plan secure? I want to retire in approx 3 years and am feeling very stressed over the state of the market.

I would appreciate any information or thoughts you may provide. Thank you for your time.

Christopher from Atlanta, GA

Answer

Answer

Hello Christopher,

Although it is impossible for anyone to say with certainty what will happen in the stock market in the future, we do know that over time investing in equities in the market gives the greatest potential for growth.  There will be ups and downs in the market, but over the long term being in the market has proven to be advantageous.  For example if you had invested $10,000 in S & P 500 on 11/22/1963(the day JFK was assassinated), it would have been worth $892,236 by 12/31/2005.  The key is not to panic by all the press and the daily ups and downs.  Of course the past performance of investments will not guarantee the same results in the future. 
  
The short haul is a little harder to predict, but even with all the economic uncertainty, the market has held its own pretty well the past year. However, as you get closer and closer to retirement, most analysts would advise you to make your portfolio more and more conservative.  You don't want to be affected by a downturn two months before you retire.
Best Regards,


Jan Jaffin

Deferred Income

Deferred Income

Hello, When I attained the age of 62 in September 2007, I retired. I had money in a deferred income fund. I withdrew 38,339 of it in January 2008 and paid a 20% tax on the withdrawal. I filed for SS at the end of January 2008 and started receiving SS payments in February 2008.

1. Do I have to declare the deferred income on my 2008 tax return? Gross or net?

2. Do deferred income receipts count as income which reduces the SS payment?

Thanks

Judy from Biloxi, MS

Answer

Answer

Hello Judy,

It sounds as if your "deferred income fund" was a retirement plan, because of the withholding of the 20% when you took the withdrawal.

1) You should have reported the $38,339 as ordinary income when you filed your 2008 taxes since you took the distribution in January 2008. You would report the gross distribution.
2) Since you have not yet reached "full retirement age," there is an earnings limitation. However the following sources of income are not considered earnings for Social Security's limitations:
a) pensions and annuities
b) interest
c) dividends
d) capital gains
e) other investment income
f) unemployment income
g) money withdrawn from an IRA, 401(k), 403(b), 457, or other deferred compensation plans
h) real estate rental income
If your "deferred income fund" falls within one of the above categories, it will not be considered "earnings" for Social Security purposes. If you are not sure how it is categorized, you should consult a tax advisor or contact your local Social Security office.

Best Regards,

Jan Jaffin
Converting Roth IRA into an Annuity

Converting Roth IRA into an Annuity

Hello, I am 52 and planning to retire at age 55 ( I am a federal employee under the older Civil Service Retirement System). My question concerns annuities. A salesman is recommending I convert my Roth IRA to an annuity so there is a guaranteed 5% return (compounded). I could make much more if the investments I choose for the annuity do well – there is a 1% reduction on those excess returns in the form of a company fee. Wouldn’t I incur a penalty by transferring the Roth IRA into the annuity? I’ve never heard of doing this and an internet search didn’t turn up much information. These are funds I don’t plan on spending until much later in life.

Thanks

Brent from Seattle, WA

Answer

Answer

Brent,

It sounds like you already have a Roth IRA, but since you used the term "convert," I just want to make sure you do not currently have a Traditional IRA, and the salesman is recommending you convert the Traditional IRA to a Roth IRA and then purchase the annuity he is recommending. For purposes of this answer, I will "assume" the former is true and that your IRA is already a Roth IRA. Purchasing a variable annuity with a rider guaranteeing lifetime income is a very good option for someone wanting to guarantee he/she will have a specified amount of income for the rest of their life, especially if you can wait 5 to 10 years to begin the income stream. However, I would like to clarify the terminology you are using as presented to you by the person making the recommendation. These "living benefit" riders come in many forms, such as GMIB(Guaranteed Minimum Income Benefit), GMWB(Guaranteed Minimum Withdrawal Benefit, GMAB(Guaranteed Minimum Accumulation Benefit), and they do add to the expense of the annuity. It is important to understand which Rider your advisor is recommending and the additional cost of the Rider. These Riders are too complicated for me to explain in this response, however, you should ask your Advisor to explain it in detail to you.

In addition, ask your Advisor, to clarify his terminology of guaranteeing you a "5% return," because that can be very misleading, and it sounds like he is proposing a "Guaranteed Minimum Accumulation Benefit." If so, the "5% guaranteed return" would only allow you to elect a lifetime income after a certain number of years utilizing that guarantee, and yes if your investments perform well, you could realize more than the 5% guarantee. The additional cost of these guarantees will, of course, lower your overall return.

As mentioned, these Riders can be complicated and often difficult to understand, therefore I recommend you have the Advisor give you a detailed explanation.

With regard to your question about a penalty, if you currently have a Roth IRA, there would be no IRS penalty for you to put the funds into an annuity if you "roll over" the IRA directly into the annuity.

One last thing I would like to mention, I would hesitate purchasing an annuity from anyone I refer to as a "salesman." An annuity with these types of features should only be purchased through a true "Financial Advisor," who you feel is taking your entire financial situation into consideration, and not looking to merely "sell" you a product.

If any of the above assumptions are incorrect, please let me know and we will look at your situation again.

Best regards,

Jan Jaffin
Converting Roth IRA into an Annuity - reply

Converting Roth IRA into an Annuity - reply

Jan,

Thanks for taking the time to answer my question about rolling over the Roth IRA (I have all Roth IRA savings having converted a traditional IRA balance some years ago). Your advice is spot-on, he did rush the decision, I need more information. It is a Xxxxxxx product but he also represents a couple other companies. No mention of a waiting period to lock in the guaranteed return was made. Having bought and cancelled whole life policies in my youth, I am hesitant to make any snap decisions. And I agree a financial advisor with my best interest in mind is the place to go for such a decision.

Brent

Answer

Answer

Brent,

I'm glad I could be a bit of help. I don't feel comfortable recommending specific companies or products through this venue, but annuities are my specialty, so feel free to ask any additional questions. Good luck to you.

Jan Jaffin
Converting Roth IRA into an Annuity - follow up

Converting Roth IRA into an Annuity - follow up

Jan,

If you have any recommendations on how to find a fee-only financial advisor, I would be most appreciative to receive it. My father was extremely complimentary of your response and we decided this is the way to go for such an important decision and complicated set of products. He started a similar annuity a few years ago and was surprised at how taxes are applied to distributions and really didn’t need the insurance that comes with a VA. So, I think professional independent advice is the way to go.

Brent

Answer

Answer

Brent,

You are correct, you do need to seek professional unbiased advice. Trusting your retirement assets to an individual to invest is an extremely important decision. There are many good Financial Advisors who will work with you to find the best way to invest your retirement funds, both fee-based and commissioned. My recommendation would be to contact some of the better known brokerage firms and banks in your area, and ask to meet with a Retirement Specialist. Then schedule an appointment and interview the Advisor to determine your comfort level with him/her. Ask them how they are compensated, and then make your decision. If they rush to make a recommendation and pressure you to make an immediate decision, that person may only be trying to "sell" you a product. This may take some time and effort on your part, however, it will be worth the effort if you find a person who will work to make sure you have the right retirement vehicle for your particular situation and a person in whom you have complete confidence.

As far as your father's annuity is concerned, it sounds like he has a non-qualified annuity. In a non-qualified annuity, the earnings come out first and of course are taxable at ordinary income tax rates. Your situation is different, if you do not take distributions from your Roth IRA until you have held it for 5 years and you are age 59 1/2, there will be no taxes due when you begin taking distributions. In addition, if you are only interested in income and not a death benefit, be sure to let the person you consult know that you only need a lifetime withdrawal benefit and not any additional death benefit. There are many options available with variable annuities, and your Advisor should only add the one(s) important to you, because each Rider will cost extra and take away from any potential earnings.

Best Regards,

Jan Jaffin
Indexed Annuity Calculation

Indexed Annuity Calculation

Hi,

I wonder how monthly/quarterly indexed annuity interest & principal adjustment calculated, Can you pls give a formula/example that I can use to calculate the monthly payment (with CPI)?

Thanks in advance,

Carl from Newark, NJ

Answer

Answer

Hello Carl,

Different annuity companies calculate interest differently. Most deferred fixed annuities calculate their interest daily. If it is an "index" annuity, the interest would be based on the growth of whatever index the annuity is using.

If you are setting up a systematic withdrawal on a deferred annuity, my advice would be to call the annuity company and get them to calculate the payment for you. If it is an immediate annuity on which you are receiving monthly payments, the payment would be based on an "internal rate of return" calculated by the annuity company.

I'm not sure which type of annuity you have and what type of payments you are receiving, therefore, you would need to call your annuity company and ask them for whatever calculations you need.

Best regards,

Jan Jaffin
Retirement on the Run

Retirement on the Run

Note: This is the actual untouched question I received.

Dear sr

my friend have a criminal case pending in the USA ,he does not return to the US to face it , now he wants to receive his retirement money but we will like to know if it is true that he can not receive anything until he will return to the USA and face his legal situation .He is USA citizeen

Please answer me back ASAP

Yolanda from South America

Answer

Answer

Yolanda,

Although I am glad to give retirement advice, this is a situation that requires legal advice from a lawyer. I would also suggest that you check out the following web site: www.socialsecurity.gov/onlineservices/ Click on the "Do you Qualify for Benefits?" link, and I think you will find some valuable information.

Good luck to you, you are probably going to need it.

Jan Jaffin
Retirement on the Run-Reply

Retirement on the Run-Reply

Dear Mr. Jaffin

thanks for your advice on the social security matter. He is allready contacting an Attorney to clear up his legal situation.

You are doing a great job and I thank you one´s more time

Yolanda

Where to Get an Annuity

Where to Get an Annuity

I'm going to be retiring soon and I'd like to purchase an annuity. I don't have a financial advisor, so where's the best place to get the service I need?

Cynthia from Punta Gorda, FL

Answer

Answer

Cynthia: First of all, you should certainly seek the advice of a professional prior to purchasing an annuity.  An annuity, especially a variable annuity, can be quite complex and has many features that many people find confusing.  You should interview several financial advisors before entrusting one with your savings.  There are many ways to begin your search, such as a referral from a trusted friend, your local bank, an insurance company you may currently utilize for other products, a local brokerage firm.  Whichever method you use to select your financial advisor, do your homework and make sure the firm and advisor are working for you and not just selling products.
Early Retirement Without Penalties

Early Retirement Without Penalties

I’m 54 years old and have just been laid off from my company.  Since I have a substantial pension built up, I would like to retire early and enjoy traveling with my spouse.  I know if I roll my pension over to an IRA and begin taking distributions before I am 59 ½, I will have to not only pay taxes on the withdrawals, but a 10% IRS penalty also.  Any suggestions?

JW from Seattle, WA

Answer

Answer

JW: I am sorry you were laid off, however, I applaud the fact that you have accumulated enough in your pension that you are able to retire early and enjoy what you have worked so hard to build.  One suggestion I have is to explore setting up a 72(t), otherwise known as “substantially equal periodic payments.”  This technique will avoid the 10% penalty, however, just be aware you will need to continue these payments without alteration until the later of 59 ½ or 5 years.  Consult your financial advisor to get all the specifics of this alternative and full details.
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