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It’s IRA Season – Ensure Your Assets Are Optimally Invested

Contributing to a traditional IRA or a Roth IRA by April 18 (or April 19 for Maine and Massachusetts residents) is your opportunity to cut your 2021 income taxes with a traditional IRA or get tax-free growth with a Roth, assuming you’re eligible.

It’s also a great time to review how you are investing your IRA funds to see whether there are better options available. Revisit your asset allocation and consider rebalancing if you’re too concentrated in equities.

By expanding your horizons, you may craft an investment strategy that will give you better growth without exposing you to unacceptable risk.

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I won’t cover well-known strategies, such as domestic and foreign equities, bonds, CDs and commodity ETFs. All of these can fill a valuable role in a diversified portfolio to keep ahead of inflation. I’ll stick to my expertise — annuities — and cover why they can be a valuable addition to your IRA plan and asset allocation.

Annuities cannot all be lumped into one category. Some annuities let you invest your assets in stock funds. Some behave like certificates of deposit. Some provide a guaranteed stream of lifetime income. Some combine growth potential without downside market risk. I won’t cover variable annuities because I believe they’re not optimal for IRAs.

Unlike variable annuities, fixed annuities all guarantee principal or income. Underwritten by life insurers, they have one thing in common: You won’t lose money in them due to market downturns. That’s because the issuing insurance company bears all of the investment risk. None of them can give you the kind of eye-popping returns you might get from growth stocks, but you eliminate the downside.

Fixed-index annuity: Upside potential without downside risk

This is the only financial product that offers market-based growth potential while still guaranteeing your principal. Fixed-indexed annuities are a distinct asset class, as they have some characteristics of both equities and fixed-income investments.

They pay a share of the gain as an annual interest rate credit when the stock market goes up. In exchange for the guarantee that you’ll never lose money, you may get only part of the market’s annual gain as measured by an index such as the Dow Jones Industrial Average or S&P 500.

If the market index is negative for the year, you’ll typically get no interest.

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Experts expect the product to produce long-term returns that exceed those of bonds or fixed-rate annuities while trailing equity returns, but without market risk and volatility. You need to be willing to withstand some interest-rate uncertainty, however. Optional guaranteed lifetime-income and/or withdrawal-benefit riders are commonly available for an additional fee. Indexed annuities have lots of positives, and sales have boomed. A have-your-cake-and-eat-it-too approach is appealing.

One drawback is complexity. It takes work to understand them and to pinpoint which one might be the best deal for you. Additionally, they’re designed to work over the long term, not for short-term needs — and that’s one reason why they can work well in IRAs. The other drawback is that you won’t get all the upside when markets boom. These annuities have various caps and participation rates that limit upside. Some insurers offer better deals than others, and it’s challenging to make apples-to-apples comparisons. More information can be found here.

Deferred income annuity (DIA) can provide guaranteed lifetime income

A deferred income annuity defers income payments to a future date you choose. It can provide guaranteed lifetime income after an initial holding period of anywhere from two to 40 years.

The main disadvantage of income annuities is that you no longer own the cash value. You give that up in return for a promise of future income.

You can choose an income annuity with a limited payout term, such as 15 years, but most people choose the lifetime option. This option gives you longevity insurance. Income payments can optionally be guaranteed jointly for the life of your spouse as well.

A DIA can work well as an IRA, but make sure your income payments begin no later than age 72 to comply with required minimum distribution (RMD) rules. If you want to defer income payments past that age, consider a qualified longevity annuity contract (QLAC).

QLAC defers RMDs for greater future income

The QLAC is an IRA deferred income annuity designed to meet IRS requirements. You don’t need to take required minimum distributions on the assets in a QLAC. It’s the only way you can legally delay RMDs for a portion of your standard IRA funds and thus keep more money in your IRA longer.

You can invest up to 25% ($135,000 maximum) of your IRA money in a QLAC. You can delay taking RMDs on the QLAC as late as age 85, instead of having to take them starting at 72 as you would with a standard IRA.

Since you’ll be relying on the insurer to pay crucial future income, choose a financially strong company.

Immediate income annuity can fulfill RMDs

If you’re over 72, an immediate annuity can help with your RMDs. You can choose guaranteed lifetime income or a limited term not to exceed your life expectancy. An immediate annuity converts an asset to income efficiently, but in return, you have little or no ability to change the income stream once it starts.

Some retirees don’t like the idea of illiquidity. But it is very hard to obtain the same level of guaranteed lifetime income any other way if you need immediate income.

Fixed-rate annuities can outperform bank CDs and bond funds

The fixed-rate annuity is sometimes called a CD-type annuity. Its formal name is the multi-year guaranteed annuity, or MYGA — a tongue-twister of a name for a simple product.

Like a bank certificate of deposit, it guarantees a set interest rate for two to 10 years. MYGAs usually pay substantially higher rates than CDs with a comparable term. For current rates, see this chart.

These annuities offer great advantages for the fixed-income part of your portfolio — especially if you need to rebalance. They offer higher current yields than most bond funds or ETFs. And you can’t lose market value with them as you can with a bond fund or ETF. The drawback is less liquidity.

You can renew an MYGA for an additional guarantee period at the end of each term. Or you may eventually choose to annuitize it, meaning convert it to a guaranteed stream of income for a set number of years or your lifetime.

As with CDs, you’ll be penalized if you make excessive withdrawals before the term ends. Unlike CDs, these annuities are not guaranteed by federal deposit insurance, so it’s wise to choose a financially strong insurer. State guaranty associations, however, do provide a good level of backup protection for annuity owners up to certain limits.

A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com  or by calling (800) 239-0356.

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10 of the Best Target-Date Fund Families

Target-date funds are a core component of many investors’ retirement strategies. And for good reason: These funds provide a one-stop shop for retirement investors.

Every target-date fund adjusts its asset allocation from more aggressive and growth-oriented holdings in the early savings years to more conservative capital-preservation strategies as investors near and enter retirement. All investors need to do is choose the fund that most closely aligns with their target retirement date, and the portfolio managers will take care of the rest.

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However, choosing is easier said than done.

Target-date funds vary in their cost, structure and methodology. While one 2050 target-date fund may use 90% stocks, another could hold only 60% stocks. These differences can result in widely different investment experiences for participants.

In general, when evaluating target-date funds, keep the following in mind:

  • Cost: All target-date funds require some degree of active management, as someone has to make the rebalancing decisions for you. But costs will vary depending on what these funds invest in. Some target-date funds hold lower-cost index funds while others use active funds that are pricier, but might provide the potential for higher returns or a less volatile investment journey.
  • “To” versus “through” glidepaths: A target-date fund’s glidepath is how it manages the level of risk, or equity (more risky) versus fixed-income (less risky) exposure, throughout an investor’s lifetime. Some funds reach their lowest equity allocation at the target retirement date and then maintain that exposure throughout retirement, known as a “to” glidepath, because they manage to retirement. Other funds manage through retirement by continuing to de-risk after (or through) the target retirement date. The “to” glidepath strategy argues that the riskiest day of an investor’s financial life is the day she retires. Managers of “through” portfolios would argue that because investors are living for 30-plus years in retirement, they need a higher allocation to growth investments at their retirement date.
  • Aggressiveness: Target-date funds offer varying degrees of aggressiveness. The fund families on our list range from 99% equities in the early years to 82% equities; in retirement, they range from 55% equities to only 8%. Funds heavier in stocks have higher growth potential, in theory, but they’re riskier and have the potential for more volatile returns.

Read on as we look at the distinguishing features of 10 of the industry’s best target-date fund providers.

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Fund families listed in alphabetical order.

40 Companies That Give Useful Student Discounts

Ah, college. It’s an investment in your future, but it demands time and money. You might need a break from thoughts about ramen noodle recipes and how much you’ve been blowing on takeout and delivery. And thoughts about debt, including when interest starts on student loans (immediately). And whether that first job will pay the […]

The post 40 Companies That Give Useful Student Discounts appeared first on SoFi.

Don’t Let Taxes Dim Your Retirement: How to Plan Ahead with Your ‘Tax Bucket List’

Taxes are on the minds of many this time of year with the filing deadline looming. But too often, people think about taxes only on a one-year-at-a-time basis, forgetting or putting off the need to adjust their strategy for future years – most importantly, their retirement.

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As you prepare for your non-working years, it’s important to consider the burden taxes can pose in retirement. Being proactive and developing a tax-efficient strategy is especially important for those who will retire soon. If you have a tax-deferred retirement account (IRA, 401(k), 403(b), SEP, etc.), you unfortunately have an account that has one of the same features as a variable-rate mortgage. At any point, the IRS can change the rate (here, though, it is the tax rate rather than the interest rate).

Some financial professionals think that given our growing national debt, tax rates will likely go up at some point in the next few years – rising from the historically low rates we have now. And remember that when you withdraw money from one of your tax-deferred retirement accounts, whether because you need the money or you were forced to due to required minimum distributions, you must pay taxes on every dollar.

Do you know what your tax rate will be one, five or 10 years from now? Perhaps you want to withdraw as little as possible and leave it to your children. Do you know what taxes they will have to pay on those funds 10, 20 or 30 years from now? And the future tax burden your spouse could face after your passing is something you must also consider.

The good news is that you can take steps to preserve some of your money in tax-free environments, thereby reducing your debt to the IRS. First, consider the three “tax buckets”:

  • Tax-deferred bucket. These are assets such as traditional IRAs, 401(k)s and deferred annuities within a qualified retirement plan, etc. These accounts generally grow tax-deferred, which means you only pay taxes when you withdraw the money.
  • Taxable bucket. This is the money you have probably already paid taxes on, and if you invest it, you pay taxes when you realize a return. These are non-IRA assets, such as brokerage accounts, savings accounts or certificates of deposits at your bank.
  • Tax-free bucket. This money grows tax-free, and whether you withdraw your gains or leave the money to your beneficiaries after your death, it is tax-free, subject to certain limitations. These assets include Roth IRAs and life insurance.

It’s more common to have most of your money in the tax-deferred and taxable buckets. If you are interested in being proactive for the long term, here are two strategies worth considering to put more in your tax-free bucket:

Roth IRA conversions

Some conditions must be met to contribute to a Roth IRA, such as earned income, income limits and contribution limits, so not everyone can contribute to a Roth. However, converting your tax-deferred money to a Roth IRA is possible for everyone. A Roth conversion must keep the big picture in mind, but if we look at the long-term savings of a Roth conversion, it can be significant.

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Here’s an example of a married couple, Greg and Tina, both aged 65 with an annual income of $75,000, whose goal is to convert $200,000 of a traditional IRA (tax-deferred) to a Roth IRA (tax-free). The tax impact on them from a traditional IRA vs. a Roth IRA is based on these assumptions: living through age 90, a 25% effective tax rate (combined federal and state) on RMDs and taxes paid on death, a 15% capital gains tax on reinvested RMDs, and a 5% average rate of return over the period. In a $200,000 conversion to a Roth IRA, they would pay $46,000 in taxes – in the year of their conversion – under the current tax code. If Greg and Tina do nothing (do not convert to a Roth IRA) and instead simply draw their required minimum distributions beginning at age 72 until they have both passed away (surviving spouse passes at age 95), they would pay $62,692 over that period of time.

The bigger tax savings are down the road. For a Roth IRA, their taxes on reinvested funds are $0, and the taxes on the value at death are $0. Total taxes paid for the Roth IRA: the $46,000 paid for the one-year conversion.

By contrast, capital gains taxes on reinvested RMDs for the traditional IRA are $26,796. Taxes on value at death for the traditional IRA: $41,665. Total taxes paid if they had stuck with the traditional IRA: $131,153.

Note: A Roth conversion is a taxable event and may have several tax-related consequences. Be sure to consult with a qualified tax adviser before making any decisions regarding your IRA. This is a hypothetical example provided for illustrative purposes only; it does not represent a real-life scenario and should not be construed as advice designed to meet the particular needs of an individual’s situation.

Life insurance

High-income earners are not the only group of investors who turn to life insurance. Pre-retirees and retirees are interested in this option because, in addition to the death benefit and potential for tax-free income, if the contract includes the additional benefits of long-term care, they can kill two birds with one stone.

The death benefit is also tax-free. If you are looking for the following features, a permanent life insurance policy might be a consideration for you:

  • Tax-free death benefit for heirs
  • No income limitation on contributions
  • Tax-free growth
  • Tax-free withdrawals
  • Tax-free long-term care benefits (with the purchase of
  • an added LTC rider)

Keep in mind, however, that because this is life insurance, there are fees and charges, including surrender penalties for early withdrawals. You will need to qualify for the policy medically and perhaps financially and fund it appropriately for it to remain in force.

If you want the IRS to take the smallest bite possible out of your money, consider these strategies, which allow you to convert your tax-deferred money into tax-free money. Being proactive is the key to enjoying your retirement more on your terms.

Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Life insurance policies are contracts between your client and an insurance company. Life insurance guarantees rely on the financial strength and claims-paying ability of the issuing insurer. This article is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Insurance offered through J. Biance Financial, 545 S. Pine Street Sebring, FL 33870 863-304-8959. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and J. Biance Wealth Management are not affiliated companies. 01232363 03/22
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Gas-Saving Tips That Actually Work

With gas prices reaching all time highs, plenty of people are feeling pain at the pump. 

Driving less, ride a bike, take public transportation – sure sure sure. Plenty of us HAVE to drive. So other than swearing a lot when filling up, what action can you take? When fuel prices spike, lots of tips and tricks to save on gas get trotted out. They’re not all worthy.

We’ve narrowed them down to seven that don’t violate the laws of physics, compromise safety, or insult your intelligence.

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Guide to Flight School Loans

To pursue a career as a pilot, aviators need to attend flight school. While learning how to fly a plane looks a lot different than the more traditional college experience, a proper education is a key element of becoming a pilot. Unfortunately, similar to a four-year college, flight school isn’t free. Let’s take a closer […]

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13 Tax Breaks for Homeowners and Home Buyers

Owning a home is part of the American Dream. Whether you fancy a log cabin in the middle of nowhere, a suburban Cape Cod with a white picket fence, or a downtown condo in the sky, there’s just something special about trading in a lease for a deed. But that transition can be difficult – and expensive. It’s tough saving up enough cash for a down payment and then keeping up with the mortgage payments — to say nothing of the maintenance costs, which are now all on you!

Fortunately, Uncle Sam has a few tax tricks up his sleeve to help you buy a home, save on home-related costs and sell your home tax-free. Some of them are complicated, limited or come with hoops you have to jump through, but they can be well worth the trouble if you qualify. And if your budget is already stretched thin, you need all the help you can get. So, without further ado, here are 13 tax breaks that can help you buy a home and prosper as a homeowner.

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