Today, I will discuss with you about guaranteed lifetime income annuities. “Guaranteed lifetime income annuities,” as suggested, is a predictable annuity in which you are able to know the total amount you will receive in the future for the amount that is put in today. A sum that is a lifetime guaranteed.

How does “Guaranteed lifetime income annuity” work?

The Guaranteed Growth, known as “Roll-up,” which is provided to you by insurance companies. What are the “Roll-up”? As every insurance company offers different types of plans, you may be provided with different kinds of “Roll-up”. The “Roll-up” are not linked to the stock markets in any way. Therefore, the effects of the fluctuations in the stock markets will not in any way affect the amount of your returns. Your investment is set up for profitable returns. A sum that can be guaranteed for a lifetime!

Some insurance companies may offer you a 4% Roll-Up for a period of 15 years, while others may provide you with a 7% compound interest Roll-Up for a 10-year period. However, this number may not directly impact the actual amount you may receive in your future returns. The actual sum of your annuity will be calculated based on your age and the amount you put in over the years of course. Thus, if you wish to purchase a guaranteed lifetime income annuity, it is best to consult with a professional to secure your income.

Are their potential hidden problems with having excess retirement funds in the US?

Professionals who own many assets and hold higher incomes, such as doctors, real estate agents or IT practitioners, tend to place a lot of money in their 401K/403B up to the allowable upper limit when they are young. If their plan offers a decent investment return, this amount may continue to increase over the years. When they reach their 60s, there could be more than five or six million dollars in savings. Nothing is wrong with placing additional funds into your retirement savings; however, there may be hidden underlying problems that could be easily overlooked, i.e., with “taxes.” Placing too much money in your retirement plans may in the long run be uneconomical. The returns earned from the principal plus interest in the 401K will likely have to be taxed in the future. If there are too many pensions, the tax rate after retirement may in fact be higher than today. Others might say, “Don’t take out the money that has been placed in it, so you won’t have to worry about paying taxes.” However, the IRS is aware of the loopholes and has implemented a requirement, i.e., the RMD (Required Minimum Distribution) to avert any potential incidents. The RMD is a mandatory minimum withdrawal for all retirement accounts. All qualifying retirement plans are subject to this provision. Qualified retirement plans that are tax-deductible, include the IRA, 401K, SEP and Pensions, such as the Defined Benefit, Keogh, Solo 401k, Profit Sharing, etc.

The money placed into these plans is tax deductible in the same year; however, you will need to start withdrawing some of those funds at the age of 72, as the IRS will begin collecting taxes. During the first year of withdrawal at the age of 72, the required minimum distribution may not need exceed 4%, however this percentage requirement does increase with each passing year. For instances, when you reach the age of 90, the RMD may be around 9%. In other words, the older you get, the greater the RMD amount is needed to be withdrawn. If you don’t take an RMD or withdraw too little by the appropriate deadline, the IRS might implement a penalty of up to 50%. Another scenario would be that if the individual passes away and there are existing funds in the current retirement plan, not only will income taxes apply, but also an inheritance tax must be paid. Though the child may decide to pay the inheritance tax first, and withdraw the amounts in later years, a higher tax rate will still apply for the remaining funds. It seems like after a lifetime of hard work, “Uncle Sam” ultimately gains the advantage, which is not a very good deal.

Therefore, we often say to see the overall picture of financial planning, and have a comprehensive balance. Individual income is very limited during certain periods of time, and many aspects require the cost of money. We are not against the idea of placing money in retirement plans; however, we are advocating rational allocation of the limited resources available and taking in consideration of maintaining a balance between long-term planning and daily life. If we notice that there are too much funds in the retirement plan, we may wish to make some adjustments, such as converting a portion of the retirement funds to a Roth IRA before the age of 72. The advantage of converting to a Roth IRA is that you will never have to pay a cent towards taxes from the Roth IRA during your lifetime. Further, there are no restrictions limited by the RMD, and you will have greater flexibility to withdrawal funds whenever you want. What if the taxes are still high after the funds have been transferred to Roth IRA? Please feel free to contact us at TransGlobal, as we can help you design a tax plan, which uses annuity, insurance, etc. as a supplement to your current retirement plan to reduce the burden and pain when it comes to paying your taxes.

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