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Frequently Asked Questions

Should You Convert Your IRA To A Roth IRA?

Find out the answer here

Can I Move Money Around in a 401(k)?

You can move money around inside a 401(k) without paying taxes. This allows you to transfer funds to something more conservative without worrying about the taxes. Taxes on traditional 401(k)s and IRAs are paid only on funds that are removed from the account (and not put back in within 60 days).

If you are over age 59½, you may be eligible for an “in-service” rollover. Some companies allow you to transfer at least a portion of your 401(k) to an IRA. You could open an IRA at a brokerage firm (e.g., Charles Schwab) or at your local bank. After the funds have been transferred, you can invest in virtually any investment the custodian offers.

What Is the Difference Between 401(k) and IRA Distributions?*

After you are age 59½, the distribution rules are very similar. However, if you retire or leave your company prior to age 59½, different rules apply.

IRA–Distributions from a traditional (not Roth) IRA taken prior to age 59½ are taxed at the individual’s personal ordinary income tax rate, plus a 10% penalty. There are several exceptions, such as distributions taken for certain medical expenses due to death or disability, for a first-time homebuyer, or if you follow the Reg. 72t rules.

Reg. 72t Rules–This regulation allows an owner who is under 59½ to avoid the 10% penalty (but not the income tax) if the distributions are taken in “substantially equal periodic payments.” The payments must last for at least five years AND past age 59½. There are several formulas to choose from, so you should check with your IRA custodian or financial advisor to help you determine which option is best for you.

401(k)–You are permitted to withdraw funds from a 401(k) prior to age 59½ without penalty, provided you have left or retired from the company. You need to be eligible for early retirement (usually age 55), and the company rules must allow distribution.

*This information is intended to be general in nature. You should consult with your tax advisor or financial planner prior to making any changes.

How Do I Convert My Roth IRA?*

With the lure of tax-free distributions, Roth IRAs have become increasingly popular retirement savings vehicles. According to the Investment Company Institute, 18.6 million U.S. households (about 15.7%) owned Roth IRAs in 2011. Because of the rising popularity of Roth IRAs, the importance of understanding the characteristics of this retirement savings vehicle is paramount.

The following article addresses many of the commonly asked questions about Roth IRAs.

*This information is intended to be general in nature. You should consult with your tax advisor or financial planner prior to making any changes.

What Can I Control in Retirement?

Unfortunately, retirement has a series of risk factors that threatens your long-term retirement goals. Some of these risk factors are in your control, some are completely out of your control, and some are in between. First, the Control Chart (link provided below) illustrates that we cannot control (nor can anyone else, for that matter) market returns or regulations that impact your retirement savings. We do not have a crystal ball showing what will happen to markets or what will happen to the political or tax landscape. Second, the chart shows that your consumption versus savings is clearly in your control and is a significant piece of your long-term outlook. You also have total control over how much portfolio risk (volatility) you are comfortable having in your portfolio. As part of the PlanFIRST retirement analysis, we determine your willingness to accept risk, and we do what we feel is best to align a portfolio that does not exceed your risk tolerance, while still meeting your retirement goals. Third, the other risk factors over which you have some control are employment and longevity. These risks can be reduced through life insurance and other types of insurance, and we believe our planning and advice to mitigate all these risk factors can help you achieve your retirement goals.

Click here to view the Control Chart

Bonds and Interest Rate Risk

Bonds have been a hot topic in the news recently. With interest rates at historic lows over the past few years, bond performance has been very strong. However, longer-term interest rates, in general, rose in May 2013. This rise in longer-term interest rates adversely affected bond returns. Then on June 18, 2013, (former) Federal Reserve Chairman Ben Bernanke announced the Federal Reserve’s plans to begin slowly reducing its stimulus efforts. Chairman Bernanke stated that the Fed hopes to end bond purchases entirely by the middle of 2014. Following Chairman Bernanke's announcement, the 10-year Treasury note yield increased from approximately 2.20% to 2.52% in three days. This sudden increase in Treasury note yield subsequently caused other interest rates to increase quickly. With such volatility in the bond market recently, many investors are attempting to obtain a better understanding of interest rate risk and how it affects their bond portfolio performance. On June 8, 2013, Mike Miller and radio guest Dr. Jim Rook, Chief Investment Officer at PlanFIRST, addressed the topic of interest rate risk on Mike’s weekly call-in radio show, Talking Money. To listen to the June 8 broadcast, please click on the following link: http://www.planfirst.com/media/feed_media/6-8-13.mp3

Student Loan Interest

After months of debate, Congress finally passed an act designed to simplify the way in which student loan interest is calculated. On August 9, 2013, President Obama signed the Bipartisan Student Loan Certainty Act of 2013. This act changes the formula for determining federal student loan interest rates.

How Do Reverse Mortgages Work?

Simply put, a reverse mortgage gives a senior citizen the opportunity to get equity out of his/her home without having to sell. The funds could come in the form of a lump sum, line of credit, monthly payments, or some combination.

You must be age 62 or older (both spouses, if the house is owned jointly). A recent change in the law stipulates that people getting federally backed reverse mortgages can no longer be required by the lender to also buy financial or insurance products, such as annuities.

However, you still need to be aware that reverse mortgages are very expensive compared to other loans. They are also very complex and difficult to understand. To help you understand the complexities, you will be required to meet with an independent mortgage counselor, which can cost up to $125.

Here is a summary of the fees associated with getting a reverse mortgage:

  • 2% origination fee for the first $200,000
  • 1% origination fee for any amount over $200,000, with a cap of $6,000
  • You must buy mortgage insurance costing 2% of the house value (not loan value).
  • Appraisal fee, typically costing $300 to $500

Note: Due to the high fees, we believe a reverse mortgage should be considered as a last resort.

Qualified Charitable Distributions (QCD)

The American Taxpayer Relief Act of 2012 (ATRA) extended tax-free charitable contributions from IRAs through 2013. The IRS clarifies that a QCD made in January 2013 that is treated as a 2012 QCD will satisfy an IRA owner's unmade 2012 required minimum distribution (RMD) if the QCD equals or exceeds the 2012 RMD. Further, QCDs made in January 2013 for 2012 cannot be used to satisfy an IRA owner's 2013 RMD (even if the IRA owner has already received his or her 2012 RMD).

Requesting a Copy of Your Property Deed

Occasionally, we have clients ask us how they can obtain a copy of their property deed. This question is usually in response to a letter received from a deed retrieval service. Frequently, the letter notifies the property owners that they can request a copy of their property deed. The letter usually looks like a bill and requests a significant amount of money (e.g., $86) due by a specified date (e.g., due by June 6). Although the letter looks like it comes from an official government agency, it is nothing more than a solicitation. Sadly, it is an attempt by a company to deceive property owners into paying for a document they can obtain very inexpensively (or freely) from their county’s register of deeds office or website.

To determine if the letter is a legitimate document from an official government agency, look at the fine print at the bottom of the letter. Phrases such as "this is not a bill" or "this is a solicitation" are clues that the letter is not from an official government agency.

For more information regarding this topic, please click on the link below showing a news story that aired in June 2012 on WSPA 7, the local CBS affiliate in Spartanburg, SC. 

Read here

SC Department of Revenue Security Breach

In 2012, tax data at the SC Department of Revenue was compromised due to a security breach. Consequently, SC taxpayers may be eligible for state-provided credit and non-credit identity protection. For SC taxpayers who signed up for this free protection in 2012, this service may be available again in 2013. Beginning October 24, 2013, CSID is providing an additional year of free credit monitoring to eligible SC taxpayers. To learn more about your options and to determine if you are eligible for this service, please click on the following links.

SCTAX

CSID

How Do Fixed Annuities Work?

Fixed annuities are purchased through an insurance company. The interest rate is typically determined each year by the company, but the rate is never lower than the guaranteed minimum. It is important to understand how the minimum interest is calculated. Sometimes the guarantee is based on a percentage of the premium payment (e.g., 92% of the contribution times the minimum) and not the entire amount of the annuity.

Other fixed annuity facts/features:

  • Guarantee is dependent on the strength of the insurance company.
  • Earnings are tax-deferred until withdrawn.
  • First withdrawals come from interest first and non-taxable return of premium last.
  • Penalty for early withdrawal of earnings is the same as a traditional IRA.
  • If annuity is in a traditional IRA, all withdrawals are taxed at ordinary income rates.
  • Deferred sales/surrender charge: Be sure to ask how long the surrender charge period is and how much the charge is. Typically, the longer the surrender charge, the higher the commission and possibly the higher the guarantee will be.
  • You name a beneficiary which avoids probate (unless the estate is the beneficiary).
  • Can be converted to an immediate annuity. This provides a guaranteed lifetime income (don’t forget that this generally means your heirs will not inherit the balance in the account if you die before getting your accumulated balance out of the contract). For a reduced lifetime income, the company will usually offer a survivor benefit that will pay a benefit for at least 10 years to the survivor.

How Do Variable Annuities Work?

Variable annuities are also purchased from an insurance company. However, the returns are based on the subaccount that you select, not a guaranteed interest rate. Many of today’s variable annuities offer guarantees, but they are generally not calculated the same way as a fixed annuity.

Here are some other facts/features:

  • Fees vary, depending on the contract and any extra “riders” you select.
  • Investigate any “guarantee” very carefully (see questions below).
  • Deferred sales/surrender charge work similar to fixed annuities.
  • Tax penalties are the same as fixed annuity.
  • It can be converted to an immediate annuity or systematic withdrawals.

IMPORTANT QUESTIONS TO ASK BEFORE BUYING


A VARIABLE ANNUITY

Below are some questions to ask when considering the purchase of a variable annuity. These questions are general in nature and may or may not apply to the contract you are considering. This is not intended to be a complete list, but it should be helpful in making a good decision.

  1. If I decide to take all of my money out (lump sum) of the contract in 10 years, how much interest will I be guaranteed to earn?
  2. If I have to annuitize (take monthly payments in exchange for the lump sum) to get the interest rate guarantee, how long will the company guarantee to continue paying my survivors? Will my benefit be reduced if I have included my spouse as a contingent payee? Will my benefit be reduced if my children are contingent payees?
  3. What is the guaranteed interest earned if my wife and I die and my children want to take a lump-sum payout? Note: in many cases, the only guarantee is the return of your net purchase payments.
  4. Can you run a proposal that shows the results, given the above scenarios? I am interested only in the guaranteed payouts, not projected rates of return.
  5. How strong financially is the company? If this company is purchased by another insurance company, could the new company charge me a higher rate for the optional riders I purchased?
  6. Can you show me actual returns this product has earned? Since the stock market goes up most years, many contracts allow the company to switch out of stock funds and into bond funds whenever it thinks it is prudent. If this contract allows this, I want to know how that may affect returns. Actual returns vs. the general market returns would also give me an idea of how the fees will impact my returns.
  7. If I take a distribution within, for example, 10 years (including any Required Minimum Distribution) will that affect my guaranteed return, including the guaranteed return of my account value or the Return of Principal Guarantee?
  8. What is the total commission? How much of it do you receive? If the agent is a Certified Financial Planner™ professional and tells you that you do not pay the commission, that he receives his pay from the insurance company, he is in breach of the CFP® ethics standards.

How Do I Maintain a Higher FICO Credit Score?

Here are some tips to help you maintain a higher FICO credit score or to help improve a lower score:

  • Pay bills on time—MOST IMPORTANT!!!
  • Keep credit card balances below 30% of the maximum limit.
  • Keep the total balance on all cards low compared to the total available credit.
  • Don’t close account, unless you have more than four cards.
  • If you do close accounts, don’t close them at the same time.
  • When you keep an account, be sure to still use it every now and then.
  • Keep the oldest account open.

Are you trying to rebuild your credit after bankruptcy? Do this first:

  • Get SECURED credit card from your bank.
  • Pay account on time for 12 months.
  • After 12 months, the credit card becomes unsecured.
  • Follow the suggestions above regarding credit score.

Need more help? Contact:
Greenville County Human Relations Commission
Greg Burgess
864-467-7223

FAQ Disclosure

Information contained herein is from sources believed to be reliable. We cannot guarantee the accuracy or completeness of such information, and we assume no liability for damages resulting from or arising out of the use of such information. Additionally, because we do not render tax or legal advice, this report should not be regarded as such.

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