One IRA Rollover per Year Clarification

Feb 18 2016

Maybe you’ve heard about the new IRS rule “one IRA rollover per year.” The key term in the rule is “rollover.” Rollover has a very specific definition.

Rollovers are when you receive IRA money, payable to you, before depositing the money in another IRA. If you have multiple IRAs, the one-per-year rule does not apply to each IRA separately. The rule applies to the owner of all IRAs; one rollover per person per year. In this rollover situation, you have access (potential use of) to the money before the rollover is completed.

Direct transfers between IRA trustees do not count toward the one-per-year rule. Direct transfers are not considered rollovers. You have no access to the money in this case.

Also, it is not considered a rollover for receiving a check from one IRA and depositing the check in another IRA when the check is made out to (payable to) the other IRA. Again, you have no access to the money during the IRA transfer.

The issue comes down to when you have access/receipt/control of the money before it is contributed to the next IRA. That’s one per year.



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Financial Schemes; Ways to Success?

Feb 18 2016

Someone asked recently about a financial scheme being pitched that claims wealth creation with no investment risks and numerous other benefits.

I believe we all have to deal with the natural laws of money to achieve our objectives. There are no short cuts, good deals, guarantees or ways around the natural laws of money and wealth building.

The truths behind “wealth creation” and “savings” are two totally different things. There are two accepted avenues for managing money, owners and loaners.


Owners (investors) are people who own assets that grow in value over time (or not if you select bad assets). Owners own stocks, properties, or their own business.

Only ownership builds wealth. Wealth is required for retirement. Owners build wealth because ownership involves risk and risk pays. To create wealth, you have to earn returns large enough to not just offset taxes and inflation but to earn a surplus of returns well above taxes and inflation. There is no such thing as a safe ownership investment.

Successful ownership requires knowledge about managing the risks associated with ownership. Manage to risks and your returns will be a by-product.


Loaners (savers) are paid interest. Loaner accounts are bonds, CDs, savings accounts, money markets, fixed-income (interest bearing) insurance products…anything safe or guaranteed is a loaner.

A loaner’s objective is wealth preservation not wealth building. Interest bearing accounts don’t pay enough to offset taxes and inflation and provide surplus returns. Being safe doesn’t pay and doesn’t create wealth.

The Schemes.

Schemes sell books. Schemes also make enticing pitches.

If the scheme is not backed by the truths mentioned above, then I discount the scheme out of hand.

Example: the scheme relayed to me was about dividend paying and fixed-income insurance products. The products didn’t involve ownership so how was this scheme going to build wealth for retirement?

If the scheme plays around with the truths mentioned above, then I question how credible their method is.

As mentioned above, the scheme relied on dividend paying and fixed-income insurance products. If your objective is wealth preservation, this scheme may work for a portion of your money. But do you need the insurance in the scheme? Are there better, more efficient, options available to you?

Valid savings or investment vehicles are all a shade of gray to me—neither totally good nor bad. It’s about whether the vehicle is best for your objective.

However there are bad schemes because they aren’t valid. They are never meant to work only to steal your money. That puts every scheme on my radar as an enemy target until proven otherwise.

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Facing Transition? Adjusting Your Finances for the Journey

Jan 26 2016

You have been employed by the same employer with a steady paycheck for a long time. That’s about to change. As a transitioning Service member, you are about to embark on a journey called your second career. It involves the instability of multiple employers and the possibility of unemployment. Planning will enhance your chance for success.

Life insurance. SGLI goes away. If the bread winner dies, how will the family maintain their financial lifestyle? What are your expenses now and in the future? Will the family live on investments and savings? Spouse career income? Other family members? Downsizing? Life insurance.

Retirement accounts. How many accounts will you have? You will probably be changing employers over the years. Have a retirement account to act as your ‘base camp’ to consolidate accounts as employers change. Your TSP can serve this purpose as can IRAs and future employer 401ks.

Transition account. Have you got accessible money to tide you over should you find yourself unemployed for a period? Better have money for 3 to 6 months of expenses.

Survivor Benefit Plan (SBP). Another way to ensure your family carries on if you are gone. It’s the only way to ensure the retired pay you earned over all those years continues after your death.

College. Have you transferred Post 9-11 GI Bill benefits to the spouse or kids? Is other funding in place?

Disability insurance. What if you don’t die but you can’t work due to illness or disability? How will your family get by without your source of income?

Taxes. You are leaving a very nice tax favorable situation. Only your base pay was taxed. And you probably claimed living in a low tax state. Now every dime you make will be taxed and you may pay state income tax. Have a tax plan. Retirement accounts offer your best tax advantages—especially employer 401ks and TSPs.

Real retirement someday. What is your plan to stop working someday? You know, that 40-year period of unemployment called retirement. How much will your retirement cost and what will be your sources of income? Do you have a plan to ensure your expenses in retirement will be minimized? Fewer expenses; less required income. More money for fun.

MOAA can help. Your MOAA Life or Premium membership entitles you to a financial planning consultation with one of our staff experts. E-mail to get the process started.

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Fixed Index Annuities

Jan 11 2016

Fixed Indexed Annuities (FIA) are very popular at this time. Let’s get to know the product.

These annuities are sold by insurance sales people and financial advisers. FIAs are an insurance product and they are a savings account rather than an investment account. Being a savings vehicle rather than an investment account allows financial people who do not have securities licenses to sell the product—most insurance sales people for example. Some sales people may pitch it as a safe investment to entice sales but it’s not an investment.

Like any financial product, it can be good or bad depending on your circumstance. We want to prevent buyer’s remorse when possible. Many features and benefits of any product sound good on the surface and only later when you realize how things really work, you realize you made a mistake—usually after the product doesn’t do something you thought it would in a given situation.

The FIA is a savings vehicle in the form of a deferred annuity. Deferred meaning you don’t have to make the annuity pay a stream of lifetime income until you choose to do so in the future—or not. Annuities are insurance companies’ savings or investment products that have guarantees (insurance) and some tax benefits. Some annuities can be considered a third-level of retirement account after employer plans (401ks, etc.) and IRAs.

The sizzle behind FIAs is the interest rate. The interest rate floats based on the performance of an outside measurement. Most use the S&P 500 Index (a stock portfolio) as their outside measurement to determine their rate of interest. You are not invested in the S&P 500 Index; it is just used as the basis of the interest rate paid to the account.

The typical FIA has a guaranteed minimum rate of interest like 1 or 2%–the floor you are guaranteed to earn. The upper limit of interest paid is a portion of the outside measurement. If the S&P 500 Index is used as the outside measurement, your interest rate is a portion of that Index’s rate. So as the sales pitch goes, you capture some of the stock market’s highs while being protected from the stock market’s lows.

Wow, that’s great! What’s the rest of the story? Best to think of these accounts as principal protection and not wealth creation. If this isn’t your objective, these are probably not for you.

You get a portion of the outside measurement’s return on the upside. The FIA has “cap rate” and a “participation rate” (terms may vary).

Cap rate is the most interest you can earn. Example…say the S&P 500 Index gains 15% in a year. Your cap rate may be 6%. In this case, you gave up 9% of the S&P 500 upside to insure your safety.

The cap rate can be decreased by the participation rate—limiting your interest rate even more. Let’s say you have a participation rate of 80%. Say the S&P 500 Index goes up 6% in a year. Your cap rate is 6% so you get the 6% right? Not so fast. In this case, your participation rate kicks in and limits you to 4.8%; 80% of the S&P500 return. The insurance company can’t pay you the same as the Index in this case. They are going to make their money.

So there you are, an interest bearing account that pays between 1 and 6% in this example.

Tax-wise, annuities are tax-deferred until withdrawal—your gains are not taxed as long as they sit in the annuity. You pay regular income tax rates upon withdrawal for all amounts that are not a return of principal. Your principal was already taxed money at the time of contribution. This means you will not get more favorable capital gains tax rates upon withdrawal. Even if you have a variable annuity (not an FIA) with investment options and capital gains, you pay regular income tax rates upon withdrawal.

Other issues are fees, surrender charges, whether you are limited to one lump-sum deposit or contributions over time, your need for a lifetime income option, liquidity options, your time horizon, your other interest rate account options, income needs, emergency withdrawal options, and your ability to close the account.

Carefully define the objectives and requirements for your money before you open a FIA. Your objective and requirements should help determine whether a FIA is right for you.

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Elimination of Social Security Retirement Benefit Claiming Strategies

Dec 11 2015

As soon as the public started to understand the mysterious Social Security strategies for enhancing their retirement benefits, the rules are changed. Just goes to show that Congress can work together and quickly when they want to.

The legal changes eliminate strategies that allow couples to maximize their Social Security retirement benefits over their lifetime. These strategies are known as the “restricted benefit” and “file and suspend.”

The “restricted benefit” is typically used by the spouse with the lesser earnings record. To set the stage, if you apply for the Social Security spouse benefit (50% of your spouse’s benefit amount if you wait until your Full Retirement Age (FRA)), by law your personal benefit amount (based on your own earnings record) is paid before the spouse benefit amount to bring you up to the 50% level. In other words, the spouse benefit formula is actually a combination of your personal benefit and the spouse benefit thereby bringing you up to 50% of your spouse’s benefit amount.

Just so you know, if you apply for the spouse benefit prior to your FRA, you don’t get the full 50% of your spouse’s amount. You get a reduced early benefit amount. And you can’t use the restricted benefit method.

The “restricted benefit” strategy allows spouses to collect the spouse benefit only and not use their personal benefit as a part of the 50% formula if you wait until FRA. By restricting yourself to the spouse benefit only, it allows your delayed personal benefit to continue to grow until age 70. The strategy is useful when your personal benefit will grow to be larger than the 50% spouse benefit over time.

The restricted benefit strategy is eliminated for everyone turning age 62 after 2015.

The “file and suspend” strategy opens the door to use the “restricted benefit.” You can’t file for the spouse benefit unless the spouse whose earnings record is used for the 50% spouse benefit amount has first filed for their own benefit. The “file and suspend” strategy permits a spouse to file for his/her benefit which opens the door for the other spouse to file for the restricted spouse benefit and then turn around and suspend his/her personal benefit so it can continue to grow until age 70. The “file and suspend” spouse has to be at FRA or beyond to use file and suspend method.

Elimination of the file and suspend strategy is effective on 1 May 2016. You may still use the strategy if you turn FRA prior to 1 May. FRA for people born between 1943 and 1954 is 66. If you are over your FRA or turn 66 prior to 1 May, go talk to Social Security as soon as possible to determine your potential file and suspend options.

People already receiving benefits under the strategies are not affected.

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