Tag Archives: Savings

Annuity Questions Answered

Posted on

So many new clients come to me already owning an annuity or several annuites, and they do not understand them or know what types of fees are in them.  I went back through my e-mails to clients and looked through the types of questions I get about annuities and thought I would answer some of them here by explaining some of the concepts around annuities.

An annuity is a product offered through insurance companies.  It is tax deferred, which means the income and earnings from the investment stay in the account and are not reported on your tax return each year.  That is the good news.  The bad news is that when you take the money out of the account, it is taxed at your income tax rate, which could actually be at a higher rate than the rate you would have paid if you hadn’t had your money invested in an annuity, depending on the type of annuity you have.  However, the tax deferral is a nice benefit.

Fixed Annuity

With a fixed annuity you get a specific interest rate for a specific time period.  Sometimes you will get a higher rate for the first year and then a lower rate for the remaining years, but you know this when you make your initial purchase.

Variable Annuity

A variable annuity offers you the opportunity to invest in mutual funds.  There are annuities that invest in multiple fund families, including index fund families.

Death Benefit

This is an insurance product, so one feature, or “insurance rider” that some of these products have is something called a Death Benefit.  Sometimes the Death Benefit value can be more than the Account Value.  Each product’s Death Benefit works differently.  Sometimes it is as simple as saying the Death Benefit is the greater of current market value or what you invest minus withdrawls.  Or it might have a Step Up feature.  For example each year on the anniversary of the purchase date the value is recorded and the highest annual value or current market value is the Death Benefit if you pass away.

1035 exchange

One nice benefit to this type of product is that you are allowed to move from one insurance company to another without any tax consequences.  Doing this is called a 1035 exchange (that is the IRS name for the procedure of moving the money, it seems like they put code numbers in the names of all of their procedures).  If you cashed the money in you would have to pay taxes on the gains.  If you just move it to another annuity, then you can continue to defer the taxes.

Fees

When looking at annuities be sure to compare fees.  Fees are quoted in percentages.  It is extremely important to convert the percentages to actual dollars based on the amount you are investing because when you do that you can sometimes see thousands of dollars of difference in fees between two annuities that when just looking at percentages seem to be pretty similar in fee structure.  I would always rather see my clients with that money in their account rather than give it to an insurance company unnecessarily.

Surrender charges

A surrender charge is a fee you pay the insurance company if you take your money out in the first few years after you have had the annuity.  A seven year surrender charge schedule is very common, for example the first year surrender charge would be 6%, the second year would be 5%, and so on until the surrender charge went away.  You might be surprised to know that there are annuities that do not have surrender charges!  So if you have an annuity and you are in the position of having to decide what to do with it, you can 1035 exchange it to an annuity that does not have a surrender charge.  Most people are not aware of that.

IRA annuity

If you have an annuity that is an IRA, you can always move it directly to an IRA, and forgo the extra layer of fees that you find in an annuity.  Things to consider before doing that: 1) are there surrender charges? 2) is the death benefit greater than the current value of the account?

Learn more about your annuity by reading the statement and the prospectus.  If you don’t have the prospectus, many of them can be found online by Googleing the product name.  If that does not work, give the customer service department a call, they will be happy to e-mail or mail you a copy of the prospectus which has the fee and investment information.

MOST – Missouri 529 College Savings Plan Offering Matching Grants

Posted on

The MOST – Missouri 529 College Savings Plan recently announced that they are offering a dollar-for-dollar match up to $500 per year per account up to a $2,500 lifetime maximum for qualified accounts. This is a privately funded grant, rather than funded by Missouri taxpayers.

Qualifying for the MOST – Missouri 529 College Savings Plan Matching Grant
In order to qualify for the matching grant, you must meet certain criteria. Quoting from the website https://www.missourimost.org/ :

* Applicant must be a parent or legal guardian of the beneficiary.
* Both you and the beneficiary must be Missouri residents.
* You must be the account owner of a MOST 529 account.
* The beneficiary must be 13 or younger (when you are first approved for the matching grant).
* Your household Missouri adjusted gross income must be $74,999 or less.

You must submit an application by June 30th. You will be notified by August 31st if you receive a matching grant. The matching funds will be applied to the account January 31st. You must reapply each year.

For details and to get the application, go to https://www.missourimost.org/.

Saving for college
There is $125,000 available for the matching grant program per year over the next four years for a total of half a million dollars. With the high cost of college constantly in the news, and frequently on the minds of parents, this seems like a no brainer if you are a Missouri resident with a child under 13 and an income under $75,000.

Investing
College can be so expensive; it makes sense to create a nest egg to offset as much of that cost as you can. People are often surprised to learn how much small regular investments can grow to over time. If you save $40 a month (think of it as just $10 a week) for 18 years assuming 6% annual growth you would have $15,611 for college. Length of time invested is such a terrific boost to your investment, the longer you have the better. However – being invested is the most important factor. The key is to get started.

Michele Clark in the news: Washington Family and Calgary’s Child

Posted on

As a financial advisor and the mother of two boys, making sure that kids understand real life money concepts is important to me.  Habits around saving, investing, and philanthropy can be established when children are young.  So I was pleased to share some ideas which were highlighted in two magazines recently. I was quoted in the January 2012 issue of Washington Family magazine in the article “Starting a Piggy Bank Teach Savings Early” and in the January/February 2012 issue of Calgary’s Child magazine in the article “Help Your Kids Be Money-Savvy.”

Best Graduation Gift for Boomerang Kids

Posted on

College graduation season is here and you know what that means. You have to give up your mancave, junior is moving back home! Boomerang kids are returning home to save money.

Here is a simple idea which will:

1) Allow you to steal a little extra time with your grad before they leave the nest for good

2) Teach your grad to establish a habit of monthly money communication

3) Establish a strategy for your grad to accumulate cash for their own place

Treat the arrangement like a practice run for “the real world” with parents playing the part of the landlord and the grad playing the part of the tenant. On the first of each month the grad pays “rent” to the parents. The parents deposit the “rent” to a savings account for the grad to later use to get their own place.

In the beginning this is about establishing the monthly habits of talking about money with the important people in their life and paying rent, even if the amount is minimal. Then, when the grad has a job, the “rent” should increase making sure it remains affordable. The goals is to eventually get the monthly “rent” up to an amount that is equal to the amount that the grad will be paying once they are out on their own. Do some online research to see what local apartments cost, preferably with roommates.

Agree in advance on a term for the “lease.” Will it be for six months? A year? By the time the “lease” is up on the grad’s childhood bedroom, they should be well on their way to having established a nest egg for a deposit on an apartment and first and last months’ rent. Consider extending the “lease” so they can set aside enough for an emergency fund of six months’ living expenses to set them on a firm foundation.

If you have an especially responsible young adult, let them handle the monthly deposit into the savings account. The real key is to pull out the bank statements and have the monthly discussion about savings and bill-paying. This will establish the habit for future money conversations with roommates and more importantly, one day, a spouse. Savings in the bank and a monthly habit of open communication about money; what a great graduation gift!