Jane M. Young CFP, EA
You can begin taking Social Security at age 62 but there are some disadvantages to starting before your normal retirement age. The decision on when to start taking Social Security is dependent on your unique set of circumstances. Generally, if you plan to keep working, if you can cover your current expenses and if you are reasonably healthy you will be better off taking Social Security on or after your normal retirement age. Your normal retirement age can be found on your annual statement or by going to www.socialsecurity.gov and searching for normal retirement age.
Taking Social Security early will result in a reduced benefit. Your benefits will be reduced based on the number of months you receive Social Security before your normal retirement age. For example if your normal retirement age is 66, the approximate reduction in benefits at age 62 is 25%, at 63 is 20%, at 64 is 13.3% and at 65 is 6.7%. If you were born after 1960 and you start taking benefits at age 62 your maximum reduction in benefits will be around 30%.
On the other hand, if you decide to take Social Security after your normal retirement age, you may receive a larger benefit. Do not wait to take your Social Security beyond age 70 because there is no additional increase in the benefit after 70. Taking Social Security after your normal retirement age is generally most beneficial for those who expect to live beyond their average life expectancy. If you plan to keep working, taking Social Security early may be especially tricky. If you take benefits before your normal retirement age and earn over a certain level, the Social Security Administration withholds part of your benefit. In 2012 Social Security will withhold $1 in benefits for every $2 of earnings above $14,640 and $1 in benefits for every $3 of earnings above $38,880. However, all is not lost, after you reach full retirement age your benefit is recalculated to give you credit for the benefits that were withheld as a result of earning above the exempt amount.
Another potential downfall to taking Social Security early, especially if you are working or have other forms of income, is paying federal income tax on your benefit. If you wait to take Social Security at your normal retirement age, your income may be lower and a smaller portion of your benefit may be taxable. If you file a joint return and you have combined income (adjusted gross income, plus ½ of Social Security and tax exempt interest) of between $32,000 and $44,000 you may have to pay income tax on up to 50% of your benefit. If your combined income is over $44,000 you may have to pay taxes on up to 85% of your benefit.
The decision on when to take Social Security can be very complicated and these are just a few of the many factors that should be taken into consideration.
Jane M. Young, CFP, EA
What is a Variable Annuity?
A variable annuity is a contract with an insurance company where you invest money into your choice of a variety of sub-accounts, similar to mutual funds. Non-qualified, variable annuities provide tax deferral on gains until the funds are withdrawn. Upon distribution your gains are taxed at regular income tax rates as opposed to capital gains rates. Variable annuities generally charge fees twice those charged by mutual funds. Additionally, you will be to subject to substantial early withdrawal charges if you purchase an annuity from an advisor who is compensated through commissions. Most variable annuities provide the option to buy a guaranteed death benefit option and/or a Guaranteed Minimum Withdrawal Benefit. These do not come without a cost and can be very complex. Below are some advantages and disadvantages of Variable Annuities.
Advantages and Disadvantages of Variable Annuities:
- Tax Deferral of gains, beneficial if you have maximized limits on other retirement vehicles such as 401ks and IRAs.
- No Required Minimum Distribution at 70 and ½ as with traditional retirement accounts. There is no Required Minimum Distribution on Roth IRAs.
- Death benefit and Guaranteed Lifetime Withdrawal Benefits (GLWB) riders can be purchased for additional fees. However, the death benefit is rarely instituted due to long term growth in the stock market. GLWBs can be very complex and not without risk.
- Trades can be made within annuity without tax consequences – this is also true within all retirement accounts.
- Non-taxable transfers can be made between companies using a 1035 exchange.
- No annual contribution limit. Traditional retirement plans have annual contribution limits.
- Gains taxed at regular income tax rates as opposed to capital gains rates on taxable mutual funds.
- Higher expense structure –Mortality and Expense fees substantially higher than mutual funds.
- Substantial surrender charges for up to 10 years on commission products
- 10% penalty on withdrawals prior to 59 ½, this is also true with most traditional retirement accounts.
- Complex insurance product
- Lack of liquidity due to surrender charges and tax on gains
- No step-up in basis, taxable mutual funds and stocks have a step-up in basis upon death
- Loss of tax harvesting opportunities
Jane M. Young, CFP, EA
Here are a couple issues on Social Security and IRA Rollovers that frequently catch people by surprise.
Think twice about taking your Social Security at 62 or before your regular retirement age, if you plan to work during this timeframe. In 2011, if you earn more than $14,160, Social Security will withhold $1 for every $2 earned above this amount. However, all is not lost, when you reach full retirement age Social Security will increase your benefits to make up for the benefits withheld. Once you reach your full retirement age there is no reduction in benefits for earning more than $14,160. However, the amount of tax you pay on your Social Security benefits will increase as your taxable income increases. This may be a good reason to wait until your full retirement age or until you stop working to begin taking Social Security.
If you are thinking about moving your IRA from one custodian to another I strongly encourage you to do this as a direct transfer and not as a rollover. We frequently use these terms synonymously but I assure you the IRS does not! A transfer is when you move your IRA directly from one IRA trustee/custodian to another – nothing is paid to you. A rollover is when a check is issued to you and you write a second check to the new IRA Trustee/Custodian. This must be done within 60 days or the transaction is treated as a taxable distribution. You can do as many transfers as you desire in a given year. However, you can only do one rollover per year, on a given IRA. This is a very stringent rule and there are very few exceptions even when the error is out of your control. Whenever possible be sure to use a direct transfer not a rollover to move your IRA Account.
You and a guest are invited to a Financial Fireside Chat with Jane and Linda at our office, from 7:30 – 9:00 am on Thursday, December 2nd to discuss “Year End Financial Planning Tips and Money Saving Ideas for the Holidays.”
A Financial Fireside chat is an informal discussion over coffee and donuts, where our clients and guests can learn about various financial topics in a casual non-threatening environment. This is free of charge and purely educational. There will be absolutely no sales of products or services during this session. We will provide plenty of time for informal discussion.
The Fireside Chat will be held at the Pinnacle Financial Concepts, Inc. offices at 7025 Tall Oak Drive, Suite 210. Please RSVP with Judy at 260-9800.
We are looking forward to seeing you on Thursday, December 2nd to learn about and discuss some great year end financial planning ideas.