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Author: Blakely Financial

Annuity Income Annuitization vs. Lifetime Withdrawal

Annuity Income: Annuitization vs. Lifetime Withdrawal

Posted on by Blakely Financial

During your working years, you’re accustomed to living on an income from your job. However, when you retire, the income from employment ends. Social Security provides a steady income, but it probably isn’t enough to meet your retirement income needs. An annuity is an option that can provide a stream of income during retirement.

There are usually two choices available to generate a steady income with most annuities: annuitization and lifetime withdrawals from a guaranteed lifetime withdrawal benefit. Here’s how each option works.

Annuitization

This is a fancy word to describe converting funds in an annuity into a stream of income for a fixed period or a lifetime. Often, once the annuity is annuitized, it can’t be changed, reversed, or revoked — you’re pretty much locked into the payments for the duration of time chosen.

The amount of annuitization payments is based on several factors, including the duration of the annuity payments (either a fixed period or lifetime), the cash value of the annuity, current interest rates applied by the annuity issuer, and the age of the person (referred to as the “annuitant”) over whose life the payments are based. With annuitization payments from nonqualified annuities (i.e., annuities funded with after-tax dollars), each distribution consists of two components: principal (a return of the money paid into the annuity) and earnings. The percentages of principal and earnings for each distribution will depend on the annuitization option chosen.

Guaranteed Lifetime Withdrawal Benefit

A guaranteed lifetime withdrawal benefit (GLWB) enables the annuity owner to receive payments without having to annuitize the annuity or give up access to the remaining cash value in the annuity. Typically, an annual fee is charged for a GLWB.

The amount of the GLWB payment is usually determined by applying a withdrawal percentage to the annuity’s principal amount or cash value, whichever is greater at the time of election. Then, the amount of each withdrawal is subtracted from the cash value. Generally, the withdrawal amount will not decrease, even if the cash value decreases or is exhausted. However, optional benefits are available for an additional fee and are subject to contractual terms, conditions, and limitations as outlined in the prospectus and may not benefit all investors.

Annuitization vs. Lifetime Withdrawal

Annuities are designed to be long-term investment vehicles. Generally, annuity contracts have fees, expenses, limitations, exclusions, holding periods, termination provisions, and terms for keeping the annuity in force. Surrender charges may be assessed during the early years of the contract if the annuity is surrendered. Withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty. Any annuity guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company. Annuities are not insured by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.

Big Boost for Social Security Payments

Big Boost for Social Security Payments

Posted on by Blakely Financial

The Social Security cost-of-living adjustment (COLA) for 2022 is 5.9%, the most significant increase since 1983. The COLA applies to December 2021 benefits, payable in January 2022. The amount is based on the rise in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from Q3 of the last year a COLA was determined to Q3 of the current year (in this case, Q3 2020 to Q3 2021).

Despite these annual adjustments for inflation, a recent study found that the buying power of Social Security benefits declined by 30% from 2000 to early 2021, in part because the CPI-W is weighted more heavily toward items purchased by younger workers than by Social Security beneficiaries.

Sources: Social Security Administration, 2021; The Senior Citizens League, August 11, 2021

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.

 

401(k) and IRA: A Combined Savings Strategy

401(k) and IRA: A Combined Savings Strategy

Posted on by Blakely Financial

Contributing to an employer-sponsored retirement plan or an IRA is a big step on the road to retirement, but contributing to both can significantly boost your retirement assets. A recent study found that, on average, individuals who owned both a 401(k) and an IRA at some point during the six years of the survey had combined balances about 2.5 times higher than those who owned only a 401(k) or an IRA. And people who owned both types of accounts consistently over the period had even higher balances.1

Here is how the two types of plans can work together in your retirement savings strategy.

Convenience vs. Control

Employer-sponsored plans such as 401(k), 403(b), and 457(b) plans offer a convenient way to save through pre-tax salary deferrals, and contribution limits are high: $19,500 in 2021 ($20,500 in 2022) and an additional $6,500 if age 50 or older. Although the costs for investments offered in the plan may be lower than those provided in an IRA, these plans typically offer limited investment choices and have restrictions on control over the account.

IRA contribution limits are much lower: $6,000 in 2021 and 2022 ($7,000 if age 50 or older). But you can usually choose from a wide variety of investments, and the account is yours to control and keep regardless of your employment situation. For example, if you leave your job, you can roll assets in your employer plan into your IRA.2. In contrast, contributions to an employer plan generally must be made by December 31; you can contribute to an IRA up to the April tax filing deadline.

Matching and Diversification

Many employer plans match a percentage of your contributions. If your employer offers this program, it would be wise to contribute enough to receive the entire match. Of course, contributing more would be better, but you also might consider funding your IRA, especially if the contributions are deductible (see below).

Along with the flexibility and control offered by the IRA, holding assets in both types of accounts, with different underlying investments, could help diversify your portfolio. Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.

Rules and Limits

Although annual contribution limits for employer plans and IRAs are separate, your ability to deduct traditional IRA contributions phases out at higher income levels if you are covered by a workplace plan: modified adjusted gross income (MAGI) of $66,000 to $76,000 for single filers and $105,000 to $125,000 for joint filers in 2021 ($68,000 to $78,000 and $109,000 to $129,000 in 2022).3 You can make nondeductible contributions to a traditional IRA regardless of income.

Eligibility to contribute to a Roth IRA phases out at higher income levels regardless of coverage by a workplace plan: MAGI of $125,000 to $140,000 for single filers and $198,000 to $208,000 for joint filers in 2021 ($129,000 to $144,000 and $204,000 to $214,000 in 2022).

 

Source: Investment Company Institute, 2021

Contributions to employer-sponsored plans and traditional IRAs are generally made pre-tax or tax-deductible and accumulate tax-deferred. Distributions are taxed as ordinary income and may be subject to a 10% federal income tax penalty if withdrawn before age 59½ (with certain exceptions). Nondeductible contributions to a traditional IRA are not taxable when withdrawn, but any earnings are subject to ordinary income tax. Required minimum distributions (RMDs) from employer-sponsored plans and traditional IRAs must begin for the year you reach age 72 (70½ if you were born before July 1, 1949). However, you are generally not required to take distributions from an employer plan as long as you still work for that employer.

Roth IRA contributions are not deductible, but they can be withdrawn at any time without penalty or taxes. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and take place after age 59½ (with certain exceptions). Original owners of Roth IRAs are exempt from RMDs. However, beneficiaries of all IRAs and employer plans must take RMDs based on their age and relationship to the original owner.

1) Employee Benefit Research Institute, 2020

2) Other options when separating from an employer include leaving the assets in your former employer’s plan (if allowed), rolling them into a new employer’s plan, or cashing out (usually not wise).

3) If a workplace plan does not cover you, but your spouse is covered, eligibility phases out at MAGI of $198,000 to $208,000 for joint filers in 2021 ($204,000 to $214,000 in 2022).

 

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.

Charitable Giving Can Be a Family Affair

Charitable Giving Can Be a Family Affair

Posted on by Blakely Financial

Charitable Giving Can Be a Family Affair

As families grow in size and overall wealth, a desire to “give back” often becomes a priority. Cultivating philanthropic values can help foster responsibility and a sense of purpose among young and old alike while providing financial benefits. In addition, charitable donations may be eligible for income tax deductions (if you itemize) and can help reduce capital gains and estate taxes. Here are four ways to incorporate charitable giving into your family’s overall financial plan.

Annual Family Giving

The holidays present a perfect opportunity to help family members develop a giving mindset. To establish an annual family giving plan, first determine the total amount that you’d like to donate as a family to charity. Next, encourage all family members to research and make a case for their favorite nonprofit organization, or divide the total amount equally among your family members and have each person donate to their favorite cause.

When choosing a charity, consider how efficiently the contribution dollars are used — i.e., how much of the organization’s total annual budget directly supports programs and services versus overhead, administration, and marketing. For help in evaluating charities, visit the Charity Navigator website, charitynavigator.org, where you’ll find star ratings and more detailed financial and operational information.

Snapshot of 2020 Giving

Despite the pandemic and economic downturn, 2020 was the highest year for charitable giving on record, reaching $471.44 billion. Giving to public-society benefit organizations, environmental and animal organizations, and human services organizations grew the most while giving to arts, culture, and humanities and health organizations declined.

Source: Giving USA 2021

Estate Planning

Charitable giving can also play a vital role in an estate plan by helping to ensure that your philanthropic wishes are carried out and potentially reducing your estate tax burden.

The federal government taxes wealth transfers both during your lifetime and at death. In 2021, the federal gift and estate tax is imposed on lifetime transfers exceeding $11,700,000, at a top rate of 40%. States may also impose taxes but at much lower thresholds than the federal government.

Ways to incorporate charitable giving into your estate plan include will and trust bequests; beneficiary designations for insurance policies and retirement plan accounts; and charitable lead and charitable remainder trusts. (Trusts incur upfront costs and often have ongoing administrative fees. The use of trusts involves complex tax rules and regulations. Before implementing such strategies, you should consider the counsel of an experienced estate planning professional and your legal and tax professionals.)

Donor-Advised Funds

Donor-advised funds offer a way to receive tax benefits now and make charitable gifts later. A donor-advised fund is an agreement between a donor and a host organization (the fund). Your contributions are generally tax-deductible, but the organization becomes the legal owner of the assets. You (or a designee, such as a family member) then advise on how those contributions will be invested and how grants will be distributed. (Although the fund has ultimate control over the assets, the donor’s wishes are generally honored.)

Family Foundations

Private family foundations are similar to donor-advised funds but on a more complex scale. Although you don’t necessarily need the coffers of Melinda Gates or Sam Walton to establish and maintain one, a private family foundation may be most appropriate if you have a significant level of wealth. The primary benefit (in addition to potential tax savings) is that you and your family have complete discretion over how the money is invested and which charities will receive grants. A drawback is that these separate legal entities are subject to stringent regulations.

These are just a few ways families can nurture a philanthropic legacy while benefitting their financial situation. For more information, contact your financial professional or an estate planning attorney.

Remember that not all charitable organizations can use all possible gifts, so it is prudent to check first; the type of organization you select can also affect the tax benefits you receive.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
What a Relief! Congress Acts Against Surprise Medical Bills Blakely Financial

What a Relief! Congress Acts Against Surprise Medical Bills

Posted on by Blakely Financial

If you have ever been caught off-guard by a large medical bill, a long-running practice known as balance billing might be the reason. A balance bill — which is the difference between an out-of-network provider’s normal charges for a service and a lower rate reimbursed by insurance — can amount to thousands of dollars.

Many consumers are already aware that it usually costs less to seek care from in-network health providers, but that’s not always possible in an emergency. Complicating matters, some hospitals and urgent-care facilities rely on physicians, ambulances, and laboratories that are not in the same network. In fact, a recent survey found that 18% of emergency room visits resulted in at least one surprise bill.1

Who’s Afraid of High Health-Care Costs? Most People

Percent of surveyed adults who say they are worried about being able to afford the following expenses

Source: Kaiser Family Foundation and JAMA, 2020

Coming Soon: Comprehensive Protection

The No Surprises Act was included in the omnibus spending bill enacted by the federal government at the end of 2020. The new rules will help ensure that consumers do not receive unexpected bills from out-of-network providers they didn’t choose or had no control over. For example, once the new law takes effect in 2022, patients will not receive balance bills for emergency care or non-emergency care at in-network hospitals when out-of-network providers unknowingly treat them. (A few states already have laws that prevent balance billing unless the patient agrees to costlier out-of-network care ahead of time.)

Patients will be responsible only for the deductibles and copayment amounts they would owe under the in-network terms of their insurance plans. Instead of charging patients, health providers will negotiate a fair price with insurers (and settle disputes with arbitration). This change applies to doctors, hospitals, and air ambulances — but not ground ambulances.

Consent to Pay More

Some patients purposely seek care from out-of-network health providers, such as a trusted family physician or a highly regarded specialist, when they believe the quality of care is worth the extra cost. In these non-emergency situations, physicians can still balance-bill their patients. However, a good-faith cost estimate must be provided, and a consent form must be signed by the patient at least 72 hours before treatment. In addition, some providers are barred from seeking consent to balance-bill for their services, including anesthesiologists, radiologists, pathologists, neonatologists, assistant surgeons, and laboratories.

Big Bills Will Keep Coming

The fact that millions of consumers could be saved from surprise medical bills is something to celebrate. Still, many people may struggle to cover their out-of-pocket health expenses, in some cases because they are uninsured or simply due to high plan deductibles or rising costs in general. Covered workers enrolled in family coverage contributed $5,588, on average, toward the cost of premiums in 2020, with deductibles ranging from $2,700 to more than $4,500, depending on the type of plan.2

When arranging non-emergency surgery or other costly treatment, you may want to take your time choosing a doctor and a facility because charges can vary widely. Don’t hesitate to ask for detailed estimates and try to negotiate a better price.

If you receive a higher-than-expected bill, don’t assume it is set in stone. Check hospital bills closely for errors, check billing codes, and dispute charges that you think insurance should cover. If all else fails, offer to settle your account at a discount.

1-2) Kaiser Family Foundation, 2020

Smarter Spending on Deep-Discount Days

Smarter Spending on Deep-Discount Days

Posted on by Blakely Financial

Unless you complete your holiday shopping before Halloween, you might be enticed by Black Friday and Cyber Monday deals. These tips may help you save time and money.

 

Create a budget. Before you start shopping, establish an overall budget. Make a list of gifts you will need to buy and decide exactly how much you can afford to spend on each person.

Beat the crowds. If you shop early in the season, items are more likely to be in stock and you may face fewer shipping delays. Sales often start well before Black Friday, so keep an eye out for special promotions at least a week or two ahead. Signing up for online or social media deal alerts can help.

Research pricing. Knowing whether a deal is truly good can be tricky, but many websites and phone apps are available that can help you compare items and prices as you shop.

Set up accounts. To complete purchases quickly, consider saving your information and shipping addresses on trusted online accounts with your favorite retailers. Make it a habit to search for promotional and coupon codes that you can use at checkout. Review shipping costs, too, to avoid paying more than you expect.

Track purchases. To help you stick with your budget, keep track of what you spend. If you’re shopping with credit, try using one card for everything so you can quickly review your spending. A rewards card may give you cash back, points, or miles that you can redeem in the future, but watch out for high-interest rates if you can’t pay off the balance in full.

Holiday retail sales totaled $789.4 billion in 2020, rising 8.3% over 2019.

Use cash.Consider using a debit card or cash for in-store purchases. Carrying only a predetermined amount of money in your wallet may help you avoid overspending.

Pay attention to the fine print.Retailers may have special policies in place for the holiday season. Knowing the time limits for exchanges or returns is especially important when you’re shopping early. Ask for gift receipts and keep your own copies.

Watch out for exclusions.Promotional prices might be limited to certain items and may expire quickly, so understand the details.

Look for price guarantees.If you buy an item that later goes on sale, some retailers will refund the difference within certain time limits. Retailers may also match a competitor’s price on an identical item (you may need to provide proof of the purchase).

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.