Financial Glossary
We are pleased to provide you with information about many of today's financial products, which include the different types of IRA's, pensions, 401k plans, mutual funds, annuities and their features and benefits. This glossary is a brief overview. You may obtain additional information by calling us at 269-429-0650. Please scroll down to view the glossary.
FIXED ANNUITY
Fixed
deferred annuities can be well suited for investors who are looking for
the safety of a more conservative retirement investment. A fixed annuity
offers the stability of a fixed, guaranteed rate of return. Plus, the
interest you earn is tax-deferred until you begin making withdrawals.
Fixed annuities also offer the advantage of competitive interest rates
versus many other fixed-rate products.
INDEX ANNUITY
IMMEDIATE ANNUITY · choice of income payout options to suit your cash flow needs. · security that your payments won't fluctuate with market volatility. · freedom from having to manage your savings to generate income.
Koehler
Financial Services, Inc., a licensed insurance agency offers insurance
products that are issued by non-affiliated insurance companies.
Guarantees are subject to the claims-paying ability of the issuing
insurance company.
If you’ve changed jobs or are retiring, rolling
over your retirement assets to an account managed by Koehler Financial
Services, Inc. is a great solution. Done correctly, it’s a non-taxable
event and gives you access to a wide range of investments. · Contacting your former plan administrator. · Opening your new rollover IRA over the phone. · Completing the paperwork and guiding you every step of the way. Is a Koehler Financial Services, Inc. Rollover IRAA right for you?· A Koehler Financial Services Inc.'s Managed Rollover IRAA is advantageous for anyone who has changed jobs or is retiring and has assets in employer-sponsored retirement plans.
· Gain
more flexibility and control over your retirement assets than with other
alternatives, such as leaving assets in your former employer’s plan,
moving them to a new employer’s plan, or taking a cash distribution.
Compare traditional and Roth individual retirement accounts
|
Account |
Traditional IRA |
Roth IRA |
Minimum to open |
$2,000 |
$2,000 |
Tax advantages |
||
Contributions |
Tax-deductible (subject to certain limitations) |
Not tax-deductible |
Earnings |
Tax-deferred (taxed when you begin withdrawing) |
Tax-free (subject to certain limitations) |
Withdrawals |
Taxable |
Tax-free (subject to certain limitations) |
Contributions |
||
Yearly amount |
Up to $5,000 for tax year 2012 ($6,000 for those age 50 and older) |
Up to $5,000 for tax year 2012 ($6,000 for those age 50 and older) You can also convert your existing IRA into a Roth. |
Age |
Under 70½ |
Any |
Income |
Must have earned income. Deductibility of contributions varies with Modified Adjusted Gross Income (MAGI). |
Must have earned income. Not available to persons with MAGI over: $125,000 (single) $183,000 (married filing jointly) $10,000 (married filing separately). |
Withdrawals |
||
Penalty-free |
After age 59½ |
After your account has been open 5 years |
Penalty |
Before age 59½ . If you do not start withdrawing by age 70½. |
Before 5-year holding period or before age 59½ unless exceptions to penalty apply. |
Exceptions to penalty |
Some exceptions for home purchase, education, or other. |
Some exceptions for home purchase, education, or other. |
Retirement resources
Transfer your IRAs to Koehler Financial Services, Inc. a
Registered Investment Advisor
Retirement planning
Estate planning services
An inherited IRA allows a spouse or non-spouse IRA beneficiary of a
traditional, rollover, SEP, SIMPLE or Roth IRA to keep his or her
inherited IRA assets tax-deferred—until the IRS requires the funds in
the inherited IRA to be distributed.
When the account holder dies, a spouse beneficiary may either transfer
the assets into an inherited IRA, complete a spousal transfer and treat
the assets as his/her own or take a distribution from the IRA. A
non-spouse beneficiary may transfer the assets into an inherited IRA in
his/her own name, and generally continue taking distributions on the
same schedule that applied to the original account holder.
Tax rules for inherited IRAs are complex. We recommend that you consult
your tax advisor before reaching a final decision.
Inherited IRA |
|
Minimum to Open |
$2,000 |
Who's Eligible |
Anyone who has inherited a traditional, rollover, SEP, SIMPLE or Roth IRA, regardless of age |
Tax Advantages |
|
Opening Deposit |
Not taxed |
Earnings |
Tax-free (Roth IRA earnings accumulate tax-free provided certain
conditions are met) |
Withdrawals |
Tax-free (withdrawal of earnings from a Roth IRA if account has been
open 5 years) |
Contributions |
|
Contribution Amounts |
· Contributions to Inherited IRAs are not permitted · Contributions to spousal transfers are allowed subject to eligibility |
Withdrawals |
|
Withdrawal Choices |
Withdrawal choices vary based on the original account holder's age
at death, who the beneficiary is (e.g., spouse, non-spouse, trust or
estate) and the type of IRA inherited. |
Roth IRA |
|
Minimum to Open |
$2,000 |
Contribution Deadline |
April 15, 2011 for 2010 tax year |
Tax advantages |
|
Contribution |
Not tax-deductible
You may contribute simultaneously to a traditional IRA and a Roth
IRA (subject to eligibility) as long as the total contributed to all
(traditional or Roth) IRAs totals no more than $5,000 for each tax
year 2010 ($6,000 age 50 and older). |
Earnings |
Tax free (earnings grow free of federal income tax) |
Withdrawals |
Tax free (withdrawal of original contribution) |
Contributions |
|
Eligibility |
No age restrictions; eligibility phase-out begins at modified adjusted gross income of $173,000 for married taxpayers filing jointly and $110,000 for single taxpayers. |
Annual Contribution Amounts |
To determine your allowable contribution amount, please contact Koehler Financial Services, Inc.’s tax planning department, or click here for our current years tax reference sheet. |
Withdrawals |
|
Penalty Free |
Withdrawal of contributions at any age, or earnings after age 59½ and after account has been open for five years. |
Penalty |
Withdrawal of earnings before age 59½ or before your account has been open for at least five years. |
Exceptions
|
Before five-year holding period ends, subject to tax, or after five-year holding period ends, not subject to tax, penalties are waived if you are over 59½ and funds are withdrawn for: · Higher education expenses for you or family members. Expenses include tuition, fees, books, supplies and room and board (must be enrolled at least part time). · First-time home purchase expenses ($10,000 lifetime limit) to buy, build, or rebuild a first home for you, your parents, children, or grandchildren. You must not have owned a home within the past two years. · Death or disability. · Certain medical expenses including qualifying health insurance costs for certain unemployed individuals and unreimbursed expenses exceeding 7.5% of AGI. · Withdrawals made in equal installments over the account holder's life expectancy. |
TRADITIONAL IRA
Save for retirement and gain tax advantages
Anyone under age 70½ with earned income can contribute to a traditional
IRA.
Contributions may be tax deductible, and taxes on earnings are
deferred until you withdraw funds from the account, so your investments
have the opportunity to compound faster.
Open a traditional IRA account managed by Koehler Financial Services,
Inc. a Registered Investment AdvisorA and
you'll also get:
A wide choice of investments.
Income availability.
Customized investment advice.
Traditional IRA |
|
Minimum to open |
$2,000 |
Contribution deadline |
April 15, 2012 for 2011 tax year |
Tax advantages |
|
Contribution |
Tax deductible - subject to certain limitations |
Earnings |
Tax deferred - taxed when you begin withdrawing |
Withdrawals |
Taxable (except withdrawals of non-deductible contributions) |
Contributions |
|
Eligibility |
Anyone with earned income may contribute up until age 70½. |
Annual contribution amounts |
To determine your allowable contribution amount, please see our tax planning experts. You may contribute simultaneously to a traditional IRA and a Roth IRA (subject to eligibility) as long as the total contributed to all (traditional or Roth) IRAs totals no more than $5,000 for each tax year 2012 ($6,000 age 50 and older). |
Withdrawals |
|
Penalty free |
Withdrawals after age 59½ |
Penalty |
· If you do not start required minimum distribution (RMD) withdrawals by age 70½, you will face a penalty. Special distribution rules may apply. · Withdrawals before age 59½ are subject to a 10% penalty. (Exceptions are listed below.) |
Exceptions
|
· Higher education expenses for you or family members; expenses include tuition, fees, books, supplies, and room and board (must be enrolled at least part time). · First-time home purchase expenses ($10,000 lifetime limit) to buy, build, or rebuild a first home for you, your parents, children, or grandchildren; you must not have owned a home within the past two years. · Death or disability · Certain medical expenses including qualifying health insurance costs for certain unemployed individuals and unreimbursed expenses exceeding 7.5% of AGI · Withdrawals made in equal installments over the account holder's life expectancy |
|
Koehler Financial Services, Inc. a Registered Investment Advisor offers a wide range of programs and service plans to meet your needs. |
SMALL BUSINESS RETIREMENT PLANS
A simple yet powerful way to save for your future
Whether you're a consultant working for yourself or a business with employees, we have a wide range of retirement plans to meet your needs.
Distributions from retirement accounts before the age of 59½ may result in a 10% early withdrawal penalty. Where specific advice is necessary or appropriate, Koehler Financial Services, Inc. a Registered Investment Advisor recommends consultation with a qualified tax advisor or CPA.
Consider an Individual 401(k)
An Individual 401(k)
is a retirement plan designed for self-employed individuals and
owner-only businesses who want to make substantial contributions
towards their retirement. |
|
|
|
Who’s It for? |
An Individual 401(k) may be best for employers who:
·
Are
self-employed or owner-only businesses with no employee
- Or have worked less than 1,000 hours in the year
beginning
·
Need to
make contributions that are larger than what can · Want flexibility in the amount contributed annually · Want an easy-to-administer, low-cost plan |
Establishing a Plan |
|
Plan Establishment |
Plan must be established by December 31, or fiscal year-end, whichever comes first. |
Contribution Deadline |
Profit-sharing contributions are due by the business tax-filing date plus extensions. Salary deferrals generally must be made by end of business tax year. |
Tax Advantages |
|
Contributions |
Tax-deductible |
Earnings |
Tax-deferred (taxed when you withdraw them) |
Withdrawals |
Taxable |
Eligibility |
|
An Individual 401(k) is available to sole proprietors or business
owners (including S and C corporations and partnerships) with no
employees other than a spouse. |
|
Contributions |
|
Funding Requirements |
Plan is funded with a combination of salary deferrals and annual
profit-sharing contributions. |
Annual Contribution Amounts |
· Allows profit-sharing contributions up to 25% of your self-employment income, up to a maximum of $50,000 for 2012. · Plus, a pre-tax salary deferral of up to $17,600 for 2012. Individuals age 50 or over may make an additional catch-up contribution of $4,900 for tax year 2012. · Maximum combined contribution, including salary deferral cannot exceed $50,000 for 2012. |
Vesting |
Immediate |
Withdrawals |
|
Distributions |
Participant must have a triggering event (generally termination of
employment or retirement) to take a distribution. In-service
withdrawals may be available after age 59½ or in case of hardship.
|
Penalty |
If you do not start RMDs when required or take less than the
required amount, you will face a 50% penalty. |
Exceptions to 10% Penalty |
Rollover of distribution to another plan or IRA |
Managing Your Individual 401(k) |
|
Tax Filings |
When your plan balance reaches $100,000 or more, you are required by law to file Form 5500-EZ annually. |
Personal Defined Benefit Plan
|
|
|
|
Who’s It for? |
Personal Defined Benefit Plan may be best for: · Professionals age 50 or more who can make annual contributions of $60,000 or more for at least five years · Highly compensated business owners, partners and key employees who are in their peak earning years · Business owners with few, if any employees · Individuals who are maximizing funding in their current retirement plan and are looking for a way to quickly increase their retirement assets |
Establishing a plan |
|
Establishment Deadline |
Plan must be opened by the end of your business’s fiscal year (usually December 31) to make contributions for that tax year. |
Tax Advantages |
|
Contributions |
100% tax-deductible (within IRS limits) |
Earnings |
Tax-deferred (taxed when you withdraw them) |
Withdrawals |
Taxable |
Contributions |
|
Contribution Levels |
Annual contribution levels are calculated based on several factors
including age, compensation and retirement age. Plan contributions
are adjusted each year (when necessary) to help you reach your
retirement savings goal. |
Funding Requirements |
Plan is funded with employer contributions only. |
Vesting |
Choice of immediate or delayed vesting, but no more than 3-year cliff or 6-year graded |
Distributions |
|
Penalty-Free |
Distributions may be received upon retirement or termination of
service. |
Penalty |
Unauthorized disbursements from the account may result in plan
disqualification, federal tax penalties or other liabilities. |
Exceptions to 10% Penalty |
Rollover of distribution to another plan or IRA |
Recordkeeping |
|
Koehler Financial will assist you in finding a qualified recordkeeping and servicer for your plan: · Compilation of annual actuarial calculations · Preparation of annual IRS Form 5500 or 5500EZ · Calculation of eligible distributions when plan participants retire or leave your company |
1. Eligible employees are those who are age 21 or older and who have worked at least 1,000 hours during the year. Union employees may be excluded. Participation may require completion of one year of service, or 2 years of service if vesting is immediate.
SIMPLE IRA
Provides and easy and economical way to establish a retirement
program for you and up to 100 employees. |
|
|
Who’s It for? |
A SIMPLE IRA may be appropriate for businesses: · With 100 or fewer employees who don’t currently have another retirement plan · With steady income who can meet mandatory contribution requirements · That have employees who may wish to make salary-deferral contributions · Seeking a low-cost plan that’s easy to administer and maintain · Wishing to retain valuable employees with a retirement plan that both you and your employees can contribute to |
Establishing a Plan |
|
Plan Establishment |
In order to fund a plan for the current year, the employer must establish the plan before October 1 of that year. |
Contribution Deadline |
Employer contributions must be made annually by the employer’s
tax-filing deadline, including extensions. |
Plan Administration |
No IRS filing or tax reporting and no compliance testing |
Tax Advantages |
|
Contributions |
Tax-deductible |
Earnings |
Tax-deferred (taxed when you withdraw them) |
Withdrawals |
Taxable |
Eligibility |
|
Employers
with 100 or fewer employees (including self-employed individuals).
Companies maintaining and contributing to another employer-sponsored
retirement plan in the same year are not eligible. |
|
Contributions |
|
Funding the Plan |
Plan is funded with contributions deducted from your employees’
salaries as well as with annual employer contributions. |
Annual Contribution Amounts |
Employees: · Up to 100% of compensation or a maximum of $11,5002 for tax year 2012. · Participants age 50 and over may contribute up to $14,000 for tax year 2012.2
· Match employee salary contributions dollar-for-dollar up to 3% of compensation (can be reduced to 1% in any two out of five years3) · Or make a non-elective contribution of 2% of compensation for all eligible employees (including those who decide not to contribute for themselves) · Or match only 1% in any two out of five years3 |
Vesting |
100% Immediate |
Withdrawals |
|
Penalty-Free |
Withdrawals after age 59½ |
Penalty |
If you do not start Required Minimum Distribution (RMD) withdrawals
by age 70½, you will face a 50% penalty. Special distribution rules
may apply. |
Exceptions to 10% Penalty |
Rollover of distribution to another IRA or employer plan. |
1. You may set a lower minimum compensation amount if you
want to allow more employees to
participate.
2. May be adjusted for inflation in future years.
3. Providing you notify employees of the lower percentage match by
November 1 preceding the
plan year.
DEATH BENEFITS
Most variable annuities offer some form of guaranteed death benefit in the base contract at not additional charge. This can be as simple as guaranteeing that the value at death will be at least the amount invested, minus any withdrawals (hereafter referred to as net premiums), and can include some other metric such as capturing the highest value on any contact anniversary. In general, and with all else equal, the more levels of guarantee that are built into the standard death benefit, the higher the base contract fee.
OPTIONAL DEATH BENEFITS
There are three broad categories of these: the maximum anniversary value (MAV), which guarantees that the death benefit will be no less than the highest value achieved on any contract anniversary; the rising floor, which guarantees a minimum value at death equal to net premiums compounded at a notional rate of interest; and the earnings enhancement (EEB), which pays some percentage of earnings (40% is typical) in addition to the contract value at death. One can also find combinations of death benefit value calculations within a single option, such as a benefit that guarantees the greater of the maximum anniversary value or the compounded (rising floor) value.
A feature that is becoming more common is spousal continuation, where the contract owner's spouse can continue the contract, with the account value adjusted for the death benefit value (to the extent that the death benefit value exceeds actual account value). Look carefully at the death benefit structure to understand any limitations: the guaranteed value may be capped at 200% or 250% of net premiums or the guaranteed amount may either stop accruing or change significantly at more advanced ages, typically 80 or 85.
Maximum Anniversary Value
MVA death benefits can be structured various ways. The most common is simply a look back to the highest value on any contract anniversary date, but this can also be done at other intervals, such as five years instead of annually. Often the look back will stop at age 80, meaning that if the contract owner dies at age 90 the value of the death benefit will be the greater of current value, net premiums, or the highest value on any anniversary prior to the owner's 81st birthday.
Rising Floor
The benefit value is equal to the greater of net premiums, current value or net premiums compounded at a stated rate, typically 6%. The 6% compounding creates a notional dollars amount that has no value other than as a death benefit payment. The compounding of the death benefit value generally stops at age 80 or 85. Compounding rates can differ, generally ranging from 3% to 7%, but 5% and 6% are common.
Earnings Enhancement Bonus
The EEB is intended to offset the tax consequences of the death benefit payment. The typical structure adds 40% of earnings to the account value to arrive at the total death benefit payment. The 40% typically drops to 25% after a certain age, often 80.
LIVING BENEFITS
While direct statistics are hard to come by, living benefits appear to be a significant driver of variable annuity sales. There are three broad types: the guaranteed minimum withdrawal benefit (GMWB), which guarantees that a fixed dollar amount can be withdrawn each year until net premiums have been completely recovered by the policyholder, regardless of the actual account value; the guaranteed minimum income benefit (GMIB), which guarantees that a minimum value can be annuitized after a set waiting period; and the guaranteed minimum accumulation benefit (GMAB), which guarantees that the account balance of the VA will be equal to net premiums after a defined period.
Often, but not always, living benefit guarantees require the owner to elect and adhere to an asset allocation model or full investment in a fund-of-funds. Where these options aren't required, investors may be prohibited from buying very aggressive, high beta investments. Insurers use such investment allocation practices to manage the risk of providing these guarantees.
Guaranteed Minimum Withdrawal Benefit
The GMWB gives the investor the right to withdraw a fixed dollar amount every year until net premiums have been recaptured, regardless of performance. The dollar amount is calculated as a percentage of the initial investment. Withdrawals are not cumulative (i.e., one cannot withdraw less in one year and make it up the next).
Recent innovations in this benefit include providing the withdrawal guarantee for life rather than only until net premiums are recovered, the addition of step-up features and extending the "for life" benefit to cover a spouse. The "for life" GMWB generally reduces the percentage of net premiums that can be withdrawn each year to 5%, but guarantees that the annual withdrawal can be take for life, regardless of actual account value.
The "for life" GMWB is essentially to attempt by the industry to solve the problem of creating guaranteed lifetime income without risk pooling, i.e., without requiring the investor to give up control over a large portion of assets. To be sure, exercising that control will generally negate the benefit - that is, taking more than 5% of net premiums will void the lifetime guarantee. The account value, however, remains the property of the contract owner rather than becoming part of the general account of the insurer, so there is certainly far great liquidity.
A GMWB covering more than one life (spousal continuation) is a more recent development introduced in 2006. This GMWB extends the lifetime payment guarantee to a second life, usually a spouse, and the annual charge can exceed the annual charge for the single life GMWB by 50% or more. Finally, many GMWB feature now include step-up provisions, which allow the withdrawal amount to be increased on specified contract anniversaries if the actual account value is higher than the benefit base.
Guaranteed Minimum Income Benefit
The GMIB guarantees that the contract owner can annuitize, or create a lifetime stream of income, using the greater of the account value, net premiums compounded at a declared rate, and/or the highest contract value on any anniversary. There is usually a 10-year waiting period before the investor can exercise the benefit, and 6% is a typical declared rate. This benefit is sometimes called the guaranteed retirement income benefit (GRIB).
Be sure to understand how the annuitization payments are limited - age setbacks and/or alternate payout rate tables are almost always used to set the annuity payout amount. In other words, $100,000 in benefit value will produce a lower annuity payment than $100,000 of actual account value, which is annuitized using the insurer's standard tables. A drawback of this design is the potential for an account value lower than the benefit value to produce a higher annuity payment, which might be hard to explain to a client. And compounding rates of GMIB benefits can vary, so a benefit value compounding at 3% that has more favorable payout rates may produce a higher payment than one with a benefit value that compounds at 6%. The GMIB does provide a floor benefit, but take care to ensure that the client understands the limitations involved.
Guaranteed Minimum Accumulation Benefit
The GMAB guarantees that the account value will be no less than premiums paid after a certain number of years, generally 10. This is the most straightforward living benefit, and also the least widely available. Since it's essentially a lump sum guarantee and lacks the additional risk management of paying out the guaranteed amount over time, it's harder for insurers to hedge the risk.
There are literally dozens of nuances to each of these benefit structures that are not covered here, some of which can materially change the value of the guarantee to your client. As VA features have increased in variety and complexity, it is more important than ever to make sure you understand what is guaranteed, the actions the client must take to elect and maintain the guarantee and in what ways the guarantee is limited.
End Notes
A
Koehler Financial
Services, Inc. holds no customer funds. Koehler Financial
Services, Inc. a
Registered Investment Advisor assists clients with fund selection and risk management.
Securities offered through TD Ameritrade and/or
Koehler Financial, LLC. This announcement
constitutes neither an offer to sell nor a solicitation of an
offer to buy any securities. The
offering is made only by the prospectus. Please read it
carefully before you invest or send
monies. Investment returns and principal values vary,
and you may have a gain or loss when
you sell shares. Koehler Financial Services, Inc. it's
affiliates, subsidiaries and associates do
not practice law. Click here for a copy of our
ADV Part II. Information deemed
accurate but is not guaranteed.