Accounting
Avoid this common retirement blunder
Your clients have worked long and hard their entire adult lives to secure a comfortable retirement, so make certain they don’t make one of the most common mistakes made by a large number of individuals as they contemplate their retirement options.
As they near retirement they’ll set up an appointment with their human resources department, they’ll go over their retirement packet containing three options indicating how much money they can expect to receive each and every month under certain conditions once they retire.
The three options
1. Life only: They can receive the highest monthly income payment guaranteed for the rest of their life if they agree to have the payment end upon their death.
2. Joint and survivor: They can take a reduced percentage payout each month and then have that benefit continue to be paid to their spouse for the rest of their life.
3. Period certain: They can have the payout guaranteed for no less than 10 or 20 years.
Regardless of which of the three options they chose, they have just purchased a Single Premium Immediate Annuity from the insurance company that was accumulating and administratively overseeing the management of the investment assets that were previously in their retirement account. They’ll sign the papers, and their first monthly guaranteed payment will soon begin. Unfortunately, like many of their peers, they’ve just made one of the most common and costly retirement mistakes.
Once a settlement option decision is made, it cannot be changed, so make certain your clients obtain independent assistance. No one has a greater vested interest in their retirement income and the assets that are passed onto the next generation than your client, so guide them to seek professional advice from a knowledgeable professional that you trust. A person that will advise your client of options they probably aren’t aware of.
An alternative option
For example, what they should have done instead, is take option No. 4, which would entail contacting an independent experienced CFP, CLU familiar with the life insurance annuity marketplace. Your client would provide them with the exact dollar amount in their current retirement account, their and their spouse’s ages, and their personal objectives. The advisor’s assignment would be to do an analysis based on the monthly payout each of those other 10-15 similarly rated insurers that do business in this SPIA marketplace would pay, if their account value was transferred to them instead of to the insurer your employer was going to use. What your client will discover is whether the monthly income payment they were initially quoted by their company’s HR department was in fact the highest payout they could obtain in the open marketplace.
The reason this mistake occurs so often is because in most cases human resource administrators are merely doing what’s easiest for them, which is obtaining a quote from the insurance company they happen to be using for their accumulation and administration services. The primary responsibility of human resource pension administrators is to complete their ERISA fiduciary responsibility and get your client off their payroll. It’s not their job to get them the best payout — that’s your client’s job — and you can certainly remind them of that when it comes to other areas such as their life insurance portfolio that they may also not be as familiar with, as they should be.
This professional will shop the entire marketplace with the intent of obtaining the best available offer from among many other A+ rated insurers. Once the decision has been made as to which A+ insurer is offering the highest annual payout, the next step is to consider a Roth IRA, or a traditional IRA and open the one that makes the most sense for your client. Then have the funds directly transferred on a trustee-to-trustee basis, which would avoid any taxes and allow the principal to continue to grow tax deferred.
It’s been my personal experience that shopping the marketplace and doing a direct trustee to trustee transfer to an IRA can often result in a higher monthly payout by as much as 5-6% annually and that’s for the rest of a retiree’s life.
Competition is a wonderful thing if used to your advantage. It’s therefore important that you’re aware of and understand all of your client’s retirement options before they make any of those irreversible retirement decisions.
Some points to keep in mind
An important reason to leave plan funds in the existing employer plan (or roll over to a new company’s plan) is federal creditor protection under ERISA. ERISA plans offer complete protection in bankruptcy and against non-bankruptcy creditors. Once plan funds are rolled over to IRAs, creditor protection is based on state law.
A significant benefit for clients who are still employed is the ability to delay required minimum distributions. Most company plans allow participants to delay RMDs beyond age 73 until retirement through the “still-working” exception. IRAs offer no such exception.
One downside about leaving funds in the 401(k) is a lack of control, and the plan will not offer as wide an array of investment or estate planning options as IRAs do.
A compelling reason to remain in the company plan is if your portfolio consists of highly appreciated company stock in the 401(k). Doing so will eventually allow the appreciation to be taxed at more favorable long-term capital gain rates rather than as ordinary income, which is how those funds would be taxed if rolled over to and then withdrawn from an IRA.
An IRA rollover often allows for more flexibility, control and options during life as well as at death. There are more customized investment options available within IRAs, and it will be easier to manage their RMDs.
Annuities to supplement retirement income
There are several other highly effective uses of a Single Premium Immediate Annuity to supplement your or your client’s retirement such as diversifying your portfolio by guaranteeing that you receive a set payout regardless of the stock, bond, or interest rate fluctuations for the rest of your life. In addition, a retiree could make deposits to several Single Premium Deferred Annuities over and above their 401, 403 or other retirement/pension deposits to allow these deposits to continue to grow and accumulate on a tax deferred basis. Purchasing several SPDAs while in your forties to fifties allows the annuitant to have these assets continue to accumulate individually and then if or when the retiree wants to increase their income to adjust for inflation, they merely annuitize one of their SPDAs into an SPIA. This strategy gives the annuitant the ability to accumulate retirement assets most efficiently and then when needed, control the flow of their income on a tax preferential basis as there is an exclusionary ratio to offset a percentage of the income they receive.
Recognizing we’re currently experiencing the highest interest rates we’ve seen in two decades, and on the precipice of beginning to anticipate the Federal Reserve soon reducing interest rates, this could be a good time to lock these higher rates in either a SPDA for three to five years, or into an SPIA for an individual’s lifetime
Life insurance and settlement options
When considering a client’s or your choices one should always consider and evaluate the option of taking the higher, life-only payout and use the difference between that option and the joint and survivor option, net after taxes, to purchase a life insurance contract on the retiree’s life so the income from the death benefit is sufficient to provide an equivalent or greater payout than the joint and survivor option would provide.
The benefit of doing so is that a client may not only able to increase their monthly guaranteed retirement income, but they will also be able to either continue the income from the investment return on the tax-free death benefit proceeds of the life insurance policy on their life to their children at their and their spouse’s passing or give them the balance of the death benefit as a legacy gift.
Keep in mind that the prime benefit for implementing this option is that the joint and survivor option payout ends at your spouse’s subsequent passing. This combination strategy keeps on giving long after the retiree and their spouse have passed.
To make this strategy even more beneficial to your or a client’s planning, keep in mind that if your client takes the joint and survivor option and your client’s spouse passes before they do, the client would have given up the difference between the two options and never receive the benefit of providing their spouse with continued income. Utilizing the strategy described above would give the client the opportunity to discontinue the premium payment for the life insurance on their life and add the savings of the premium to supplement your client’s retirement income.
Use the correct type of life insurance
When utilizing this or any strategy involving life insurance coverage make certain that your client selects a permanent policy that will guarantee your premium, and death benefit to at least age 92-95, as you don’t want this coverage to expire before they do. Such would be the case if you made the mistake of selecting an association group term, or any term policy when exercising the life insurance and life only payout strategy.
The cost of association group term coverage is considerably less expensive than any other form of life insurance coverage up to age 40-45. But, the association group term premium increases significantly each and every five-year period over age 50 and it becomes exorbitantly expensive at ages 65-75. Further, the coverage gets reduced by 50% at age 75 and expires as do all term policies at age 80. Which accounts for why only 2% of term life insurance policies are ever paid out as a death claim. A money maker for the insurance companies, but not the right strategy for the retiree nor their family. If one wants to maintain life insurance coverage beyond age 80, they would be far better off if they were to consider a 20- or 30-year Guaranteed Fixed Term policy in their 50s or 60s rather than one that increases every five years. Then in the last 10 years of their coverage they should convert a percentage of their death benefit from the term policy into a permanent Guaranteed Universal policy, which should last into their late 80’s or 90’s. Since the cost of life insurance increases each year, the earlier they convert, the less expensive is the cost. One of the most significant benefits of term insurance is the ability to convert to a permanent policy without any medical questions asked.
Plan ahead to enhance your client’s future retirement
If you, or your client, are already maxed out of the allowable contributions to a 401(k) or SEP IRA and still want to supplement their future retirement income, but your or your client’s current income is too high to qualify? You should consider utilizing the tax-deferred accumulation benefits of a high cash value low death benefit type of a life insurance policy instead of a traditional Roth. The reason being that you get all of the tax-deferred benefits of a Roth plus the ability to withdraw the accumulated income on a tax-free basis through a series of surrenders of cash value and loans that never have to be paid back, as long as the life insurance policy survives the insured. Doing so also avoids any RMDs, thus allowing the tax-deferred accumulation to continue for a longer period of time. Lastly, using a life insurance policy to accumulate supplemental assets at retirement rather than a Roth account using mutual funds or other investments, also provides a client’s family the significant benefit of a leveraged tax-free death benefit.
Lastly, advise your clients over age 70 to never let their life insurance expire or turn it into the insurance company for its cash value without first seeing if your client can get a higher payout using an alternate exit strategy called a life settlement, where an individual sells their life insurance policy to an institutional investor through a licensed settlement broker for a significantly higher payout and uses those proceeds to supplement their retirement income.
The point being that you should make your clients aware of all the various options and available alternative strategies that can be used to increase their retirement income as well as provide a lasting legacy for the next generation well before a client turns 50 and certainly well before they make any final decisions regarding their distribution options at retirement.
The Financial Accounting Standards Board met this week to discuss its projects on accounting for transfers of cryptocurrency assets and enhancing the disclosures around certain digital assets, such as stablecoins.
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During Wednesday’s meeting, FASB’s board made certain tentative decisions, according to a
At a future meeting, the board plans to consider clarifying the derecognition guidance for crypto transfer arrangements to assess whether the control of a crypto asset has been transferred.
FASB also began deliberations on the
The board decided to provide illustrative examples in Topic 230, Statement of Cash Flows, to clarify whether certain digital assets such as stablecoins can meet the definition of cash equivalents. It also decided to include the following concepts in the illustrative examples:
- Interpretive explanations that link to the current cash equivalents definition;
- The amount and composition of reserve assets; and,
- The nature of qualifying on-demand, contractual cash redemption rights directly with the issuer.
FASB plans to clarify that an entity should consider compliance with relevant laws and regulations when it’s creating a policy concerning which assets that satisfy the Master Glossary definition of the term “cash equivalents“ will be treated as cash equivalents.
“I agree with the staff suggestion to look at examples,” said FASB vice chair Hillary Salo. “From my perspective, I think that is going to help level the playing field. People have been making reasonable judgments. I agree with that. And I think that this is really going to help show those goalposts or guardrails of what types of stablecoins would be in the scope of cash equivalents, and which ones would not be in the scope of cash equivalents. I certainly appreciate that approach, and I think it has the least potential impact of unintended consequences, because I do agree with my fellow board members that we shouldn’t be changing the definition of cash equivalents, and it’s a high bar to get into the cash equivalent definition.”
“I’m definitely supportive of not changing the definition of cash equivalents,” said FASB chair Richard Jones. “I believe that’s settled GAAP in a way, and we’re not really seeing a call to change it for broader issues. I am supportive of the example-based approach. The challenge with examples, though, is everybody’s going to want their exact pattern, but that’s not what we’re doing.”
The examples will explain the rationale for how digital assets such as stablecoins do or do not qualify as cash equivalents and give a roadmap for other types of digital assets with varying fact patterns to be able to apply.
“We really don’t want to be as a board facing a situation where something was a cash equivalent and then no longer is at a later date,” said Jones. “That’s not good for anyone, so keeping it as a high bar with certain rigid criteria, I think, is fine.”
Stablecoins are supposed to be pegged to fiat currencies such as U.S. dollars and thus provide more stability to investors. “In my view, while a stablecoin may meet the accounting definition established for cash equivalents, not every one of those stablecoins in the cash equivalent classification represents the same level of risk,” said FASB member Joyce Joseph.
She noted that the capital markets recognize the distinctions and have established a Stablecoin Stability Assessment Framework to evaluate a stablecoin’s ability to maintain its peg to a fiat currency. Such assessments look at the legal and regulatory framework associated with the stablecoin, and provide investors with information that could enable them to do forward-looking assessments about the stability of the stablecoin.
“However, for an investor to consider and utilize such information for a company analysis the financial statement disclosures would need to include information about the stablecoin itself,” Joseph added. “In outreach, the staff learned that investors supported classifying certain stablecoins as cash equivalents when transparent information is available about the entities at which the reserve assets are held. Therefore, in my view, taking all of this into consideration a relevant and informative company disclosure would include providing investors with the name of the stablecoin and the amount of the stablecoin that is classified as a cash equivalent, so investors can independently assess the liquidity risks more meaningfully and more comprehensively by utilizing broader information that is available in the capital markets and its emerging information.”
Such information could include the issuer, reserves, governance and management, she noted, so investors would get a more holistic look at the risks that holding the stablecoin would entail for a given company.
The board decided to require all entities to disclose the significant classes and related amounts of cash equivalents on an annual basis for each period that a statement of financial position is presented.
Entities should apply the amendments related to the classification of certain digital assets as cash equivalents on a modified prospective basis as of the beginning of the annual reporting period in the year of adoption.
FASB decided that entities should apply the amendments related to the disclosure of the significant classes and amounts of cash equivalents on a prospective basis as of the date of the most recent statement of financial position presented in the period of adoption.
The board will allow early adoption in both interim and annual reporting periods in which financial statements have not been issued or made available for issuance.
FASB also decided to permit entities to adopt the amendments to be illustrated in the examples related to the classification of certain digital assets as cash equivalents without the need to perform a preferability assessment as described in Topic 250, Accounting Changes and Error Corrections.
The board directed the staff to draft a proposed accounting standards update to be voted on by written ballot. The proposed update will have a 90-day comment period.
Senators introduced several pieces of tax-related legislation this week, including measures aimed at improving customer service at the Internal Revenue Service, cracking down on tax evasion and curbing the carried interest tax break, in addition to efforts in the House to repeal the Corporate Transparency Act.
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Senators Bill Cassidy, R-Louisiana, and Mark Warner, D-Virginia, teamed up on introducing a bipartisan bill, the
The bill would establish a dashboard to inform taxpayers of backlogs and wait times; expand electronic access to information and refunds; expand callback technology and online accounts; and inform individuals facing economic hardship about collection alternatives.
“Taxpayers deserve a simple, stress-free experience when dealing with the IRS,” Cassidy said in a statement Wednesday. “This bill makes the process quicker and easier for taxpayers to get the information they need.”
He also mentioned the bill during a
“I’m happy to meet with the team … and do all I can to make it as good as you want it to be,” said Bisignano.
“My bill would equip the IRS with the legislative mandate to create an online dashboard so that taxpayers can monitor average call wait time and budget time accordingly,” said Cassidy. He noted that the bill would allow a callback for taxpayers that might need to wait longer than five minutes to speak to a representative, and establish a program to identify and support taxpayers struggling to make ends meet by providing information about alternative payment methods, such as installments, partial payments and offers in compromise.
“I know people are kind of desperate and don’t know where to turn for cash, so I think this could really ease anxiety,” he added. “This legislation is bipartisan and is likely to pass this Congress.”
Cassidy and Warner
“Taxpayers shouldn’t have to jump through hoops to get basic answers from the IRS — and in the last year, those challenges have only gotten worse,” Warner said in a statement. “I am glad to reintroduce this bipartisan legislation on Tax Day to ease some of this frustration by increasing clear communication and making IRS resources more readily available.”
Stop CHEATERS Act
Also on Tax Day, a group of Senate Democrats and an independent who usually caucuses with Democrats teamed up to introduce the Stop Corporations and High Earners from Avoiding Taxes and Enforce the Rules Strictly (Stop CHEATERS) Act.
Senate Finance Committee ranking member Ron Wyden, D-Oregon, joined with Senators Angus King, I-Maine, Elizabeth Warren, D-Massachusetts, Tim Kaine, D-Virginia, and Sheldon Whitehouse, D-Rhode Island. The bill would provide additional funding for the IRS to strengthen and expand tax collection services and systems and crack down on tax cheating by the wealthy.
“Wealthy tax cheats and scofflaw corporations are stealing billions and billions from the American people by refusing to pay what they legally owe, and far too many of them are getting a free pass because Republicans gutted the enforcement capacity of the IRS,” Wyden said in a statement. “A rich tax cheat who shelters mountains of cash among a web of shell companies and passthroughs is likelier to be struck by lightning than face an IRS audit, and Republicans want to keep it that way. This bill is about making sure the IRS has the resources it needs to go after wealthy tax cheats while improving customer service for the vast majority of American taxpayers who follow the law every year.”
Earlier this week. Wyden also
The Stop CHEATERS Act would provide the IRS with additional funding for tax enforcement focused upon high-income tax evasion, technology operations support, systems modernization, and taxpayer services like free tax-payer assistance.
“As Congress seeks ways to fund much-needed policy priorities and address our growing national debt, there is one common sense solution that should have unanimous bipartisan support: let’s enforce the tax laws already on the books,” said King in a statement. “Our legislation will make sure the IRS has the resources it needs to confront the gap between taxes owed and taxes paid – while ensuring that our tax enforcement professionals are focused on the high-income earners who account for the most tax evasion. This is a serious problem with an easy solution; let’s pass this legislation and make sure every American pays what they owe in taxes.”
Carried interest
Wyden, King and Whitehouse also teamed up on another bill Thursday to close the carried interest tax break for hedge fund managers that
Carried interest is a form of compensation received by a fund manager in exchange for investment management services, according to a
Under the bill, the
“Our tax code is rigged to favor ultra-wealthy investors who know how to game the system to dodge paying a fair share, and there is no better example of how it works in practice than the carried interest loophole,” Wyden said in a statement. “For several decades now we’ve had a tax system that rewards the accumulation of wealth by the rich while punishing middle-class wage earners, and the effect of that system has been the strangulation of prosperity and opportunity for everybody but the ultra-wealthy. There are a lot of problems to fix to restore fairness and common sense to our tax code, and closing the carried interest loophole is a great place to start.”
Repealing Corporate Transparency Act
The House Financial Services Committee is also planning to markup a bill next Tuesday that would fully repeal the Corporate Transparency Act, which has already been significantly
If enacted, the repeal would eliminate beneficial ownership reporting requirements, removing a transparency measure designed to help law enforcement and national security officials identify who is behind U.S. companies.
“This repeal would turn the United States back into one of the easiest places in the world to set up anonymous shell companies, something Congress worked for years to fix,” said Erica Hanichak, deputy director of the FACT Coalition, in a statement. “These entities are routinely used to facilitate corruption, financial crime, and abuse. Rolling back the CTA doesn’t just weaken transparency, it signals to bad actors around the world that the U.S. is once again open for illicit business.”
The Internal Revenue Service rarely penalizes taxpayers who have high balances in foreign bank accounts and fail to file the proper forms, according to a new report.
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The
Taxpayers with specified foreign financial assets that meet a certain dollar threshold are also required to report the information to the IRS by filing Form 8938. Failure to file the form can result in penalties of up to $60,000. However, TIGTA’s previous reports have demonstrated that the IRS rarely enforces these penalties.
The IRS created an Offshore Private Banking Campaign initiative to address tax noncompliance related to taxpayers’ failure to file Form 8938 and information reporting associated with offshore banking accounts, but it’s had limited success.
Even though the initiative identified hundreds of individual taxpayers with significant foreign bank account deposits who failed to file Forms 8938, the campaign only resulted in relatively few taxpayer examinations and a small number of nonfiling penalties. The campaign identified 405 taxpayers with significant foreign account balances who appeared to be noncompliant with their FATCA reporting requirements.
The IRS used two ways to address the 405 noncompliant taxpayers: referral for examinations and the issuance of letters to them.
- 164 taxpayers (who had an average unreported foreign account balance of $1.3 billion) were referred for possible examination, but only 12 of the 164 were examined, with five having $39.7 million in additional tax and $80,000 in penalties assessed.
- 241 noncompliant taxpayers (who had an average unreported account balance of $377 million) received a combination of 225 educational letters (requiring no response from the taxpayers) and 16 soft letters (requiring taxpayers to respond). None of the 241 taxpayers were assessed the initial $10,000 FATCA nonfiling penalty.
“While taxpayers can hold offshore banking accounts for a number of legitimate reasons, some taxpayers have also used them to hide income and evade taxes,” said the report.
Significant assets and income are factors considered by the IRS when assessing whether taxpayers intentionally evaded their tax responsibilities, the report noted. Given the large size of the average unreported foreign account balances, these taxpayers probably have higher levels of sophistication and an awareness of their obligation to comply with the law.
TIGTA believes the IRS needs to establish specific performance measures to determine the effectiveness of the FATCA program. “If the IRS does not plan to enforce the FATCA provisions even where obvious noncompliance is identified, it should at least quantify the enforcement impact of its efforts,” said the report. “This will ensure that IRS decision makers have the information they need to determine if the FATCA program is worth the investment and improves taxpayer compliance.
TIGTA made three recommendations in the report, including revising Campaign 896 processes to include assessing FATCA failure to file penalties; assessing the viability of using Form 1099 data to identify Form 8938 nonfilers; and implementing additional performance measures to give decision makers comprehensive information about the effectiveness of the FATCA program. The IRS disagreed with two of TIGTA’s recommendations and partially agreed with the remaining recommendation. IRS officials didn’t agree to assess penalties in Campaign 896 or with implementing performance measures to assess the effectiveness of the FATCA program.
“From our perspective, TIGTA’s conclusions regarding IRS Campaign 896 are based, in part, on a misguided premise and overgeneralizations, including the treatment of ‘potential noncompliance’ as tantamount to ‘egregious noncompliance’ that warrants a monetary penalty without contemplating the variety of justifications that may exempt a taxpayer from having to file Form 8938,” wrote Mabeline Baldwin, acting commissioner of the IRS’s Large Business and International Division, in response to the report.
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