Maxed out on IRA?

The Covington News - - BUSINESS -

Many peo­ple rely on their IRAs and 401(k) plans to help them pay for their re­tire­ment years — and for good rea­son, be­cause IRAs and 401(k)s are ex­cel­lent re­tire­ment-sav­ings ve­hi­cles. But once you reach the point where you are con­tribut­ing the max­i­mum amount to your IRA and 401(k) each year, what else can you do to build re­sources for re­tire­ment? You might want to con­sider an­nu­ities and cash value in­sur­ance.

An­nu­ities

When you buy a fixed an­nu­ity, the in­sur­ance com­pany puts your funds into fixed in­come in­vest­ments, such as bonds. Your prin­ci­pal is guar­an­teed, and the in­sur­ance com­pany pays you an in­ter­est rate that is also guar­an­teed for a cer­tain pe­riod of time. At the end of the guar­an­tee pe­riod, the in­surer ad­justs the guar­an­teed in­ter­est rate up­ward or down­ward.

If you’d like the po­ten­tial to earn more than you can re­ceive from a fixed an­nu­ity, you might want to con­sider a vari­able an­nu­ity. When you pur­chase a vari­able an­nu­ity, you place your money in var­i­ous ac­counts that can be made up of stocks, bonds and other se­cu­ri­ties. You choose how to al­lo­cate your in­vest­ment dol­lars, based on your risk tol­er­ance and time hori­zon. (Keep in mind, though, that this in­vest­ment is called “vari­able” for a rea­son; your ac­count bal­ance will fluc­tu­ate along with the fi­nan­cial mar­kets, and there’s no guar­an­tee you will get back your en­tire prin­ci­pal. Fur­ther­more, var­i­ous fees are as­so­ci­ated with in­vest­ing in vari­able an­nu­ities.)

With ei­ther a fixed or vari­able an­nu­ity, you won’t pay taxes on your earn­ings un­til you be­gin tak­ing with­drawals. Be aware though, that if you are younger than 59-1/2 when you start tak­ing with­drawals, you will have to pay a 10 per­cent tax penalty in ad­di­tion to or­di­nary in­come tax on the amount with­drawn.

Apart from tax de­fer­ral, an­nu­ities of­fer at least one other key ben­e­fit: flex­i­bil­ity in tak­ing your pay­ments. You can ac­cept dis­tri­bu­tions as a lump sum, spread them out over a cer­tain num­ber of years or cre­ate an in­come stream for the rest of your life — or even your life and that of your spouse.

Cash value

When you buy per­ma­nent in­sur­ance, also known as “cash value” in­sur­ance, part of your pre­mium pays for the death ben­e­fit (the amount that goes to your ben­e­fi­ciary), but some of the pay­ment goes to help build cash value — and this money grows on a tax-de­ferred ba­sis, sim­i­lar to an­nu­ities, your tra­di­tional IRA and your 401(k).

You can choose from a variety of cash-value in­sur­ance poli­cies. In build­ing cash value, some of th­ese poli­cies rely on vari­able in­vest­ments, such as stocks. Con­se­quently, your cash value will fluc­tu­ate over time, and, as is the case with vari­able an­nu­ities, you could lose some of your prin­ci­pal. How­ever, you can also choose va­ri­eties of cash­value in­sur­ance, such as whole life or uni­ver­sal life, that typ­i­cally pay guar­an­teed rates of re­turn.

To ac­cess your cash value, you can can­cel or sur­ren­der your pol­icy (al­though, if you sur­ren­der it within a few years of pur­chas­ing it, you may have to pay sur­ren­der charges) or you can bor­row from your pol­icy and pay your­self back with in­ter­est.

Ul­ti­mately, you can pro­vide a sig­nif­i­cant boost to your re­tire­ment sav­ings by in­vest­ing in an­nu­ities and cash value in­sur­ance. So, give them some con­sid­er­a­tion once you’ve hit the “ceil­ing” on your 401(k) and IRA.

Tom Sch­midt

In­vest­ment Rep­re­sen­ta­tive

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