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March 1994

Wink Tax Services




Financial decisions made in retirement will have a long-term effect on your financial well being. Some of the more important considerations include:


Participants in profit-sharing or 401(k) plans must decide whether to receive a lump-sum distribution or an annuity with monthly payments. Individuals whose retirement benefits result solely from a defined benefit pension plan will probably receive monthly distributions, but must choose among several options.

While annuities assure you of a fixed monthly income, inflation can seriously erode the purchasing power of this income over the years. With a lump-sum distribution, you can make your own investment decisions.

The most common forms of annuities include "life only," which pays a certain monthly amount until your death; "joint and survivor," which will also pay a certain amount to your spouse after your death ( not necessarily the same amount that you will receive); and "life and period certain," which pays a certain amount for your life or for a specific time period, whichever is longer. The "life only" option will provide the highest monthly benefit. The portion of the monthly payment that is attributable to employer contributions and deferred earnings is taxable.

Tax laws regarding lump-sum distributions are very complicated and should be carefully evaluated before you receive your distribution. After-tax contributions made to the plan are tax free, but several options are available for the remainder of the distribution:

1. Include all of the proceeds in your taxable income for the current year, subjecting them to taxes at your top tax rate.

2. Roll the distribution over into an IRA, avoiding taxation until the funds are withdrawn. Be aware that new tax laws effective January 1, 1993, have significantly changed the procedures for these rollovers, so you should exercise this option with caution.

3. Use five- or ten-year forward averaging to calculate your tax bill. If your distribution is your entire interest in the plan, you have participated in the plan for at least five years, you receive the distribution after you leave your job, and you are at least 59 ˝, you can use forward averaging to lessen the tax bite. This can only be used once during your lifetime.

Keep in mind that most distributions made before the age of 59 ˝ are subject to a 10% penalty on the taxable portion of the distribution. Also, taxable annual distributions exceeding $150,000 or lump sum distributions exceeding $750,000 are subject to a 15% excise tax on the excess.


Although normal retirement age for Social Security is 65, you can retire as early as age 62 with reduced benefits or wait until as late as age 70 to increase benefits. Reductions for early retirement equal 5/9 of 1 percent for each month ( or 6 2/3% annually) prior to age 65, while increases for late retirement range from 3.5% annually to 8% annually. Waiting until age 70 to retire will result in a 17.5% to 32.67% increase, depending on the year you were born.


You can take distributions from your IRA without penalty after age 59 ˝. After age 70 ˝, you must take mandatory distributions or pay a 50% penalty on the amount you should have withdrawn. But between the ages of 59 ˝ and 70 ˝, you can decide every year how much to withdraw. Funds withdrawn from your IRA are fully taxable in the year of distribution, unless made with non-deductible contributions.


You should review your investments as you approach retirement age. You may find that you need to reallocate your investments among different asset classes due to changing personal needs or to ensure monthly distributions to supplement your other income sources.


Once you retire, you may decide to sell major assets such as a home or investment property. Before selling, investigate whether an installment sale would be more advantageous, since you can recognize the gain from the sale over several years.

When selling your personal residence, be sure to consider the once-in-a-lifetime exclusion of $125,000 of gain from taxable income. You can elect to exclude the gain if you are at least 55 before the date of the sale and have owned and used the property as your principal residence for at least three of five years proceeding the sale.

Many of the financial decisions facing you as you approach retirement will have a significant impact on the quality of your retirement years. If you’d like help with these decisions, feel free to give us a call.


Looking for an indication of where the economy is heading? You may want to take the lead of the Federal Reserve and start following statistics on the growth of money supply.

Why is the Federal Reserve (the Fed) so interested in money supply growth? Money supply influences interest rates, and money and credit are the basic fuel for economic growth. If money and credit grow too slowly, recession or even depression may result. If money and credit grow too quickly, inflation and higher interest rates can follow, which hurts businesses and consumers and can also lead to a recession.

There are various measures of money supply. The narrowest, M1, consists of checking account deposits, traveler’s checks, and currency held by the public. M2 is more widely watched and consists of all items contained in M1 plus savings deposits, time deposits under $100,000, over-night repurchase agreements, over-night Eurodollars, money market funds, and money deposit accounts. M3 consists of everything included in M2 plus time deposits over $100,000, institutional money funds, term repurchase agreements, and term Eurodollars. The broadcast measure, L, includes all items in M3 plus bankers’ acceptances, commercial paper, savings bonds, and marketable liquid Treasury obligations.


The Federal Reserve can influence short-term interest rates and money supply in three ways:

1. Purchase/Sale of U.S. Securities in the open market. When the Fed sells U.S. Treasury securities, it removes money from the private economy, reducing the supply of money. When it buys securities, it expands the supply of money.

2. Raise/Lower the Discount Rate. The Fed can raise or lower the discount rate charged to banks in the system. Lowering the rate makes it less expensive for banks to buy money and loan it out and vice versa.

3. Change the Reserve Requirements. The Fed can change its requirements regarding the amount of money banks must retain in relation to their deposits. If they lower the requirements, banks will have more money to loan out and vice versa.

The Fed regularly uses the open market, occasionally uses the discount rate, and rarely uses reserve requirements to influence interest rates and money supply.


Individuals over age 65 generally find that equity in their home is a substantial portion of their net worth. Unfortunately, equity doesn’t provide any income. In order to tap into that equity, you may want to consider one of the following strategies:

Trade down to a smaller home — By selling your current home and purchasing a smaller one, you may be able to lower your housing expenses, convert some equity into a lump sum that can be invested for income, and still leave a house for your heirs.

You may want to time the sale to take advantage of beneficial tax laws — you can exclude up to $125,000 of gain from your tax return if you or your spouse are over 55 and you have lived in your house for at least three of the proceeding five years. This tax benefit can only be used once.

Obtain a reverse mortgage — If you don’t want to sell your current home but need a additional income, consider a reverse mortgage. A reverse mortgage is a loan against the equity in a home that pays a homeowner over age 62 a fixed monthly amount. Repayment of principal and interest is deferred until the house is sold or the borrower dies. Your income will depend on the size of the mortgage and the life expectancies of you and your spouse.

You can receive payments for the rest of your life for a specific term, usually 5 to 20 years. A term loan is normally only appropriate if you intend to sell your home when the loan is due. Some lenders will take all or part of the appreciation in your home that occurs after you obtain the loan, which can significantly increase the cost of the loan.

Sale-leaseback of current home — With a sale-leaseback, you sell your home to an investor and then rent it back from that individual. You will generally receive a 10-20% down payment and give a 15-year mortgage to the buyer. If properly planned, the mortgage payment you receive will be greater than your rental payments. Finding an outside investor may be difficult, making your family the most likely buyer.

Charitable donation — Another alternative is to give a remainder interest in your property to a charitable organization. During your lifetime, you own the property and receive a lifetime annuity from the charity. Once you die, the property transfers to the charity.

There are several ways to tap the equity in your home if income is needed for retirement. Before selecting any, however, make sure you have reviewed all available options.

401(K) FACTS

401(k) plans may become the retirement plan of the future, as indicated by the following statistics:

While 42,000 employers terminated defined-benefit plans between 1989 and 1991, the number of 401(k) plans increased from 0 in 1980 to 100,000 in 1991. (Source: Your Best Money Moves Now, 1993, p. 98)

As of 1991, defined-contribution plans, which include 401(k) plans, equaled 81% of all retirement plans, while defined-benefit plans compromised only 19%. (Source: Your Best Money Moves Now, 1993, p. 98)

It is estimated that in 1991, 95% of all large and medium-sized companies offered 401(k) plans. (Source: Buck Consultants, 1993)

Howard Johnson & Co. estimates that 401(k) plans will provide approximately 50% of retirement income for people retiring in the year 2012, compared to approximately 15% for current retirees. (Source: Fortune, December 28, 1992, p. 78)

Since this is likely to be the case, it is important for participants to take more control of their plans and for employers to make better alternatives available to employees, as indicated by the following statistics:

One quarter of eligible workers do not participate at all in their 401(k) plans. (Source: Kiplinger’s Personal Finance Magazine, May 1993, p. 42)

Of those covered by 401(k) plans in 1988, 81% of those earning over $50,000 were participating in the plan compared to 67% of those earning $30,000 - 49,999, 59% of those earning $25,000-29,999, 57% of those earning $20,000-24,999, 50% of those earning $15,000-19,999, 42% of those earning $10,000-14,999, 33% of those earning $5,000-9,999, and 22% of those earning less than $5,000. (Source: Financial Planning, August 1991, p. K-3)

Responding to a recent survey, 27% of the participants indicated that they must use their 401(k) funds for education, 27% for medical expenses or emergencies, 12% to purchase a home, and 6% for other purposes. (Source: National Underwriter, April 12, 1993, p. 7)

Of those who received a lump sum distribution in 1992 from their pension plan because of retirement or a job change, it is estimated that one-third spent all of it, only 11% rolled the entire balance over to another retirement plan, and the rest saved some and spent some of the distribution. (Source: Employee Benefit Research Institute, Barron’s, July 12, 1993)

A 1992 survey of companies offering 401(k) plans indicates that 10% offer 1-2 investment options, 25% offer 3, 48% offer 4-5, 15% offer 6-10, and 1% offer over 10. (Source: Buck Consultants, Registered Representative, December 1992)

78% of employers did not know what investment management expenses their 401(k) plans incurred. (Source: Fortune, December 28, 1992, p. 78)

With 401(k) plans becoming a more important part of retirement planning, both participants and employers must take a more active role in managing these plans.


Capitalize on your property tax cut!!

Most Michigan homeowners will receive a substantial property tax cut this March 1st, no matter which proposal passes in the coming special vote.

Governor Engler signed into law a requirement last December that all escrow accounts be adjusted, and that the required monthly deposit be dropped automatically 30% be March 1, 1994.

Opportunity – why not take this reduction in your monthly mortgage payment and save it, or better yet invest it.

At an average cut of $50 or more per month, you could accumulate over $600 per year in additional savings.

Don’t let this monthly savings disappear into a black hole of unknown spending.

Call us at (248) 816-1230 to set up a new monthly investment account or to add this option to one of your current accounts (we can make it automatic, no checks to write, no postage, just a simple debit from your checking or savings account).

Remember, we offer all investment opportunities, from Annuities, Stocks & Bonds, Mutual Funds (all funds excluding proprietary), to Pension & Retirement plans.

You can start for as little as $50. Call (248) 816-1230 or (800) 878-4036.

Know where your property tax cut is by saving & investing it.


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We do not offer legal advice. All information provided on this website is for informational purposes only and is not a substitute for proper legal advice. If you have legal questions, we recommend that you seek the advice of legal professionals.

Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

Copyright © 2017 Wink Tax Services / Wink Inc.
Last modified: January 30, 2017