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sschullo

New Heros In 403b Reform Movement

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Hi,

I want to draw attention to a new development in the 403b reform movement. I have been reading and posting to this forum since its inception in early 2000 and before on the 403b forum in Morningstar. The vast majority of folks posting were educators and other non-profit employees asking questions. Once in a great while, a HR person would ask for advice on what to do with their company or district’s plan.

What we have today and I believe for the first time, three individuals who truly care about the best interests of their employees and must be recognized: Warren, Tampagator and gschech.

Folks, you need to realize that these individuals do not have to do this. I would be willing to bet my retirement nest egg that there was no outcry from employees to change 403b providers from the rip off TSAs from large insurance companies to lower cost TIAA CREF or Vanguard. Yet, these folks are trying to convince the powers to be that this is good for the employees. They have repeatedly come back and reported what happen and ask for more suggestions to more forward. This takes courage, guts and persistence to make fundamental change.

Fellows, I am truly impressed with your efforts. I really mean this. I have been fighting with my school district and my union for almost a decade to no avail. Nevertheless, I have not given up, in fact, the conversations you initiated with the good folks on this site have given me some ideas. I am so grateful that our message is spreading to the people that can make the decisions.

Just wanted to acknowledge that your efforts have not gone unnoticed.

Warmest regards,

Steve

3rd grade teacher,

Los Angeles USD

PS I apologize in advance if I have missed the names of other HR folks. If anybody knows of others to be recognized, please let all of us know.

 

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Thank you so much sschullo.

 

I appreciate your comments and it means alot to me. However, the help at this site in the last day or two, help from Vanguard, and a ton of help from the www.Diehards.org (Vanguard DieHards on Morningstar) has really made me push this issue far.

 

To be honest, I think most people are not well educated on this topic. I am thankful that I have an MBA, CPA, and partially on the way to a ChFC designation. I am 32 years old and a huge advocate of maxing out your retirement plans. That is what got me so interested in my company's 403 b plan. I was doing some evaluations of putting money into the plan and rebalancing my portfolio when I dug into VALIC's plan and was SHOCKED. Now I am on a manhunt to get this thing out of VALIC's hand. I now have a passion for it, because its costing us employees a ton of money.

 

You are correct that there has been no outcry from the 750 employees from my company. I have convinced my CEO (direct boss) to look at it and he has me working with the HR director who will be hard to convince. My biggest problem is the CEO and HR director are all scared what the employees are going to think. This year they got a huge increase in Health Insurance Premimums and a crappy raise. Now we are taking away VALIC and putting someone else in. I have to convince my CEO and HR Director to SPEND TIME EDUCATING ARE EMPLOYEES IN ORDER to make the switch. I don't want to just negotiate better rates with VALIC. They have screwed us for years and why just accept it now. My other concern is the issue with the 5% redemption fee which I am working on by getting the contract.

 

Nevertheless, the funny thing is what my CEO has told me. Basically, every YEAR our personnel Committee and Finance Committee spend a ton of time reviewing Health Insurance Plans, Life Insurance Plans, and Disability Insurance Plans but no one has addressed the Retirement PLans since they were started about 25 years ago. I personally don't think anyone understands it much or wants to understand it.

 

I will be fighting this battle as hard as possible for as long as I can. However, I have been fortunate to put a good chunk of my Maxing out retirement plan in my own personal SEP through a publishing company I started 4 years ago. It has allowed me to put more money in there than through my employer's VALIC plan. However, I don't make enough on the side company (based on income & % limits) to put it all on my own in a low cost Vanguard SEP. To be honest, if I can't move out of VALIC I am selfishly looking to starting a Personal 401K through Fidelity (Vanguard doesn't offer yet) to allow me to put all my contributions in the that plan rather than VALIC.

 

I am just SHOCKED at how out of control this entire industry is and how the gov't needs to do something about this. It has really motivated me in the next few years to finish off my financial planning designations, get my series 65 license, and become a fee-based only Financial Planner that will be one of the good ones.

 

Sorry for the rant, but until I accomplish this task of removing VALIC and their pesky/stupid sales rep I will not sleep.

 

Thanks,

 

John (Tampa Gator)

 

 

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Steve,

 

I would like to second your nomination. These three inviduals have brought a real energy and passion to the debate. We welcome them with open arms and hope they continue to share their thoughts and findings.

 

Dan Otter

403(b)wise

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Dan (and others),

 

Does anyone know what has happened to Tim Younkin's "403(b) Advocate" website? It had some excellent articles and other resources/links. I have not been able to access it.

 

Thanks,

 

Alec

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Hi Alec,

 

I agree that Tim had some excellent material on his site. He was a real pioneer in pointing out retirement plan abuses. He was also an early supporter of this site. It seems that he has ceased operating his website. I've been trying to email him for some time to no avial. I would be very interested to see how he is doing.

 

Dan

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I would like to thank everyone for their comments. I've been pushing my company to switch from Valic to TIAA-CREF for over a year now. I think it's finally going to pay off. We should be making the move soon. I'm confident that all employees will benefit from this change. I just encourage all individuals who are going through this process not to give up. It make take a while to convince the decisions makers to make the change, but keep on it and DON"T GIVE UP! I will follow up with new posts to let everyone know how the transistion is going. Good luck to all.

 

Garry

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gschech:

 

Did your VALIC plan have redemption fees? If so, how did you deal with that with transfering plans? We have a 5% redemption fee.

 

In addition, did your VALIC plan have contracts with each individual as oppossed to the company? This is what I believe we have which will make it harder. We might actually have to freeze the old VALIC account for no new contributions and then start the new account with Vanguard, Fidelity, or TIA-CREF.

 

Any suggestions would be appreciated.

 

Thanks,

 

Tampa Gator

 

 

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• Committee Chairmen Sic Congressional Watchdog on Bogus Degrees (The Washington Post, Jul 22, 2003)

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By Stephen Barr

Wednesday, July 23, 2003; Page B02

 

 

The Thrift Savings Plan offers this advice on its Web site to government employees and retirees:

 

"Avoid the crowds. Peak times are 8 a.m. to 4 p.m., eastern time, on business days. The least busy times are between midnight and 6 a.m., eastern time. Weekends are also a good time to access your account."

 

That's not the message that the TSP wanted to post, of course.

 

The notice went up last week, about a month after the Federal Retirement Thrift Investment Board launched a new record-keeping system that has not worked as planned. As Internet access bogged down because of software glitches, employees and retirees turned to the TSP phone line, which was soon overwhelmed. Angry TSP participants reported losing out on home purchases and stock transfers.

 

The system woes have raised questions about whether the TSP can handle the traffic generated by its 3 million participants. Other retirement savings programs and mutual funds face similar demands and appear to deliver quality customer service with fewer hitches, numerous employees have pointed out in recent days.

 

For a window on customer service, the House Government Reform Committee has turned to TIAA-CREF, the retirement savings fund used by many universities and research institutions, for testimony tomorrow. The fund has about 2.6 million participants, which makes it roughly the size of the TSP.

 

The New York firm provides 10 annuity investment options, 19 funds that can be used for individual retirement accounts and 25 mutual funds.

 

Teachers Insurance and Annuity Association College Retirement Equities Fund offers an automated telephone system for members seeking basic account information, a telephone counseling service and an Internet site.

 

The firm's Web site has had about 10 million visitors since the start of the year and has recorded 275,000 transactions, including requests for loans and to move money among accounts. Its automated phone line received about 2 million calls last year; the counseling center served 1.9 million callers. The call centers are in three locations and operate from 8 a.m. to 11 p.m. Eastern time.

 

TIAA-CREF started its telephone service in the early 1980s and began offering daily transactions in the late 1980s, about the time that the TSP was being started. (With the record-keeping system launched a month ago, the TSP has replaced its monthly valuation system with one that allows daily transactions.)

 

Keith Rauschenbach, vice president for consulting services at TIAA-CREF, said the firm's Web center, launched in 1996, experienced some early problems. But the firm typically posts messages to warn users of any limitations and has contingency plans ready to implement, he said.

 

"We provide ourselves with an avenue to back out of something new if we find it is creating response problems or customer access problems," Rauschenbach said.

 

He will be among the witnesses at the hearing scheduled by Government Reform Committee Chairman Thomas M. Davis III (R-Va.) to examine TSP customer service issues.

 

The key for TIAA-CREF, Rauschenbach said, has been its willingness to act on customer feedback. "We listen very carefully."

 

TIAA-CREF, he said, monitors the quality of its services, surveys customers and conducts focus groups "to get a sense from them on how we are measuring up."

 

Rauschenbach added: "We are trying to maintain a dialogue with our customers on how they want to interact with us. . . . We have quite a few who want a personal approach, and we have newer participants who are more Web savvy and want to interact that way."

 

How Slow Is Slow?

 

 

Although online access at the TSP has improved during the last month, it remains balky.

 

Yesterday morning, a career federal employee and technology manager at a Cabinet department reported waiting three minutes to get to the TSP log-in page for "general account access." Once logged in, the employee said, "the system response was good."

 

Selecting the "account balance access" option resulted in a 41/2-minute wait to get to the log-in page. After entering the required information, the employee waited 11/2 minutes for a response.

 

After two minutes, the connection failed.

 

The user's experience contradicted the TSP's advice, which recommends using the account balance option because "it's quicker."

 

Stephen Barr's e-mail address is

 

barrs@washpost.com.

 

 

 

© 2003 The Washington Post Company

 

 

 

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Met with my boss (CEO) this morning and he is pretty supportive of my quest. He has asked me to get comparisons of our company versus the university (403b) we are related to. He also wants me to get a quote from Fidelity and then TIA-CREF as we moved forward. Therefore, I am still going through some due dilligence to convince everyone its the best option.

 

I will keep everyone updated.

 

Thanks for all the help so far.

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The following comes from the Florida Retirement System

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Investment Expenses and Fees

"A small percentage" ... "a nominal fee" ... these are little words you might not notice when you're looking into investment funds. But the little fine print can cost you big bucks down the road if you're not careful.

 

Most investment funds charge fees and expenses to cover the costs of managing the funds. Some charge more than others, so it makes sense to know what they charge before you invest in any one fund.

 

Why should you care? Because it's your money that pays these expenses, not your employer's or anyone else's. The fees and expenses come straight out of your investment income.

 

Investment Income - Fees and Expenses = Your Investment Income

 

 

While fees and expenses may sound like nothing, they can add up – so it makes sense to know how much you'll be charged before you invest.

 

What's a percentage or two among friends? Take a look at the expenses on a $50,000 nest egg that earns 8% per year before fees:

 

Expenses paid: If expenses are:

 

1.25% per year .25% per year

After 5 years $ 846 $4,154

After 10 years $2,473 $11,863

After 20 years $10,555 $48,407

After 40 years $96,167 $404,382

 

 

 

As a general rule, over a 30-year period, an investment fund's 1% annual fee could eat up about 25% of the fund's value.

 

As you can see, being a successful investor means knowing what you'll spend, as well as what you'll earn!

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Home · Online Publications · Journal of Accountancy · Online Issues · August 2003 ·Investment Tax Planning For Retirement

 

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PERSONAL FINANCIAL PLANNING

 

How to make taxes work for the client.

 

Investment Tax Planning

For Retirement

 

 

 

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BY DELTON L. CHESSER, WALTER T. HARRISON JR.

AND WILLIAM R. REICHENSTEIN

 

 

 

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EXECUTIVE SUMMARY

FOR CLIENTS DREAMING OF A FINANCIALLY SECURE retirement, CPAs need to offer assistance on which savings vehicles—qualified and nonqualified—will help them reach their goal. This decision involves both tax and nontax considerations.

CLIENTS PREPARING FOR RETIREMENT HAVE a wide variety of savings vehicles available to them including 401(k) plans, regular and Roth IRAs and other qualified plans. CPAs can recommend clients also set aside funds in other aftertax investment vehicles.

 

IN RECOMMENDING RETIREMENT SAVINGS OPTIONS, CPAs have to keep in mind certain rules including minimum distribution requirements, premature withdrawal penalties and liquidity concerns.

 

CLIENTS SHOULD CONTRIBUTE AS MUCH AS POSSIBLE on a pretax basis to their 401(k) plans, particularly those that offer employer matching, which immediately boosts the plan’s “return.” Clients over age 50 can make additional, catch-up contributions.

 

THERE ARE SOME SAVINGS OPTIONS CPAs SHOULD encourage clients to avoid. These include tax-deferred annuities, which usually carry high fees, and nondeductible IRAs; a Roth IRA would be a better alternative.

 

DELTON L. CHESSER, CPA, PhD, is the Roderick L. Holmes Professor of Accounting at Baylor University in Waco, Texas. His e-mail address is Del_Chesser@baylor.edu. WALTER T. HARRISON JR., CPA, PhD, is professor of accounting at Baylor University. His e-mail address is Tom_Harrison@baylor.edu. WILLIAM R. REICHENSTEIN, PhD, is professor of finance and the Pat and Thomas R. Powers Professor of Investment Management at Baylor University. His e-mail address is Bill_Reichenstein@baylor.edu.

 

s many Americans do, Sam and Sue dream of a stress-free retirement—enjoying an Alaskan cruise, visiting New York City or just strolling through the park. For this couple, tomorrow cannot come soon enough. Regrettably, for some retirees tomorrow may bring with it some disappointment.

 

Living one’s retirement dreams requires much more savings and financial planning than most people realize. Today’s prospective retirees are experiencing neither the increase in real income nor the corporate stability that past generations have enjoyed. Employers have shifted the risk of preparing for retirement to employees by replacing defined-benefit plans, which offer a guaranteed monthly retirement benefit, with defined-contribution and 401(k) plans, which are not guaranteed.

Couples such as Sam and Sue—and single individuals as well—realize they need help preparing for retirement and are turning to their CPAs for professional help. One question clients have is whether they should put their savings in tax-deferred or taxable accounts. They think tax-deferred investments would be better for them, but they don’t fully understand the impact taxes will have on their retirement savings. And they worry about the liquidity of those funds and any related premature-withdrawal penalties. In addition they wonder what effect tax-rate changes after they retire will have on the savings vehicles they select today. This article answers these questions and provides a framework to help CPAs counsel clients like Sam and Sue on their choice of retirement savings vehicles.

Saving for Retirement

Of those between the ages of 50 and 61

 

31.2% have a 401(k) plan.

 

41.1% have contributed to an IRA or Keogh account.

 

52% are covered by a pension plan.

 

Source: AARP, Washington, D.C., www.aarp.org.

 

 

 

 

ACCUMULATING ASSETS FOR RETIREMENT

CPAs can begin this process by identifying available savings vehicles. Clients have several options for accumulating retirement capital—among them taxable accounts, deductible pension plans, nondeductible IRAs and Roth IRAs. The various vehicles are best categorized by their tax treatment. Clients who understand the differences can make better decisions about how best to accumulate funds for their retirement. Most likely, they will use more than one vehicle to accomplish their goals.

 

Exhibit 1 summarizes the tax treatment of some of the more common savings vehicles. The tax consequences differ at inception, during the investment period and at withdrawal. At inception, the initial savings amount the clients place in a taxable account, a nondeductible IRA or a Roth IRA is made with aftertax dollars. Deductible pensions are funded with pretax dollars because these contributions escape current taxation.

 

Exhibit 1: Online Compliance Resources

Savings vehicles Tax treatment of initial investment Tax treatment during investment period Tax treatment at withdrawal

1. Taxable account Aftertax dollars Taxable at either ordinary or capital gains rates No additional tax is due because tax was paid during the investment period.

2. Deductible Pretax dollars Tax-deferred Initial investment and earnings pension account* are taxed at ordinary rates.

3. Nondeductible IRA Aftertax dollars Tax-deferred Only earnings are taxed at ordinary rates.

4. Roth IRA Aftertax dollars Tax-exempt Initial aftertax investment and earnings are tax-exempt.

 

* Includes defined-contribution plans, profit-sharing plans, 401(k) plans, 403(b) plans, 457 plans, Keogh plans, Simplified Employee Plans (SEPs), SIMPLE plans and deductible IRAs.

 

 

 

During the investment period, the returns a taxable account generates are taxed annually at either ordinary income or capital gains rates. In contrast, returns are not taxed in deductible pensions, nondeductible IRAs or Roth IRAs. At withdrawal, the accumulated returns in a nondeductible IRA are taxed at ordinary income tax rates. In a Roth IRA, withdrawals are tax-free (if the client began the Roth at least five years earlier and takes withdrawals after age 591¦2). In a deductible pension, all withdrawals are taxed at ordinary income rates.

 

AFTERTAX RETURNS

Sam and Sue both are 52 years old and plan to retire in nine years. They have taxable income of $100,000 before considering any deductible retirement accounts. Since their combined federal and state income tax rate totals 35%, they have $65,000 of aftertax income. Because the couple needs only $59,000 to meet their living expenses, they plan to save $6,000 of aftertax dollars each year for the next nine years. Unless unexpected emergencies occur, the couple will not need to use these funds before age 72. Sam and Sue participate in their respective employers’ 401(k) plans, and each is eligible to contribute up to $12,000. Their employers match 50% of the first $5,000. Each spouse expects to contribute $5,000 annually.

 

Sam and Sue need help determining the savings vehicles that will provide them with the greatest amount of aftertax funds in 20 years. Because of employer matching, their first contributions should go to their 401(k) plans. Putting $5,000 in such a plan is the equivalent of investing $7,692 in aftertax dollars. The employer’s matching contributions gives taxpayers like Sam and Sue an immediate 50% return on their investment.

 

The next decision involves where the couple should invest their remaining $6,000. To help them determine this, the CPA can assume their tax rate will remain at 35% during the couple’s working years and will range from 15% to 40% during retirement. These rates reflect the added effect of state income taxes. Investments are expected to earn 7% pretax annually.

 

Exhibit 2 shows that the deductible pension and Roth IRA would provide the couple with substantially greater accumulated aftertax funds than the other two savings vehicles. Whether Sam and Sue should choose deductible pensions that don’t offer matching contributions or Roth IRAs depends mainly on the relationship between their expected income tax rate during retirement and their current rate. Rates lower than 35% during retirement favor deductible pensions, while rates greater than 35% favor Roth IRAs. In the case of Sam and Sue, lower rates mean the “added accumulation” of $81,454 ($232,725 – $151,271) from investing in a deductible pension will exceed the related tax bill. For example, a 15% tax rate during retirement results in a tax bill of $34,909, which is more than offset by the additional $81,454. Exhibit 2 shows that when the tax rate during retirement is more than 35%, the Roth IRA becomes the preferred choice because the final tax liability exceeds the added accumulation of $81,454.

 

Exhibit 2: Aftertax Balance in 20 Years

 

 

 

WITHDRAWAL AND LIQUIDITY CONCERNS

Retirement accounts, other than Roth IRAs, have minimum withdrawal requirements. Individuals must begin withdrawing funds from deductible pensions by April 1 of the year following the year they turn age 701¦2. Failure to do so can result in a 50% excise tax levied on the amount by which the required minimum distribution exceeds the actual distribution. Roth IRA withdrawals do not have minimum distribution requirements, nor do they affect taxes paid on Social Security benefits. Withdrawals from deductible pensions, on the other hand, can affect how much tax a retiree pays on his or her Social Security benefits.

 

All tax-favored retirement accounts have liquidity restrictions. In general, a 10% penalty tax applies to withdrawals from retirement accounts before age 591¦2. This restriction is seldom as pressing as it seems.

 

If the savings are for retirement, this penalty tax rarely comes into play since few people retire before this age.

 

About 75% of pension plans sponsored by large employers allow participants to borrow against their retirement accounts.

 

Withdrawals for disability, major medical expenses or other special circumstances before age 591¦2 are not subject to the penalty tax.

 

Again, Roth IRAs receive special consideration. In addition to the above reasons, Roth withdrawals escape the 10% penalty when used for a first-time home purchase (this distribution must be less than $10,000). Also investors can withdraw their contributions (not earnings) from a Roth IRA at any time without incurring income or penalty taxes. Any such withdrawals are first considered to be contributions. After 10 years the tax advantages of Roth IRAs and deductible pensions are so great that their aftertax accumulated amounts, even reduced by the 10% penalty, still would exceed the accumulated amounts in most taxable accounts.

 

These withdrawal requirements and liquidity restrictions favor the Roth IRA over the deductible pension, particularly when the clients’ tax rate during retirement equals or exceeds the current rate.

 

SUGGESTED SAVINGS VEHICLES

CPAs can now recommend other savings vehicles that will enable their clients to accumulate additional aftertax retirement funds. First, as discussed above, they should direct their savings to 401(k) plans that receive matching employer contributions. A 50% matching contribution provides the client with an added 50% rate of return on these accounts.

 

Next they should decide whether to place any remaining cash in deductible pensions without matching contributions or in Roth IRAs. As previously discussed, this decision is heavily influenced by the relationship between the clients’ current tax rate and the expected rate during retirement. Higher tax rates in retirement tend to favor Roth IRAs. If the clients are concerned about withdrawal requirements and liquidity restrictions, this further favors Roth IRAs. Lower tax rates during retirement make deductible pension funds the more attractive option.

 

Because Sam and Sue should save all they can in deductible pensions and Roth IRAs, it was fortuitous that the Economic Growth and Tax Relief Reconciliation Act of 2001 significantly increased contribution limits for these vehicles. Exhibit 3 shows that in 2003, a taxpayer can individually contribute a maximum of $3,000 to an IRA plus another $500 if she or he is over age 50. Sam and Sue can invest a maximum of $12,000, plus the $2,000 catch-up contribution the 2001 act permitted for taxpayers over age 50, in their 401(k) plans. Exhibit 3 also includes contribution limits for other plans that might apply to Sam and Sue if their employment status changes in the future and to other clients like them.

 

Exhibit 3: Contribution Limits to IRAs and Deductible Pensions

Traditional and

Roth IRAs 401(k), 403(b),

457 plans SIMPLE plans Keogh plans SEP-IRA plans

Year Regular contribution Catch-up* contribution Regular contribution Catch-up* contribution Regular contribution Catch-up* contribution Regular contribution Regular contribution

2003 $3,000 $500 $12,000 $2,000 $8,000 $1,000 $40,000 15%

2004 $3,000 $500 $13,000 $3,000 $9,000 $1,500 Indexed† 15%

2005 $4,000 $500 $14,000 $4,000 $10,000 $2,000 15%

2006 $4,000 $1,000 $15,000 $5,000 Indexed† $2,500 15%

2007 $4,000 $1,000 Indexed† Indexed† Indexed† 15%

2008 $5,000 $1,000 15%

2009 Indexed† $1,000 15%

 

* Eligible individuals 50 years or older at end of the year can contribute this additional amount.

 

† Indexed for inflation.

 

Source: Adapted from Integrating Taxes and Investments, William Reichenstein and William W. Jennings, Wiley Press, January 2003.

 

 

 

FUTURE INVESTMENT CONSIDERATIONS

Because Sam and Sue can expect future salary increases, may change jobs or decide to save more money, they also may seek advice about savings vehicles to accommodate these changes. Earlier recommendations would remain unchanged. Currently, neither spouse can invest in a deductible IRA because both participate in employer-sponsored retirement plans and their adjusted gross income exceeds $54,000. But if in the future either qualifies for a deductible IRA and has to choose between a Roth IRA and a deductible IRA, the same analysis used in exhibit 2 applies. Again, the choice largely depends on the couple’s expected tax rates before and during retirement.

 

Exhibit 2 shows that a Roth IRA yields the highest return under expected high future tax rates. But if Sam and Sue fail to qualify for a Roth IRA because their adjusted gross income exceeds the allowed limit (currently $160,000 for married couples filing jointly) they should consider a nondeductible IRA. Any taxpayer with earned income, regardless of amount or participation in any other qualified retirement plan, is eligible to contribute to a nondeductible IRA. Exhibit 1 shows the major difference between the two is that the government levies ordinary income taxes on earnings a taxpayer withdraws from a nondeductible IRA while all Roth withdrawals are tax-exempt.

 

CPAs should remind clients that an individual’s maximum contributions to all IRAs except the SEP IRA and the Coverdell Education Savings Account (formerly the Education IRA) is $3,000 annually before considering any catch-up contributions.

 

Both now and in the future, taxable accounts should be Sam and Sue’s last choice as savings vehicles. Some financial advisers offer nonqualified tax-deferred annuities as an investment alternative. These annuities are essentially high-cost nondeductible IRAs. Clients invest in both vehicles using aftertax dollars that grow tax-deferred. The earnings are taxed at ordinary rates upon withdrawal. Although the tax treatment may be the same, the rates of return are not. Unlike a nondeductible IRA, a deferred annuity is an insurance product that typically carries additional annual fees of 1.25%, lowering the rate of return. Therefore, the nondeductible IRA is the

 

Studies show that nonqualified annuities are usually preferred over taxable accounts only when the insurance fees are low—for example, below 0.5%—and the investment horizon is long—say, greater than 12 years. Because the typical fees exceed 0.5%, CPAs should advise couples to invest in taxable accounts before buying nonqualified tax-deferred annuities. If the clients are averse to taxable accounts, advise them to consider municipal bonds or other tax-exempt investments.

CPAs should advise clients considering taxable accounts to select investments that minimize expenses and get the most benefit from the federal long-term capital-gains tax rate. Changes in the Jobs and Growth Tax Relief Reconciliation Act of 2003 make the taxation of long-term gains even more favorable, as well as offering preferential rates on stock dividends. Most long-term capital gains after May 5, 2003, will be taxed at a maximum rate of 15% (down from 20%). For tax years beginning after 2003, dividends noncorporate taxpayers receive from domestic corporations will be taxed at 15% (or at 5% for taxpayers in the two lowest tax brackets).

PRACTICAL TIPS TO REMEMBER

 

Clients should direct their initial retirement savings to a 401(k) plan if their employer offers one. These plans offer professional management and employer matching up to certain limits.

 

A Roth IRA provides investors with a substantially greater aftertax return than a taxable investment or a nondeductible IRA.

 

Keep minimum distribution requirements and premature withdrawal penalties in mind when recommending savings vehicles based on the client’s projected retirement age and need for income to supplement pensions and Social Security.

 

The high fees associated with nonqualified tax-deferred annuities mean they are seldom the best alternative for clients saving for retirement. Generally even a nondeductible IRA is a better option.

 

 

 

 

HOW TO BE TAX SAVVY

With all that has happened in the investment markets, many clients, Sam and Sue included, are concerned their vision of retirement may not become a reality because they won’t have enough money. To make sure this doesn’t happen, one of the greatest services CPAs can offer clients is to help them save in a tax-savvy manner. Not only is it important to save; it also is important to do so in the most tax-favored way. The understanding CPAs have of the tax laws gives them a distinct advantage over other investment professionals when it comes to making sure these rules work for clients not against them.

 

Resources

www.aarp.org. Advice on retirement finances and lifestyle issues from the organization formerly known as the American Association of Retired Persons.

www.aoa.gov/retirement. Guidance from the U.S. Department of Health and Human Services Administration on Aging.

 

www.morningstar.com. Includes access to the Morningstar Retirement Center.

 

www.investorguide.com/Retirement.htm. Information on retirement and estate planning.

 

www.rothira.com. Everything there is to know about this popular retirement plan.

 

www.seniors-site.com. Advice for adults over 50.

 

www.spry.org. An organization that helps individuals set priorities for their retirement years.

 

 

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

 

©2003 AICPA

 

 

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Tampa Gator,

 

Our contract with Valic does not have the 5% surrender fee. So there are no surrender charges. Our company puts in money for each employee. Therefore, one account is set-up as an employer contribution account and if the employee makes voluntary contributions then another account is set-up as an individual account. TIAA-CREF was very helpful in explaining to us the way these things work. Valic has almost been useless for us. Good luck.

 

Garry

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Garry,

I'm certainly not in position to speak for VALIC, and am not doing so now, but I worked for VALIC as a rep. for several years (I no longer do). When I was there the only way a group could avoid the 5% surrender was to take on a product with significantly higher yearly fees (for the employees--1.25% M&E minimum), the lowest fixed rate guarantee offered, and limited service (up to the discretion of the rep). If an insurance company is going to let you exit their product devoid of surrender fees, you can be assured they will milk all the money from the account that they can while you're in it (in anticipation that the client will likely roll the money well before actual retirement). Your plan may very well be a car wreck. I'd have a trusted, independent CFP take a gander at your contract. For what it's worth . . . .

Galland

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Galland104,

 

I understand what you stated and we had Valic in here a few weeks ago and they put together a written synopsis of of our plan and it stated that we do not have to pay surrender charges. That could explain why the M&E fees are high (1.25%).

 

Garry

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Thank you to all,

I too appreciate the support that has been offered and the advice that has been constructive and encouraging.

Some months ago, Dan Otter had requested that I consider contributing to the website and this forum.Unfortunately, I was apprehensive as I felt I had little to contribute. With little knowledge or experience or for that matter confidence, I decided to pursue the revamping of our organizations 403(b) anyway. I'll layout why later. We are small nonprofit in San Diego, with less than 30 eligible employees in an ERISA compliant DC plan. I had watched my personal contributions dwindle further than the market had and wondered why. Other participants were dumbfounded by investments period and were looking at retirement in less than 10 years and had little saved. I wanted to get them on the right track and have them diversfy as the market was just beginning to tank.

(This was three ago this past spring).

I did some research on, amoung others, morningstar.com in thier 403bforum, Tim Youmkins site and this website and began to do some homework. No pun intended for the educators out there.

I tracked my daily asset values, the subaccount NAVs, and the shares that I had supposedly owned in each fund. To my suprise, the shares that I had purchased had been ever so slowly disappearing as the weeks and months went by. Some days it was .002 shares other days it was 1.32 shares. Either way, it adds up. And add up it did! It added up to an incredible 5.04%. I was optomistic though, as I was anticipating that oneday soon the dividend payout will happen and I'd recieve these shares back. After obtaining a copy of the plan document from our archives and reviewing it while on vacation in Mexico, I confirmed my suspicions. There is no dividend payout as it goes directly to the subaccount management in commissions. Now I know there is no real additional management with regard to these non-propietory funds, as the subaccounts just mirror the investment funds and have a float for dispersion, but either way we're getting zilch.

After decifering the plan contract I found:

 

1) Wrap fees on all of thier proprietory Lifestyle funds.

2) Paricipant fee- .24%

3) Asset Charge- .50%

4) Administative fee- .72%

5) M&E Fees- 1.50%

6) Commission fee 1.33%

 

Total underlying fee 4.29% (Accessed quarterly)

Average Core AIC% + 1.25%* (Accessed charges daily)

Grand total in expenses>>>>> 5.54% annually+/- for compounding.

 

I know my fellow employees could care less about what they are investing in. They are just happy that they are contributing and are under the false impression that by putting a little bit away, they will be all right in retirement. They have done little planning and if they have, it's been at

the bowling alley of advice.

We have now an investment library at work funded by my online research topics and a deal I made with my local library. Everytime they are upgrading books or recieve a donation in the finance catagory, they will hold it for me and I happily make a donation to the branch. (We both win!)

 

I have been told by our legal team that now, I am a "functional fiduciary" and am personally liable to my fellow employees and thier families since I've had a material influence in our retirement plan.

 

I have been struggling with getting the "costs matter" point across to the "powers that be" and have often vented or sought the advice from all of you, for that, I am very greatful.

 

Thank you for support.

 

Warren P.

 

PS.-I've got a finance committee meeting scheduled this week and am taking the advice from Daniel Clark on stressing the "FIDUCIARY DUTY" and "PRUDENCE" they are required to adhere to, in representing the employee' interest. Additionally, the initiation of a RFP in this analysis is fundamental to getting a reasonable evaluation of services and fees.

 

*This plan does offer some proprietory index funds. Although they lag thier respective indices marginally, the AIC charge is .60% on average.

 

 

 

 

 

 

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