Question : Tax shelter for the retired??
My mom is 62 years old and retired two years ago. She's been living off her savings and interest income she collects monthly from a local bank. I believe she earns about 5.2% in interest from a base of $500k. Now, is there some sort of tax shelter for someone that's retired? What other options does she have in putting the money somewhere else to maximize her return? I'm not too familiar with retirement plans and if she's qualified to set aside money into any sort of plan. I'm thinking there are better ways to invest her $800k for better return or tax shleter. please share your thoughts. Thanks in advance for your thoughtful answers.
- asked by yah27
All Answers:
Answer #1
Yes. There are several type of tax advantageinvestment vehicles available for her. Let meexplain the advantages and thedisadvantages:
http://www.sec.gov/answers/annuity.htmAnnuityIt is a contract between you and aninsurance company, under which you make a lump-sumpayment or series of payments. In return, theinsurer agrees to make periodic payments to youbeginning immediately or at some future date.Annuities typically offer tax-deferred growth ofearnings and may include a death benefit that willpay your beneficiary a guaranteed minimum amount,such as your total purchase payments.There aregenerally two types of annuities—fixed andvariable. In a fixed annuity, the insurancecompany guarantees that you will earn a minimumrate of interest during the time that your accountis growing. The insurance company also guaranteesthat the periodic payments will be a guaranteedamount per dollar in your account. These periodicpayments may last for a definite period, such as20 years, or an indefinite period, such as yourlifetime or the lifetime of you and your spouse.Ina variable annuity, by contrast, you can choose toinvest your purchase payments from among a rangeof different investment options, typically mutualfunds. The rate of return on your purchasepayments, and the amount of the periodic paymentsyou will eventually receive, will vary dependingon the performance of the investment options youhave selected.An equity-indexed annuity is aspecial type of annuity. During the accumulationperiod – when you make either a lump sum paymentor a series of payments – the insurance companycredits you with a return that is based on changesin an equity index, such as the S&P 500 CompositeStock Price Index. The insurance company typicallyguarantees a minimum return. Guaranteed minimumreturn rates vary. After the accumulation period,the insurance company will make periodic paymentsto you under the terms of your contract, unlessyou choose to receive your contract value in alump sum.Variable annuities are securitiesregulated by the SEC. Fixed annuities are notsecurities and are not regulated by the SEC.Equity-indexed annuities combine features oftraditional insurance products (guaranteed minimumreturn) and traditional securities (return linkedto equity markets). Depending on the mix offeatures, an equity-indexed annuity may or may notbe a security. The typical equity-indexed annuityis not registered with the SEC....Pro: 1) It isnot taxed until withdraw. 2) You can alwayschoose safty (fixed annuities). Con: 1) All thegrowth or the interest is taxed first andimmediately and at your marginal tax rate when youdistribute it. 2. You may pay penalty if youhave early withdraw (like the bank). This couldbe bad for estate planning purposes if the gainwithin the account is substaintial.Financialprofessionals who sell variable annuities have aduty to advise you as to whether the product theyare trying to sell is suitable to your particularinvestment needs. Don't be afraid to ask themquestions. And write down their answers, so therewon't be any confusion later as to what was said.Variable annuity contracts typically have a "freelook" period of ten or more days, during which youcan terminate the contract without paying anysurrender charges and get back your purchasepayments (which may be adjusted to reflect chargesand the performance of your investment). You cancontinue to ask questions in this period to makesure you understand your variable annuity beforethe "free look" period ends. Before you decide tobuy a variable annuity, consider the followingquestions:Will you use the variable annuityprimarily to save for retirement or a similarlong-term goal? Are you investing in the variableannuity through a retirement plan or IRA (whichwould mean that you are not receiving anyadditional tax-deferral benefit from the variableannuity)? Are you willing to take the risk thatyour account value may decrease if the underlyingmutual fund investment options perform badly? Doyou understand the features of the variableannuity? Do you understand all of the fees andexpenses that the variable annuity charges? Do youintend to remain in the variable annuity longenough to avoid paying any surrender charges ifyou have to withdraw money? If a variable annuityoffers a bonus credit, will the bonus outweigh anyhigher fees and charges that the product maycharge? Are there features of the variableannuity, such as long-term care insurance, thatyou could purchase more cheaply separately? Haveyou consulted with a tax adviser and consideredall the tax consequences of purchasing an annuity,including the effect of annuity payments on yourtax status in retirement? If you are exchangingone annuity for another one, do the benefits ofthe exchange outweigh the costs, such as anysurrender charges you will have to pay if youwithdraw your money before the end of thesurrender charge period for the new annuity?____________________Rental property:Pro: 1)Almost always, this is a tax write-off. 2) streamof income. 3) Hedge against inflation in the longrun. 4) You can borrow against it when you'veemergency or reverse mortgage.Con: 1) It is notliquid. If you want max profit, you cannot sellit immediately and get your money back right away. 2) You may have vacancy in the house.
http://www.aarp.org/money/revmort/ReverseMortgageA New Kind of Loan: In ReverseA "reverse"mortgage is a loan against your home that you donot have to pay back for as long as you livethere. With a reverse mortgage, you can turn thevalue of your home into cash without having tomove or to repay the loan each month. The cash youget from a reverse mortgage can be paid to you inseveral ways: all at once, in a single lump sum ofcash; as a regular monthly cash advance; as a"creditline" account that lets you decide when andhow much of your available cash is paid to you; oras a combination of these payment methods. Nomatter how this loan is paid out to you, youtypically don't have to pay anything back untilyou die, sell your home, or permanently move outof your home. To be eligible for most reversemortgages, you must own your home and be 62 yearsof age or older. Pro: A) No tax! It is a loanagainst your house. No capital gain for most ofpeople. B) You may continue to live in thereuntil you die even if the equity of the home iszero.Con: A) You have to pay anything backuntil you die, sell your home, or permanently moveout of your home. That may reduce the size ofthe estate when you die. B) You may want to livein another house.You may want to invest Preferredstocks that have low risks. The dividends and the capital appreciation (or gain) are tax atcapital gain rate (lower than your marginal taxrate). Need additional advices? Let me know :)PSSomeone answer your question incomplete lastyear:Can my mom claim me as a dependent?He gaveyou the answer for Qualified Child.
http://www.irs.gov/taxtopics/tc354.htmlGenerally,you may claim a dependency exemption for aqualifying child or a qualifying relative. You canbe a qualifying relative:There are four tests thatmust be met for a person to be your qualifyingrelative. The four tests are: Not a qualifyingchild test,Member of household or relationshiptest,Gross income test, andSupport test.(Accordingto your description, you meet all the test. Except you must earn less than $3,300 for tax year2006.)
http://www.irs.gov/publications/p501/ar02.html#d0e3763
- answered by naekuo
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measure and fulfill your financial needs
