Special Topics - Retirement Planning

Retirement Planning

Everyone wants a golden retirement, but saving for retirement is no easy task. As more and more people are approaching retirement age, Social Security's assets are being consumed and the number of workers that will support it are shrinking. As a result, we will have to rely more on our personal savings when it's time to retire.

Today, we have a myriad of options to help prepare for the golden years. Yet, without a specific plan of action, many people find themselves falling short when it is time for them to live off of their life's work.

Click below to learn about some of the most powerful retirement strategies, including:

Take the time to review your options, and ensure that you're prepared when it's your turn to retire. And when you're ready to speak with a professional about saving for retirement, call us at 714-572-2050.


Annuities are flexible insurance contracts designed to provide income and help you achieve long-term savings goals. And these are not unused financial vehicles: last year alone, annuity sales topped $200 billion.

Much like a CD is a contract between you and a bank, an annuity is a long-term contract between you and an insurance company. In essence, the same company that insures your home or protects your family may also help you save for retirement.

After making a single lump-sum premium payment, or a series of periodic payments, individuals can then receive regular annuity payments from the insurance company. These payments can be made over a definite period of time, or they can last a lifetime.

Fixed Annuities are products of the insurance industry and are designed for long-term retirement investing. Annuity guarantees are subject to the claims-paying ability of the insurance company. Surrender charges may apply if money is withdrawn before the end of the contract. All withdrawals of tax-deferred earnings are subject to current income tax, and, if made prior to age 59½, may also be subject to a 10% federal income tax penalty. Annuities generally contain fees and charges which include, but are not limited to, sales and surrender charges. Additionally, if purchased within a qualified plan, an annuity will provide no further tax deferral features. The contract, when redeemed, may be worth more or less than the total amount invested.  

A Myriad of Options

Tax deferral is not the only reason why annuities have mushroomed in popularity. While they typically have maturity dates of 5-7 years, annuities require no medical exams, and can usually be opened by filling out a basic annuity contract.

Today, there are hundreds of annuities to choose from, designed for different retirement goals.

Annuity Flexibility

Annuities are one of the most flexible savings vehicles today. You can use after-tax money to deposit into an annuity, or you can fund your annuity by rolling over qualified money.

In some cases, annuities will offer fixed interest rates, added death benefits, or other features from the insurance company that are not available in a qualified retirement plan.

Non-qualified (or "after-tax") annuities are just as popular. Because no rollover from another account is involved, non-qualified annuities often require less time to establish. In addition, when you withdraw funds, you'll only pay taxes on your accrued interest, since your principal was already taxed once before (when you earned it).

When the payout phase begins, you can opt to receive your annuity's value in one lump sum, or you can elect to receive a steady stream of payments in regular intervals (e.g. monthly, quarterly, etc.).

If you decide to opt for a regular stream of payments, many insurers will allow you to have annuity payments last for a set amount of time (such as 10 or 20 years). For many annuity owners, having indefinite payments for the rest of your life provides a predictable source of income.

Choices to Consider

When shopping for an annuity, there are several considerations that must be weighed.

Immediate vs. Deferred Income

When it comes time to withdraw your money out of an annuity, you have a variety of payment options to choose from. The insurance company can pay you either in a lump sum, make periodic payments, or guarantee you a lifetime of income on a tax-advantaged basis. Depending on the annuity contract you purchase, the choice is yours.

Qualified vs. Non-Qualified

Annuities can accommodate qualified or non-qualified money. For instance, suppose you are switching jobs and need to move over a 401(k). However, you already have an IRA and are looking to diversify your portfolio. You can reduce your portfolio exposure by rolling into an annuity, and not be forced to lose your money's tax advantages.

In another scenario, suppose you receive an inheritance of $20,000. If you don't need the money right away and want to build a long-term nest egg, consider putting the inheritance into an annuity. You'll gain the advantage of tax deferral. Plus, when it comes time to withdraw from your non-qualified annuity, you'll only be taxed on the accumulated interest, not the principal itself.

Insurance Company

The quality of the insurance company is important, especially when purchasing a fixed annuity. Working with a respected, highly rated insurer can help eliminate default risk, and ensure a retirement income when you need it most.

Common Benefits

All annuities, share several common benefits. Here's a summary of what annuities can bring to your retirement portfolio:

  • Ideal for Estate Planning: Proceeds from annuities pass directly to your beneficiaries without the delay, expense and publicity of probate in most states.
  • The Power of Tax Deferral: Because you do not pay taxes on earnings every year, your annuity is able to work harder thanks to tax deferral. You will have to pay taxes on earnings when you withdraw your annuity's gains, but at least you can decide when that happens.
  • No Contribution Limits: Contributions to other retirement savings vehicles, like 401(k)s and Individual Retirement Accounts, are strictly limited. Annuities, however, offer tremendous flexibility. You can contribute as much as you want, up to the limits imposed by the insurer, to take advantage of tax deferral inside the annuity. Plus, you can add to your annuity contract at any time.
  • Flexible Payment Options: Unlike 401(k)s and IRAs, which require that you begin making withdrawals at age 70½, you may be able to wait much longer with annuities. When you do decide to begin receiving payments, you can usually select one of the following methods: lump sum distribution (a one-time payment), periodic distributions (you can take money only when you need it), systematic distributions (an amount is sent to you at regular intervals) or Annuitization (guaranteed for the rest of your life).
  • Tax Control: The money inside your annuity is made up of two components: principal and earnings. Assuming your annuity was opened with after-tax dollars, you're only taxed on your earnings.
  • Easy To Start and Maintain: Usually, a simple application, a check and your signature will begin your annuity. And, at the end of each year, you will not receive a 1099 for income earned within your annuity contract.
  • Other Features: Annuities also do not offset Social Security benefits like bond, CD and other investment income sources do.

Annuities are easy to establish and often come with a "free look period." Your state of residence or the annuity contract will define a length of time (usually 30 days) where can cancel your contract if you decide it's not right for you.

You can even exchange older, non-performing annuities into a newer fixed annuity with no tax consequences thanks to Section 1035 of the Internal Revenue Code.

If you are a conservative investor looking for a consistent way to build your retirement savings, then fixed annuities may be the answer for you.

Modified Endowment Contracts (MECs)

For nearly two decades, tax-deferred annuities have enjoyed remarkable popularity. Most tax-deferred annuities require a single premium payment in the beginning, which then accumulates on a tax-deferred basis.

However, annuities are not perfect. For retirement savers looking to preserve a little more wealth for their family, there may be a solution: a type of life insurance policy known as a Modified Endowment Contract (MEC).

Royal Alliance does not offer tax or legal services.

The Basics of MECs

The same insurance companies that issue annuities also underwrite Modified Endowment Contracts. MECs are very similar to annuities in terms of tax-deferred accumulation of your initial premium.

However, the tax code is not very favorable to annuities, particularly if the owner passes away during the annuity's accumulation stage. If that happens, all deferred income taxes on growth become due.

MECs are able to overcome this by including an insurance "rider" in the contract, designed to pass the entire account value to your beneficiaries’ income tax free. MECs offer several distinct advantages over deferred annuities and other wealth-accumulation vehicles:

  • MECs avoid income taxes during the accumulation stage of your account;
  • MECs do not force you to make distributions by a particular age, like some IRAs and 401(k)s;
  • MECs allow you to make withdrawals or loans in cases of emergency;
  • MECs give you the flexibility to choose different options;
  • MECs provide a lump sum payment to heirs that is tax-free;
  • Unlike annuities, MECs can be owned by certain types of trusts without losing their tax-advantaged status

MECs can provide a retirement income for you, while preserving your legacy for your loved ones.

Reducing Taxes

The Internal Revenue Code provides tax advantages for MECs. Insurance products have always received very favorable treatment by Congress, and MECs are no exception.

Unlike stocks which are taxed every year, any earnings within your MEC remain untaxed as long as they stay within the MEC account. You choose when to pay taxes, since income taxes on the growth of your MEC are due only upon withdrawal. Over the long haul, this tax-free accumulation can produce dramatic advantages.

Long-Term Strategy

Tax deferral is wonderful, but there is a small price to be paid in terms of liquidity. MECs are able to grow without annual income taxes being paid because they are designed for retirement.

Like annuities and traditional IRAs, money placed inside a MEC must remain there past age 59½. If you make a withdrawal from the MEC before that age, the IRS will slap a 10% penalty on any withdrawals made. For this reason, they are not liquid, and should remain untouched until you're ready to draw money in the form of retirement income.

Roth IRA

Roth IRAs, unlike traditional IRAs, have a simple premise: you pay income tax going in rather than when you pull out.

The Roth IRA is a type of account that you establish through a qualified broker. Beginning in 2008, you can contribute up to $5,000 annually to your Roth IRA. Any contributions that you make to your Roth IRA are considered "after tax," and cannot be deducted from your tax return. However, when it is time for you to draw money from your account, you will not pay income taxes on the growth of your account. If you're in a high tax bracket, that can amount to tremendous savings.

Just like a traditional IRA, Roth IRA accounts can hold stocks, mutual funds and other types of investments. Retirement-minded investors looking to build their nest egg, can open a Roth IRA brokerage account and invest it like they would any other account.

People who are still working and are eligible to contribute more have to think about what kind of IRA they should contribute to. This is especially true if you have already accumulated a large IRA, perhaps from the rollover of a retirement plan, and if you want to know whether you should convert that pot of money into a Roth IRA.

If you have accumulated a large traditional IRA, you can elect to convert the entire account to a Roth IRA. Upon conversion, you must declare the entire IRA taxable balance as taxable income and pay taxes on it in the year of conversion. From that point on, the IRA is federal income tax-free during compounding, and federal income tax-free when you pull money from it (if you have held the Roth IRA for at least five years, you are age 59½ or meet other requirements).

Better to Pay Now or Later?

Are you better off waiting to pay taxes, or paying them now? For many, paying your taxes owed now is the smart thing to do.

Who should not convert their existing IRA to Roth? If your tax bracket is higher now than your heirs' tax bracket will be when the money is spent. Also, be very careful if you aren't sure about falling under the $100,000 ceiling. Converting and then discovering later that your income was higher could blow up in your face, creating significant tax penalties.

From an estate planning standpoint, if your main goal is to accumulate as much as you can and leave it for your heirs, conversion can make a lot of sense. Traditional IRA owners must begin taking distributions by age 70½. However, Roth IRAs require no minimum distributions each year during the life of the IRA owner, nor on the life of the IRA owner's spouse. If you want to keep your money growing on a tax-preferred basis longer, then the Roth IRA may be your solution.