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                                   The 10 Biggest Mistakes Made By IRA Owners and Their Beneficiaries

MISTAKE 1: Failure to Properly Name Beneficiaries and S T R E T C H Your IRA

Some of the biggest mistakes with IRAs are made after they pass to the second generation of
the owners or contingent / secondary beneficiaries. Heirs routinely lose a large percentage of
inherited IRAs to unnecessary taxes. The rules are simple - yet they aren't obvious and most
heirs don't know about them or know to ask about them. If you don't want a large portion or
your hard-earned wealth and careful plans wasted, be sure your heirs know how to manage
their new IRAs.

   Question: Do you currently contingent / secondary beneficiary (s) named to your IRA? If
    you do not you are depriving your estate of substantial inheritance while making your
    Uncle Sam very happy. By structuring your beneficiaries correctly, you will not only
    maximize on what will be passed as an inheritance, but discover a new found legacy to be
    left to a favorite charity.

Here are the key points:

   Spouses vs. non-spouses: A spouse beneficiary of an IRA has one big advantage. He or she
    can roll over the IRA to a new IRA that is his or her own. That means the beneficiaries and
    required minimum distribution schedule can be reset. This often is a good idea for an
    inheriting spouse. But non-spouses who are beneficiaries cannot rollover the IRA to a new

   Naming the IRA: Other than a spousal rollover, heirs should not make the mistake of
    changing the IRA to their own names or allow the custodian to do so. The name change
    requires a rapid distribution of all the IRA's assets, making them taxable at ordinary
    income tax rates. An inherited IRA needs three things in its title: (1) the name of the
    owner who died; (2) the word 'IRA'; and (3) the statement that it is 'for the benefit of' the
    heir. An appropriate title is 'Max Profits IRA (deceased), F/B/O Hi Profits, beneficiary.

   Deadlines: IRA beneficiaries must begin required minimum distributions, can split the IRA
    into separate IRAs for each beneficiary and exercise other options. But these actions must
    be taken by the end of the year after the year in which the owner died. Failure to act by
    the deadline ends the right to take an action and can result in higher taxes than would
    otherwise be paid.
   Splitting the IRA: A single IRA can be left to multiple beneficiaries. For example, Max
    Profits can name his three children by name as equal beneficiaries. If they decide to share
    the IRA, required minimum distributions must be based on the age of the oldest
    beneficiary. The owners also would have to agree on how to invest the IRA and on rules
                                  The 10 Biggest Mistakes Made By IRA Owners and Their Beneficiaries

    for taking additional distributions. An alternative is to split the IRA into a separate one
    for each beneficiary. Most IRA custodians allow the IRA to be split in this way.
    Beneficiaries need to know this option is available and how to exercise it.
    Caution: If you currently have your contingent / secondary beneficiary (s) named as
    “children” which is all too common, under the new rules this MUST be amended to list
    each child by name including the percentage of the proceeds to go to each.

   Distributions: Most heirs tend to withdraw all the money from an inherited IRA quickly,
    pay taxes, and spend the after-tax amount. When beneficiaries prefer to use the IRA's tax
    deferral, they should know about required minimum distributions. The amount of the
    RMDs depends on whether the original owner was already taking RMDs, and the
    beneficiary also has some flexibility.

   No 10% penalty: Beneficiaries should be aware that regardless of their ages, there is no
    10% penalty for early distributions from inherited IRAs before age 59½. This exception
    does not apply to other IRAs of the beneficiaries, but for distributions taken from the
    inherited IRA, there is no 10% penalty for any distribution. The distributions will be
    subject to income taxes to the extent they are not of after-tax contributions.

   An overlooked deduction: Most taxpayers and even many tax advisers are unaware of
    the deduction for 'income in respect of a decedent. But many people who inherit a
    substantial IRA are eligible for this deduction, which essentially is a deduction for the
    estate taxes that were paid on the IRA. The deduction is best explained with an example.

   Disclaimers: The details of who should get an IRA can be left to your executor who, along
    with family members, can determine from both a financial and tax standpoint who should
    be the beneficiary. The beneficiary does not have to be selected until Sept. 30 of the year
    following the year of the owner's death. The first required distribution does not have to
    be made until Dec. 31 of that year. But the designated beneficiary must be one of a
    group of primary and contingent beneficiaries named by the account owner.

The way to take advantage of this provision is for you to name both primary and
contingent beneficiaries. After your heirs and executor decide who should inherit, those
who are ahead of that person in the beneficiary chain can disclaim their interests.

                                The 10 Biggest Mistakes Made By IRA Owners and Their Beneficiaries

There is a procedure in the tax law for making qualified disclaimers. Your heirs and
executor should be aware of your intentions and this process, and you should give the
executor guidelines for making the decision and advising the beneficiaries.

                                   The 10 Biggest Mistakes Made By IRA Owners and Their Beneficiaries

MISTAKE 2: Failure to Consider Equity Indexed Annuities for Your IRA

It’s not every day that you find the opportunity for potential growth with true safety in the
same financial vehicle. Usually investors are compelled to make one of two choices, either they
give up a degree of safety in exchange for a greater potential for growth or they accept less
growth in exchange for a higher degree of safety. Thanks to an innovation in the insurance
industry, you can have the potential high returns available in the stock market and the security
of a guarantee—it’s called an equity indexed annuity.

Equity indexed annuities are excellent alternatives for investors seeking safety in a low interest
rate environment or a volatile market. Here’s how they work, your return is based on the
increase of a stock or equity index, such as the S&P 500.1 If stocks rise, you benefit from the
increase. If stocks fall, you do not lose any money, most contracts guarantee a minimum
return, typically 3%. This is what makes these newer products so attractive to retired persons
and to those approaching retirement.

Now, imagine this scenario: Suppose you and I take a trip to Las Vegas for a week. I decide to
make you the following offer. You can gamble at one of the casinos as much as you like for the
entire week and I will guarantee you in writing that no matter how bad you do you will not lose.
In fact, I guarantee that you will walk away from the tables with no less than what you started
with, plus some interest. If you win, you get to keep the winnings.

Would take me up on the offer? I would imagine given that opportunity, you would load up
with casino chips as soon as possible. So, what’s the catch? You can’t lose a dime, but the
catch is, you have to play for the whole seven days, otherwise you may have to give back a
small portion of your chips. In other words, if you invest with the intent to hold your
investments for some time down the road, index annuities can be a powerful investment. This
brief example is simplified, but in very basic terms, this is the concept behind equity index

Obviously, there is no such thing as a free lunch, so the company that issues the annuity will
limit the maximum returns that you receive from a rising market in return for the downside
protection they provide. This limit depends on the particular indexing method that the annuity

                                   The 10 Biggest Mistakes Made By IRA Owners and Their Beneficiaries

company uses. The most common method used to limit returns is something called the
“participation rate.” For example, the insurance company may set the participation at 90%
(some companies are as low as 50%), which means the annuity would be credited with 90% of
the growth experienced by the index. If the index gained 10%, your gain would be 9% for that
year. Essentially, you’re trading 100% of the market risk in order to receive a share of the
market gain.

In addition to the different participation options, there are index annuities that use an “annual
reset” method for crediting index-linked interest. This valuable method allows you to lock in
gains permanently in an up market. In volatile markets where the index declines, the annuity
simply resets locking you in at the now lower index level. In fact, some index annuity renewals
have been reset at very attractive levels. The lower the reset is, the more opportunity there is
for future growth.

Let’s take a look at another tough time in the market and see how the index annuity would
have performed utilizing the annual reset method. One of the best examples of a prolonged
bear market was the 1970’s; in the 1973-74 downturn stock prices fell more than 40%. The S&P
500 closed at an all time high towards the end of 1972 and it wasn’t until 1980 that these levels
were retraced. So, if you bought at year-end in 1972, it would have taken about 7 years to
break even using the traditional buy and hold technique. Utilizing a 90% participation index
annuity with the annual reset method from 1972 to 1979 would have resulted in a return for
those seven years of approximately 70%—even though the index had not yet returned to its
former high.

In todays market environment it’s hard to beat an annuity that only goes up. Many seniors,
who fled the stock markets, locked in gains and purchased equity index annuities. They are
now waiting for an upturn, which will produce further gains for them, not just a recovery to
former highs. The use of these vehicles has allowed them some comfort during market

Due to the complexity of equity index annuities I strongly suggest you consult with a
knowledgeable advisor to see how they might fit into your financial plan.

                                            The 10 Biggest Mistakes Made By IRA Owners and Their Beneficiaries


1. The S&P 500 is an unmanaged broad based market index often representative of the stock market as a whole. An
investment may not be made directly in the index.

2. Equity indexed annuities are long term investments subject to possible surrender charges and 10% IRS early
withdrawal penalty prior to age 59 ½. Current interest earnings linked to the growth of the equity market. Minimum
return, principal value and prior earnings guaranteed by issuing insurance company, subject to their claims paying
ability, when held to the end of term.

Risks include inflation and default risk.

                                   The 10 Biggest Mistakes Made By IRA Owners and Their Beneficiaries

MISTAKE 3: Too Much of Your IRA Is At Risk

Last summer, the IRS finalized new regulations for required distributions of IRAs. Under the old
rules, children and grandchildren who inherited an IRA were forced to pay the income taxes in
one to five years, depending on the age of the IRA owner at death.

Under the new distribution rules, the same beneficiaries can STRETCH the distributions and
taxes over their individual life expectancies. According to pages 38 and 86 of the 2006 IRS
Publication 590, a beneficiary age zero, who inherits a traditional IRA, can spread the
distributions for as long as 82.4 years. Spreading out or "stretching" the distributions allows the
beneficiaries to continue earning interest on money that, under the old rules, would have been
paid prematurely to the IRS.

A $300,000 IRA at 5 percent can pay out in distributions as much or more than $1.5 million
over three generations, if the IRA is properly structured. These new distribution rules gave
birth to the "Stretch/Multigenerational IRA." Unfortunately, many IRA owners aren't taking
advantage of the new tax laws and most advisers are not up to speed on the new distribution
rules. The bottom line is that most IRAs are broken.

Examine these important signs of a broken IRA:

1. You have no formal distribution plan. The first of the 78 million baby boomers began turning
59 1/2 in 2005 and became eligible to take distributions from their IRAs and 401(k)s without the
10 percent penalty. Eighty-five percent of boomers nearing retirement have no formal
distribution plan to transform their retirement savings into a steady stream of retirement
income. They are not taking advantage of the new distribution rules and run the risk that their
beneficiaries may be forced into rapid distribution causing rapid taxation. The beneficiaries may
lose the advantage of stretching the distributions over their individual life expectancies.

2. You are not taking advantage of the "Separate Account Rule." The 2006 IRS Publication 590
states, "If Separate Accounts with separate beneficiaries are not established, all beneficiaries'
distributions will be based on the life expectancy of the oldest beneficiary. This will greatly
diminish the income to the younger beneficiaries."

3. You have improper or no designated beneficiaries. Only a properly set up "Designated
Beneficiary" has the right to spread the distributions and taxes over his or her individual life

                                    The 10 Biggest Mistakes Made By IRA Owners and Their Beneficiaries

expectancy. Only the IRA owner or inheriting spouse can establish a designated beneficiary. If
designated beneficiaries are not established, the beneficiaries may have to pay all the IRA taxes
in five years if the owner dies before age 70 1/2 or they may use the remainder of the owner's
life expectancy if death occurs after age 70 1/2. Either way the stretch is lost.

4. Your current adviser is not an IRA distribution specialist. Most advisers are not trained in
the new distribution rules and may unknowingly be giving the IRA owner bad advice. Poor
advice can result in IRA owners and their beneficiaries losing the many advantages of the new
distribution rules.

5. Your money is still in a 401(k), 403b, Simple IRA or a 457 Plan. The new distribution rules
originally applied to IRAs only. However, Congress recently passed legislation to allow the
"Stretch" of 401(k), 403(b), 457, and other qualified retirement accounts. The problem lies in
the fact that most plan custodians, including 401(k), 403(b), 457 and IRA plan administrators,
including brokerage firms and banks, lack the training, knowledge and expertise of the new
laws, to structure the account properly under stringent IRS guidelines, let alone the resources
to administer the payouts over several generations.

6. You have too much of your IRA at risk in the market. During the accumulation years of an
IRA, market losses can be compensated for by making additional contributions and taking
advantage of dollar cost averaging. When you turn 70 1/2, two things change:

1) Owners can no longer make contributions to compensate for market fluctuations.

2) Owners must begin taking Required Minimum Distributions from their traditional IRAs.

Market losses can dramatically reduce the income streams to the IRA owner, spouse, children
and grandchildren. Risking the income from your retirement plans, for those who will depend
on that income is the primary culprit that can decimate well-made plans for a comfortable

3) Apply Rule 100. Let’s look at a male age 55. 100 – 55 (his age) = 45. No more than 45% of
the IRA should be at risk and that is high with only 10 years remaining until retirement. Equity
Indexed Annuities are a very strong alternative in this case.

7. You are still paying fees and loads on your IRAs. The high cost of small fees can cost IRA
owners and their beneficiaries as much as half of the total income paid over three generations.

                                   The 10 Biggest Mistakes Made By IRA Owners and Their Beneficiaries

Learning all the new distribution rules and the signs that your IRAs/401(k)’s are broken will help
you achieve your retirement income goals.

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MISTAKE 4: Failing to Plan for the New Retirement Reality

Boomers are facing a new retirement reality. Gone are the days of relying on an employer’s
defined benefit plan or being able to live off a monthly social security check. The Boomer
generation has historically been very independent; a cohort of “Do It Yourselfers”. However,
since market downturns have impacted retirement portfolios, and traditional income sources
have dried up, boomers need help recalibrating retirement income success.

Success can be subjective and goal oriented but three elements can really make a retirement
plan shine. These elements are: 1) the certainty of protected income in down markets, 2) the
opportunity in up markets to increase retirement income over time, and 3) the flexibility to
adapt the plan to changing needs.

Of course, there are risks to achieving retirement income success and as an industry; we have
focused on four main risks that should be planned for in a retirement income plan:

Lifestyle Risk relates to how most people want to enjoy certain hobbies and activities during
retirement, but may have to curtail their standard of living because they haven’t adequately
planned for the income needed to support their desired lifestyle. Eighty percent of those
people who plan to work at the age of 67 stated their motive for working past age 65 was to
earn enough money to live well.

If not properly accounted for, Inflation Risk will eat away at the purchasing power of people’s
income or assets. For instance, assuming an annual inflation rate of 3.20%, you will need
$938,780 in 2030 to replace $500,000 in 2010—that’s 88% more in just 20 years.

Longevity Risk comes into play when people outlive their assets or retirement income sources.
According to the Annuity 2000 Valuation Mortality Table, life expectancy continues to climb.
For a couple aged 65, there is a 50% chance of one spouse living to age 92, and a 25% chance of
one living to age 97.

Investment Risk is traditionally associated with asset allocation strategies, often the
opportunity costs of not participating in the stock market. But now, it’s the impact of stock
market losses on retirement savings that has many investors concerned. Stock market losses
are an all-too-familiar reality for many Americans: the Federal Reserve reported that
households, on average, lost $100,000 in wealth from 2007 to the second quarter of 2010.

As we have seen in the last few years, any of these risks can derail a plan. While there may be
varying opinions on how to properly plan for each of these risks, there is one thing many agree
on — guaranteed lifetime income is more important than ever before.

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The Solution

The value of annuities may be more apparent than any time in the past. Annuities are unique
given that they are the only financial solution that can provide lifetime income guarantees in a
down market and increase retirement income in an up market. This speaks directly to the
certainty and opportunity factors, which are keys to a successful retirement income plan. Of
course, all guarantees are subject to the claims-paying ability of the insurance company issuing
the annuity.

Certainty: A Guaranteed Core

Many Boomers want a specific answer to the question: How much income do I need to live the
retirement I want? It can be an overwhelming question often addressed in an initial
conversation many of you have with clients about core expenses versus non-essential expenses
for their retirement years.

Once core expenses are determined—such as mortgage payments, utility costs, food, and the
costs associated with visiting grandchildren— retirement income options can be planned for by
using guarantees offered within the annuity. Guaranteed income earmarked for these essential
expenses gives people freedom to make plans for retirement without having to worry about
altering the lifestyle they are accustomed to.

Certainty + Opportunity = Diversifying Among Asset Classes

The discussion of diversification typically relates to various assets, such as equities, fixed
income or cash. However, with market losses in consumer’s portfolios over the past 2 years,
many clients who have withdrawn income should think of “guaranteed income” as a stand-
alone asset class.

One approach to consider is to create a portfolio that combines a single-premium immediate
annuity (SPIA), a variable annuity with a living benefit, and mutual funds. This strategy can
protect and grow income, and also provides the flexibility to access more income if financial
needs change. Allocating assets among these three sources of income showcases how certainty
and opportunity can create a foundation for retirement income success. As you know variable
annuities and mutual funds involve market risk, including possible loss of principal.

Planning Strategies

Financial service firms have now developed solutions-based planning tools and materials, which
serve as blueprints for helping clients move easily from the planning stage to making

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adjustments to current plans. These tools and materials take into consideration the emotional
rollercoaster some clients have been on in recent years as it relates to retirement income
planning and connect on a more personal level than in the past. As an industry, we’ve always
been about the solutions to client needs. Retirement plans should be reviewed annually to keep
abreast of changes, and as a way to explore the new opportunities that can help them reach
their goals.

On The Horizon

Three additional risks could present challenges in assisting Boomers with a successful
retirement income plan: healthcare uncertainty, flawed asset allocation, and the effect of
withdrawing too much income. The results of the healthcare debate have real implications for
those planning for retirement. Many retirement dreams are just one debilitating illness or
severe injury away from not becoming a reality. Similarly, an individual’s portfolio can be
subject to adverse conditions if asset allocation isn’t updated on a regular basis to align with a
dynamic retirement income plan. And living beyond your means through excessive withdrawals
can also adversely diminish future income.

Boomers have had their fair share of detours, speed bumps and construction zones on the road
to planning for retirement. Providing solutions-based strategies to evolving client needs can be
the key to attaining retirement income success with: flexibility, guarantees, certainty, and

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MISTAKE 5: IRA Arbitrage For Estate Purposes Has Not Been Considered Or Introduced By
Your Advisor

The only way out of an IRA is through the IRS. After the taxes are paid, what’s next? From the
moment you contributed to an IRA, Uncle Sam became their partner. The unfortunate reality is
that their new partner, aka Uncle Sam will determine what percentage of your IRA savings is
owed to the IRS.

It’s a simple proposition at the time you are making tax deductable contributions. You save the
tax on the seed, but when it comes time to harvest that hard earned savings, you must pay the
tax on the crop. Not a pretty picture when your IRS partner begins to raise the Tax Rates, and
that is exactly what is over the short term horizon. IRA Arbitrage is one way to sever your
unwanted partner at the fewest dollars possible. The alternative, for many, may allow the IRS to
become the Senior Partner in their retirement plans.

Many IRA owners are affluent and will not need much if any of their IRAs to produce post
retirement income. For these people, IRA Arbitrage may be the best way to pass more tax free
dollars to the next generation.

Consider the retired engineer who has a defined benefit pension plan that will provide him with
$160,000 per year for life, or the retired physician who has saved money in an SEP/IRA and sold
his practice for $1 or $2 million. Will either of these prospects need their IRAs to provide
income for their retirement years?

One solution for those who answer no, is to use the after tax value of their IRAs to purchase Life
Insurance that will endow their beneficiaries with more INCOME TAX FREE MONEY.

5 Strategies for IRA-Arbitrage
1- Cash out the IRA and purchase Single Premium Life Insurance.

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2- Roth IRA Arbitrage – Use Life Insurance to pay the Roth IRA Conversion Tax.
3- Use the IRA Value to purchase a 7 Pay Life Insurance policy
4- Use after Tax RMDs to purchase Life Insurance
5- Use IRA Annuity 10% Free Withdrawal to purchase Life insurance.

All Approaches will Increase Inheritance and Eliminate Income Taxes for the Heirs.

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   MISTAKE 6: Not Rolling Your 401(k) To An IRA After Retirement

1. Most 401(k) s and other company plans have limited investment options. They may offer 50
   different mutual funds and other investments options, but most of the options are subject to
   market fluctuations. If we learned anything in 2008 and early 2009, it’s that what the market
   gives can be taken away with little to no warning. Many of these accounts lost as much as 40
   percent in 2008 alone. Those who chose to play it safe and moved their 401(k) money into
   bond funds or funds invested in CDs and other short-term investments were rewarded with
   little or no growth while inflation and management fees ate away at their principal. IRAs have
   almost unlimited investment options including annuities that guarantee the principal and offer
   a competitive rate of return.

2. Plan guidelines can restrict the owner’s access to their money. The plan document is
   essentially the 401(k) rulebook. If it’s not in the book, you can’t do it! With savings down and
   unemployment up, you never know when you may need access to your retirement accounts.
   IRAs offer greater flexibility, allowing the owners to make their own rules if they are willing to
   pay the tax on the distributions.

3. Direct rollovers avoid the 20 percent mandatory withholding. It’s critical that the funds are
   moved as a trustee-to-trustee transfer. If a check is written to the 401(k) owner, you can count
   on the custodian withholding 20 percent for the IRS. Numerous advisors, who have
   encountered this problem, are still battling with the IRS to get the 20 percent withholding back
   where it belongs.

4. 401(k) s have limited distribution flexibility for the children and grandchildren who are likely
   to inherit when both the owner and spouse are gone. In 2002 when the
   multi-generational “Stretch” IRA was born, the children and grandchildren were given new
   valuable distribution options. They now have the right to spread the inherited IRA distributions
   over their individual life expectancies, according to Appendix C, Table 1 of IRS Publication 590.
   This means they are no longer forced into rapid distribution, causing rapid taxation. The 401(k)
   plan administrators didn’t get on board with this valuable income planning tool and are, in
   many cases, forcing these non-spousal beneficiaries to take full taxable distribution in just five
   years. Under the “Worker, Retiree and Employer Recovery Act” of 2008 (HR 7327), all employer
   plans will be required to allow non-spousal beneficiaries to do direct rollovers to properly titled
   inherited IRAs beginning Jan. 1, 2010. IRAs allow these beneficiaries to take control and choose
   between cashing out and receiving a lifetime of income.

5. Most 401(k) plans do not allow the Roth IRA conversion. New legislation now allows 401(k)
   participants to roll their traditional 401(k) to a Roth 401(k), however until their plan documents
   are amended, most plans won’t allow this maneuver. Beginning this year IRA owners with
   adjusted gross incomes over $100,000 can for the first time convert their traditional IRAs to
   Roth IRAs. After the conversion tax is paid, the new Roth will grow tax-free and distributions
   after the five-year holding will also be income tax free. The Pension Protection Act simplified
   Roth conversions from 401(k) s and other company sponsored plans. Beginning in 2008, owners

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can convert company sponsored plan funds directly to a Roth IRA. They no longer need to
convert to a traditional IRA first then convert the traditional IRA to a Roth IRA.

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MISTAKE 7: Minimum Distributions Are Not Taken Properly or Are Taken Late

Not only is this still the single biggest IRA mistake, but missing a required minimum distribution,
(RMD) also carries one of the biggest penalties in the tax code. It’s a 50 percent penalty on the
amount of an RMD that should have been withdrawn but wasn’t. But the penalty can be waived
by making up the missed distribution and asking the IRS to abate the penalty. The penalty is
commonly waived for good cause, but the missed RMD still must be taken.

Some people just don’t open mail from their financial institutions. They see that the letter is
from their bank, so they don’t open it. They put it in a file to save for their accountant at tax
time. Then, at tax time, when the accountant has seen the letters and asks about it, the missed
RMD is brought to light. Other times, people tell us they treat the mail like junk mail. They say
they receive so much mail from financial institutions that they disregard most of it. In some
cases, they just throw it away!

You can’t keep your money in your plan forever. That’s why there is a required beginning date
(RBD) and the 50 percent penalty for not taking RMDs. Calculating the first required distribution
can be a bit confusing, mainly because the rules for the first RMD are slightly different than the
rules for all future RMDs.

Your first RMD should be taken by Dec. 31 of the year you turn 70½. However, the date you
must begin RMDs is generally April 1 of the year following the year you turn 70½. If you turned
70½ at any time in 2010, your RBD is April 1, 2011. If you wait until 2011 to take that first RMD,
you have to also take a second RMD by Dec. 31, 2011. For most taxpayers, it doesn’t make
sense to double up on the distribution in one year.

Exceptions to the April 1 RBD include the following:

      "Still working" exception: For those who have 401(k)s or other employer plans (not IRAs,
       SEPs or SIMPLEs), your required beginning date is the same April 1 date as for IRA
       owners, unless you are still working for the company where you have the plan. If you
       don’t own more than 5 percent of the company, you can delay your RBD to April 1 of
       the year following the year you retire. This is sometimes called the "still working"
       exception to the RBD.

      "Old money" exception for 403(b)s: Old money does not mean it is from J. Paul Getty.
       Rather, it refers to 403(b) plan money contributed before 1987. Required distributions
       on the balance of your 403(b) plan at Dec. 31, 1986 can be delayed until age 75. You
       must have a cut-off balance clearly showing the Dec. 31, 1986 balance, which most
       plans will have readily available, or it may even be on your current statement. The
       remaining 403(b) account balance (post 1986 money, a.k.a. the "new money") must still
       follow the regular age 70½ IRA distribution rules.

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RMD basics for IRA and plan beneficiaries

Death gets you out of pretty much everything under the tax code, except RMDs. Any RMD not
taken by the IRA owner in the year of death is still required and must be taken by the
beneficiary. It is not taken by the estate unless the estate is the beneficiary. The beneficiary
reports the income on his own tax return. If the IRA owner dies before his RBD, then no
distributions are required for the year of death, even if the IRA owner dies in the year he turned
age 70½.

IRA and plan beneficiaries are also subject to RMDs and the 50 percent penalty for not taking
them. RMDs generally will begin in the year after death of the IRA or plan owner. Non-spouse
beneficiaries of plans may be subject to the plan’s own rules which may require withdrawals
under the five-year rule or even within the year after death. A beneficiary subject to the five-
year rule must completely distribute the account balance by the end of the fifth year following
the year of death. A non-spouse plan beneficiary would be stuck with that option unless the
plan allows the Pension Protection Act provision (effective in 2007) permitting a direct transfer
to an inherited IRA. Roth IRA beneficiaries are also subject to RMDs even though Roth IRA
owners are not.

Spouse beneficiary

Spouse beneficiaries may be able to delay required distributions. If the spouse beneficiary
chooses to roll the IRA over or treat it as her own, she is subject to the regular IRA distribution
rules for IRA owners. If she is 50 years old for example, once she rolls the IRA over, she is not
subject to required distributions until she reaches age 70½, even if her husband was already
taking required distributions.

If the spouse elects to remain as a beneficiary on a traditional or Roth IRA, then required
distributions can be delayed until the later of Dec. 31 of the year the IRA owner would have
reached age 70½, or Dec. 31 of the year following the year of the IRA owner’s death.

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MISTAKE 8: Not Understanding “Green” From “Red” Money

With the oldest boomers turning age 65 in 2011, we are seeing the largest demographic in
history enter into the retirement phase of their lives. This wave of boomers has been met with
a stream of financial products hitting the market hoping to capitalize on all the money in
motion. Boomers, and seniors alike, need to start making serious decisions about which
financial vehicles to utilize for their hard-earned nest egg.

With The Color of Money Planning System, we show clients a simple way to break down the
complex world into two primary categories: Green Money and Red Money. It is specifically
designed to help our clients or prospective clients narrow the, often times overwhelming, world
of financial products and focus in on two or three products to best suit their planning. From
this point, the advisor and client can dig deeper into a simplified selection that is truly right for
their situation.

Incorporated in The Color of Money Planning System is an essential element of the program,
the Rule of 100 report. It uses age as a baseline in its computation to appropriately allocate
assets. The calculation begins with the number 100. Subtracting a client’s age from 100
provides an immediate snapshot of the percentage of his or her assets that should be in the
market or “at risk” and what percentage should be in SAFE money or “no risk” alternatives.
Adjustments are then applied through a detailed risk analysis to ensure your report is based on
your client’s unique preferences and tolerance to risk. This strategy will reduce your client’s
vulnerability to excessive market uncertainty and the volatile market fluctuation that so many
people experienced in 2008, resulting in significant loss.

With so many investors proving to be over-exposed in the market, the Rule of 100 is a perfect
way to educate and inform our clients and prospective clients of the recommended level of risk

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for their age. It also serves as an ideal way to gauge their potential need and interest in
annuities and safe money strategies.

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MISTAKE 9: Not Bridging the “Income Gap”

Qualified retirement plans and Social Security place limits on the contributions, payouts and tax
advantages of benefits for employers and employees. After two market bubbles and two severe
economic recessions in a single decade too many participants have lost their lifetime savings
and now face sizable savings gaps when setting their retirement goals.

As people continue to live longer and retire sooner, they may spend as much as 30% of their
living years in retirement1. 1The Bureau of Labor Statistics reports that retirement is occurring
5.5 years sooner on average in 2000 than in 1950. Over the same period, the expected number
of years in retirement has increased 7.1 years (according to Monthly Labor Review, October
2001). As people continue to live longer and retire sooner, they may spend as much as 30% of
their living years in retirement.

The 401(k) plan and plan sponsor challenge

Many businesses find it advantageous to have a company sponsored retirement savings plan.
The traditional 401(k) plan offered simplicity, good stewardship, and the ability to attract top
talent; however, with the current benefit structure, plan sponsors have been constrained by a
number of challenges that bear on the magnitude of the fees and expenses employees must
pay to the plan:

• Vendors of a Stable Value Fund for example offer reimbursements to administrators for plan
  deposits made to their fund thereby incentivizing the installation of their fund in the plan
  line-up: this arrangement may not always benefit sponsors or participants. In addition,
  Stable Value Funds include Guaranteed Income Contracts (GICs) which typically do not
  disclose fees because investment management fees and distribution charges are
  incorporated into the computation of the guaranteed rate of return.

•   Vendors offer higher payouts to the advisor when they sell their bundled 401(k) plan which
    often forces a sponsor to keep their plan for 10-20 years because of the steep surrender
    costs incurred if cancelling early. Vendors pay higher broker commissions and cover these
    costs with higher investment expenses paid for by a participant which reduces their total
    return on investment.

•   Participants also pay for investment expenses and advisory services in advance by having
    fees debited daily from their account values. Adding fees of 2-4% to adverse market
    corrections and it is clear these plans benefit Wall Street over Main Street.

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The need for safety, principal protection, and guaranteed income for life

As business owners and participants prepare for retirement, they realize much of their
retirement income will be dependent upon uncontrollable market forces. Our Income Planning
System offers a number of options for the timing and characterization of income that will
minimize the amount of exposure to markets and economic recessions. The Income Planning
System eliminates the risk of outliving your assets and links investment savings to future
lifestyle and income expenses rather than betting on having the right asset allocation in place
to increase the pool of assets for the given amount of risk being taken.

Fixed Indexed Annuities generally provide for an election of a guaranteed income payout. These
payouts can be structured to spread taxable income over the distribution period.

How it works

Our Income Planning System is specifically designed to help address many of the challenges
employees face throughout retirement. The plan can:

   Provide funding for needs such as death protection, retirement and disability protection.

   Provide flexibility to choose either fixed or market index accounts or even a combination of
    both as the growth source.

   Offers the opportunity for risk management and more diversification planning.

   Provide certain protection from Long-term Care needs.

1. You select an amount to contribute on a pre-tax basis. Your dollars are used to finance your
   essential income need for life. Contributions can be made from the employer match,
   employee salary deferrals, and qualified asset transfers.

2. At retirement, you may access the values in the financial product to supplement retirement
   income or take a guaranteed income payment for life.

Design alternatives

Depending on the structure of the company and the number of owners involved, the owner has
options as to how to structure the plan. Income Planning can be added to your existing 401(k)
Plan without changing a thing: it is treated just like any other self-directed account. This design
allows employees to self-direct their savings to a principle protected investment that can grow
with market indexes without subjecting those savings to stock and bond market risk. The
contribution is made “before tax” just like it is with mutual funds. This complements the

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qualified plan where the benefits are paid out monthly to meet expenses thus allowing other
qualified plan assets to grow longer term.

Depending on the index selected, growth may be realized in the form of indexed interest that
gets locked in annually so all subsequent growth is tax deferred and compounds tax favored.
This offers not only tax advantages but guarantees all realized gains.

Financing options

You can choose a financing tool that works the best for your situation. The best approach is
dependent upon your age, health, needs and objectives. The earnings from these financial
assets will determine your retirement benefit. Investment returns and principal values will
never reverse backward so their value upon redemption will always be there regardless of stock
and bond markets risk.

Fixed Indexed Annuities Vs Mutual Funds

Annuities and mutual funds are not similar in that our Income Planning System uses a fixed
indexed annuity - a safe, secure investment with guaranteed rates of return based on interest
rates and issued by large financial institutions. Mutual funds are distributed by broker dealers
and fixed indexed annuities are offered by insurance companies. Both possess inherent

The big differences are that while fixed indexed annuities offer market indexed growth they do
not invest directly in the index. This carries several advantages…

   1. No stock or bond market risk
   2. Tax-Deferral
   3. Liquidity

Fixed Indexed Annuities are not SPIC or FDIC protected to guard against Insurance industry
failure, but Annuities do have safety measures put in place by the state to ensure Insurance
companies have reserve pools in place. Insurance companies may also be vetted for financial
strength by obtaining their rating from objective rating firms -- Standard & Poor's, Moody's,
A.M. Best or Duff & Phelps. The more solid the rating usually equates to a more solid financial
backbone of Insurance Company.

Guaranteed Returns:

Annuities are hinged to interest rates and have a minimum guarantee in place. Your investment
will never dip below the guaranteed minimum interest rate during times of falling or low

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interest rates. To offset the problem of low or falling interest rates, insurance companies equip
annuities with guaranteed minimums. This is an agreed minimum rate of interest so that your
investment is assured not to fall below the minimum performance.


Fixed Indexed Annuities have provisions that allow you to withdraw money, generally 10% of
your account value annually. Several other contract provisions allow you access to all of your
funds such as in the event you are hospitalized, undergoing a life-threatening illness, subjected
to a permanent or extended stay in a nursing home, or other major calamities that affect you
economically. In addition, annuities can be structured to pay-out for the life of the owner or
over a fixed term such as five or ten years, thereby spreading out your tax-burden and
providing enhanced income security.

The participant contributes to the fixed indexed annuity and participates in the growth of
various market indexes such as the S&P 500, NASDAQ. Etc. The earnings from these indexes are
credited and subject to caps (either monthly or annually).

If the fixed indexed annuity contract has surrender charges, withdrawals beyond the free
withdrawal provision may be charged. Withdrawals are taxable as ordinary income to the
extent of the gain, and if taken before age 591/2, a 10% penalty may apply.

Below is a sample of the planning system…

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MISTAKE 10: Failure to Understand Your 401k and Other Qualified Plan Rollover Options

Are you unhappy with your 401(K)? If you are like most people, then you too are very
dissatisfied with your 401(K)’s investment options and high fees. This is exactly why so many
people decide to move their money from a 401(K) to an IRA rollover as soon as they leave their
job. Some people even elect to rollover eligible 401(K) balances even while they are working.
The rollover process has a wide range of costly landmines for the uninformed. The steps can be
extremely simple or extremely complex depending on your plan. The tendency is for people to
give up at the first road block. You have to remember that your existing 401(K) provider doesn’t
really want you to move and they are incentivized to keep your account.

If you have already decided that you want to move your 401(K) plan, here is a four step

Step 1: Gathering Information and the CORRECT Forms

Call your employer’s HR department or person who handles the plan. Find out what they
require for a direct rollover. Ask who the plan administrator is. Ask who the 401(K) custodian is.
Sometimes the plan administrator is also the 401(K) custodian but not always.

Call the plan administrator. Ask if you are eligible for a lump sum rollover. If you are no longer
working for the sponsoring company you should be eligible. If are still working for the
sponsoring company or if you are not eligible for a lump sum rollover, find out if any money is
eligible for a partial rollover or an in-service withdrawal. Some company retirement plans have
an all or nothing rollover policy so you need to ask. Find out how much of the eligible balance
to rollover is pre-tax versus after-tax. If you have any after-tax money, you need to decide if you
want that money to be sent directly to you in a separate check (over 59.5 years old) or if you
want it to be rolled over to the IRA. If you roll it over, be sure to keep track of this amount since
it is your cost basis which means you shouldn’t pay taxes on this money since you already did.
You also might want to consider converting the after-tax portion to a ROTH IRA though that
decision involves a much more in-depth decision process.

Call your plan custodian. Be sure to ask if you have any balance in a ROTH 401(K) or if it is all in
a Regular 401(K). If you do have any funds in a ROTH 401(K), you will want to do a direct
rollover for that balance to a ROTH IRA. Be sure to ask if there will be any fees incurred. Fees
vary and may include transfer fees, closing fees, fund redemption fees. If there will be fees, ask
if there is any balance you can rollover without incurring such fees. Depending on the type and
extent of the fees, you might be able to get your new IRA rollover provider to cover the cost. If
the fees are too high, you need to figure out what is causing the fees and if there is anything
that can be done. For instance if there are short-term redemption fees on the funds, you need
to stop contributing to these funds and wait until the redemption period expires.

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You need to find out if there are any surrender penalties. If there are, ask if there is any balance
you can rollover without incurring the penalty. Typically you will find this issue with 403(b)
accounts that have selected the annuity option. For example, one specific annuity option for
403b plans requires about 10 years for the participant to completely rollover their balance
without incurring the surrender penalties. So you might only be able to do a partial rollover
today and have to wait for the remainder until the surrender penalties expire.

If you are still working and planning to do an in-service withdrawal, you need to ask if there will
be restrictions for your participation moving forward. For example, some plans allow in-service
withdrawals but will prohibit you from contributing to the plan for the next six months. If there
are restrictions, you need to weigh the rollover benefit against the restrictions moving forward.

Next, let them know you want to do a DIRECT ROLLOVER (Trustee-to-Trustee). Ask them what
the options are for implementing a direct rollover. Some will be able to do an electronic
transfer while others will only be able to issue a check. It is always best to make it a DIRECT
ROLLOVER which means the money is never titled in your name. The ideal option would be to
transfer the funds directly to your new account electronically. Ask if they require a Letter of
Acceptance and ask if it needs to be notarized or certified. Ask if they require notarized spousal
consent. Ask for the direct rollover forms and any paperwork to do a DIRECT ROLLOVER.

What if you are under 59.5 years of age and planning to retire early?

The Rule-of-55 allows a worker who retires or leaves a job after the year in which he or she
turns 55 to take non-penalized withdrawals from a 401(K). However, if the funds go into an IRA
and are then withdrawn, prior to age 59 ½, a 10% penalty would apply. If you are planning an
early retirement after age 55 but before age 59 1/2, and if your 401k plan allows it, funding
your retirement needs from your 401k plan may make better sense.

What if you are still working?

Your plan might allow in-service withdrawals to an IRA Rollover while still employed. You have
to call and ask them if they allow in-service withdrawals sometimes known as in-service
rollovers, AGE-59.5 Rollovers or AGE-65 Rollovers. Remember to ask if the plan has any
provisions or restrictions that would discourage such a rollover.

Okay, by now you should know what you have and what your options are. If you are doing this
alone, you will need to decide between the options at hand.

Step 2: Contact Your Chosen IRA Rollover Account Custodian.

1. Ask them if they require anything to accept the direct rollover.
2. Open up your IRA Rollover account.

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3. If your 401k provider only distributes by check, tell them how you would like the check to be
made out for a DIRECT Rollover.

Now you should have your new account ready to receive your direct rollover.

Step 3: Execute the Transfer

1. Submit the direct rollover forms and required documentation to the custodian or plan
administrator, which ever applies to you.

2. Be sure to provide them with your new IRA Rollover account number. It should be on your
check or part of the electronic transfer request.

3. it’s important to avoid any receipt of the funds that might trigger an unanticipated tax
consequence. The DIRECT ROLLOVER (Trustee-to-Trustee) transfer minimizes the chance of a
taxable event occurring during the transfer process.

4. The direct rollover typically takes two to six weeks though it can be even longer depending
on the responsiveness of your 401(K) provider.

5. You should periodically contact the HR department, the custodian or the administrator to
verify progression.

6. If you get a check in the mail, make sure the balance is what you had expected and make
sure the check was made out correctly. Remember, the check should not name you directly but
should name the new custodian for your benefit and include the new account number.

7. You will have 60 days, including weekend and holidays, from receipt to make the deposit into
your new account. Remember to request that your new account number be included on the
check or the electronic transfer.

Warning – If the rollover check is payable to you, the firm must withhold 20% of the
distribution. As a result, you will get a check for only 80% of your 401(K) balance. This means
you will need to come up with the remaining 20% from your own pocket to deposit into your
IRA rollover. You will receive credit for the taxes that were withheld but not until you file the
following year. This could leave you short on cash, out of the markets or providing a sizable
interest-free loan to the government. To avoid this 20% headache, you need to complete a
DIRECT ROLLOVER (Trustee-To-Trustee) which essentially means you never get the money in
your name but rather FBO (For the Benefit Of), For Your Benefit.

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Step 4: Once the money is in your new IRA Rollover:

1. You will likely have to transfer cash from your 401(K) so you should have an idea of what you
are going to do with the money once it is deposited.

2. Contact your old 401(K) custodian and confirm that they show a zero balance for your

3. Expect a form 1099R from your old plan. Hold on to it. Even though you don’t have a taxable
event, you will need to show the rollover on your next annual tax return.

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