Retirement Investment – Can You Squeeze the Risk Out of Your Retirement Investment

The Perfect Retirement Investment

A perfect retirement investment would look something like this –
* You can’t lose money. Safety guaranteed.
* Your payouts can only go up. Never down. No matter what happens.

This retirement investment exists: variable annuities. Competition has made them better. Take a second look now, if you passed on them before.

There’s one type of variable annuity that has what you want. Don’t confuse it with the many other annuities out there. Here’s how it works –
* A state-regulated “Guaranty Fund” insures your money.
* $100K to $500K, depending on state.
* An insurance company guarantees your payouts.
* It must have the cash to pay you, by law.
* You get monthly payouts for the rest of your life, or until you withdraw your money.
* Your monthly payouts never go down.
* You can’t lose money.
* Your heirs get the balance, if you die before you get back what you put in.
* You can cash in your investment without penalty – typically after 8 years.

Insurance companies create annuities. You can buy from insurance companies, banks, brokers, insurance agents, and financial planners.
* Your retirement investment is made in a lump sum, or a series of payments over time.
* The annuity has a cash value which rises or falls with what it’s invested in, but
* You buy an annuity to get monthly payouts.
* Your monthly payout goes up if the annuity’s average cash value goes up over time.
* Some annuities offer a selection of “sub-accounts” like mutual funds. You can move your money among them.
* Your monthly payout can only go up with variable annuities. Never down.
* Payouts can last the rest of your life.
Safety from market volatility.

You can get monthly payouts right away. You can also defer payouts until sometime in the future.
* The longer payouts are deferred, the bigger they can get.
* Some companies grow your eventual payout as if the annuity’s cash value had grown at least 5% for each year you defer payouts,
* For example, if you buy an annuity for $100K, and a bear market drags the annuity’s cash value down to $80K the first year –
* Your eventual payout would still rise as if the annuity’s cash value had gone up 5% to $105K.
* This would happen every year, so long as you deferred payouts.
* If the annuity’s value rises to $110K the first year, your eventual payouts would reflect the 10% gain.
* If a 50-year old bought an annuity and deferred payouts until he was 60,
* His payouts would grow as if the annuity’s value had grown at least 50% (10 years X 5%), no matter what.

Things to Watch Out For

Sales Fees – Brokers and agents charge fees of 1% to 12% of your retirement investment. That’s huge. They’re paid by the insurance company, which is paid by you.
* Buy direct from “no load” insurance companies or from a financial planner to avoid sales fees.

Surrender Fees – Many annuities charge “surrender” fees if you withdraw more than a small part of your money before 8 years, on average. These fees can also be very high.
* “No load” companies usually don’t charge surrender fees.
* Big fees can crush your returns, so shop carefully.

Taxes – Annuities are taxed like IRAs.
* Payouts and withdrawals are regular income.
* Assets grow untaxed until they’re withdrawn.
* Withdrawals before you’re 59 get a 10% tax penalty.
* Don’t buy an annuity in an IRA.
* The IRA is already tax deferred, so you get no tax break for paying annuity fees.

Insurance Companies – The insurance company selling you the annuity must be solid.
* A.M. Best rates insurance companies.
* Find the A.M. Best books in the reference department of your library.
* Go with an A+ rating or better.

Inflation- Even with a variable annuity, your payout rises slowly with the average value of the annuity.
* Inflation can erode that income,
* So put only part of your retirement investments in an annuity.

Annuities are long-term investments.

They’re not made for fast trades.
* If you want guaranteed monthly payouts for life, variable annuities are a perfect retirement investment.
* You pay fees 1%+ above mutual funds to get this security.
* If you want tax-deferred capital gains, IRAs and 401Ks have lower fees.

Decide how much money you’ll need every month after retirement.
* Consider your Social Security, pensions, and any other retirement investment.
* With a variable annuity, you should be able to cover your basic expenses.

Don’t try for more with your annuity. Remember inflation risk.

I’ve described just variable annuities. There are many other kinds. Shop with care. Use advisers who work with several insurance companies.

Medicare and California Sales Tax An Analysis

Theres a rumor going around that a 3.8 percent sales tax will be applied to home sales in order to fund Medicare under the Affordable Care Act. Although that rumor is patently false, there has always been sales tax associated with certain Medicare-covered transactions.

Specifically, if your firm sells medical supplies and has been treating sales under Medicare Part B (Medicare B) as exempt from California sales tax, it is sitting on a fiscal time bomb. Since the program began, the California State Board of Equalization (Board) has been regularly assessing sales tax on Medicare B transactions in its audits.

Even businesses reporting correctly are generally confused about why sales under Medicare B are treated differently from sales under Part A. This article will discuss the different treatments and explain how sales tax applies to Medicare receipts in general.

Some sales under Medicare are always exempt, simply because the products involved fall under the general California exemption for prescription medicines. However, such transactions are outside the scope of this article, which solely addresses products ordinarily considered taxable when sold to patients. (Medical services are exempt from sales taxes in general, in California and nearly everywhere else.)

In order for an otherwise taxable product to be exempted from sales tax under Medicare, the product must be considered sold to the United States government rather than to the patient. Sales to the U.S. government are exempt from sales tax for Constitutional reasons. This exemption has been codified in California Revenue and Taxation Code Section 6381 and is further delineated by Sales and Use Tax Regulation 1614.

Whether a Medicare transaction is considered an exempt sale to the U.S. government or a taxable sale to an individual patient depends on whether the sale falls under Medicare Part A or Part B. All sales under Part A are regarded as exempt sales to the U.S. government. Sales under Part B are considered made directly to the patient, and they are taxable unless some other exemption applies (such as the exemption for sales for resale or sales in interstate commerce). Differences between Parts A and B that give rise to this distinction are discussed below.

Financing and Participation:

Medicare A is financed through payroll withholding and self-employment taxes. Participation is mandatory for anyone within the Social Security system. Most people who pay the taxes that fund Medicare A are under retirement age and not yet eligible for Medicare coverage.

Medicare B is financed partly through monthly premiums paid by those covered under the program. The rest of the financing comes from general funds of the federal government. Anyone covered by Part A is eligible for Part B, but participation in Part B is optional. Once participants enroll in the Medicare B program, they are required to pay the monthly premiums, generally through withholding from their Social Security checks.

Cost to Participants:

Medicare A is funded entirely through self-employment taxes and the Medicare percentage withheld from employee paychecks and matched by employers. There are no costs specific to participants.

Medicare B is charged directly to each participant, generally by a monthly deduction from the participants Social Security check. The monthly costs are considered medical insurance premiums and may be claimed as an itemized deduction on the participants income tax return.

Payment of Claims:

Medicare A payments are made directly to providers of medical products or services under a procedure mandated by federal law. Since the law requires direct payment by the U.S. government to providers, medical supplies sold by providers under Medicare A are considered sold to the U.S. Government.

Medicare B payments may be made either to providers or patients. If a provider has agreed to accept assignment of Medicare benefits (which essentially constitutes agreement to accept Medicares version of “reasonable charges”), the provider prepares and submits a claim form and is reimbursed directly by the insurer acting on behalf of the U.S. government. The patient pays only the deductible, co-insurance or non-allowable costs.

If the patient uses a provider who has not agreed to accept assignment of benefits, the patient pays the entire charge and then files a claim for reimbursement. Any such reimbursement goes directly to the patient. Under Medicare B, payments are considered reimbursements of charges to the patient, whether the payments go directly to the patient or to the provider on the patients behalf.

The U.S. Governments Position:

Medicare A does not allow reimbursement for sales taxes charged on medical supplies, based on the theory that providers are selling to the U.S. government and the sales are therefore exempt.

Medicare B has built sales taxes into its calculations of “reasonable charges,” as stated inMedicare Carriers Manualsection 5213. In accepting sales taxes as allowable charges under Medicare B, the U.S. Department of Health and Human Services has taken the position that sales under the program are not sales to the U.S. government.

Sales Tax Effect:

Medicare A payments are made directly by the U.S. government to providers under federal law, which theoretically results in sales to the United States as discussed above.

Medicare B payments may be made either directly to patients or to providers for the benefit of patients, depending on each patients choice of provider. The patients ability to make this choice has been interpreted to mean that payments under Medicare B are simply reimbursements to patients. Under this “patient reimbursement” theory, any sale by the provider under Medicare B is made to the patient rather than the United States, regardless of which party prepares the claim form or receives the reimbursement check.

Both the U.S. Department of Health and Human Services and the State Board of Equalization have accepted these legal interpretations, and it appears unlikely that an effort to re-characterize sales under Medicare B as sales to the U.S. government would prevail. If the law is ever changed to make direct payments to providers mandatory under Part B, the application of sales tax could well change with it.

Although subject to tax, amounts claimed for 80 percent reimbursement under Medicare B are considered to include applicable sales taxes, because the Medicare Carriers Manual defines “reasonable charges” as including such taxes. Accordingly, when providers report their taxable sales to the Board, they are entitled to claim a deduction for sales taxes included in Medicare B reimbursements.


The theoretical justification for distinguishing sales under Medicare A from sales under Medicare B may not be entirely logical, but compliance with the Board of Equalizations interpretation is the only prudent approach. If you have been treating all sales under Medicare B as exempt, you should now begin reporting those sales as you would report sales to any private party.

But what about earlier periods? If your firm is selected for a Board audit, you undoubtedly will be billed for additional taxes for those periods. However, the amount of additional taxes may be subject to adjustment. This is true not only for Medicare sales but for any area where tax changes are recommended by Board auditors. Audits incorporate assumptions and tests that often can be modified and occasionally can be overcome.

Always remember that you have the right to review any tax auditors working papers or have a sales tax expert review the audit on your behalf. Exercising that right will at least bring you peace of mind. It might also result in significant tax savings.