SPLIT FUNDING

Split Funding is a safe money technique that can be used to provide a variety of financial solutions. The purpose of split funding is to generate stable tax-advantaged monthly income while preserving principal.

SPLIT FUNDING COULD BE USED TO:

• Possibly reduce or eliminate Social Security Benefit Taxation
• Pay long-term-care premiums or other expenses while maintaining control of the asset
• Create an income stream to bridge the gap between early retirement and Social Security
• Pay college costs on a tax-advantaged basis

THE BASIC PREMISE:

Let’s say you were age 57, had $100,000 and wanted to receive additional monthly income for 5 years until you were eligible for Social Security. Perhaps you could put that money into a 5-year fixed annuity or CD earning around 4.5%, but the income would be fully taxable. Here's the split-funded idea:

Put $80,000 into the five year multi-year fixed annuity. If we can earn 4.56% a year the $80,000 will grow back to $100,000 in five years and we'll still have our nest egg. The reason an annuity is used is because the interest growth is not taxed as long as it remains inside the annuity (you could also use Savings Bonds for the tax-deferred growth, but the rate on the bonds changes every six months leaving uncertainty about how much the bonds would be worth in five years).

Take the remaining $20,000 and buy an immediate annuity (aka income annuity) that will pay a monthly income for five years (technically called a 5-Year Period Certain), and then it the immediate annuity is used up. When I last looked at rates this produced around $345 for 60 months or five years.

THE RESULTS:

For every month from age 57 until age 62 the immediate annuity will produce an income of $345 and $333 of that amount is Income Tax Free. Almost 97% of the income is free from federal, state and Social Security benefit taxation. At the end of five years the multi-year fixed annuity has a value if $100,000. It should be noted that if the fixed annuity is cashed in taxes would be owed on the growth over the original $80,000.

Split funding provides stable income for the period needed and protection of principal. Although the concept may be used with a variety of safe money places, the tax advantages and guarantees of annuities make these places the usual choice.

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Split Funding

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Resources

CONSUMER'S GUIDE:
WEALTH TRANSFER

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More Financial Concepts

Personal Pension Plan

Wealth Transfer

Basic Money Math

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