Have you been contributing to an IRA or 401(k) for most of your working life? Many of us do this in an effort to reduce our taxable income and receive tax-deferred growth. We often refer to these plans as “front-loaded” because most of the tax benefits you’ll receive are limited to the time when the contributions are made. The headaches or IRA tax problem arises down the road when it’s time for distributions or when you attempt to pass that tax deferral along to your heirs. Let’s review a few reasons why life insurance is a superior vehicle for building, preserving, and transferring wealth.
Required minimum distributions (RMD). Uncle Sam doesn’t want you to pass your tax-deferred funds along to your heirs. For this reason, distribution rules exist that require you to start taking money out of your IRA accounts by age 72, even if you don’t want to. This requirement can boost your income and push you into a higher tax bracket at a time when you’re not working and trying to pay less tax. Life insurance doesn’t have this confusing, onerous requirement. If you take money out while you’re still alive, the distribution generally comes in the form of a loan. If you don’t need the money while you’re alive, your heirs will receive the full, tax-free death benefit payment.
Death benefits. Let’s say you open a new IRA account and deposit $1,000. What exactly did that buy you? Probably a few shares in a mutual fund, perhaps one that bounces around with the price of stocks and bonds. When you make that first annual premium payment into your life insurance policy, you are buying a death benefit. That death benefit could be $1 million, $2 million, maybe $10 million dollars! Of course, you hope not to pass away until a ripe old age, but the fact that life insurance puts that death benefit protection in place as soon as that first premium is paid is a very valuable insurance benefit — one you won’t find with any other financial vehicle.
Significant cash value and accumulation. Many policies, when properly structured, provide for market-based performance tied to a market index. Over time, this money can create a fabulous source of tax-free income through policy loans that can be very helpful supplementing retirement income. Through special software programs these plans can be designed to solve for a “target income” during the retirement years from 65-95 of $20,000, $40,000, or $100,000 a year or more. All without any risk of principal loss!
Contribution limits. The contribution limit for an IRA is a measly $6,000 this year. If you’re over age 50, you get to contribute an extra $1,000. Contribution limits on retirement plans like 401(k)s are a bit better ($19,500 or $26,000 if over age 50) but even so, how much is this really helping a person who earns $500,000 or more and wants to really sock money away? When funding life insurance, you don’t need to think about contribution limits. In fact, you often start with the benefit amount you want to buy (say $2 million or $5 million) and then deduce what your one-time or annual premium will need to be to pass that amount along.
Early withdrawal penalties. Situations may arise in life in which you need to access the money inside one of your retirement plans. Unfortunately, early withdrawals from IRA accounts are heavily penalized. Not only will you pay income taxes on your withdrawal, but the IRS imposes a 10% penalty as well. The hardship withdrawals that may allow you to sidestep the 10% penalty are few and far between and hard to qualify for. Properly structured life insurance that passes a “seven- pay test” does not impose early withdrawal penalties. As long as the policy has built up cash value, there are several ways in which to access that cash, including partial withdrawals and policy loans.
If you already have an IRA and are wondering how to reposition your portfolio now to avoid going further down a road that may complicate your financial life, don’t worry. We have IRA solutions that will show you how withdrawing money now — even when that involves paying tax — will help you pass much more money along to your heirs later on. Our IRA maximization strategies are time tested.
The life insurance advisors at Howard Kaye can show you a new way to think about life insurance. By properly using this incredibly flexible estate planning tool, you can avoid many of the pitfalls with IRAs and more easily reach your financial goals. Speak to us today by calling 800-DIE-RICH and let’s start developing a custom plan for you.
