When you think about retirement planning, what generally comes to mind? Funding your 401(k), IRA, or other tax-deferred retirement account is probably high on the list.
We like the idea of saving in advance for retirement through tax-efficient vehicles, but we have a real problem naming the traditional 401(k) as one of the most tax-efficient places to save. Here’s why.
Why 401(k)s Aren’t Such a Great Deal
In the early years, when you are accumulating assets, traditional retirement plans such as the 401(k) seem like a great deal. Whatever you invest in the plan reduces your taxable income and grows on a tax-deferred basis until retirement. Presumably, you’ll be in a lower tax bracket during retirement and the benefits of many years of tax deferral will outweigh the tax due on your future distributions.
Fast forward to retirement. Let’s say you have $1 million in your IRA and reach the point where required minimum distributions (RMD) begin. Regardless of whether you want to or not, you will be forced to pull roughly $40,000 out of your account once you reach age 70½.
The RMD amount, which increases a little bit each year, will be taxed at your ordinary income rate. If you happen to be in a fairly high tax bracket because you did well in your life and have multiple income sources, you may start regretting your decision to place so much cash into these tax-deferred vehicles in the first place.
Buying Life Insurance on A Parent Using Your 401K
So what do we suggest doing? Rather than pumping $15,000 or more each year into a 401(K) plan, we think you should consider our “401 Kaye” strategy instead. This means taking the same money you were dedicating to your retirement plan and using it to buy a life insurance policy on one or both of your parents. Be the beneficiary! This will help you create a much more secure retirement in several important ways. In this manner, you will literally create your own inheritance.
First, the death benefit payment from a life insurance policy is fixed and guaranteed, so you’ll know exactly how much money you will inherit. If your $15,000 per year buys a $2 million policy on your 60-year-old mother, that means you will receive $2 million at some point in the future. You don’t know the exact date because none of us can know with certainty when anybody will die, but you can probably estimate that your parents’ death will be around the same time as your retirement.
A Tax-Free Guaranteed Alternative
In addition to being fixed and guaranteed, the death benefit payment can be income- and estate-tax-free when structured properly. This creates much more tax efficiency than simply deferring tax and paying income and estate taxes down the road when your account balance is higher. You’ll also avoid the hated RMD requirement, which comes back to haunt many people and their retirement plans. By eliminating the requirement to withdraw money, you avoid paying unnecessary tax and save a huge headache for you and your heirs.
The 401 Kaye strategy also eliminates the need to invest your hard-earned money in stocks and bonds. By using life insurance, you know exactly how much cash you are buying in the future and don’t have to worry about global politics or natural disasters causing the value of your retirement account to crumble. After that first premium payment is made, the death benefit is locked into place.
If you’ve already funded your retirement plan and are dealing with the tax issues related to distributions, we do have a rescue solution for you as well. Pulling money out, paying the tax, and buying a life insurance policy with the proceeds could help pass significantly more wealth along to your heirs.
At Howard Kaye, we can show you how to rethink retirement planning in a whole new light. Our 401-Kaye strategy is tax efficient, guaranteed, and will help you better fund retirement than if you use the typical investment products and strategies that many people blindly use. Call 800-DIE-RICH to speak to one our advisors today to learn more.
