Are you familiar with the common challenges associated with IRA accounts? Many individuals encounter issues with taxes, required minimum distributions, beneficiary taxation, and market volatility as they progress through retirement planning. These hurdles often lead to financial strain for retirees and their beneficiaries. To address these concerns, the IRA rescue plan was created as a strategic solution. This plan offers a way to mitigate the drawbacks of traditional IRAs and maximize the benefits for future generations. In this blog, we delve into the intricacies of the IRA rescue plan and explore how it can help safeguard your financial future
Are you one of the many who have diligently funded an IRA for retirement? It’s understandable—with tax-deductible contributions and tax-deferred growth, IRAs seem like a smart move. But here’s the catch: those benefits are front-loaded.
The Most Common IRA Issues
Here are the main problems that investors encounter with IRAs decades after funding them and why you may want to consider an IRA rescue plan.
- Tax on distributions: IRA distributions are taxed as ordinary income. The age-old wisdom here was that, when you’re retired, you should be in a lower tax bracket, thereby paying a low rate of tax on your distributions. Clearly, there are several assumptions built in here because you may or may not be in a lower tax bracket, and we don’t know what the tax brackets will look like in the future.
- Required minimum distributions (RMD): RMDs can be nasty. Let’s say you were very diligent with funding your retirement, you have other income sources, and you decide not to take withdrawals from your IRA account. Perhaps you can pass it along to your kids so they can enjoy the tax-deferred growth for another few decades? Think again. RMDs require you to start taking money out each year once you reach age 72. The amount you are required to take will increase a little bit each year. RMDs eliminate one of the key potential benefits of funding IRA accounts — that the tax deferral can be passed along to future generations.
- Beneficiary taxation: If you happen to be above the estate and gift tax exclusion amount (currently $11.7 million), you may have another IRA issue on your hands. Not only will your beneficiaries be required to take taxable distributions each year, but the IRA account value will also be included when calculating your estate tax bill. What does that mean? Your IRA could be taxed at 50% in addition to your beneficiaries paying income tax on the distributions. The result could be a $1 million IRA yielding only a few hundred thousand dollars to the beneficiaries.
- Volatility: Don’t forget that the stock market can play a role in all of this. Hopefully, your IRA averaged a 7-9% return over the 30 or so years in which you were funding it. However, as a vehicle for creating and transferring wealth, an IRA that owns stocks and bonds can be quite risky. If you’re using it for retirement income, you don’t know with any certainty what your account value will be from year to year. Perhaps one year it’s up 20%, but the next year it’s down 30%. Your beneficiaries will experience a similar problem when it comes to taking distributions or even paying estate taxes. The account value could drop by 20% from the date of death, resulting in even more of a tax headache for the beneficiaries.
The IRA Rescue Plan with Life Insurance
So what is an IRA rescue with life insurance? Depending on your exact goals, withdrawing money from your IRA now, paying the tax due, and then funding a life insurance policy with the proceeds may net your beneficiaries dramatically more money. You may be able to increase the ultimate value of your IRA up to 20 times the ultimate value in this manner.
Not only is the death benefit from a life insurance policy guaranteed (meaning you’ll know exactly what your beneficiaries will get) but the proceeds can be income and estate tax free. The tax efficiency of life insurance is the primary reason to convert your existing IRA account to a life insurance policy, particularly if your goal is to maximize the transfer of your wealth from one generation to the next.
The specifics regarding how to handle your IRA can vary a bit depending on your age, health status, and goals for the IRA. Rather than blindly contributing and distributing from your IRA, call 800-DIE-RICH to speak to one of Howard Kaye’s life insurance advisors. We can help you think through your estate plan and show you how to create dramatically more wealth to pass along to future generations.
