How to Leverage Your IRA for Family and Charity Using Life Insurance

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Let’s talk about IRA accounts. When we refer to IRAs, we’re including 401(k)s, 403(b)s, SEP IRAs, and any other traditional retirement plan you can think of under that title. It’s likely you’re already putting money into one of these vehicles automatically every pay cycle.

You – and so many other investors – probably do so for the two main benefits: The first is that contributions into traditional retirement plans are tax deductible, so if you earn $100,000 and defer $15,000 into your 401(k), you will only pay tax on $85,000. The other benefit is that each dollar you put into the plan grows tax deferred until withdrawn, which will presumably be many years into the future. That’s a great deal, right?

Not necessarily. We would like to share a less-talked-about view with you. We think you may be setting yourself and your heirs up for a taxable disaster. We think most of the so-called “benefits” of IRA accounts are misunderstood and front-loaded. Why? To start, either you or your heirs will pay tax on that money in the future. If your $500,000 grows to $1 million over time, all of it will be taxed when it’s withdrawn.

And if you plan to pass that money along to your kids instead of withdrawing it — think again. Required minimum distribution (RMD) rules require that you start taking money out (and pay tax on it) once you turn 70½. IRA accounts are also included in estate tax calculations, so if you’re within the estate tax bracket, your heirs may only see a fraction of your money after income and estate taxes are paid.

Life Insurance Offers a Superior Alternative

What’s a better solution? Funding a life insurance policy instead will allow you to pass along far more dollars to both your family and charity. Take the following example:

Sam is 70 years old. He has an IRA worth $2 million, which he doesn’t need to take withdrawals from during retirement. Sam would like to leave most of his money to his family but also provide for a few charities that he supports. We figure that if Sam were to die and his kids inherited his IRA, based on Sam’s net worth and estate tax liability, they would take home only $800,000 after paying $1.2 million in income and estate taxes. But we can turn that same $2 million into $7 million instead.

That $2 million IRA can spin off around $120,000 in dividends and interest if the IRA is allocated specifically into income-producing investments. After taxes, that amount is closer to $80,000. If Sam dedicates the full $80,000 each year to a life insurance policy written on his 63-year-old wife, his kids will be guaranteed $5 million when she passes away. If purchased inside of a life insurance trust (ILIT), that full $5 million would be tax-free.  

Besides that, Sam still has his original principal of $2 million generating dividends and interest inside a portfolio of stocks and bonds. This money can be used for anything, like fulfilling his wish to support charities by making them his IRA beneficiaries. If he wants to ensure that the $2 million in his IRA remains free of income and estate tax, he can set up a private foundation through which to give that money away.

Try a New Approach

Our IRA strategies will help you avoid losing up to 75% of your IRA to income and estate taxes upon your death. We can also help you eliminate the onerous RMD rules that most of us will be subjected to at age 70½. Finally, we can maximize the legacy you leave to your families and charity by leveraging the value of your IRA by 10 times — or even 20 times — its current value.  

If you want to learn more about how to greatly enhance your legacy using our innovative life insurance strategies, call the Howard Kaye Insurance Agency today at 800-DIE-RICH and speak with one of our experts. We will help you build a rock solid estate plan that leaves as much money as possible to your  beneficiaries.

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