Brad Rhodes: Does your retirement account need saving? – Salisbury Post
Because of the accumulation benefits of tax deferral, many people have successfully created substantial IRAs or 401(K) accounts or other qualified plans.
Many people are shocked at how much of their tax-deferred balances will be wiped out by current taxes when the funds are withdrawn. It’s not uncommon for these accounts to have amassed seven figures of dollars in total. It is also generally the case that little thought has been given to what will happen to hard-earned money when money is withdrawn from the Scheme.
Tax reductions can be dramatic
The tax-induced reduction in total assets accruing to family members can be dramatic. For example, we recently reviewed a client situation where the plan holder had a balance of $6 million. The client wanted to start distributions at age 70.5. Additionally, the client did not need any distribution to maintain his lifestyle and wanted all funds to go to the children. The client was disappointed to learn that under the client’s current structure when spread over 10 years, the $6 million would be reduced by $2.6 million due to taxes and would only earn $3.4 million dollars of net proceeds to beneficiaries.
The asset erosion of $2.6 million occurs because all funds from a qualified plan are fully taxable as ordinary income. And, contrary to common belief, the assets of an IRA do not benefit from a progressive basis when they are transmitted. So while this case was about a 43% reduction, other plans can be crushed by up to 75% due to income and inheritance taxes.
The existing plan also had other vulnerabilities. One was that the assets were all held in inequities subject to significant declines in value. Over a long period, the probability of such a reduction occurring is significant.
How to increase net to beneficiaries without risk
Fortunately, a solution that could produce guaranteed results was possible in this particular situation. We have a plan in place where taxable IRA distributions will be used to purchase the appropriate type of life insurance with the family named as the beneficiary. The client and their family can be much better off with this solution because:
- Assets are transferred from taxable to untaxed.
- The family’s total after-tax net worth is greatly increased.
- The increase in assets is immediate.
- There is no need to enter speculative investments to realize the gain.
- Account value is not subject to market losses.
- The results are guaranteed by some of the most important financial companies in the world.
- The whole plan can be implemented on a set-and-forget basis.
IRA Rescue Implementation for Your Qualified Plan
Each rescue from an IRA or 401K or other qualified plan is tailor-made for your situation. For people with separate plans and assets, net benefits can go from about 25% of asset value to several times the asset value. For married couples inheriting each other’s IRAs, the after-tax return can be much higher than otherwise. IRA Rescue can be achieved by converting a client’s weakest assets – those with the largest tax liabilities – into non-taxed assets.
And even if the value of a plan’s assets increases dramatically immediately, the tax liability on plan distributions is spread over time, to the benefit of the client.
All plans can and should be coordinated with your accounting and legal, trustee and estate advisors, and of course we do.
A comprehensive solution is available with plan distributions that can be executed on time, trustees ensuring policy premiums are paid as needed, trustees providing gifts to beneficiaries, and taxes that can be paid to the funding source. These solutions can truly be set up to be set and forget while providing far greater financial benefits to those for whom a client wishes to provide financial security.
Brad Rhodes is a Lexington columnist and member of Syndicated columnistsa national organization committed to a transparent approach to financial management.