Joe Marullo Insurance & Retirement Services
16818 Doverwood Way
Houston, Texas 77058
Many people are shocked at how much of their tax-deferred balances will be erased by current taxes when funds are withdrawn, as it is not uncommon for these accounts to have amassed seven figures of total dollars. It is also usually the case that little attention has been focused on what will happen to one’s hard-earned dollars when taking money out of the Plan.
Reductions Due To Taxes Can Be Dramatic
The tax-caused decrease in total assets going to family members can be dramatic. For example, a client recently reviewed their situation in which the plan holder had a $6 million balance. The client wished to begin distributions at age 70½. Further, the client did not require any distributions to maintain their lifestyle and wanted all the funds to go to children. The client was disappointed to learn that, under the current structure, the $6 million, when distributed over ten years, would be slashed by $2.6 million in taxes and only yield $3.4 million net proceeds to the beneficiaries.
The $2.6 million of asset erosion occurs because all funds coming out of a qualified plan are fully taxable as ordinary income. And, contrary to common belief, assets in an IRA do not benefit from a step-up basis when passed on. While this case was confronting a reduction of some 43%, other plans can be crushed by as much as 75% because of income and estate taxes.
The existing Plan had other vulnerabilities, as well. The assets were all held in equities subject to significant drops in value. Over a lengthy period, the probability that such a reduction will occur is substantial.
How To Increase Net To Beneficiaries Without Risk
Fortunately, a solution that could produce guaranteed results was possible in this particular situation. A plan was set up where taxable distributions from the IRA would be used to purchase the appropriate type of life insurance with the family named as beneficiaries. The client and the client’s family would be better off with this solution because:
Implementing IRA Rescue For Your Qualified Plan
IRA Rescue is achieved by converting a client’s weakest assets – those with the most significant tax liabilities – to non-taxed assets. Each rescue of an IRA or 401K or other qualified Plan is custom-made for your particular circumstances. For individuals with separate Plans and assets, net benefits can increase from some 25% of asset value to many times the asset value. For married couples inheriting each others’ IRAs, the after-tax yield can be much higher than otherwise.
And while a plan’s asset value is significantly increased immediately, the tax liability on distributions from the Plan is spread over time, much to the client’s advantage.
All plans should be coordinated with accounting and legal, trust, and estate advisors, as a matter of course. A complete solution is available with plan distributions to be executed on schedule, trustees guaranteeing that policy premiums are paid as required, trustees delivering gifts to beneficiaries, and taxes can be paid at the funding source. These solutions can truly be established to set and forget while delivering much more financial benefit to clients who wish to provide financial security.
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