When
Your IRA Becomes a
Tax Time-Bomb
Individual Retirement
Accounts have for years been the most popular retirement savings alternative for
people who want high interest and tax shelter for their retirement savings. In
the last 20 years, billions of dollars have been invested in these accounts by
individuals seeking safety and predictability, competitive rates of return and
favorable tax treatment. If you currently own an IRA, there is something you
should know that is seldom mentioned by the company or the agent who presents
it.
One of the most important
features of an IRA is that it allows you to take an income-tax deduction on the
money you contribute to the plan and compound yearly earnings free of current
tax. By eliminating the current tax cost on the deposits and on the
accumulation, you can build a much larger account value than with a typical
interest bearing account such as a bank CD. When you combine these features with
a slightly higher interest rate than is typically found in bank savings, it is
easy to see why IRAs are so popular.
IRA’s are great for
accumulating money to be used at some future date to enhance income; as long as
it is understood that when you begin to withdraw money from the plan you must
then pay taxes on all that you withdraw. Many people find that, in retirement,
their needs for income are less than expected and they are able to get along
just fine on the income from other sources without taking money from their IRA.
As long as the money remains in the plan, it will be sheltered from taxes. But
IRS regulations require that, regardless of your need (or lack there of) for
additional retirement income, you must begin taking distributions from
the plan at age 70 ˝. You are given a choice of formulas to determine the
amount of income you must take, and most people choose the one which will allow
the most money to remain tax-sheltered in the plan.
The
Unknown Tax Trap
It is at the
time of the total withdrawal of funds, which most often occurs upon the death of
the owner, that the surprise occurs.
An IRA does not get a
“step-up in basis” at the time of your death. It is quite common today to
see real estate and stocks that have been owned for years and that have
appreciated ten fold to a hundred fold be passed on to heirs upon the death of
the owner with no income tax whatsoever. But an IRA does not enjoy this tax
feature. Specifically excluded from the step-up in basis rule, all of the money
in the plan, including all of the deposits and all of the gain is subject to
income tax when received by the beneficiary.
Since a vast majority of the
$Billions now residing in IRAs is destined to be passed on to the children of
the owners, the tax bills will come as a tremendous shock to all concerned. In
fact, it is not uncommon to see proceeds from an IRA that has been accumulated
and tax sheltered in a relatively low tax bracket, incur taxes of 33% or more
when added to the existing income of the beneficiary. This clearly was not the
intent of the IRA owner. But it occurred because of the failure to recognize
that there is now a new purpose for the money on deposit in the IRA and
to choose a new, more appropriate strategy.
The Better Strategy
There is an
alternative to the IRA that will satisfy the new objectives of saving
money for an emergency and passing any unused balances to our heirs. It provides
tax deferral, safety and immediate liquidity, but when it passes to a
beneficiary upon the death of the owner, there is a major difference. The entire
tax-sheltered accumulation passes income tax-free to the named
beneficiary.
The product is a special life
insurance policy designed for acceptable cash value growth and a very high
estate benefit to the heirs. People who are planning on passing their IRA’s on
to their children at death will find that the after tax benefits will be
substantially higher if the money is accumulated in a life insurance policy
rather than an IRA when they die. Not only does it include the money which
accumulated in the cash value account, but an additional amount of life
insurance benefit that is paid to the beneficiary. This combination, paid income
tax free, is the most desirable way to pass IRA’s to children or other named
beneficiaries.
For
a complete unbiased analysis of your specific situation, simply go to our Tax
Time-Bomb Form, supply the requested information and we will provide you
with a FREE detailed Illustration/Evaluation via email, fax or U.S. Postal
Service, to help you determine if this strategy is right for you:
Tax Time-Bomb Form
Or, if you would prefer to speak directly with one of our
Specialists, please call us toll-free at 1-800-239-0356.
Getting From an IRA To
Life Insurance
Once most
people realize the benefit of using life insurance, they seek the most efficient
way to transfer the money from the IRA. Unfortunately, there is no way to make a
tax-free transfer of the balance from an IRA to a life insurance policy. In
other words, the tax must always be paid. But the sooner you recognize the
income, the less sheltered tax you will be accumulating.
If the life insurance
approach matches your desire to transfer your money to your loved ones, move the
money as soon as possible. The sooner this transaction occurs, the less taxes
will be paid. It’s really OK to pay these taxes now because they will
ultimately be recovered by the life insurance element that will be paid
to the beneficiary in addition to the cash value.
Assume a lady (Sally) who is
70 years old who owns an IRA which is now worth $70,000. If it continues to
accumulate until she is 78 years old when she dies, it will have a value of
approximately $111,569. But when her beneficiary receives it, income taxes will
be due on the entire $111,569. At 33% the taxes would be $36,818 leaving a final
balance of $74,751 for the heirs.
If instead she were to begin
liquidating her IRA over 7 years, her taxes would be approximately $2,151 per
year, leaving $8,604 per year for seven years to deposit into a life insurance
policy. This would purchase a contract with a death benefit of approximately
$123,000*. Now if she died at age 78, her children would receive $123,000
instead of $74,751.
As you can see, the added
benefit available from the life insurance policy more than compensates for the
current taxes Sally must pay now to cancel her IRA and move the money. The money
in the cash value of the insurance policy continues to grow tax sheltered (like
the IRA) and is available should it be needed for an emergency.
Of course, there are several
ways to address this situation and depending on your individual needs, current
health, and other personal factors the benefits could be greater or less than
this example. There are special versions of these policies that can also provide
benefits to cover nursing home and convalescent care by making the larger death
benefit available to the insured (prior to death) to help pay for these costs.
It is best to consult with a
qualified advisor to evaluate your personal options to determine if this is a
better option for you than the IRA. Further exploration of the life insurance
alternative could be a very valuable step for you as well as your loved ones.
For a complete unbiased analysis of your specific
situation, simply go to our Tax Time-Bomb Form,
supply the requested information and we will provide you with a FREE detailed
Illustration/Evaluation via email, fax or U.S. Postal Service, to help you
determine if this strategy is right for you:
Tax Time-Bomb Form
Or, if you would prefer to speak directly with one of our
Specialists, please call us toll-free at 1-800-239-0356.
*This
amount will vary slightly from company to company and based on sex, health and
actual policy designed to fit your personal needs.
