1 Converting to a Roth IRA Eliminating the Pain by using Life Insurance Lanny D. Levin, CLU, ChFC, President LANNY D. LEVIN AGENCY, INC.
2 The Roth Advantage as an estate tool Traditional IRAs are great for accumulation BUT Awful for distribution Awful for wealth perpetuation Roth IRAs are terrific for distributions Roth IRAs are terrific for wealth perpetuation
3 Traditional IRA Distributions subject to income tax Account balance is includible in estate Distributions are required at age 70 ½ For the wealthy IRA owner who doesn t need the assets for retirement, these are all negatives
4 Roth IRA Distributions are tax-free Account is includible in estate NO distributions are ever required For the wealthy Roth IRA owner, this means assets can grow tax-free for years, and distributions are received tax-free
5 Family Wealth Impact $1.5 million Roth IRA at death of husband Surviving spouse, 70 Life Expectancy: 16 years Value in 16 years: At 5%, $3,274,312 At 7%, $4,428,246
6 Family Wealth Impact-5% $3.2 million Roth IRA at death of mother,86 Surviving son, 61 Life Expectancy: 19 years Value in 19 years (for grandchild of mother): At 5%, $8,274,023
7 Family Wealth Impact-5% $3.2 million Roth IRA at death of mother,86 Surviving daughter, 61 Life Expectancy: 23 years Value in 23 years (for grandchild of mother): At 5%, $10,057,127
8 Family Wealth Impact-7% $4.4 million Roth IRA at death of mother,86 Surviving son, 61 Life Expectancy: 19 years Value in 19 years (for grandchild of mother) At 7%, $16,014,872
9 Family Wealth Impact-7% $4.4 million Roth IRA at death of mother,86 Surviving daughter, 61 Life Expectancy: 23 years Value in 23 years (for grandchild of mother) At 7%, $20,992,231
10 So why not just convert? Until 2010, Adjusted Gross Income must be less than $100,000 After 2009, TIPRA of 2005 removes the income requirement However: income tax must be paid on the Traditional IRA in order to convert
11 Idea: Maintain the Traditional IRA until death Utilize part of the Required Minimum Distribution (RMD) to purchase life insurance At death of IRA owner Wife inherits IRA Wife receives life insurance proceeds income tax free Surviving spouse uses life insurance to pay income tax cost of converting IRA to Roth IRA
12 Example RMD at age 70 on $1.5 MM account is $54,744 Income tax on $1.5 MM conversion to Roth IRA is $525,000 (35% rate assumed) Premium for $525,000 WL121 is $25,000 Funds left over to make further gift to child, can purchase additional life insurance if desired
13 Estate implications Life insurance can be owned and controlled by insured Life insurance will be includible in estate but deductible as marital deduction Proceeds paid to government for IRA conversion, so no proceeds at spouse s death Roth IRA includible in spouse s estate, same as Traditional IRA Absent other planning, if IRA must be tapped for her F.E.T., distributions are not subject to income tax
15 Positioning Whole Life Insurance in the Retirement Marketplace
16 Tax Diversification We often talk with clients about the need to diversify their investments What about tax diversification? i. e. why not own a variety of vehicles with differing tax attributes Same reasoning as investment diversification one approach or another may turn out to be less attractive than we anticipated
17 Now that we ve touted all the great things about Qualified Plans.
18 The Darker Side of Qualified Plans They are governed by hundreds of rules, regulations and restrictions. The annual contribution to the plan is limited. Government rules require that most or all employees be included. Costs of administration, accounting, actuarial, and legal fees can be substantial and recurring. Withdrawal of funds prior to age 59½ will generally incur a tax penalty.
19 The Darker Side of Qualified Plans Plan accumulations are potentially subject to estate taxes at death and income taxes at time of distribution to heirs; taxes that may easily total over 70% of the distributions. Deductible contributions are made today when income tax rates are relatively low and may actually be distributed and taxed at a higher rate at retirement age.
20 What might be features of an ideal retirement plan? 1. Tax-deductible contributions 2. Safely accumulate money 3. Earn interest on a tax-deferred basis 4. Funds protected from creditors 5. Distribute funds tax-free 6. Self-completing in the event of death 7. Self-completing in the event of a disability Whole Life insurance has all but one of these features IRAs & Roth IRAs have only 4 out of 7!
21 The Three Phases of a Retirement Plan: The Timing of Taxation Contribution Accumulation Distribution QP Deductible Tax-Deferred Taxable NQP Non- Deductible Tax-Deferred Tax-Free Don t focus on the advantages of only one Phase
22 What else? Qualified Plan Contribution limited Account values unavailable till retirement Very little latitude to select participants Assets protected from claims of creditors Life Ins Alternative Contribution unlimited Account values available during working years Participation can be limited Assets protected from claims of creditors
23 Life Insurance an unlimited Roth IRA?
24 Non-deductible What s so great about a Roth IRA? Accumulates tax-deferred Distributions are tax-free No RMD required It is so attractive that Congress has limited its utilization by affluent people
25 What s so great about Life Insurance? Non-deductible Accumulates tax-deferred Distributions are tax-free No RMD required Creditor-proof Self-completing upon death Self-completing upon disability (optional)
26 AND.. Its utilization by affluent clients is NOT limited There is no limit on how much premiums someone can contribute to life insurance
27 Reasons to Own Life Insurance in Retirement 1. Traditional need. Retirement is simply under funded 2. Hidden need, e.g. loss of income streams when one spouse dies 3. Estate planning--the flip side of need 4. Stretch IRA planning (read Ed Slott)
28 Reasons to Own Life Insurance in Retirement 5. Pension Maximization strategies 6. Estate leverage for heirs 7. Charitable planning. Estate leverage for charitable giving 8. Second marriage, multiple children & grandchildren issues
29 Reasons to Own Life Insurance in Retirement 9. Business transfer issues 10. Tax diversification 11. Investment diversification 12. Provide for grandchildren at risk 13. College funding for grandchildren
30 The Power to Consume Whole life insurance ownership will allow other assets to produce greater income by providing access to the principal as well as interest as a source of income. Life insurance gives the owner the power to consume assets that would otherwise have to be managed in an ultra-conservative fashion in order to preserve the principle and the income stream it produces.
31 Pension Maximization Most retirees will select a joint and 50% survivor annuity as the retirement income option on their pension plan. The cost of selecting this option is a lower retirement income, as much as 15%, followed by an income to the surviving spouse of 50% of the lowered retirement income.
32 Pension Maximization The presence of permanent whole life insurance will enable a retiree to take a much higher retirement income in the form of a single life annuity because the insurance benefits will be available to a surviving spouse as a future source of income.
33 Charitable Remainder Trust The cost of successfully building a business or managing a personal investment portfolio is often measured by the enormous capital gains tax that must be paid when a business owner looks to sell a business interest or portfolio holdings in order to fund retirement income
34 Charitable Remainder Trust Often financial success brings with it a desire to express benevolence towards those charitable causes that are of particular interest. With a charitable remainder trust these two seemingly diverse needs and desires can be met with one device
35 Charitable Remainder Trust can provide: a lifetime income for a benevolent donor, a substantial bequest to a charity of choice, avoidance of the capital gains tax, and significant income tax deductions. The ownership of permanent whole life insurance by a donor makes it possible to achieve the desired charitable intent with all the collateral benefits while providing an intact transfer of estate assets to heirs
36 Our Goals Today 1. Provide you with a reminder of the opportunities in the retirement plan AND retirement planning markets 2. Remind you that life insurance is a triple-duty, fail-safe asset class unto itself 3. Remind you that people who disrespect life insurance and don t realize #2 don t really understand life insurance at all. 4. Remind you that you have strategic partners (LDLA and NBSI) willing to help you capitalize on the retirement markets