Putting Your IRA To Work
Strategy #1 | Income Tax Offset
Are These SOME OF YOUR Clients?
• Retired, under age 70
• Owns an IRA
• Isn’t taking any money out of IRA
• If not, will they need their RMDs when they
reach age 70?
• Retired, over age 70
• Don’t need their RMDs
• Tend to reinvest their RMDs
• If it weren’t for RMDs, they wouldn’t take any
money out of their IRA
IRA Reviews
How do we tend to look at IRAs for clients that do not
need their RMDs?
• Take out an RMD
• Rebalance the IRA for appropriate asset allocation (in relation
to the rest of their portfolio)
• Put it back in the drawer until next year
• Next year. . . Repeat the process
It’s not really a “long-term strategy”
Projected IRA Values
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
70
75
80
85
90
95
100
105
$100,000 IRA; 7% hypothetical annual return
110
115
Consider This:
When your client is forced to take an RMD they don’t need, and they
ask you to reinvest it what does this spell for you..? OPPORTUNITY
• You have a good opportunity to make
an investment recommendation!
Case Study
• John Smith, age 70
• Normal health
• Survives until age 80
• Jane Smith, age 65
• Normal health
• Survives until age 85
• IRA Balance: $500,000
• IRA Hypothetical Annual Return: 7.00%
In The Absence
Of A Strategy
Ages
IRA Value*
RMD*
70 /65
$500,000
$18,249
80 / 75
$640,014
$33,794
85 (Jane)
$711,519
$48,187
Less Taxes @ 35%**
Daughter
*Some values have been rounded for simplicity.
** Taxes include Federal and State income taxes.
$462,487
For information specific to
your client’s situation, please
refer to an illustration
prepared especially for your
client. Taking additional
withdrawals from the
IRA to pay life insurance
premiums may not be
the best alternative.
Whenever life insurance
premiums exceed RMDs, the
client should consider paying
those premiums from sources
other than the IRA.
IRA Legacy Strategy
Here is an IRA Strategy that have the potential to:
• Keep your clients’ IRA in their Care, Custody, and
Control
• For the rest of their life
• In case of emergency
• Significantly increase the value of their
IRA legacy, and
• Take no additional market risk in
their portfolio
• Your money can go to three places when you
die.
Loved One
Charity
L.O.
C
X
Government
G
Cross out the one you would least like to get your
money when you die.
You Have Control
Today you will learn 2 things:
• You have control over how much of your
client’s money each of these three circles
gets, and. . .
• How much your decisions about the three
circles will affect your client’s IRA legacy
Absence of strategy
L.O.
Current Plan
*Values have been rounded for simplicity.
$462,487
C
G
-0-
$249,032
Income Tax Offset
Income Tax Offset
• Daughter’s estimated income taxes when she
inherits $711,519* = $249,032
• Assumes taxes at 35%
• Purchase a $250,000 survivorship Universal Life
policy today
• Name the Daughter as the beneficiary
• It’s almost like having someone else pay the IRA
income taxes for you!
• What does it cost to do that?
*Some values have been rounded for simplicity.
Income Tax Offset
• What does the life insurance policy cost?
• $3,952.18 per year
• Based on M70 / F65, Standard underwriting class
• Protective Survivor UL 1/13 policy
• Where do we find $3,952.18 per year?
• From the RMDs that John & Jane don’t need
• $18,249* in year 1
• $33,794* in year 10
• $48,187* in year 20
• The life insurance premium is just a fraction of the total
RMD amount
*Values have been rounded for simplicity.
For information specific to
your client’s situation, please
refer to an illustration
prepared especially for your
client. Taking additional
withdrawals from the IRA to
pay life insurance premiums
may not be the best
alternative. Whenever life
insurance premiums exceed
RMDs, the client should
consider paying those
premiums from sources other
than the IRA.
Results of
Income Tax Offset
• The IRA remained in John & Jane’s C-C-C (Care,
Custody, and Control)
• The after-tax legacy increased by over 50%
• From $462,487 to $711,519*
• John & Jane took no additional market or
investment risk in the portfolio
*Some values have been rounded for simplicity.
Income Tax Offset
L.O.
C
G
Current Plan
$462,487
-0-
$249,032
Income Tax Offset
$711,519
-0-
$249,032
*Values have been rounded for simplicity.
Income Tax Elimination
Income Tax Elimination
• We forecasted the future value of the IRA
• Approximately $711,519 at Jane’s death
• Instead of purchasing a $250,000 survivorship policy, purchase a
$711,519 Protective Survivor UL 1/13 policy
• Daughter as beneficiary
• Daughter inherits $711,519 income-tax-free
• That’s over 50% more (net after-tax) than her original $462,487 after-tax
inheritance!
• Jane names a Charity* as beneficiary of her $711,519 IRA
• No income taxes are due—charities are considered exempt from paying
income taxes
* The term “charity,” as used in this context, means a charitable organization exempt from income tax under the Internal Revenue Code.
Income Tax Elimination
• What does the life insurance policy cost?
• $11,248.07 per year
• Where do we find $11,248.07
per year?
• From the RMDs that John & Jane don’t need
• $18,249 in year 1
• $33,794 in year 10
• $48,187 in year 20
For information specific to
your client’s situation, please
refer to an illustration
prepared especially for your
client. Taking additional
withdrawals from the IRA to
pay life insurance premiums
may not be the best
alternative. Whenever life
insurance premiums exceed
RMDs, the client should
consider paying those
premiums from sources other
than the IRA.
Results of
Income Tax Elimination
• IRA remained in John & Jane’s C-C-C
• More than tripled the total legacy:
• Original legacy was $462,487 after-tax
• New legacy:
• $711,519 income-tax-free to daughter
• $711,519 income-tax-free to Charity
• $1,423,038 total legacy
• John and Jane took no additional market risk in the
portfolio
Income Tax Elimination
L.O.
C
G
Current Plan
$462,487
-0-
$249,032
Income Tax Offset
$711,519
-0-
$249,032
Income Tax Elimination
$711,519
$711,519
-0-
*Values have been rounded for simplicity.
Legacy Enhancement
Legacy Enhancement
• From a tax perspective, what is one of the worst assets to
die with? IRA
• If you don’t need the RMDs, then stop the growth!
•
•
•
•
Withdraw the annual earnings
$500,000 x 7% = $35,000 per year
$35,000 – 25% tax = $26,250
$26,250 as an annual premium can purchase a
$1,660,489 income-tax-free Protective Survivor UL 1/13 death
benefit
• Based on M70 / F65, Standard underwriting class.
• $500,000 IRA donated to Charity
Results of
Legacy Enhancement
• IRA remained in John & Jane’s C-C-C
• Increased the total legacy by nearly 5 times!
• Original legacy was $462,487 after-tax
• New legacy:
• $1,660,489 income-tax-free to daughter
• $500,000 income-tax-free to Charity*
• $2,178,902 total legacy
• John and Jane took no additional market risk in
the portfolio
* The term “charity,” as used in this context, means a charitable organization exempt from income tax under the Internal Revenue Code.
Legacy Enhancement
L.O.
C
G
Current Plan
$462,487
-0-
$249,032
Income Tax Offset
$711,519
-0-
$249,032
Income Tax Elimination
$711,519
$711,519
-0-
$1,678,902
$500,000
-0-
Legacy Enhancement
*Values have been rounded for simplicity.
Flexibility of Legacy Enhancement
• Clients can change how they divide the
inheritance between the Loved Ones and
Charity at any time prior to death.
Choose From 3 IRA Strategies
• Income Tax Offset
• Income Tax Elimination
• Legacy Enhancement
• Offer your clients one, two, or all three!