Living Wealthy Financial
If you’re like many Americans, you have money in your 401(k) or IRA plan. That’s a good thing, especially if your employer matches all or part of your contribution. Qualified plans and Social Security form the foundation of many retirement strategies.
If you have children or grandchildren, you may even have thought about how to pass that money to them when you die. You’d like to ensure that your loved ones are taken care of and the IRS gets the least amount of your legacy that is legally possible.
Giving the money in your qualified plans to your beneficiaries is not the only way to create a legacy. In fact, a lot of people are discovering that leaving IRA and 401(k) money to their heirs may have some costly tax implications.
These potential tax problems are where the unique “turbo-charged” life insurance products I design for my clients can really be useful.
Custom-designed, dividend-paying life insurance has numerous benefits for you while you are alive. And, it can also help you create an amazing tax-advantaged inheritance for those you love.
IRA and 401(k) Money Could Devastate Your Legacy
A problem often encountered when 401(k) or IRA money is left to children, grandchildren, or other beneficiaries is that it can expose them to unintended tax issues. In some cases, beneficiaries can lose 40-50% of the money you wanted them to receive!
Formerly, savvy financial planners would help clients develop a “stretch IRA” strategy. Doing this allowed people to draw out the life and tax advantages of traditional IRAs. The result of stretching an IRA meant funds in it would have more time to grow tax-deferred.
However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed into law by President Trump at the end of 2019 put an end to stretch IRA planning.
As of January, 2020, SECURE requires beneficiaries to take out all of the money in inherited 401(k) plans and IRAs within ten years. This has particular impact when a person inherits an IRA through a trust. The money in a trust is generally inaccessible. A beneficiary must take out the entire amount of their inherited IRA at once, with no possibility of to taking distributions during the 10-year-wait.
This lump-sum payout is taxed as regular income at the beneficiary’s income tax bracket. Since the majority of payouts begin while a beneficiary is still working (and is thus in a higher tax bracket) payout could trigger a substantial tax bill.
Life Insurance Can Help
Specially modified whole life insurance from a dividend-paying company is a tax-advantaged alternative to passing on your 401(k) or IRA. Not only do these policies give you unparalleled use, liquidity and control of your money, along with other “living benefits,” but proceeds from a life insurance policy are generally not included in your gross income at tax time. This tax treatment could have life-changing consequences for your loved ones.
If any of these situations fit you, you need to check out life insurance for legacy creation.
- You have multiple beneficiaries and assets which are difficult to divide equally. These could include real estate or undeveloped land.
- You’d like to leave a SPECIFIC amount of money to your beneficiaries. Life insurance, properly structured, allows you a much greater measure of predictability.
- You own a business that you are leaving to one child or grandchild, but you want to be fair to other beneficiaries. Life insurance can ensure that each beneficiary receives cash equivalent to the current business valuation.
- You care for someone with special needs and want make sure that their quality care continues.
- You have left a property or business to a loved one and you realize that means additional expenses such as insurance, maintenance, marketing, and employees. Life insurance can give the beneficiary instant operating capital to an income to help with expenses.
- You need liquid funds to assist in transitioning a business when you die. Exiting a business incurs numerous expenses that many owners never consider. Life insurance can go a long way in filling the cash gap and making a business exit much smoother.
- You would like your beneficiaries to be paid quickly and directly, instead of having to wait for a lengthy probate process. In most instances, proceeds from life insurance never wind up in probate. It’s one of the fastest ways to get your money into the hands of those who need it most.
- You don’t want anyone, especially your beneficiaries, to pay more in tax than is legally required.
If you intend to leave a legacy, it is critical that you plan early and well. You should consult every member of your financial team, especially your modified whole life specialist. Contrary to popular belief, not every licensed insurance agent has the specific knowledge needed to create and customize these kinds of policies. There are many nuances, rules, and considerations of which an insurance generalist may or may not be aware.
If you would like more information on how to use this powerful legacy strategy, contact me and I will send you what you need to make an informed decision and create a lifetime legacy for your loved ones.
