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The retirement plan rescue
Raise your hand if you have a substantial amount in a qualified retirement plan — typically an IRA, 401(k), profit-sharing plan or the like. For our purposes, a substantial amount means $300,000 or more.
The larger the amount, the bigger the problem or the better the opportunity (to apply the “Retirement Plan Rescue” and create tax-free wealth).
This is a bad-news/good-news article. Most people want to weep at the bad news, yet high-five at the good news.
First, the bad news, in the form of an example: Joe (winters in Florida, but is not a Florida resident) has $1 million (substitute your own real number) in his 401(k). Two taxes destroy Joe’s $1 million plan wealth. When Joe takes out just $1, the income tax on average (state and federal) grabs 40-percent (40 cents), leaving 60 cents. At Joe’s death (using 2011 rates) the estate tax steals 55-percent (33 cents) of the 60 cents. What’s the results? The family gets only 27 cents out of every $1; the tax collector gets 73 cents. If Joe dies with funds still in his 401(k), the tax collector still double taxes the balance (as described above).
So, dead or alive, the tax collector will get $730,000 of Joe’s $1 million in his 401(k); the family only $270,000. Outrageous!
Note: If you are a Florida resident, you escape the state income tax and are only subject to the 35-percent federal income tax rate.
To make matters worse the IRS has, without warning, refused to favorably rule (as it did in the past) on a strategy called the subtrust. The use of this strategy allowed us — depending on the client’s marital status, age and health — to turn that $270,000 (as in Joe’s example) into a range between $2 million and $6 million in cash wealth, all taxes paid in full.
The subtrust only had one trick: allowed you to use qualified plan funds to buy life insurance and the death benefit was free of the income tax and the estate tax. We’ll miss the subtrust.
So, it was back to the drawing board for me and my network of experts. Our goal was to come up with a strategy that would give us the tax-saving, wealth-building results of a subtrust but was free of even a remote possibility of an IRS naysayer.
Now the good news: We have come up with a new strategy (really a variation of various strategies we have been using for decades) that gives the same tax-saving, wealth-building results as a subtrust. We named the strategy the Retirement Plan Rescue (RPR for short).
The core concept behind an RPR is to shift from a highly taxed environment (a qualified plan) into a tax-free environment (life insurance). Sorry, but if you are uninsurable or highly rated (have serious health issues), an RPR won’t work for you. Have a healthy spouse? She/he will probably save the day and put an RPR in your planning picture.
The benefits of RPR are easy to summarize — save a large amount of taxes and multiply the before — tax value of your qualified retirement plan (tax-free). However, the implementation of an RPR requires a great deal of expertise. In addition, each RPR (because of the many variables) is different and must be looked at on a case by case basis.
Finally, the big questions for readers are, “How will an RPR work for me and my family? What will my tax-savings be? How much tax-free wealth can I create?”
So, if you have $300,000 or more in your qualified plans (have more than one plan? … just combine them), you can turn a potential tax travesty into a tax-free, wealth-building cash pool for your family.
I have arranged for readers of this column to submit the information necessary to create an RPR. Here’s the information you should fax (847-674-5299) to me (Irv Blackman): (a) your name, address, phone numbers (business/home/cell); (b) total amount in all qualified plans combined (if married, same for your spouse) and (c) your birthday (also your spouse.) Write “RPR” at the top of the page.
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Estate Tax Blog
by Irv Blackman
First and foremost, Irv Blackman is both a CPA and a lawyer. Irv is a tax guy. Stay tuned to the site by signing up for the RSS feed.
