Well this isn’t your fathers life insurance I’m talking about here.  I’m talking about a SPECIAL TYPE of investment grade permanent cash-value life insurance that was even mentioned on CNBC back in 2008 as a “ safe money” alternative to the stock market when everyone was losing their shirt.

Here is a simple way I explain this to my clients:  On a blank sheet of paper, I draw 2 horizontal lines, 1 at the top, which I label “Maximum Premium,” & 1 at the bottom of the page, which I label “Minimum Premium.”

I then ask my client, “who do you think determines the amount of the minimum premium?”

The answer:  ”The insurance carrier.”  Their actuaries determine the minimum amount of premium necessary to keep an amount of insurance in force to an age of 100 or 120.

Then I ask, “who do you think determines the maximum premium you’re able to invest into a life insurance policy?”

The answer:  “The U.S.  government.”  I ask, why do you think the U.S. government would be remotely interested in the amount of premium you’re able to invest in your personal (private) life insurance policy as it relates to taxes?  Because the government knows that life insurance is a good, tax-advantaged vehicle, which is why they limit the amount of premium you’re able to deposit into it.”

I then begin to explain the benefits they will receive when they deposit premium above the minimum premium, up to the maximum, modified endowment contract (MEC) limits, such as:

Tax Deferral: 1 of the chief advantages using permanent whole life insurance is the tax-deferred growth of cash values.  With business life insurance, policy cash values can be listed as assets on the company balance sheet & can be accessed for use by the company at any time.  The tax deferral of cash growth makes life insurance an  ideal vehicle for funding executive compensation plans, creating supplemental (tax free) retirement income for business owners or funding a corporate stock redemption plan.

Tax Free Distributions:  Another tax advantage found in whole life or universal life insurance policies is that cash values may be accessed by the company tax free.  If structured properly, policy withdrawals & loans can be used to essentially eliminate taxes on cash received from a life insurance policy.

Competitive Internal Rate of Return:  These policies can be an appropriate, even an excellent investment because of the lack of federal taxation on the internal earnings of the policies.  And if they are held until death, no tax is EVER paid on these earnings.

Guarantees:  Insurance carriers have come up with a solution to guarantee the insurance benefit on a universal life insurance policy even if the cash in the policy goes to zero.  This is known as a “secondary guarantee.”  You agree to pay a premium that is often less than a whole life insurance premium, & if you keep your payments up, the policy’s death benefit is now guaranteed.

Creditor Protection:  The simplest form of asset protection planning involves the ownership of “exempt” property that state law considers unreachable by creditors.  Certain property, such as a primary residence, may be entirely exempt, while the exemption for other property may be limited to a certain dollar amount.  Life insurance benefits may also be exempt property in your state.

Unlimited Contributions:  The IRS allows contributions in life insurance up to the MEC limits.

Collateral:  It is very common to designate a policy’s death benefit or its cash surrender value to a creditor as security for a loan.  If the loan is not repaid, the creditor receives the policy proceeds up to the balance of the outstanding loan, & the beneficiary receives the remainder.  Because life insurance is freely assignable, it is readily acceptable to lending institutions as security.

Freedom from Estate Tax:  Life insurance death benefits are income tax free.

Liquidity, use & control:  The cash values & death benefits can be used in a number of ways, including:

Funeral expenses-Federal estate taxes, which are due within nine months of death-State estate taxes, which are often also due witin nine months of death-Federal personal (form 1040) & estate (form 1041) income taxes (including taxes on pension distributions)-Probate & administrative costs (including court filing fees & fees paid to the executor of the estate & the attorney who administers probate)-Payment of your debts-Maintenance & welfare of family-Payment of specific cash bequests-Funds to continue operation of a family business, meet payroll & inventory costs, & recruit replacement personnel while new management is learning the business.

Disability Protection:  The policy’s cash values can be accessed for short term income needs when the policyholder is disabled, & if waiver of premium is added, no premiums are due when 1 is disabled.

So, do you now see why the government is interested in limiting the amount of premium you can deposit into this SPECIAL TYPE of investment grade permanent cash-value life insurance contract?

Life insurance premiums up to the MEC limits provide all these benefits with the exception of deductible premiums, but there are ways for us to help accomplish that as well.

The accumulation aspect of an insurance policy can have unique benefits.  The closer you get to the MEC limit, the more focus is on the living benefits:  tax-deferred growth along with TAX-FREE distributions, competitive IRR, guarantees & creditor protection.

So, when I am speaking with someone about having a tax-free retirement this is one of the  pieces of the puzzle.  I am speaking about a policy that is just below the MEC limit that offers you the benefits that you are looking for in a place to park your money.  It’s a great place to put money that grows tax-deferred & can be accessed TAX-FREE while  maintaining access to your money.

In closing, the government knows that life insurance is a good tax-advantaged vehicle, which is why they limit the premium.

Call my office toll-free @ 1.866.718.4386 if you would like for me to reveal to you my very own TAX-FREE retirement plan & how I can help you achieve a TAX-FREE retirement as well!

Taking a lump sum distribution means withdrawing all the assets from your retirement plan in one fell swoop-typically at retirement.  If you participate in a 401k, taking a lump-sum distribution could net you a couple of big tax breaks you may not have considered, or perhaps, never even heard about: NUA (Net Unrealized Appreciation) on company stock in your plan, and 10- year averaging on on your distribution.  Not everyone with a 401k qualifies for these breaks, but if you do, either or both of them can make a big, big dent in your tax bill by helping you get funds out of your plan at bargain-basement tax rates, & maybe even for free.

These breaks do not apply to lump-sum distributions from 403b or 457 plans or from IRAs (including SEP & SIMPLE IRAs.)  And a triggering event must occur for 401k owners to qualify for a lump sum distribution.  For the lump-sum distribution NUA tax break, the triggering events are:  (1) Separation from service (not for self-employed individuals)  (2) Reaching age 591/2  (3) Death (4) Disability (for self-employed individuals only.)  Triggering events for 10-year averaging qualification are the same, plus these extras:  You must have participated in the plan for a minimum of 5 years (2) You must have been born before 1936 (3) You cannot have elected 10-year averaging anytime since 1986.

The NUA tax break allows you to withdraw employer stock (stock of the company you work for) from your 401k as part of a lump-sum distribution & pay tax only on the original cost of the stock, not its appreciated value over your years of service.  So, let’s say you have $1,000,000 worth of company stock in your 401k & the original cost of that stock when purchased for your plan is $100,000.   The NUA amount is $900,000 (the difference between the $1,000,000 value of the company stock at the date of the lump-sum distribution & the $100,000 original cost of the stock.)  That $900,000 is not taxed until you sell the stock, at which time you pay just long-term capital gains tax, no matter how long you have held the stock.  The rule requiring you to hold stock for more than one year to receive long-term capital gains rates does not apply to NUA stock, so you can sell the stock one day after your lump-sum distribution & still pay only long-term capital gains tax (currently at 15%.)

What’s In It For Me?

You won’t know until you run the numbers, but there is the potential for huge tax savings here depending on the amount of company stock in your 401k.  For example, if you have company stock in your plan, the longer you worked for your company, the more likely it is that your stock has appreciated in value.  The greater the appreciation in the value of your company stock, the greater your NUA tax break.

Once you get the numbers for NUA and/or 10-year averaging, contact your tax advisor to determine what the tax benefit for you will be & whether the strategy is right for you in terms of your overall tax-planning goals.  Remember that with either break, you will have to pay some tax up front (whereas with an IRA rollover you will have to pay no tax but IRREVOCABLY lose both tax breaks.)  The idea is to see how much less that tax can be.  (There’s a good chance your current CPA or tax advisor, etc. has never heard about this…in that case let me know & we can consult with the CPA that works closely with me on this little known legal tax break.)

However, TIPRA also also gave us something with far-reaching potential, all the way to the future retirement of the American public.  In 2010, the existing $100,000 modified adjusted gross (MAGI) limit on the conversion of traditional IRAs has been eliminated.  This means that taxpayers earning above $100,000 are now eligible to convert their traditional IRAs to Roth IRAs.  In addition, in 2010 ONLY, you may elect to soften the tax blow and spread the taxes incurred over two years and effectively manage your tax bracket.

“With strict limits on contributions, never before have clients had the ability to place essentially a limitless amount of money into a Roth IRA and receive such favorable tax treatment: Tax-Free growth and Tax-Free distributions”

Why the change?

Any good finacial steward would now ask the question:  Why is the government allowing us this benefit?  The answer is two-fold:

1) The government is in need of funds now and they are acutely aware of a very valuable economic principle.  With inflation looming, the dollar is worth much more today than it will be in the future.

2) With the national deficit as high as it is and the current programs in need of immediate funding, our government has to make a quick buck.  The conversion, while a fantastic strategy for the average investor, provides the government with a much-needed infusion of capital and an increase in value on an asset that it currently holds.

Tax-Free growth and distribution.

Bottom line, you can pay the tax now on the conversion while the income rate is at a historic low and pull the money out Tax-Free later while everybody else is still paying for today’s national debt.

What’s new in 2010 for Roth IRAs

From IRS service publication 590:

Conversions to Roth IRAs.

In 2010, the modified AGI and filing status requirements for converting a traditional IRA to a Roth IRA are ELIMINATED.  Also, for any 2010 rollover from an IRA other than a Roth IRA to a Roth IRA, any amounts that would be included as income will be included in equal amounts in 2011 and 2012.  You can choose to include the entire amount in income in 2010.

Regular Roth IRA contributions.

Modified AGI limit for Roth IRA contributions increased.  For 2010, your Roth IRA contribution limit is reduced (phased out) in the following situations.

* Your filing status is married filing jointly or qualifying widow(r) and your modified AGI is at least $167,000.  You cannot make a Roth IRA contribution if your modified AGI is $177,000 or more.

*Your filing status is single, head of household or married filing separately and you did not live with your spouse at any time in 2010 and your modified AGI is at least $105,000.  You cannot make a Roth IRA contribution if your modified AGI is $120,000 or more.

*Your filing status is married filing separate, you lived with your spouse at any time during the year and your modified AGI is more than -0-.  You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.

The only way to force the stretch IRA (to make sure your children benefit from this greatparlay of wealth) is to name a trust as your beneficiary to force the issue.

But even then, if you have to force the issue, maybe you are better off leaving this child-children-or grandchildren other assets and leaving your IRAs to others who would get the true benefit of the stretch IRA.

Different beneficiaries will act differently…some will stretch; some won’t, some need a trust; others won’t.

Maybe the stretch IRA, which is a benefit not for you, but only for your beneficiaries, is not that important to you.

A question that you must ask:

Reasons the stretch IRA may NOT be important to you:

Your retirement funds are in a 401-k and you are still working (the plan won’t stretch anyway.)  But under a special provision in the tax law allowing non-spouse direct rollovers from company plans, the stretch still may be accomplished even if your non-spouse individual beneficiaries inherit your company plan balance.

You are leaving the IRA to charity.  The charity does not need to stretch out the distributions.  They can just withdraw all the money and pay no tax, so the stretch IRA is not an issue here.

You have only distant relatives and no close family, and you are not concerned about who gets what’s left of your retirement funds.  You will be spending most of it during your lifetime anyway, and whatever is left they can just inherit.  They might still get the stretch IRA on whatever is left to them, but that is not a major concern of yours.

You are not concerned about the stretch IRA because you feel that your beneficiaries won’t stretch the funds anyway.  This can be forced though by naming a trust as your IRA beneficiary.

Post-death instructions for your family

Once your loved ones inherit, they will need guidance.  This is another reason why you need to find a competent advisor now, both for you and your loved ones who will inherit from you.

If you are interested in a FREE no-obligation consulation to see how you could benefit from working with me; call my office @ 336.254.8432 and my assistant will schedule a meeting.

Answer:  Those who you want to inherit your retirement savings.

Taxes aren’t everything.  Yes, they need to be planned for,  but they should not change your choice of beneficiary.  You should not name beneficiaries just because it might be better tax-wise.  Name the people you want to inherit your assets and then do the planning to make sure that those people inherit with the best possible tax plan.

Name Both Primary Benficiaries and Contingent Beneficiaries.

Naming beneficiaries always means naming both primary beneficiaries and secondary benficiaries (contingent benficiaries.)  Contingent beneficiaries will inherit if the primary benficiary dies before the IRA owner, or if the primary beneficiary disclaims (refuses) his or her inheritance, so that it can pass to the named contingent benficiary.

Think of the contingent benficiary as a back-up plan – like a Plan B.  Always name a contingent beneficiary in addition to the primary benficiary.

If you are married: 

Generally if you are married, you will probably want to name your spouse as your primary beneficiary, unless your spouse has sufficient assets and does not need to inherit additional funds from you.  You would probably name your children as contingent benficiaries.

Consider using life insurance to take care of your spouse so that he or she can inherit those funds tax-free.  You’ll need to work with an insurance professional on this. 

Planning is essential to make sure your funds go exactly to the people you wish.  With a married couple, if no one dies, then even with poor planning, property will probably end up with the surviving spouse.  With an unmarried person, there is no such “automatic” type beneficiary, so you have to make sure that you name exactly the people you wish to inherit your savings and other property, and be careful to also include contingent beneficiaries.

There is also more likelihood of an estate tax since there is no spouse who can inherit estate tax-free under the marital deduction.  This should be planned for with life insurance if you are concerned about the financial security of your loved ones after you die.

Work only with an experienced life insurance professional that can set up the life insurance outside your estate making the life insurance proceeds both estate and income tax-free to your loved ones.

If you are an unmarried couple

Planning is essential for unmarried couples since blood relatives may have better rights to your property than your partner, if nothing is specified otherwise.  Planning can also avoid post death problems where your relatives might contest property going to your partner.

Same sex couples legally married under state law are not entitiled to the tax benefits married couples have under federal law.  Under federal law for example, your partner can’t do a spousal rollover if he or she inherits your IRA, the way a married couple can.  So for you, it is extremely impoortant that you name your partner specifically for all property that you want to pass to him or her (since he or she will not have the spousal benefits and protections that married couples have under federal law.)

Here again, you should consider using life insurance to provide post-death financial security for your partner, and to protect against estate taxes when the first partner dies.  While married couples can leave each other unlimited amounts of property at death that is tax-free under the marital deduction provision of the tax code, that marital deduction is not available to a surving partner of an unmarried couple.  It is essential to provide for taxes and financial security of an unmarried partner.

Life insurance and the stretch IRA (as mentioned in a previous post) are a perfect combination for this .  Make sure you work with a knowledgeable life insurance and planning professional so that the life insurance is set up outside the estate.  This way the life insurance money received will be estate and income tax-free when it is needed most.

1. IRA Rollover

2. Lump-sum distribution

3. Leave it in the company plan (Do not exercise this option…take control of it)

4. Roll it to a new company plan

In most cases you are best doing the IRA rollover so you can take total control of your money.

Exception:

Tax Breaks for Lump-Sum Distributions

There are some exceptions though to doing the IRA rollover.  For example, if you have highly appreciated company stock in your company plan (this is called NUA – Net Unrealized Appreciation tax break) or if you qualify for special 10 year averaging rates, it may be better for you to take the lump-sum distribution and not do the IRA rollover.  Speak to a well qualified financial advisor (like Jeff Futrell, RFC) about these items to see if it pays for you to go this route rather than the IRA rollover.

Once you retire or are able to access your 401k, 403b, 457 or other company retirement plan at work, get that money out and roll it over to an IRA where you take control of your money.  Did you know that one of your best options might be to roll the money into a tax-deferred retirement account where your principal is 100% protected against loss?  In this type of  “Safe Money” account you are able to participate in the upside swings of the market, however you do not participate in the downside swings.  The icing on the cake to this transaction is that you may earn approximately a 10% bonus on the money transferred, so if you rolled 100k into this type of account, immediately from day 1 your account jumps from 100k to 110k…pretty amazing huh?

The people at the company do not work for you, they work for the company, if you think that they have your best interest at heart…think again!  This is the time to move your money and work with your own financial planner who does work for you!

401k Plans Have Fees…even when they say they don’t!

Do not leave your money at the company because you think there are no fees in the 401k.  There are fees, but they are not disclosed.  The fees are often higher than you would pay a professional financial advisor who works for you.  Don’t take the advice from the company phone operator.  Get your own financial advisor.

Once the funds are in your own IRA you have better investment and estate planning options.  Also, you can guarantee the stretch IRA (that great parlay of wealth) for your loved ones.

Take Control of Your Money now – Do the IRA Rollover!

For more tax advantaged retirement savings tips go to www.jefffutrell.com.

      All the money went to her sister and nothing to him!  His wife was a teacher in the New York School System, can you imagine how difficult it must have been to accumulate a $1million dollar nest egg? 

     The beneficiary form TRUMPS EVERYTHING when it comes to IRA’s.  Wills, trusts it doesn’t matter.   It’s the most important document when it comes to estate planning.

Think about it.  I certainly do not wish anything bad on anyone, but let’s say something terrible happened today, and you had to leave this minute to go home and put your hands on your IRA beneficiary form for every IRA or  retirement account you have;  could you do it?  For most, the answer is “No.”

     This is incredible.  Some people think, “well, the bank must have it.”  They don’t.  With all the recent bank mergers, the retirement plan paperwork has not been followed up on.  The paperwork is not being carried over to the new institution. 

     You may have had your old bank bring it to your new bank but your new bank used new forms and didn’t enter the information.  You may be surprised to go to your new bank now and ask for those beneficiary forms only to find out they  are blank, meaning that your estate may now be your beneficiary and that is not good.

     If the estate is your beneficiary, the stretch IRA option is lost forever for whomever inherits from your estate.  If you have a broker, it’s not uncommon that he moves to a different firm.  When the broker switches to a new brokerage firm, the paperwork is often lost in the shuffle.

     Most people do not realize the importance and long-term significance of the IRA beneficiary designation form and lose track of it.  It is interesting that most people can locate their wills, but the wills do not cover the IRA.

     The IRA passes outside the will by beneficiary designation.  It is amazing to think that the one document that:

     Will determine the ultimate value of your retirement savings, will determine how soon the government can grab their share of your money, can make the government wait so long for their money that they can never catch up, is the main estate planning document for what may be the largest single asset in your estate, controls the distribution for money that you worked for and saved for your entire working life, is in effect the will for your IRA, will guarantee the stretch IRA for your loved ones, Cannot be found by anyone in America anywhere!

    How to Fix the Problem…

     Lucky for you, this amazing phenomenon is easily corrected.  Here’s what to do right now.

     Get a copy of the beneficiary form for every IRA and other retirement accounts  you own.  Your advisors may be able to help you with this, or get the forms from the banks, brokers or funds companies holding your IRA funds.

     Make sure you check that a beneficiary is named on the form.  Don’t take anyone’s word for it.

     Go one step further.  Make sure a secondary or contingent beneficiary is named in case the first one predeceases or to take advantage of post-death estate planning and disclaimer opportunities available under the IRA rules.

     Make sure that when there are multiple beneficiaries, each name and share is clearly stated.  The form must identify each beneficiary and his share, by using either a fraction, a percentage or the word “equally” if that is applicable.  Otherwise some beneficiaries may be left out or it may be unclear what their portion is.  There should no question as to who gets what.  This includes contingent beneficiaries a swell.

     Get it in writing.  Ask your IRA institution (bank, broker or Mutual Fund Company) to send you the beneficiary forms and make sure your beneficiary and your contingent beneficiaries are named in writing. 

     Check that the copy on file with the financial institution designates the correct beneficiaries.  If the form is blank, or names deceased beneficiaries (which is common when beneficiary forms have not been checked in a while,) your estate may become the beneficiary. 

      That would probably be the worst choice of all because the estate is not a designated beneficiary and cannot extend the life of the IRA.  The stretch IRA will be lost and your estate will end up with probate and related legal complications.

     Our tax system is unfortunately a penalty on savers.  You must approach any tax planning with the assumption that Congress will find a way to highly tax your tax-deferred retirement savings.  Do you realize that your Dear Ole’ Uncle Sam is a senior partner on your retirment accounts?  We all know that a senior partner gets a larger cut than all other partners, right?  Well, you can believe that unless you do some planning & maximize all the LEGAL & ETHICAL benefits regarding the tax code that your “Uncle” will get more than his “fair” share of your retirement accounts! 

It’s imperative that you address the planning now, so the government doesn’t gain access to your money later.  Taxes will increase in the coming years due to a combination of looming financial crises, which I will refer to as the S.H.I.P for:

Social Security

Health Care

Income Taxes

Pensions

    We are definitely entering the Y.O.Y.O economy, which means you’re on your own!  The government will not help you here.  Your company or employer can’t help you either.  They are out of money.  You are on your own & only you can help yourself.  You need to ask yourself…do I want the government plan or my own plan?  We all have a plan whether we realize it or not, for those who choose to bury their head in the sand & just keep trudging along…guess what, you get the government plan (the one where those savvy government officials spend 25K for a toilet seat, or 12K for a hammer) on the other hand if you are pro-active & take the initiative to create your own plan, you control how your money is spent.

     Your retirement funds have not yet been taxed so you don’t really know what the eventual tax will be when you or your loved ones withdraw the funds.

You need to develop an “exit strategy” which is a distribution plan so that you do not end up with the government plan.  Which entails paying the highest taxes possible.  “Your” plan means minimizing raxes now & forever.

    When you create your own plan…you have more money for you now, more for youre retirement, more for your loved ones & more of it TAX-FREE!

The plan to cut taxes & keep more of your money is NOT in your will.  You have to create your plan with the help of professional advisors with specialized training in the exit strategy.

    It’s how much you keep that counts…after taxes.  It’s the score at the end of the game that counts!  It’s not how much you make, it’s how much you keep at the end of the game…when it counts, & how much of it is TAX-FREE!

    For help on creating your own tax-free plan, visit www.JeffFutrell.com or www.TaxFreeRetirementFordoctors.com  for the medical community.

     This brings me to the second biggest benefit of the tax code: the estate tax exemption.  Most people have “heard” about this but only a few know how to get the maximum legal benefit out of it.  In my state of North Carolina in 2010 the estate tax exemption is 3.5 million and 45% over 3.5  million.  This is a freebie and should be taken advantage of.  If you do not use it, you lose it.  Each spouse receives their own estate tax exemption, so for married couples both exemptions should be maximized.  It’s vitally important that you use the exemption by leaving property to someone other than your spouse, like children or grandchildren, for example.

     The third biggest benefit of the tax code is the “Stretch IRA.”  The savvy financial advisors refer to this little gem as the great parlay of wealth.  The way to build real wealth is to keep your money away from the government or make the government wait so long for their money that they can never catch up.  This is what the stretch IRA does.  Using the stretch IRA you can pass your IRA or Roth IRA to your loved ones and they can take minimum distributions over the rest of their lives, giving only crumbs to the government each year while the accounts build for them tax deferred or even tax free with the Roth IRA.

By working with a knowledgable financial planner you can maximize all 3 of these benefits to their full legal potential.

     Tax-Free Growth And Distribution.  You can pay the tax now while the income rate is at a historic low and pull the money out Tax-Free later while everybody else is still paying for today’s national debt. 

     It’s up to  you to consult with a knowledgeable professional who is up to speed on the many benefits that these new tax law changes afford.  However, don’t dilly-dally December 31, 2010 will be here before you know it.  Come January 1, 2011 it will be too late to take advantage of them.

Tax Payment Break.  The amount of  money that is converted from a traditional IRA to a Roth IRA has to be claimed as income, and you might say I can’t handle the tax burden this year.  TIPRA to the rescue again!  The income can be split in two, with one half claimed in 2011 and the other in 2012.  So, if you don’t want to pay ANY taxes on the conversion in 2010, you don’t have to!