QUALIFIED PLAN

CONVERSION&

TAX STRATEGY PLAN

BILL GASTL, CLU

QUALIFIED PLAN CONVERSION AND TAX STRATEGY

The Qualified Plan Conversion and Tax Strategy (QPCTS) is a financial strategy which allows you to convert your qualified plan assets from what the Internal Revenue Service classifies as a qualified plan to a non-qualified plan funded with a properly designed Indexed Universal Life Insurance contract. A qualified plan could be a typical IRA, 401(k), 403(b), 457 or any other type of qualified plan as defined under the Internal Revenue Code. The non-qualified plan using an Index Universal Life contract utilizes the tax advantages available under IRC Sections 7702 and 72(e).

While qualified plans have been very popular savings vehicles in the past, this might be the time to consider an alternative strategy due to several conditions which are present today which might affect the plans assets. This brochure will address some of the risks associated with a qualified plan and present the advantages of transferring the assets into a non-qualified plan.

There are approximately eight risks associated with a qualified plan. Each of these risks will be described so you have a better understanding of how each can or will affect your retirement savings.

TAX RISK

Because of the tax deferred treatment of qualified plans, as well as the tax deduction available when contributions are made, all distributions from the plan will be taxed. Depending upon your income during retirement and your top marginal tax rate at the time of distribution depends on how much net income you will receive each year in retirement. Deferring the taxes may or may not be advantageous to you. Tax deferral in most cases is advantageous if your top marginal tax bracket is higher when your contributions are being made, as opposed to your tax bracket when distributions are taken from your plan. If we reverse the order, deferring taxes becomes a disadvantage.

So the question becomes What are the chances I will be in a higher top marginal tax rate when I begin distributions from my qualified account? The graph to the right illustrates the top marginal tax rates since the introduction of the income tax by the United States government in 1913. As the graph illustrates, the top marginal tax rate in 2015 is at one of lowest points in the history of the country. Considering this and the fact and the size of the federal debt , you need to ask yourself What is the likelihood I will be in a higher tax bracket when I start taking distributions from my account or forced to by the Internal Revenue Services, and how will it affect the longevity of my account assets?

Due to the current debt of the federal government, congress may have no alternative but increase tax rates due to the amount of the debt and the increasing interest payment due on this increasing debt. The graph to the right shows the growth curve on the federal debt. If you examine the graph, you will notice the slope of the curve has steepens over the last several years, which means the debt is increasing dramatically over previous years, which also means the interest needed to service the debt is growing exponentially. According to a recent report," The 2013 Long Term Budget Outlook issued by the Congressional Budget Office, they indicate that the projected growth of federal debt will require large changes in tax and spending policies.

The Qualified Plan Conversion and Tax Strategy outlined in this report provides the process and savings vehicle to allow you to convert your qualified plan into a non-qualified plan without reducing the value of your account, or reducing your cash flow by paying the tax from this liquid assets.

MARKET RISK

According to Investopia, market risk is losses in an investment due to factors that affect the overall performance of the financial markets. Market risk, also called systematic risk, cannot be eliminated through diversification. Market risk can occur due to recessions, political turmoil, changes in interest rates, terrorists attacks, economic changes or natural disasters. The tables below shows two hypothetical projections mirroring the experience of the Standard & Poors 500 Index (less dividends) from 2003 to 2008 compared to the same data but capping the upside gain on the index to 13%, while eliminating the loss in 2008.

Since the Qualified Plan and Conversion and Tax Strategy eliminates market losses, the ending value with QPCTS plan has in increased ending balance of $27,245. Eliminating market losses become extremely important when distributions are taken from the account, which are mandatory at age 70 with a qualified account. Market losses with distributions creates an additional risk known as the sequence of return risk.

Beginning Balance Year

Percentage ROR

Gain or Loss

Ending Balance

$500,000 2003 28.36% $141,800 $641,800

$641,800 2004 10.74% $68,929 $710,729

$710,729 2005 4.83% $34,328 $745,058

$745,058 2006 15.61% $116,303 $861,361

$861,361 2007 5.48% $47,203 $908,564

$908,564 2008 -36.55% -$332,080 $576,484

$576,484 2009 25.94% $149,540 $726,023

$726,023 2010 14.82% $107,597 $833,620

$833,620 2011 2.07% $17,256 $850,876

$850,876 2012 15.83% $134,694 $985,570

$985,570 2013 29.53% $291,039 $1,276,609

$1,276,609 2014 11.40% $145,533 $1,422,142

Beginning Balance Year

Percentage ROR

Gain or Loss

Ending Balance

$500,000 2003 13.00% $65,000 $565,000

$565,000 2004 10.74% $60,681 $625,681

$625,681 2005 4.83% $30,220 $655,901

$655,901 2006 13.00% $85,267 $741,169

$741,169 2007 5.48% $40,616 $781,785

$781,785 2008 0.00% $0 $781,785

$781,785 2009 13.00% $101,632 $883,417

$883,417 2010 13.00% $114,844 $998,261

$998,261 2011 2.07% $20,664 $1,018,925

$1,018,925 2012 13.00% $132,460 $1,151,385

$1,151,385 2013 13.00% $149,680 $1,301,065

$1,301,065 2014 11.40% $148,321 $1,449,386

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$200,000

$400,000

$600,000

$800,000

$1,000,000

1 5 10 15Ending Balance- Tax Rate of 20%

Ending Balance - Tax Rate of 25%

Ending Balance - Tax Rate 30%

If during your retirement phase taxes were to increase, how would this increase affect the account balances in your retirement plan, assuming the assets were invested in the S&P 500 Index, less dividends since 2014 backswards? The graph below illustrates a retirement account of $500,000 with an annual net distribution of $36,000. Assuming an increase of 5% or 10% in the individuals tax rate, the ending balance of the account with a 5% increase would reduce the ending balance of the account by $44,239. If the increase was 10%, the ending balance would be reduced by $99,798 to net the same net distribution of $36,000.

According to the Journal on Financial Planning four rules regarding tax-deferral, Rule Four states: If ordinary income tax rates increase as much as or more than your current tax rate, it makes sense to withdraw from a qualified account, pay the tax and redirect the proceeds into a tax free entity.

LONGEVITY RISK

Longevity risk becomes an important consideration in your qualified account since the average 65-year old has an average life expectancy of 19 more years, or approximately 84. In fact, one out of every four 65-year olds will live past age 90, and one out of ten will live past age 95.

Longevity risk is affected by Market Risk and the Sequence of returns in your qualified plan portfolio. The graph to the right shows three hypothetical returns on $500,000 using the S&P 500 Index but introducing each years return at different years in each projection.

MANAGEMENT FEES

Like Tax Risk, Management fees are another important consideration in a retirement plan. Large management fees can also effect the accumulation value of a retirement account and can also impact the sequence of return since it affects the gain or loss experienced on the account assets. The average fees is most mutual funds or with a typical 401(k) plan is around 1.5% according to the Investment Company Institute. Under the QPCTS plan in a properly designed contract, the fees charged are similar or less over the distribution period. Below is a graph illustrating management fees to the fees charged in the QPCTS plan.

With QPCTS plan fees are higher initially but are much more efficient after the 10th year which is in most cases the breakeven point when comparing the two strategies. This is important because in later years the QPCTS plan has less impact on distributions, whereas under a typical mutual fund the same percentage is being charged.

With a beginning balance of $500,000 in the 15th year, the cumulative fees on S&P 500 Example 1 are $161,757, Example 2 $164,051 and Example 3 $79,811. The charges with the QPCTS fees were $116,370. The fees on Example 3 were less, but the account was depleted in the 18thyear. All S&P 500 Index are depleted by age 89, while the QPCTS illustrates a positive ending balance to age 100.

The graph to the right illustrates the effect the sequence affects a retirement account when there are distributions from the account On Market Examples 1 & 2, the average rate of return is identical at 5.68%. As a result the account that experienced early losses during the distribution phase is depleted in the tenth year. If the experience is reversed as illustrated in S&P 500 Index, Example 2 where the losses are experienced later in retirement, the ending balance after the fifth-teen year is $226,280. Under the QPCTS plan, the ending balance in the 15th year using the same sequence is $253,183 since both market losses have been eliminated

SENSITIVITY OF SEQUENCE OF RETURN RISK

This risk involves the order in which an retirement account experiences returns. The sequence of returns becomes important prior to or during the distributions phase of an individuals retirement.

Historical data using the S&P 500 Index less dividends from 2003 to 2014. QPCTS eliminates losses & caps gains at 13%.

Distribution assumes $45,000 per year.

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$200,000

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$600,000

$800,000

$1,000,000

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Example 1 - 2014 to 2003 S&P - Late Losses

Example 2 - 2000 to 2014 S&P Early Losses

QPCTS - 2014 -2000 No Losses

QPCTS - 2000 -2014 No Losses

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$100,000

$200,000

$300,000

62 65 70 75 80 85 90 95 100 Management Fees - Example 1 Management Fees - Example 2 Management Fees - Example 3 QPCTS Charges

$0

$500,000

$1,000,000

$1,500,000

62 65 70 75 80 85 90

Example 1 - S&P Example 2 - S&P Example 3 - S&P

The graph on the previous page projects the ending balances at todays tax rates. The graph to right show the ending balances on three hypothetical examples with an increase in the top marginal tax rate of 10%. The tax increase depletes the accounts by several years. For example, Example 1 account is depleted in the 22nd year, as opposed 24th year at todays tax rates.

Longevity risk when there are market losses in the portfolio become hard to manage since each years return is unknown and the risk is affected due to the sequence of returns prior to or during the distribution phase of retirement.

LEGISLATIVE RISK

Legislative risk is the last of the major risks present in a qualified plan. This risk involves major changes in federal laws involving qualified plans. Since the federal government has legal rights to any distributions due from a qualified plan, they can impact the plans assets by changing the tax code or federal statues relative to qualified plans. This includes, but is not limited to excise taxes on distributions or fully nationalizing the accounts assets and replacing those assets with a government type annuity.

THE QUALIFIED PLAN CONVERSION & TAX STRATEGY PLAN

HOW DOES IT WORK?

Below is the process of how one would convert a qualified plan to a non-qualified account using the QPCTS plan.

Qualified Plan 401(k) / IRA

New IRA

Indexed Universal Life

Contract

Loans* Retains

Opportunity Costs

Tax-Free Income (Policy Loans)

Internal Revenue Services

*Retaining the opportunity costs associated with the tax obligations or income to supplement retirement allow the owner of thecontract to accrue additional interest when the return on the money borrowed is greater than the interest rate the insurance charges

to borrow the money. This is an example of Financial Arbitrage.

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$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

62 65 70 75 80

Example 1 - S&P 500 Example 2 - S&P 500

Example 3 - S&P 500

OPPORTUNITY COSTS

Opportunity Costs refers to the future value lost when control of assets is no longer retained. When you relinquish control of an opportunity, you loose the ability to create future wealth with that asset. In a financial model, if a dollar is spent, the ability for that dollar to create future wealth is lost. With most qualified type of retirement plans, the taxes paid on distributions is usually lost. Under the QPCTS plan, the dollars needed to satisfy the taxes due on a conversion are not lost, since the amount of the taxes is borrowed from the general account of the life insurance company. This can have a major impact on the accumulation account of the life contract since the dollars borrowed can create accrue additional interest to the life insurance contract.

ARBITRAGE

Arbitrage is a financial process that banks, financial institutions and individuals use to create wealth. This is done by acquiring a transaction at a pre-determined price, utilizing the acquired funds to profit from a higher price than the acquiring price creating a positive spread on the funds acquired. With an Index Universal Life contract, when the owner borrows money from the insurance company and uses those funds to pay taxes or supplement retirement, the interest earned on the life insurance contract are higher than the cost of borrow the funds from the insurance company, the amount borrowed is credited a higher amount it costs to borrow the funds.

60.00%

65.00%

70.00%

75.00%

70%

65%

73.33% 72.50%

"10 Year" "20 Year" "30 Year" "40 Year"

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$50,000

$100,000

$150,000

$200,000

70 75 80 85

Opportunity Cost on Taxes Paid

Opportunity Cost on Taxes Paid

Losing the Opportunity Cost on the taxes paid during the distribution phase in retirement can be significant. The graph to the right assumes gross distributions of $45,000 between the ages of 70 to 85 at a 20% tax rate. Retaining the Opportunity Cost associated with these tax payments with an average interest rate of of 1%. Retaining the Opportunity Costs produces additional wealth of $150,276. At average rate of 2%, $171,109.

The QPCTS Plan allows you to retain the Opportunity Costs both on the tax obligations on the conversion, as well as the income needed to supplement your retirement.

An Arbitrage strategy does contain risk. The graph to the right illustrates the success of an arbitrage strategy when the cost of the arbitrage is 5.14% and compares that rate with the percentage of time the S&P 500 Index has experienced a higher than 5.14%.

Over a 10 year period, the loan balance on an IUL would have accrued additional interest 70%, 65% over 20 years, and 73.33% and 72.50 over 30 and 40 year timeframes.

The information provided in this report is based on hypothetical models believed to be accurate; however there is no guarantee on the correctness of the projection tables and summary pages contained herein. Under no circumstances shall our firm or any of its affiliates, officers, employees, directors, advisers or agents of any kind be responsible for damage, error, omission, inaccuracy, or misuse in the connection with the use of this report. The information presented is for educational purposes only and does not intend to make an offer or solicitation for sale or purchase of any securities or financial products. Most financial strategies involve risk. The financial strategies illustrated for the life insurance contract ledgers contained in this report contain a degree of risk. Interest credited to the life insurance contract can be allocated and linked to a market index, and if they are, can have periods where there is no interest credited to the accumulation value of the life insurance contract when the index experiences a loss. When policy loans are elected to meet the tax obligations on the amount converted from a qualified account to a non-qualified account or to supplement income, the projections in the following reports implements and illustrates a financial strategy known as arbitrage. An arbitrage strategy contains risk and can introduce additional fees to the life insurance contract, when the spread of the arbitrage is negative. Owners of qualified accounts should consult with a qualified financial advisor and/or tax professional before implementing any financial strategy.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that, to the extent this communication addresses any tax matter, it was not written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax or accounting obligations and requirements. IUL projection includes an arbitrage strategy which assumes additional risk For investment advice please consult a FINRA registered advisor. Taxes are calculated at your tax rate currently. Future taxes will increase or decease according to your income in each specific year and the individual tax rate pursuant to the IRS rules in each specific year of the above projection.

Tax Free Income & Social Security Benefits

For most individuals their social security benefits are a major portion of the monthly income. Depending upon your income other than your social security benefits depends on whether your benefits will be taxed. For a married couple who file jointly, 50% of your social security benefits are taxed if your other reportable income exceeds $32,000 and is less than $43,999. If your reportable income exceeds $44,000, 85% of your social security benefits will be taxed.

Using the previous examples in this brochure, and assuming gross of $53,000 or net income of $45,000, 85% of an individuals social security benefit would be taxable. Assuming a couple elected their social security benefit at age 70 and the combined benefit from both spouses is $5,254 monthly, the amount of the social security benefit taxed would be $4,466.

SUMMARY

Converting a qualified plan into a non-qualified plan can be a powerful strategy for qualified individuals. Eliminating the risks described above can have a major impact on your retirement assets. By converting a qualified account to a non-qualified account, you may be able to reduce or eliminate any taxes due on your social security benefits and all future distributions from your new non-qualified account due to the conversion. QPCTS allows you to meet your tax obligations at todays low rates, eliminate many of risks associated with qualified plans, and provide a tax free wealth transfer to your non-spousal beneficiaries.

It is important to have your plan analyzed prior to deciding on a conversion strategy. The financial advisor who gave this brochure to you would be happy to provide a COMPLEMENTARY Qualified Plan Conversion & Tax Strategy report for you to see if this financial solution is appropriate for you.

$0 $500,000 $1,000,000 $1,500,000 $2,000,000

70

75

80

85

Cumulative Tax-Free Income - QPCTS & SS Benefits"

Cumulative Taxable Net Taxable Income - IRA & SS Benefits"

The additional tax due on the combined social security benefit would be approximately $11,933, while the amount of the social security benefit received after taxes would be $47,730 annually. By eliminating taxes on the social security benefits and distributions from the IRA due to the QPCTS strategy, the additional cumulative income receive from age 70 to age 75 would be $160,752.

1

The Power of Arbitrage in a Retirement Account

Being able to incorporate a financial strategy known as arbitrage in a retirement account can have a dramatically effect on the overall value of the account. Although there is risk involved with arbitrage, the upside potential is impressive due to additional interest that can accrue on the account if the spread of the arbitrage is positive. When an arbitrage strategy is combined with an index universal life contract where market risk is eliminated and the growth capped relative to the performance of the index it is linked to, the results are impressive when projections are back tested on historical data of the Standard & Poors 500 Index, less dividends as the assumed investment rate of returns. When compared to the Standard & Poors Index, less dividends while factoring in market and sensitivity of sequence of return risk, the risk is minimal. Below we will examine an IRA funded using the Standard & Poors 500 Index to an index universal life contract where the interest credit to the account is also linked to the Standard & Poors 500 Index on an annual basis. Distributions from each account will net the same net income after taxes. To recap the assumptions used for the future value calculations, both accounts utilize the same historical data for the future value calculations with the exception that the index universal life contracts interest credits are capped at 13%, negative performance receive 0% credits, whereas the IRA receives the full gains and losses of the index.

Using the assumptions below lets look at an example of how arbitrage and the elimination of losses can affect the value of a retirement plan when the same net distributions are taken from each plan.

Assumptions

Value of the IRA: $400,000 Conversion period from IRA to a non-qualified account: 3 Years Tax bracket prior to conversion: 30% Tax bracket during conversion: 33% Cost of arbitrage or variable loan rate: 4.5% Annual net income from IRA and from non-qualified account: $75,000

The table below is a projection of the future values of an IRA where the gains and losses are based upon past performance of the Standard & Poors 500 Index, less dividends from 2013 backwards. Distributions are increased to net the same net income after taxes that are available in the non-qualified account which is funded with an index universal life contract. The net distribution from the account on an annual basis is $75,000.

YR Age

Qualified Plan - IRA

IRA Beginning Balance

Year for S&P Data S&P 500 Gain or Loss

Taxable Income Fees Taxes Ending Balance IRA

1 60 $400,000 2013 29.53% $118,120 $0 $7,600 $0 $510,520 2 61 $510,520 2012 15.83% $80,796 $0 $9,700 $0 $581,616 3 62 $581,616 2011 2.07% $12,015 $0 $11,051 $0 $582,580 4 63 $582,580 2010 14.82% $86,345 $0 $11,069 $0 $657,856 5 64 $657,856 2009 25.94% $170,616 $0 $12,499 $0 $815,973 6 65 $815,973 2008 -36.55% -$298,257 $0 $15,503 $0 $502,212 7 66 $502,212 2007 5.48% $27,545 $0 $9,542 $0 $520,215 8 67 $520,215 2006 15.61% $81,219 $0 $9,884 $0 $591,550 9 68 $591,550 2005 4.83% $28,598 $0 $11,239 $0 $608,909

10 69 $608,909 2004 10.74% $65,414 $0 $11,569 $0 $662,753 11 70 $662,753 2003 28.36% $187,929 $107,143 $12,592 $32,143 $730,947 12 71 $730,947 2002 -21.97% -$160,560 $107,143 $13,888 $32,143 $449,356 13 72 $449,356 2001 -11.85% -$53,248 $107,143 $8,538 $32,143 $280,428 14 73 $280,428 2000 -9.03% -$25,328 $107,143 $5,328 $32,143 $142,629 15 74 $142,629 1999 20.89% $29,789 $107,143 $2,710 $32,143 $62,565 16 75 $62,565 1998 28.34% $17,730 $79,106 $1,189 $23,732 $0 17 76 $0 1997 0.00% $0 $0 $0 $0 $0

2

In this example, the IRA is depleted at the owners age of 75. This is due to a couple of factors. The first factor is the amount of distributions being taken from the account. The second factor is the timing of the distributions relative to the performance of the index. The third factor is the loss of the opportunity costs associated with the distributions, and the fourth factor is the affect fees have on the account. It is important to highlight the market losses in 2008, 2002, 2001 and 2000, and the affect these losses have on the portfolio due to distributions, market risk and the sensitivity of sequence of returns. As a result, the account is depleted very early in retirement. This is also assuming the individual rate tax does not increase in the future. If prior to the owners reaching age 70, the owners individuals individual tax bracket increases by 5%, the accounts income would be reduced by $36,872. A 10% increase in the individuals tax bracket would reduce income by $69,902. In order to maintain a constant flow of income from the IRA based upon the assumed investment returns, net distributions from the IRA would have to be reduced to $39,500.

Compared to a conversion plan funded with an index universal life contract with arbitrage implemented in the contract on loans, the projections are much more favorable relative to the ending balance, the amount of income available during retirement, the longevity of the account and the major tax advantages available to life insurance contracts.

Converted Non-Qualified Plan

YR Age Premium Outlay Interest Credit Tax Free Income Credit / Debit On Arbitrage

Interest on Non Loaned Values Ending Balance

1 60 $133,333 13.00% $0 $0 $17,333 $150,667 2 61 $133,333 13.00% $44,000 $3,740 $31,686 $275,426 3 62 $133,333 2.07% $44,000 -$3,960 $7,453 $368,253 4 63 $0 13.00% $44,000 $11,220 $43,611 $379,084 5 64 $0 13.00% $0 $11,220 $50,740 $441,044 6 65 $0 0.00% $0 -$5,940 $0 $435,104 7 66 $0 5.48% $0 $1,300 $23,936 $460,339 8 67 $0 13.00% $0 $11,220 $61,303 $532,862 9 68 $0 4.83% $0 $436 $25,758 $559,056

10 69 $0 10.74% $0 $8,237 $60,927 $628,220 11 70 $0 13.00% $75,000 $17,595 $74,206 $645,021 12 71 $0 0.00% $75,000 -$12,690 $0 $557,331 13 72 $0 0.00% $75,000 -$16,065 $0 $466,266 14 73 $0 0.00% $75,000 -$19,440 $0 $371,826 15 74 $0 13.00% $75,000 $43,095 $44,190 $384,111 16 75 $0 13.00% $75,000 $49,470 $46,615 $405,196 17 76 $0 13.00% $75,000 $55,845 $50,185 $436,226 18 77 $0 13.00% $75,000 $62,220 $55,048 $478,494 19 78 $0 13.00% $75,000 $68,595 $61,372 $533,461 20 79 $0 1.33% $75,000 -$39,690 $5,553 $424,324 21 80 $0 9.97% $75,000 $52,348 $40,047 $441,718 22 81 $0 7.49% $75,000 $30,857 $29,778 $427,353 23 82 $0 13.00% $75,000 $94,095 $58,038 $504,487 24 83 $0 0.00% $75,000 -$53,190 $0 $376,297 25 84 $0 13.00% $75,000 $106,845 $53,058 $461,200 26 85 $0 13.00% $75,000 $113,220 $64,925 $564,345 27 86 $0 5.81% $75,000 $18,432 $29,502 $537,278 28 87 $0 13.00% $75,000 $125,970 $76,472 $664,720 29 88 $0 13.00% $75,000 $132,345 $93,868 $815,934 30 89 $0 6.15% $75,000 $26,928 $47,224 $815,085 31 90 $0 13.00% $75,000 $145,095 $115,073 $1,000,254 32 91 $0 13.00% $75,000 $151,470 $139,974 $1,216,698 36 95 $0 6.51% $75,000 -$93,690 $91,416 $1,495,803

40 99 $0 0.00% $75,000 -$102,690 $0 $1,901,815

3

To explain the mechanics of the arbitrage on loans, lets look at the year 2011 on the index universal life table, the account value is charged interest on the loan balance due to the 2.07% return on the S&P 500 Index. This is true due to the cost of the arbitrage being greater than the annual return of the index (2.07% minus 4.5%). Since the cost of the arbitrage is 4.5% and the return received was 2.07%, there is negative spread on the arbitrage of 2.43% which equates to additional interest on the loan balance. Note the unloan balance of the index universal life contract receives interest of $7,435 or an interest credit of 2.07%.

However, when we compare the IRA and the losses incurred in years 2008, 2002, 2001 and 2000 to the index universal life contract, the losses in the IRA are considerably higher and have a dramatic affect on the ending balance and longevity of the IRA. For example, in 2008 the IRA suffered a loss of $298,257, while the life contract loss was confined to the interest charge on the loan balance or the amount of the arbitrage or $5,490. In 2002, the IRA experienced an additional loss of $160,560, compared to $12,690 on the life contract due the negative spread of the arbitrage. In 2001, the IRA lost $53,348 compared to $16,065 on the life contract, and in 2000, the IRA lost $25,238 compared to $19,440 in the life contract.

In the years the arbitrage in the life contract experienced a positive spread on the loan balance, the loan balance is credited with additional interest, as opposed to a charge. This result from retaining the opportunity costs associated with the loan balance, which was used to meet the tax obligations on the conversion of the qualified plan, as well as the income needed in retirement. During the first 16 years of the projection, the arbitrage strategy is positive 10 years and negative 5 years. This produced $99,437 of additional income credits to the life contract.

When an arbitrage strategy is combined with the ability to eliminate market losses, the value of a retirement account becomes very attractive. Prior to and during the distribution phase of a retirement plan, market risk can affect the longevity of an account due to the sensitivity of sequence of returns when the portfolio suffers a loss and distributions are taken prior to the market loss or congruent to the loss. The graph below illustrates the ending balance of a qualified plan to a non-qualified fund when the same net distributions after taxes are withdrawn from both plans. Market losses are eliminated from the life contract, gains capped at 13%, while the IRA experiences the entire gains and losses of the S&P 500 Index less dividends. Since market losses are eliminated from the insurance contract, the sensitivity of sequence of returns is also eliminated. The tax deferral on the growth inside the life contract is always positive since income is tax free via loans. However, tax deferral on the IRA may or may not be beneficial depending upon the owners individual tax rate when contributions were made to the IRA and the individual tax rate when distributions are taken from the IRA account.

$0

$1,000,000

$2,000,000

$3,000,000

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62

64

66

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72

74

76

78

80

82

84

86

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90

92

94

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100

The Affect of Market Losses on a Portfolio Standard & Poor's 500 Index (less dividends)

IRA Conversion Plan - IUL

4

Based upon an annual net distribution of $75,000 with an individual tax rate of 30%, the IRA or qualified account is depleted at age 75. When compared to the life insurance contract, the ending balance at age 75 is $405,196. At age 90, the life contract has an ending balance of $1,000,254.

To summarize, although there is some risk with an arbitrage strategy inside an index universal life contract, it also offers additional growth potential to the contracts accumulation value. Based upon the historical performance used for above projections, the IRA produced $430,473 of net income before being depleted at age 75. At the individuals current tax rate the owner paid $184,446 in taxes on distributions from the IRA comparedto $132,000 when converting the IRA to a non-qualified account. In comparison, the index universal life contract had an ending balance of $405,196 at age 75, had tax-free income of $582,000 including the loans used paid to meet the taxes on the conversion, and a tax-free death benefit to his beneficiaries. After age 75, the IRA offer no wealth transfer to the owners beneficiaries since the account was depleted. Any wealth transfer available based upon the ending value of the account at the owners death would be taxed to the beneficiary unless the beneficiary was the spouse of the owner. Any subsequent wealth transfer from this spousal transfer would be taxable to his/her beneficiaries.

If you are interested in learning more about this unique strategy, please contact the advisor who provided this report for you and a complimentary comprehensive IRA analysis would be provided for you to see if a conversion is right for you.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that, to the extent this communication addresses any tax matter, it was not written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax or accounting obligations and requirements. The above tables are for illustrative purposes only and are based upon historical statistics and past results are not a projection or promise that future results will be the same as illustrated above. For investment advice please consult a FINRA registered advisor.

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Fidelity Financial215 S. 88th Street Omaha, NE 68114

Mark T. Houston (402) 880-7008 mark@fidfin.co