IRA Conversion & Tax Strategy

8/9/2019 IRA Conversion & Tax Strategy

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Smart Solutions to the IRA Tax Prison

DONT LET THE IRS

TAXYOUR RETIREMENT

TO DEATH!

This book is compliments of:

MARK T HOUSTON


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Contents

Te individual retirement account ................................................1

Te IRS-IRA Rescue Plan .............................................................2

Why is this important? ...............................................................2

Case study ..................................................................................3

Non-qualied plan index

universal life insurance ................................................................6

How do I begin? ...........................................................................6

Conclusion ...................................................................................8


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DONT LET THE IRS TAX YOUR RETIREMENT TO DEATH!

THE INDIVIDUAL RETIREMENT ACCOUNT

Te Individual Retirement Account was signed into law by President GeraldFord through the Employee Retirement Income Security Act (ERISA),on September 2, 1974. Te purpose of the Act was to protect and enhance

Americans retirement security by establishing comprehensive standards foremployee benet plans. As a result, the Act created qualied plans as weknow them today. Tis includes IRAs, 401(k), 403(b), and 457 plans.

Te purpose of the IRA was to serve as a dual role. One was to giveindividuals not covered by an employer sponsored plan an opportunity tosave for retirement on their own in tax deferred accounts made availablethrough private nancial institutions. Te other was to give retirement

workers or individuals changing jobs a means to preserve employer-sponsored retirement plan assets by allowing them to transfer, or rolloverplan balances into IRAs.

As more Americans transition from their working years to retirement,the ability to convert employer sponsored plans into IRAs has increased.ERISA provides a process whereby workers can preserve retirement planassets upon job change or retirement. Workers of all age and income

groups take advantage of rollovers and the holding of IRA rollover assets iswidespread among traditional IRA owners.

Similar to many nancial strategies qualied plans may or may not be thecorrect strategy based upon your age, your risk tolerance, your income taxrate now and in the future, your income needs, and your goal for any wealthtransfers to your beneciaries.

TAX DEFERRAL FUTURE TAXESAccording to the Journal of Financial Planning, there are four basic rulesrelative to tax deferral and tax brackets.

Rule 1 Deferral on ordinary income most likely makes sense ifyou are comfortable that tax rates will not rise signicantlyin the future, or if you expect to be in a tax bracket inthe future not signicantly higher than your present tax

bracket.

R l 2 If i hi h i t t t h N Y k


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SMART SOLUTIONS TO THE IRA TAX PRISON

exodus of high earners from high-tax states to lower taxstates like Florida and Nevada.

Rule 3 If the taxpayer expects ordinary income tax rates to rise asmuch as or more than they would under current tax law,

deferral might be a poor strategy.Rule 4 If you expect ordinary income tax rates to rise as much

as or more than they would under current law, it makesense to withdraw from your regular IRA, pay the tax, andredirect the proceeds into a tax-free entity.

THE IRS-IRA RESCUE PLAN

Te IRS Rescue Plan is a nancial strategy which allows you to convertyour qualied plan (IRA) into a tax-free entity. By converting your IRAto a non-qualied plan, you are removing the governments control andlegal rights to any portion of your retirement savings. It eliminates futuretaxes and the requirement to take distributions, known as RMDs fromyour retirement savings. Tis unique nancial strategy allows you to be incomplete control of your retirement savings, while also addressing some

major risks associated with retirement assets.

WHY IS THIS IMPORTANT?

Tere are approximately $19.5 trillion1dollars residing in qualied plans.Tis includes private sector dened contribution plans, 401(k), 403(b),457 and IRA type of plans. In comparison, the national debt of the UnitedStates is $17.04 trillion dollars2, while the unfunded liabilities are $126

trillion.T

ese unfunded liabilities include social security, prescription drugand Medicare liabilities.

With the national debt and unfunded liabilities rising, the chances ofan increase in tax brackets are very likely. Refer back to the Journal ofFinancial Plannings Rule 4 which states If you expect ordinary incometax rates to rise as much as or more than they would under current law,

it makes sense to withdraw from a regular IRA, pay the tax, and redirectthe proceeds into a tax-free entity. Satisfying your tax obligations at


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CASE STUDYAt age 63, Tom decides he wants to compare how current and future taxeswill affect his retirement savings that are residing in his IRA. He is alsointerested in analyzing the future values of a non-qualied account shouldhe convert his IRA into a tax-free entity. Assuming a 6.5 percent constantrate of return on his IRA plan assets net of the management fees of 1.5percent, a current tax bracket of 25 percent federal and 5 percent state,

Tom decides he would like a nancial advisor to prepare pro formas orfuture value projections on his IRA, as well as a non-qualied plan. Sincehis current nancial advisor is not able to prepare the pro formas Tom isinterested in, he approaches his new advisor to assist him in this task. Tomplans on taking an annual distribution of $26,000 each year to supplementthe social security benets he and his wife will be receiving at age 70. Basedupon the above assumptions, Toms new nancial advisor creates pro formaswhich project the future values of his IRA account and the future values ofa non-qualied account when a distribution of $26,000 is taken from eachaccount In order to receive the same income of $26 000 Tom is informed


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Tom is concerned he will be in a larger tax bracket when he starts takingdistributions from his IRA due to the governments decit, its unfundedliabilities and the impact the new health care law will have on all aspects ofthe economy. Tom is concerned in order to meet its future obligations, the

government will need to increase the income tax rates on its citizens, or lookat new sources of tax revenue in order to meet its future obligations. Tomasks his advisor to project how an increase in taxes will affect the longevityof his IRA or retirement savings based upon the distribution he plans ontaking at age 70. Te graph below illustrates the impact an increase in taxeswill have on his IRA.

Tom discovers that if his income tax rate increases by 10 percent, he wouldpay an additional $137,332 in taxes. Tis increased tax obligation wouldeliminate 3 years of potential income. At the same time, Tom discoversif he converts his IRA to a non-qualied account, he would meet his taxobligation by the fourth year with the amount of tax paid being $99,0001.Te projections also project Tom could take distributions of $26,000

through age 100 from the non-qualied plan.Te pro forma illustrates at age 85 assuming Toms tax bracket remains the


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would lose $65,534 of income. At his current income tax rate his IRA isdepleted at age 86. With a 5 percent increase in taxes, his IRA is depleted atage 85, and age 83 if his tax rate increased by 10 percent. Income from hisnon-qualied account was constant to age 100 with an ending balance of

$281,365.Although Toms primary goal was income from his IRA, he was interested inanalyzing the potential impact taxes would have on the balance of this IRAto his beneciaries upon death. Tom discovers there two possible scenariosavailable to his beneciaries. Te rst option would be for his beneciariesto receive the inheritance in a lump sum. If elected his beneciaries wouldbe taxed on the entire amount received. Tis most likely would increasetheir current income tax rate since the additional income would be includedon their tax return. Te second option would be to stretch the taxes dueby taking a series of distributions from the inherited IRA according to eachof Toms beneciarys life expectancy according to Publication 590 of theInternal Revenue Code.

In analyzing his IRA to a non-qualied option at age 85, Tom discoversthe non-qualied plan would produce a tax-free wealth transfer to hisbeneciaries of $113,878, while the IRA assuming no increase in his income

tax rates would produce a taxable wealth transfer of $34,234. In the eventthere was an increase in his income tax rates prior to age 70, there would nowealth transfer available to his beneciaries since his IRA would be depletedby age 86.

In comparison, Tom discovers the non-qualied plan provides for a

larger and more effi

cient wealth transfer to his bene

ciaries due to the taxadvantages available to the non-qualied plan pursuant to IRS Code Section7702 F h T i li d h hi b i i ld h


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his beneciaries, which is approximately 38% of the original balance of hisIRA prior to it being converted into a non-qualied plan.

After further research, Tom discovers there are additional benets availableshould he convert his IRA to a non-qualied account, such as having a long

term care insurance benet included into his plan.Based his analysis Tom concludes it is in his favor to convert his IRA to anon-qualied account as soon as possible. Tom is relieved to have a planthat removes the government from his retirement savings, eliminates thevolatility his IRA is presently exposed to due to the uncertainties in thestock market, but still provides strong tax-deferred growth potential withoutthe risks associated with market based investments.

Tom and his advisor begin the process of converting his IRA into a non-qualied plan funded with an index universal life insurance contract.

NON-QUALIFIED PLAN INDEX UNIVERSALLIFE INSURANCE

Te main purpose of the IRA conversion is to implement a strategy whichmaximizes the current tax advantages available when a life insurance

contract is designed correctly. As a permanent policy, a life insurancecontract provides lifetime protection, offers tax-deferred growth on thesavings component of the contract, tax-free income through policy loans,which do not have to be repaid as long as the contract remains in force, atax-free death benet to designated beneciaries, and if elected, long termcare benets.

HOW DO I BEGIN?If the qualied plan assets are residing in an employer sponsored plan suchas a 401(k) and the owner is retired or the 401(k) is an orphan 401(k), orif the plan provides for in-service distributions, the plan needs to be rolledover to a traditional IRA. If the assets are currently residing in an IRA, norollover is needed.

Te IRA balance is converted within 3 to 5 years depending upon the value

of the IRA and the age of the owner to an index universal life contract.Tese premiums are allocated to an index such as the Standard & Poors


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the crediting strategy selected. Depending upon the crediting strategy andthe index selected, there is a cap on the performance of the selected index.For example, the cap rate might be 12 percent. Any increase in the S&P500 would be capped at 12 percent when the index performance exceeded

the cap rate. All gains are reset, increasing the

oor of the contract each yearthere is a gain. In years where the index is negative, 0 percent is credited tothe accumulation value of the contract unless a portion of the assets wereallocated to the xed income account.

Policy loans are available in the rst year of the contract. Te amountof loan is dependent upon the value of the accumulation account in thecontract. Loans are taken from the insurance companys general accountand not the insurance contract. Te accumulation value of the insurancecontract serves as collateral for the loan amount. Te cash surrender valueof the contract is the accumulation value plus any earned interest minus theamount of the loan plus any accrued interest plus administrative charges onthe life insurance contract.

Te tax due on the portion of the IRA being converted (usually the annualpremium) is paid by taking a policy loan from the insurance contract in thesecond contract year. Future tax obligations are taken in subsequent years

until the IRA is fully converted to a non-qualied account and the taxes aremet.

Loans allow you to borrow money by utilizing your cash accumulation inthe policy to create a tax-free distribution at any time, even before age 59.Again, policy loans are utilized to pay the tax obligations on the amountbeing converted from your IRA, as well as for future distributions. Tereare two loan options, a xed option and a variable option. Te difference

between the xed and variable loan options lies in how the interest on theloan is charged and how the interest on the loan is credited1.

Fixed Rate Charged Fixed Rate Credit

4%3.0% (years 1-10)

3.9% (year 11+)

Variable Rate Charged Variable Rate Credit


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CONCLUSION

Te success of a nancial strategy is dependent upon plan variablesremaining constant when the strategy was implemented and the risksassociated with a plan being managed. With the uncertainties in future

income tax rates, the uncertainties of how the new health care act will affectall aspects of the economy, the increasing federal decit and the risks presentin retirement, it may be time for you to consider converting your qualiedplan into a non-qualied plan.

To receive a comprehensive report analyzing your qualied plan to a non-qualied plan, ask the advisor who gave you this booklet to prepare an IRSRescue Report for you. All questions concerning a qualied plan conversion

should be directed to the advisor who gave this booklet to you.

1--The IRS-IRA conversion plan ulizes a variable loan opon in its projecons. This opon can have

adverse aects on the policy if the interest rate credited on the loan amount is less than the amount

charged to the loan amount.

Once the IRA is fully converted, you and your nancial advisor need to meet atleast once a year to make sure the contract is performing as illustrated.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we

inform you that, to the extent this booklet addresses any tax maer, it was not wrien to be used,

and cannot be used, for the purpose of (1) avoiding penales under the Internal Revenue Code or

(ii) promong, markeng, or recommending to another party any transacon or maer addressed

herein. You should consult with appropriate counsel or other advisors on all maers pertaining to le-gal, tax or accounng obligaons and requirements. The projecons referenced in this booklet are for

illustrave purposes only. Future values referenced in this booklet are based upon a constant variable

and are not a promise that future results will be the same as the values stated above. For investment

advice please consult a FINRA registered advisor.


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"#$"% &' (")*+,#*

Hi, Im Mark Houston!

Since I was a young adult I had a thirst for learning more. Having

traveled across the US to attend workshops for the last 38 years, I have

been fortunate to gain meaningful exposure to many very talented

professionals. That all transfers directly to my business as I really enjoy

being of help to others.

When it comes to financial issues I find that many people do not know

who to turn to, what to do, or what product actually helps them. Thru

greater knowledge provided to those we connect with, we are able to

provide better direction, more powerful outcomes and satisfied clients that

are moving in a better direction towards their dream!

I started my practice to make all of that easier and less stressful for

you. Every day, I help new clients just like you to set financial goals, create

a spending plan that actually works, get the right protections in place, and

start saving for the future. With the right plan in place, my clients spend

less time worrying about money and more time enjoying what is most

important to them.

If you would like to review with us or receive a second opinion, I invite

you to schedule a free, no-obligation phone call so that you can tell me alittle more about your current situation and your dreams. Even the simple

act of talking about your struggles and concerns can bring you a lot of

relief, so please click the button below to schedule a time to connect.

If you have trouble finding a time that works for you, just shoot me an

email at [email protected] well work it out. Im looking forward to talking

to you soon!

MARK


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Resources

For more information and financial knowledge to help you make

better life decisions, check out these excellent publications available online

at Fidelity Financials University storefront:

"#$"% &' '()*(


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Disclaimer

This eBook is for educational purposes only and should not beconsidered as specific investment or planning advice. Depending on

individual circumstances, the strategies discussed in this eBook may not be

appropriate for your situation. Please consult a qualified advisor regarding

your individual circumstances and to learn more on strategies that may be

appropriate for you. All investments involve the risk of potential investment

losses as well as the potential for investment gains. Prior performance is no

guarantee of future results, and there can be no assurance that future

performance will be comparable to past performance. Any examples orclient case studies are hypothetical, intended for illustrative purposes only

and highlight a single possible outcome. Your results will vary.


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Fidelity Financial215 S. 88thStreet

Omaha, NE 68114

Mark T. Houston

(402) 880-7008

[email protected]

WWW.FIDFIN.CO

IRA Conversion & Tax Strategy

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