Leveraging Your IRA For Future Generations
Many retirees find they do not need or want the distributions from their IRA, 401(k), 403(b), or other qualified pension plans. Instead, they find themselves living comfortably on their pensions and Social Security. Taking advantage of your IRA by leveraging the asset for your children and grandchildren has been steadily increasing in popularity. One good way to increase the value of that account for your beneficiaries is using life insurance. The insurance is used to “leverage” the value of the IRA and provide a tax-free benefit to your heirs. Let’s see how this might work:
For example, say you have a $400,000 IRA, that in your mind you want to leave to your children as an inheritance. If you are on the wrong plane at the wrong time, that asset passes to your children, and they receive $400,000. The problem with this is that it isn’t really $400,000! It’s actually $400,000 minus your children’s tax brackets. There is an opportunity to “stretch” the IRA payments over their lifetimes; however, many times we find that the money is needed, taxed, and spent thus depleting the retirement account quickly.
Clients that leverage their IRA accounts for their children using life insurance create immediate tax-free cash upon their death; therefore, eliminating the NEED to tap into IRA accounts and creating an environment that allows the child to “stretch” payments over their lifetime. Please see below for a hypothetical scenario:
$300k IRA (assuming $100k spent on life premiums during the life of the insured)
$300k (hypothetical death benefit)* total to heirs:
600K Life insurance provides for the immediate cash need, thus eliminating the need to take more than the Required Minimum Distribution out of the inherited IRA.
*(subject to medical underwriting/age)
$120k (25% income tax), Total to heirs:
$280k after taxes assuming they needed to spend the asset rather than utilizing the “stretch” provision to maximize the asset.
Jonathan is part owner of Clark Financial Services and is an Investment Advisor Representative with Investment Advisory Services offered through Brookstone Capital Management LLC, an SEC Registered Investment Advisor