Do you have a large amount of money in an IRA, profit-sharing plan, 401(k) plan or other qualified plan? If so, this article will not only save you from paying excessive taxes, but will also show you how to dramatically increase your after-tax wealth tax-free.
This article is one of those bad-news, good-news tax stories. First, the bad news: Someday, the money in your plan must be distributed to you or your beneficiaries. If, over time, you have become wealthy, you can lose about 73 cents of every dollar. Your (or your family’s) share will be worth approximately 27 percent of the total amount because the IRS will get the rest in taxes. Typically you must pay two taxes on your plan distributions: income tax and estate tax. It’s even worse in some high-tax states (check with your accountant regarding local tax obligations).
How do I define wealthy? You are irrevocably in the highest income tax bracket (40 percent, state and federal) and highest estate tax bracket (55 percent, using 2011 rates.) If this sounds like your situation, the tax collector will take the lion’s share of your plan assets whether you get plan distributions during life or the distributions go to your heirs after death.
Now for the good news: There’s something you can do to prevent this tax robbery. Regular readers of this column know I am part of a national network of tax professionals who work together and share tax knowledge. Some of the experts in the network have devised two tax concepts that are designed to enrich your family instead of the IRS. These concepts are designed to help individuals who have accumulated large amounts (from $200,000 to millions of dollars or more) in their plans.
Suppose you have $1 million in one plan or all of your plans combined. If you fail to take advantage of one or both of these concepts, you will lose $730,000 in taxes to the IRS. Just take 73 percent out of the total amount in all of your plans and you will clearly see the full tax-disaster picture. Additionally, your local tax collectors (state, county or city) may want a piece of the tax action. Before you lose all hope, let’s look at each concept separately.
The first concept—called the “Single Premium Strategy (SPS)”—overcomes the tax robbers by combining three strategies: First, an immediate-pay annuity (typically a joint-life annuity if you are married); second, a life insurance policy (second-to-die if you are married); and third, an irrevocable life insurance trust. In one real-life case, an unmarried reader of this column turned $325,000 into $2,878,385 (with all taxes paid). Another reader, who is married, turned $270,000 into $3,496,063 (with all taxes paid). Single or married, it’s smart to get an exact quote of how much tax-free wealth an SPS would create for you and your family.
The second concept is named “Retirement Plan Rescue” (RPR). With an RPR, you use the funds in the plan to buy the insurance—either for a single life or second-to-die for a husband and wife. A married reader (Joe) used an RPR to buy $10 million of second-to-die insurance, which will go to his children tax-free. Joe actually turned $567,900 into $10 million. Joe’s wife, Mary, called the entire transaction a “tax miracle.”
You’ll be surprised by how easy the above strategies are to do. So, if you are lucky enough to be wealthy, but unlucky enough to have a substantial part of your wealth in a qualified plan, you owe it to your family to take a closer look at the above two “tax-miracle concepts.”
Readers of this column can get a free analysis of their plans using both of these concepts. Just fax your name and birthday (include your spouse’s name and birthday if you are married), the amount of all of your combined plans and all of your phone numbers (business/home/cell) to 847-674-5299. Include any other information, questions or problems you have.