Maximizing an IRA Under the Secure Act

Steven Gates   |   May 2021   |   1-minute read
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The story

A financial planner has several clients with significant qualified plan assets. Due to the changes in the stretch provisions from the SECURE Act for non-spouse inherited IRAs, the planner was looking for ideas beyond Roth conversions to mitigate the taxes due to a non-spouse beneficiary. Clients (male age 66/spouse age 64) have $3M in qualified plan assets. The financial planner verified these clients did not need to depend on these assets for retirement spend down. These assets would ultimately end up in the hands of their children. Clients are also charitably inclined and would like to leave money to their favorite charity.

The problem

Non-spouse beneficiaries of an inherited IRA are now required to take all IRA assets as distributions within 10 years of death. Those distributions, combined with the beneficiaries own earned income, often push the beneficiary into the highest tax bracket resulting in significant and unavoidable tax liabilities. If the IRA is liquidated immediately, as beneficiaries commonly request, the estate will pay taxes on the full amount as income with respect to the decedent (IRD), potentially at the highest tax bracket.

Client profile

  • Clients age 60-75 with $500,000 or greater in qualified plan assets, especially those with only one or two children
  • Financial planner has confirmed they do not need to depend on the IRA for retirement spend down, ultimately leaving these assets to a non-spouse beneficiary
  • Client is looking to help reduce or even eliminate the additional tax liability from forcing distribution of the entire IRA within 10 years for a non-spouse beneficiary

How it works

  • Purchase a $3,000,000 survivorship life policy by taking systematic withdrawals from the IRA account balance (or their separate NQ accounts to avoid paying taxes until RMDs start at age 72)
  • Starting at age 72 fund the life insurance from the RMDs
  • The children are the beneficiaries of the life insurance policy, guaranteeing they inherit $3M income-tax free
  • Any remaining IRA account balance upon second death will be given to their favorite charity, eliminating the IRD tax altogether

The result

The target premium for the life policy was $48,000.

Download the PDF to see:

• Traditional IRA + Reinvested RMDs • IRA Distributions + Trust Owned Life Insurance • Comparison of Results • Philanthropy Discussion • Qualified Money Today • Modeling Status Quo • Insurance Only Strategy • Summary Discussion

Download supporting materials.

About the Author

Through analytical expertise, Steven Gates supports advisors serving high-net-worth clients and business owners. Using customized modeling, he creates insurance-driven strategies for wealth transfer, business protection and charitable leverage. Steven is the go-to guy when you need a unique blend of technological expertise, industry knowledge and entrepreneurial drive.