Tax Secrets: How to stay in control of your qualified plan money

Irv Blackman

Giving tax seminars has always been one of my favorite pastimes. I would ask the audience, “Do you have a large amount of money in an IRA, profit-sharing plan, 401(k) plan or other qualified plan? If so, raise your hand.”

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Almost every hand in the audience would go up. Would you have raised your hand? Or do you know someone (family, friend, or co-worker) who has big bucks in one or more plans? Then, this article will not only save you a ton of taxes, but will show you how to dramatically increase your after-tax wealth; tax-free.

This 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 you make the mistake of becoming rich, those beautiful dollars that took you decades to accumulate will be worth only in the 30 percent range to you and your family. You see, the IRS will get the rest in taxes. Yep, typically you will lose about 70 cents out of every dollar because you must pay two taxes on your plan distributions: income tax and ultimately, estate tax. It’s even worse in some high-tax states like New York (check with your accountant).

How do I define rich? You are irrevocably in the highest income tax bracket (say 40 percent, state and federal combined) and highest estate tax bracket (40 percent, using 2017 rates.) Sorry, but 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.

Can anything be done to prevent this tax robbery? Yes! Here comes the good news; how to turn the tables on the IRS. Regular readers of this column know I am part of a national tax network (other professionals who work together and share tax knowledge). Well, my partner experts in the network have devised two tax concepts to enrich your family instead of the IRS.

These concepts are designed to help individuals who have accumulated large amounts (from $400,000 to millions of dollars or more) in their plans.

Suppose you have $1 million (fill in your own exact number) in one Plan or all of your Plans combined. If you fail to take advantage of one or both of these concepts, you can lose about $700,000 (or more) in taxes to the IRS. Just take 70 percent of the amount in all your plans, and you can clearly see the full tax-disaster picture. Of course, your local tax collectors (state, as well as your local, county or city) may grab an additional piece of the tax action. Now, let’s look at each concept separately.

The first concept – called the “Single Premium Strategy (SPS)” – to overcome the tax robbers combines three strategies: (1) an immediate-pay annuity (typically, a joint-life annuity if you are married); (2) a life insurance policy (second-to-die if you are married) and (3) an irrevocable life insurance trust. In one real-life case, an unmarried reader of this column turned $425,000 into $2,878,385 (all taxes paid). Another reader, who is married, turned $470,000 into $3,896,063 (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 called “Retirement Plan Rescue” (RPR). When using an RPR, your qualified Plan uses 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 kids tax-free. Joe actually turned $567,900 into $10 million (all tax-free). Joe’s wife Mary called the entire transaction a “tax miracle.”

You’ll also be surprised at how easy the above strategies are to put in place. So, if you are lucky enough to be rich, but unlucky enough to have a substantial part of your wealth in a qualified plan (IRA, profit-sharing, 401(k) or similar plan), you owe it to your family to take a close look at the above two tax-miracle concepts. Best of all, either an SRS or an RPR is easy to do.

I have arranged for readers of this column to get a free analysis of their plans for both of these concepts. If you have more than $400,000 in your plans (rollover IRA or your company’s 401(k)/profit-sharing plan or any other qualified plan), you owe it to your family to check out how an SPS and /or an RPR will enrich your family, instead of losing 70% of your Plan funds to the tax collector. Just email to (1) your name and birthday (also your spouse if married); (2) total amount in all your plans combined; and (3) all phone numbers (business/home/cell) where you can be reached. Mark “SPS” and/or “RPR” at the top of the page. You are welcome to include other information, questions or problems concerning you, your business or your family.

Have a question? Call Irv at 847-767-5296.