Tax Secrets: Multiply your retirement dollars

Irv Blackman

Chances are you spent most of your working life contributing to your retirement plan. Now what? This article is an exciting tax story.

Do you have $400,000 or more in a qualified plan (IRA, 401(k), profit-sharing or other plan)? If so, read every word of this article. You’ll save a ton of taxes, while your family will inherit a small fortune; tax-free.

The story starts when a reader of this column showed the column to two of his friends [Joe (age 58) and Sam (age 56)] who are brothers. Each owns 50 percent of a successful business. Both have a similar medical problem and although Joe is insurable, his high rating makes insurance on his life too expensive. Sam is not insurable.

Many visits too many professional advisors still left each of them with about a $3.1 million potential estate tax liability. Part of the problem was the amount – $1.8 million – each had in their company profit-sharing plan.

More:Tax Secrets: Transferring the business to your kids?

Big dollar numbers in your plan sure sound good, but let’s do the math for just $1. Take out $1 and the IRS gets 36 cents in income tax... 64 cents left. When you get hit by the final bus, the IRS gets 40 percent (using 2017 rates) of that 64 cents for estate taxes... another 26 cents down the tax drain. Sorry, but only 38 cents to your family.

Now, do the math on the $1.8 million Joe and Sam each have in their profit-sharing plan. Would you believe $1,116,000 to the IRS ... only $684,000 to the ... family?

A tax tragedy!

Two more points:

  1. If you die with money in your qualified plan, the IRS nails your estate for the same double tax. (Now, stop. Do the math for the amount in your plans).
  2. Sorry, but your home state may get into the act and take more tax dollars. Fortunately, for you lucky residents of Florida, there is no State income tax.

Is there a way to legally sidestep this tax tragedy? Yes! It’s called “Retirement Plan Rescue” (RPR).

The concept behind an RPR is to shift from a highly taxed environment (qualified plan) to a tax-free environment (life insurance). Sorry, but if you are uninsurable or highly rated because you have serious health issues), an RPR won’t work for you. Have a healthy spouse? She/he can save the day and put an RPR in your planning picture.

For example, here’s how an RPR saved the day for Joe and Sam. Using an RPR, each bought $4 million of life insurance on their wives (both age 54 and healthy). When each $4 million in proceeds will be paid down-the-road to Joe’s and Sam’s families (that’s $8 million total) the entire amount will be received tax-free – no income tax, no estate tax.

An RPR is easy to do.

Now an example for you married folks, where both the husband and wife are healthy and insurable. Jack (61 years old) and Jill (60 years old) had $732,000 in their rollover IRAs. They used an RPR to create $3.7 million (tax-free) for their family by buying a second-to-die life insurance policy.

And finally, an example of a healthy 74-year-old (Henry) … single with $1.25 million in a Rollover IRA. Henry lives in a high-tax state, so the $1.25 million is only worth $337,500 to his family. Instead, Henry used an RPR to acquire $1.9 million in insurance on his life, which will go to his family tax-free. Wow!

Will an RPR work for you? I twisted the arm of my insurance guru and have arranged for readers of this column to find out if an RPR will work for them .... no obligation. Just send the following information via email ( to me: (a) your name, address, phone numbers (business/home/cell); (b) total amount in all your qualified plans combined (if married, same for your spouse) and (c) your birthday (also your spouse). Please put “RPR – Eagle” at the top of your email.