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| © 2001, 2002 Strictly Business Magazine All Rights Reserved. A division of S&S Enterprises, a Floyd Snyder Production. Santa Maria, California, 93454 Feedback. |
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| Senior Finances Specializing in Investment Management and Asset Preservation For Mature Investors Published by: |
| Trent J. Benedetti, C.P.A., C.F.P. |
| Benedetti & Associates Certified Public Accountant,Inc. 2151 S. College Drive, Suite 101 P.O.Box 5958 Santa Maria Ca. 93456 Tele: (805) 922-4881 Fax: (805) 922-7953 Email Mr. Benedetti |
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| Two articles this page: Convert Your IRA from Tax Deferred to Tax Free Why Would a Retiree Own Life Insurance? |
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| Convert Your IRA from Tax Deferred to Tax Free Wouldn’t it be great if you did not need to take mandatory distributions on your IRA (and pay tax)? Wouldn’t it be great to have that IRA money grow tax-free (rather than tax deferred)? Although the Roth IRA offers these two benefits to IRA owners, their incomplete knowledge has kept them from converting their IRA to tax free status. Because the accumulated tax on your IRA must be paid immediately upon conversion to the tax-free Roth IRA, many investors do not convert. Even though for most, the long run advantages outweigh the immediate payment of the tax, they still avoid the tax by keeping their existing tax-deferred IRA. But what if you could reduce this tax or even push it off until after your lifetime? You can reduce the tax by purchasing a fixed annuity in your IRA and then converting to a Roth IRA. Based on the IRS rule that you pay tax on the fair market value of assets in your IRA, annuities are taxed at their fair market value, which is their “surrender value,” rather than their higher “account value” when distributed from or converted in an IRA. So just by owning the right investment, you can reduce the taxable amount of your IRA. That still leaves the problem of an immediate tax payment, albeit smaller by using the annuity. Although the immediate tax payment is due, here’s a way to avoid taking the money from your pocket. For those who really want to maximize the cash flow from the conversion, use a residential equity line to pay the tax. Many financial institutions offer equity lines, interest-only, at prime rate (5%, 11/28/01). Most people can deduct this interest and then pay the interest with a tax-free withdrawal from the Roth IRA. As long as your investments in the Roth earn more than the prime rate, you are ahead. You potentially get a tax deduction and also have your IRA growing tax-free. When do you pay off the equity line? When your house is sold. So if you live in your current house for the rest of your life, when your estate is settled and house is sold, the equity line is paid from the house proceeds and your heirs inherit a tax-free Roth IRA. If you would like having more of your money working tax free, the Roth conversion may be for you. To have an analysis prepared, check off on the attached reply coupon. ------------------------------------------------------------------------ Why Would a Retiree Own Life Insurance? Traditionally, life insurance is purchased during your working years to replace your income for your family in case you died. But if you’re retired, do you still need life insurance? Yes. There may be three reasons to own a policy: 1. Because many couples are dependent upon two social security checks or two pension checks, and when one spouse passes away, the other spouse finds that the income falls but many of the expenses and lifestyle requirements remain. The inexpensive way to protect against this is to own term life insurance. Recently, I obtained a $100,000 policy for a 70-year-old male for a premium of $200 monthly. If he predeceases his wife (women statistically outlive men by 7 years), his wife will receive this $100,000. Invested for income at 8% (a hypothetical rate), this would produce $8,000 annually of income to offset the loss of his social security check. If used up over her lifetime, (assumed to be another 7 years), the principal plus interest would generate over $17,000 annually for the wife. 2. For estate planning reasons. Let’s say you’ve developed your net worth by owning real property. One son takes an active interest and manages most of your property. The other son lives 2,000 miles away, travels around the globe as an archeologist and has no interest in the properties. Maybe you want to leave the properties to the son who cares for them but are concerned what to leave the other son. Easy answer, buy life insurance and name the archeologist as the beneficiary. Or if your estate is over $1 million, the excess is subject to estate taxes at hefty rates. A simple, often inexpensive, way to pay the tax without taking money from the beneficiaries to do so is to have a life insurance policy to pay the tax. 3. To make the most of your IRA or retirement plan. Say you are age 70 and it’s time to start taking mandatory distributions from your IRA. Let’s assume the distributions are a hypothetical $15,000 annually. If you invested that at a hypothetical 8% (5.2% net after combined taxes of 35%), you would accumulate $190,439. Take that same amount and buy life insurance, and upon death your heirs get $1.25 million. You can do the same if you have a qualified retirement plan but the numbers are even better as you can purchase the policy inside the plan with pre-tax dollars. There are some very powerful ways to use a policy you already own or use a new policy to achieve financial goals for your family. |