Other than a house, people’s 401(k)s, IRAs, and other retirement accounts are often considered to be their single, largest asset. In fact, I have spoken to a lot of people who say these are their estate plan. This is the way that they plan on having everything paid out upon their death. Today, I want to discuss having strings attached to that plan.
The first string is: if you would die under age 59 1/2, it is not an estate plan. It is an account. When that money is received by your next of kin, you have a 10% tax penalty. So, if you take a 10% hit because you decided that your retirement account was your estate plan, does it make sense that you have to pay an additional 10% to the government?
String #2: At any point in time when you take money out of a traditional 401(k) or IRA, the money in the account is not all your money. If this is your estate plan, do you realize that there are income taxes both federal and usually state as well that needs to be paid. So, the government could be taking 20-30% of your money or more because you didn’t have an estate plan that actually took that into consideration.
String #3: You have to die on the correct day. Is the market high or is it low. Granted, any day that you die, it’s going to be a bad day, at least for you. But think about it, If the market is low, I’m getting less than I should be getting because now money needs to be pulled out when the market is low because I don’t have the option to wait for it to be high later on. This is not in an estate plan. This is a plan that has strings attached.
String #4: What if there are delays? Now I’ve got to meet with all these additional advisors trying to figure out how do we properly take it out of my retirement plan. If it was just pure simple life insurance, I know I have 10 business days from when a death certificate is received by our office and money is processed and is deposited income tax free into a bank account of your choice. No strings attached.
String #5: How about loss time value of money? Again, additional strings attached. The money inside my retirement accounts were supposed to be left alone so they could actually grow. Now, it’s become part of my estate plan. So, after all these taxes, potentially penalties, the money’s got to come out. That money was supposed to grow over time and now it is not going to be there. Strings attached.
String #6: What probate fees? Does the account list the beneficiary as a trust or as your estate? Now it’s got to go through probate. Strings attached. Life insurance has a named beneficiary, so the money will automatically go to those people that you love and who you have named.
String #7: What has the government decided that they want us to do with traditional 401(k)s and IRAs? Delay, Delay, Delay taking the money out. It used to be that you could take your money out at any time after age 59 ½. Now, they want you to delay it. They delayed it until 70 ½. Then delayed it to 72, no 73. Under the current legislation, they’re moving the required minimum distributions on your retirement accounts to age 75. Why? Because the government does not invest in the capitalistic markets where a person is expected to make a decent rate of return as opposed to investing money in government bonds. Because the government does not invest in businesses, but they can have you invest in businesses. The longer that they have you do that, the more time there is for your money to accumulate. You know what also accumulates with time, the taxes due. When it is eventually pulled out, you not only have more money, but you will also potentially have higher taxes.
Here’s a thought: Let life insurance do what life insurance is supposed to do. That’s why I wrote the book Investments Don’t Hug: Embracing the Life Insurance Asset. We are authorities on how this asset works. If you are an older individual, in your 60s or your 70s, you could begin taking money out of your accounts now while you are potentially in a lower tax bracket. Funnel those required minimum distributions into a life insurance policy. Funnel that money that most people don’t even wish to use. They wanted that money to accumulate, and while they are doing that, they are accumulating taxes due.
You can have an estate plan with no strings attached. Take a little bit of that money out each and every year at your, potentially, lower tax bracket. Buy yourself a permanent whole life insurance policy that can pay you a benefit, income-tax free. This is an estate plan that will be available to you at exactly the time it’s needed.
