To Take Advantage of Stretch IRA and give immediate sum
client has multiple IRA and 401K accounts which has a total value of over $800K, and wants to allow for her three children’s immediate needs and the balance (majority) in accounts to take advantage of Stretch IRA.
Client is Female 83 in good health … children are single ages 49, 51 and 53.
Also would like to use funds from the 401K’s to purchase Life Insurance and/or take into account the basis of company stock at ordinary income rates and the growth at 15% capitol gain. I understand that 49% of the value of the 401K can be in a UL policy.
Permalink Submitted by mk foss on Thu, 2008-09-18 19:15
This is a good summary of the facts but what are your specific questions?
Permalink Submitted by Bradley Miller on Thu, 2008-09-18 19:38
1. Should 401k money be direct transferred to an IRA while the client is still alive … I am also waiting for a report on the actual holdings within each account. I also asked if the required minimum is being drawn from all accounts or if the required minimum is being drawn from the worst producing account (which I understand is allowed).
2. Should money be used within the 401K to purchase Life Insurance and/or is it advisable (if a statement can be obtained as to basis on any company stock) to take it out whie the client is alive and pay ordinary tax on basis and 15% capitol gain on the growth.
3. can a plan set up for the beneficiaries to get a lump sum at the insured’s passing and, the balance go into separate accounts with the majority to allow the beneficiaries to take advantage of the “stretch”.
Permalink Submitted by mk foss on Tue, 2008-09-23 04:33
It is generally a good idea to have 401k funds transferred to an IRA during the participant’s lifetime. IRA distribution options are more flexible than those that you find in a qualified plan.
Insurance is not the best investment for a qualified plan – there is ordinary income tax on the cash value which would not be the case if the policy was outside a plan. Usually it is just recommended if the particpant is not insurable outside a group. Insurance must be available to all participants and is not ordinarily an investment choice offered.
IRA beneficiary options could be flexible enough to acheive your third point. The individuals could be named as beneficiaries directly and trusts named for the portion to be “stretched” – this will take some clever doing because you want to use fractions for the amounts going each place rather than dollar amounts. The other choice would be to roll the funds to an IRA which is then divided into enough IRAs so that each would have one beneficiary where funds are disbursed as the owner desires.
Permalink Submitted by Bradley Miller on Wed, 2008-09-24 02:41
I am awaiting the full information on the plans and specific investments housed within each … I want to make sure what options are available …
It seems to me that if there is a significant amount of company sock with a lot of growth that if we take the basis as ordinary income and the growth as a 15% capitol gain, that if there is a place if cash is needed …
The balance makes sense to roll into Ira accounts with the use of conservative investments as compared with the mutual funds I suspect are a good portion …
I will still run some Insurance illustrations if only to rule it out … I do not believe that there is any in force … I am hoping for other assets to show a higher net worth than I was told
I appreciate your response …
Permalink Submitted by Alan Spross on Wed, 2008-09-24 03:13
You seem to be inquiring about NUA, the provision for distributing highly appreciated company stock to a taxable account, paying ordinary income tax on the cost basis, and LT cap gains tax when the shares are eventually sold in the taxable account.
While this can be viable for many if the cost basis is under 30% of the current fair market value, in order to apply NUA, the client must be eligible to make a lump sum distribution which qualifies under the tax code for NUA. Unfortuneately, if client has been taking RMDs due to age (83), she is no longer eligible because the RMDs or any other distributions since she turned 59.5 are considered “intervening distributions” and disqualify the LSD for NUA purposes. If she has not reached her RBD due to continued employment and not taken any distributions, she would still qualify, but that is not likely to be the case. In any event, holding large amounts of a single stock presents major diversification hazards and that danger often trumps NUA benefits. In addition, the current top 15% LT cap gain rate may not be around for many more years given the budget and financial crisis of the day.
Should you have any questions or if I have misinterpreted your post, please advise.
Permalink Submitted by Bradley Miller on Wed, 2008-09-24 14:20
I an glad to have posted in this forum and appreciate the reply alan-oniras. I had studied the topic of pension distribution over a year ago and was asked by a friend to become an agent liason to help build a brokerage specializing in Senior Settlements and Premium Financing. I am currently recruiting agents across the country for this brokerage.
I have an agent in Arizona who’s Mother has this problem and I was fortunate to see the PBS presentation by Ed Slott. I went to Border’s book store and rad for several hours from one of Ed’s books and bought two others. I found that I had some knowledge of the topic but I don’t know everything.
I appreciate the response to this posting and I wil continue to use it. Thank you …