Funding life insurance with RMD’s + Stretch/Roth Conv.
I have a client that seems to be exactly like a case study scenario out of the text books but it is the first time that I have needed to deal with it directly. I’m sure there is a wealth of information out there but while I am starting the research today I thought I would throw out the facts to see what some other folks think. Client is 69 now and 70.5 next January 2012. She has about $935k in IRA money and never intends to use a dime of it. The first RMD will be about $35k and we are testing the life market now for an offer. I would expect a standard rating (and of course hoping for better) so there are no medical issues that would get in the way. My initial thoughts are to reposition the IRA for high cash flow, perhaps 6%+, to accommodate for insurance premiums and RMD’s. That would mean carving out $600k to generate $36,000 in cash flow and planning on a Stretch for that portion of the IRA. With the remaining $325K, consider Roth conversions in increments (with awareness to tax implications) to try and help minimize future RMD requirements. The client is currently in a lower tax bracket than the 2 daughters, in their late 30’s, who are in the highest tax brackets, (who are very responsible and professionally successful). Those are my ‘cocktail napkin’ thoughts before I roll up my sleeves and start digging into this.
Does anybody have any creative thoughts outside of my initial approach or are there any resources that would be helpful outside Mr. Slott’s agenda?
Permalink Submitted by Bruce Steiner on Thu, 2011-04-21 02:58
If she has $935,000 in her IRA and expects never to need any of it, then she must have a substantial amount of other assets. In that case, if she’s 69 years old, why does she need life insurance, particularly at the cost of giving up the opportunity to convert nearly 2/3 of her IRA to a Roth.
Since she does not expect to need any of her IRA, and she’s in a lower bracket than her beneficiaries, she should consider converting more of her IRA to a Roth. Of course, she has to weigh the benefit of converting all at once, or over a small number of years (getting more money into the tax-free Roth environment sooner, and avoiding or reducing her required distributions) against spreading the conversion out over more years (so as not to be in too high an income tax bracket in any one year).
She should also consider providing for her daughters in trust rather than outright, to keep their inheritances out of their estates in case the daughters will have taxable estates of their own.
Permalink Submitted by J. Shawn McGuire, CFP on Thu, 2011-04-21 03:35
Despite having a large IRA, there are only assets totaling about $650,000 between few houses and a bank account of about $250K. SS, pension, and a small amount of rental income provide more than enough for a debt free lifestyle. There obviously isn’t a need for insurance in the sense of income replacement, debt consolidation, or estate taxes. However a small portion of the RMD would fund a significant face amount. So my initial thoughts were to use all opportunities (Roth, Life & Stretch). $12,500 annually would purchase around or over $500K in guaranteed payout through age 100. That equates to about a little over 1.3% annually of the entire IRA under circumstances of the forced distribution. So it is hard to ignore the premium outlay vs the face amount. 20 years of payments still amounts to less than half of the payout. The marginal tax is around 25%, so large, lump sum Roth conversions are a concern due to a bump in brackets. However annual conversion with tax planning could be very beneficial due to a number of reasons. I like the trust route as well due to possibility of divorces and disabilities for the bene’s.