ROTH annuity options

[DHK]

We all have a compass within us and based on our experience, training, and study how we can best serve our clients.

This is why we primarily work with people who believe (or want to believe) the same things we do. We lead with our why - why we do what we do - not 'what' we do.



When we find someone who is drawn to us based on our beliefs, all we have to do then is show them the extent of the problems, show the solution, and determine if that's what they want to have.

We're not (necessarily) presenting ourselves as the "financial advisor on the corner" and then trying to get everyone to do this strategy. It has to be with people who want it and people whom it can make sense for. We do this so that we can attract the 15% of the people who would want it... and (more importantly) dismiss the 85% who would waste our time and be a PITA.

And collectively, as a group, we do about $10 million in annual commission volume each year teaching people these strategies.

 

[scagnt83]

Please show me the IRS publication on life insurance.

Yes, there are rules for everything. But other than keeping the policy in force, avoiding a MEC, and adhering to the 7 pay rules, it's not that regulated in terms of the contract holders behavior regarding it compared to qualified plans.

As Allen pointed out, there are at least 7 pages of IRS Code specific to Life Insurance. Just as the IRS code covers all other appreciable assets one can own in the US.

Now, if you want to get into the "level of IRS regulation" among each asset, then yeah, life insurance has a very low level of IRS rules and regulations compared to a Qualified Plan. But you also are not able to use pre-tax money to fund life insurance (generally speaking). Or get matching funds from your employer. Or get as many investment choices. Or get the same level of creditor protection. Of course life insurance and other non-qualified solutions have many benefits QPs do not. But you are starting with 10%-20% more initially using a QP... which means 10%-20% less in interest earned each year using the after tax non-qualified solution. So for every dollar in life insurance premium paid, you could have $1.20+/- working for you in a Qualified Plan. Pros and Cons to everything. But everything falls under the tax code, everything is "regulated" by the IRS from a tax standpoint.

 

[DHK]

So for every dollar in life insurance premium paid, you could have $1.20+/- working for you in a Qualified Plan.

That's not enough to offset the impact of taxation on qualified plans in retirement.

Let's take an extraordinary wealthy individual. We believe that this CNBC article was about Michael Dell.

https://www.cnbc.com/2014/03/14/som...ost-expensive-life-insurance-policy-ever.html

Dell is putting in $1.2 million per month into several 10-pay policies.

That's $1.2 million per month x 12 = $14.4 million each year for 10 years.

That's $144 million.

It'll probably only grow to $150 million.

That sucks for a rate of return.

But he'll be able to spend $10 million a year without a place to put it on his tax return!

Here's the question:

How much would he have to have in an IRS regulated "qualified" account to net the same results?

$10 million grossed up by 40% = $16 million per year.

$16 million divided by the safe withdrawal rate of 3% = $533 million.

Bottom line: Dell can spend $150 million as though it was worth $533 million... all because of WHERE the money is.

What rate of return would you have to earn in the 401(k)? 27.58% each year for 10 years without fail... after fees.

Nothing touches cash value life insurance when you apply the tax code. (And because of the level of wealth in this example, I didn't bother to talk about social security or Medicare/IRMAA affecting anything either.)

My parents would have to have $1.7 million OR earn 11.5% each year after fees for 10 years without fail to equate what their life insurance plan will do.

That $1.20 working for you versus what's in the life insurance on day one... is irrelevant.

Investment choices? Are unlimited only because you have liquidity and can use them however you wish, not just the 'fiduciary chosen funds' in the plan.

I already denounced creditor protection (at least for California where there is little to none anyway).

And this plan immunizes one against changes in the tax code - even if they change taxation of life insurance - based on past-precedent, they'll be grandfathered under old rules.

Also immune against Wall Street volatility. Granted, returns play a role in dividend performance, but probably not as much as mortality experience. But even then, only a slight reduction of cash flow may be needed as opposed to making severe changes in income/cash flow from an investment account.

But that's okay. You continue to believe, do, and advise your clients as you do.

I will do the same.

 

[DHK]

As Allen pointed out, there are at least 7 pages of IRS Code specific to Life Insurance. Just as the IRS code covers all other appreciable assets one can own in the US.

I specifically said IRS Publication, not tax code. Two different things.

The IRS Publications, such as 590 a & b, cover things for the public to better understand these accounts and how they're regulated.

There is no such publication for life insurance put out by the IRS.

Ever wonder why that is?

This is a summary of IRS Publications I put on my website for reference: You won't find a single one for life insurance.

IRS Publications:

• General Taxation:
  • 15 - Employer's Tax Guide (Circular E)
  • 17 - Your Federal Income Tax for Individuals
  • 501 - Exemptions, Standard Deduction, and Filing Information
  • 504 - Divorced or Separated Individuals
  • 505 - Tax Withholding and Estimated Tax
  • 525 - Taxable and Nontaxable Income
  • 529 - Miscellaneous Deductions
  • 555 - Community Property
  • 596 - Earned income Credit
  • 3995 - Recognizing ILLEGAL Tax Avoidance Schemes
  • Form 6251 - Alternative Minimum Tax (Individuals)
• Children and Education:
  • 503 - Child and Dependent Care Expenses
  • 929 - IRS Tax Rules for Children and Dependents
  • 972 - Child Tax Credit
  • 970 - Tax Benefits For Education
• Retirement Plans:
  • 590a - Individual Retirement Arrangement (IRA) Contributions
  • 590b - Individual Retirement Arrangement (IRA) Distributions
    • Trivia: Think about this: Who is your "arrangement" with? Who sets the rules? Who dictates how much belongs to them?
    • IRS.gov - Retirement Plans FAQs regarding Substantially Equal Periodic Payments Under 72(t) and 72(q)
  • 560 - Small Business Retirement Plans (including SEP-IRA, SIMPLE-IRA, and 401(k) plans; The "age 55 rule" is on page 19-20)
    • IRAHelp: "Age 55 Rule" For Taking Money Out Of A Company Retirement Plan
  • 571 - Tax Sheltered Annuity Plans (403(b) plans)
  • 575 - Pension and Annuity Income (including 457(b) plans)
  • 939 - General Rule for Pensions and Annuities
  • 721 - Tax Guide to U.S. Civil Service Retirement Benefits
  • 915 - Social Security and Equivalent Railroad Retirement Benefits
    • IRS - Retirement Plans FAQs regarding Hardship Distributions
  • 4012 - Form 1099 R Roth IRA
• Investments & Rental Real Estate:
  • 527 - Residential Rental Property
  • 534 - Depreciating Property Placed In Service Before 1987
  • 544 - Sales and Other Dispositions of Assets
  • 550 - Investment Income and Expenses
  • 551 - Basis of Assets
  • 925 - Passive Activity and At-Risk Rules
  • 946 - How To Depreciate Property
  • 4681 - Cancelled Debts, Foreclosures, Reposessions, and Abandonments
  • 1212 - Guide to Original Discount (OID) Instruments
  • IRS Publication for Bitcoin/Cryptocurrency
• Homeowners:
  • 936 - Home Mortgage Interest Deduction
  • Sample Tax Form 1098 Mortgage Interest Statement
    • NOTE: For 2018, home equity loans/lines of credit will no longer issue these statements because home equity interest is no longer deductible!
  • 530 - Tax Information for Homeowners
  • 523 - Selling Your Home
  • 547 - Casualties, Disasters, and Thefts
  • 584 - Casualty, Disaster, and Theft Loss Workbook
  • 926 - Household Employer's Tax Guide
• Business Owners:
  • 15 - Employer's Tax Guide (Circular E)
  • 15-b - Employer's Guide to Fringe Benefits
  • 334 - Tax Guide For Small Business
  • 463 - Travel, Entertainment, Gift, and Car Expenses
  • 535 - Business Expenses
    • Note page 3 Introduction: "Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit."
    • Note page 13 Interest: "Business interest expense is an amount charged for the use of money you borrowed for business activities."
  • 537 - Installment Sales
  • 550 - Investment Income and Expenses
  • 587 - Business Use of Your Home
• Medical Expenses:
  • 502 - Medical and Dental Expenses (Including the Health Coverage Tax Credit)
  • 969 - Health Savings Accounts and Other Tax-Favored Health Plans
  • 974 - Premium Tax Credit
• Charitable Contributions:
  • 526 - Charitable Contributions
  • 561 - Determining The Value of Donated Property
• Other:
  • 4345 - Taxability of Settlements from Lawsuits

 

[scagnt83]

I specifically said IRS Publication, not tax code. Two different things.

The IRS Publications, such as 590 a & b, cover things for the public to better understand these accounts and how they're regulated.

There is no such publication for life insurance put out by the IRS.

Ever wonder why that is?

This is a summary of IRS Publications I put on my website for reference: You won't find a single one for life insurance

And I said subject to the tax code. Not if the IRS puts out a Publication about it or not. Publications are issued about important subjects that must have timely and up to date info in order to make any relevant changes. QPs are much more widely used than life insurance. Hence the publication.

An IRS publication is just an effort to make that section of the tax code easier to access for both consumers and professionals.

Just because a product does not have an IRS publication about it, does not mean its not subject to IRS regulations.

 

[scagnt83]

That's not enough to offset the impact of taxation on qualified plans in retirement.

Let's take an extraordinary wealthy individual. We believe that this CNBC article was about Michael Dell.

https://www.cnbc.com/2014/03/14/som...ost-expensive-life-insurance-policy-ever.html

Dell is putting in $1.2 million per month into several 10-pay policies.

That's $1.2 million per month x 12 = $14.4 million each year for 10 years.

That's $144 million.

Do you think he doesnt max out his Qualified Plan first and foremost?

Not only is that not a real world example. That only accounts for 2% of his net worth.

Huge difference between that and taking a normal persons entire 401k and putting it into life insurance. Or directing 401k contributions into life insurance. etc. etc.

 

[DHK]

And I said subject to the tax code. Not if the IRS puts out a Publication about it or not. Publications are issued about important subjects that must have timely and up to date info in order to make any relevant changes. QPs are much more widely used than life insurance. Hence the publication.

An IRS publication is just an effort to make that section of the tax code easier to access for both consumers and professionals.

Just because a product does not have an IRS publication about it, does not mean its not subject to IRS regulations.

I already clarified that. And yes, it has minute regulation (already discussed) particularly compared to 'qualified' plans.

So, without an IRS publication, is the IRS saying that most people shouldn't have life insurance? It's not important? Interesting take on it.

Do you think he doesnt max out his Qualified Plan first and foremost?

Not only is that not a real world example. That only accounts for 2% of his net worth.

Huge difference between that and taking a normal persons entire 401k and putting it into life insurance.

No, I don't. Wealthy people (well, wealthy people with a wealth-building mentality) don't keep their money locked up in 401(k) plans where the rules are outside of their control.

IF they do, they'll leverage it for their other purposes, such as using it to purchase life insurance on a tax-deductible basis. But with plan contribution limitations, top-hat testing & provisions, and all that stuff... business owners and wealthy people in that range may be putting in TRIFLE amounts into qualified plans, if they bother at all.

Do you really think he's worried about his $20k contribution? Or is it $58k? (I don't even know what the max would be anymore anyway.)

It's such a pittance compared to everything else.

$20k or $58k annual vs $14.4 million annual. Think about that sometime.


Just because you don't like that we put the money in life insurance... doesn't make it any less valuable of a strategy. In fact, it's the #1 objection we get when people focus on what it's called over what it does.

And I already did (and doing this) for "normal" people. The results aren't 5:1... but they are between 2-4:1 of efficiency for generating retirement cash flow. Would also have to beat at least 8.5% each and every year after fees.

 

[scagnt83]

I already clarified that. And yes, it has minute regulation (already discussed) particularly compared to 'qualified' plans.

So, without an IRS publication, is the IRS saying that most people shouldn't have life insurance? It's not important? Interesting take on it.

Umm. Now you are just putting words in my mouth.

I said all taxable assets in the US are "regulated by the IRS", not just Qualified Plans.

You brought up one having a specific Pub and the other not.

I never said anything about them judging suitability based on a Pub being issued or not. Not sure where you are getting that from.

 

[scagnt83]

No, I don't. Wealthy people (well, wealthy people with a wealth-building mentality) don't keep their money locked up in 401(k) plans where the rules are outside of their control.

IF they do, they'll leverage it for their other purposes, such as using it to purchase life insurance on a tax-deductible basis. But with plan contribution limitations, top-hat testing & provisions, and all that stuff... business owners and wealthy people in that range may be putting in TRIFLE amounts into qualified plans, if they bother at all.

Plenty of wealthy people max out their 401k. $58k per year is a substantial amount of money to most people, even someone making $1m per year.

A business owner can contribute hundreds of thousands per year with the right Defined Benefits Plan set up. Many do. And you better believe they have a "wealth building" mentality.

While it does not make up their entire liquid assets. Qualified Funds are often a substantial amount of most business owners overall retirement portfolio. Most business owners who are retiring have $2m-$5m in their Qualified Plans.

If you had ever dealt with a CPA who advises business owners, you would know how big of a fan they are of Qualified Plans. They are constantly looking for more room to save money on a pre-tax basis. It is by far the very first place a business owner saves money. So they have to pay income taxes on it eventually upon withdrawal ... but they are also saving even more than employees are because they pay zero payroll tax on it (DB & PS).

15% savings on the payroll tax alone... + effective rate of 24% + state at 10%= 49% more money being saved through Qualified Plans vs. after tax option.

That means it takes $119,000 of total income to match the $58,000 annual 401k contribution if deciding to use after tax funds.

You dont have to be a billionaire or a CPA to know that makes financial sense when in such a high tax bracket.

And the owners themselves understand why... they are in one of the highest tax brackets during working years, and are likely to be in a lower bracket once retired. Most people who save 40%-60% of their income in savings is not going to be in the same bracket in retirement.

 

[scagnt83]

Just because you don't like that we put the money in life insurance... doesn't make it any less valuable of a strategy. In fact, it's the #1 objection we get when people focus on what it's called over what it does.

I have zero issues with people using Permanent Life Insurance for wealth building. It makes up a decent amount of my insurance practice.

I take issue with life insurance being compared to other investments in a non-factual and misleading manner.