By Dan Schulte, Vice President and Manager, Annuities and InsurancePrint This Post
The recently passed Setting Every Community Up for Retirement Enhancement (SECURE) Act, changes the post-death distribution rules for retirement account owners by requiring most beneficiaries to receive funds from their inherited account within 10 years after the original owner’s death. This change mandates much faster distributions than what was previously allowed under the ‘stretch’ provision, which lets beneficiaries spread distributions over their own life expectancies. These new rules mean that not only must all the tax on IRAs and similar plan benefits be paid much earlier than before for non-spousal beneficiaries, but the income tax rate will likely be much higher because the income will typically be bundled into the beneficiaries’ peak earning years. This legislative change could significantly reduce the legacy left to loved ones due to a potential huge tax bill.
Individuals may want to consider the purchase of life insurance to offset the tax liability of their retirement plan distributions. The strategy requires taking distributions from their pre-tax retirement account during their lifetime and using the after-tax amount to pay the annual premiums on a permanent life insurance policy. Life insurance is a unique asset class that provides a leveraged income tax free death benefit. It’s also possible to structure policies to be estate-tax-free with proper trust planning.
For retirees who plan to use most of their retirement funds during their lifetime to meet living expenses, repositioning these assets to life insurance is generally not a viable option. But for those retirement account owners who don’t expect to tap into some or all of the savings they’ve accumulated in retirement accounts, and are healthy enough to qualify, permanent life insurance can be a great enhancement to a legacy plan. Work with your Benjamin F. Edwards financial advisor to see what type of planning may be best for your particular situation.
Benjamin F. Edwards & Co. does not provide legal or tax advice, therefore it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.