Blog #134: Best Strategy for an IRA (Part 2 of 2)

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(Presentations in this blog were created using InsMark Illustration System

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Strategy 1:  Stretch IRA
Strategy 2:  Charitable IRA
Strategy 3:  Roth Conversion

Bob Ritter's blog 133 image the best strategy for an IRA

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In Part 1 of this series (Blog #133), we compared Stretch IRA vs. Charitable IRA vs. Roth IRA for Harry and Angela Dorsey who are ages 55 and 50, respectively.  Their current net worth is a little over $5 million of which $800,000 is in Harry’s IRA.  They plan to retire in ten years and want $150,000 a year in after tax cash flow indexed at 3.00% as inflation offset.

Stretch IRA:  This involves naming heirs as the final beneficiary of the IRA.

Charitable IRA:  This involves naming a charitable organization as the final beneficiary of the IRA and replacing its value for heirs with $1.5 million of indexed survivor universal life coverage bearing a $25,000 annual premium and paid by withdrawals from their liquid assets.

Roth IRA:  This involves converting the IRA to a Roth IRA with the income tax caused by the conversion paid by withdrawals from their liquid assets.

The purpose of this Blog is to compare the effect of leaving their daughter, Caroline Dorsey Baker, currently age 25, either the Stretch IRA or the Roth IRA.  (The difference in favor of the Roth is substantial.)

Note:  If you did not read Blog #133 (Part 1 of 2), this would be a good time to review it as the details in it are important as well a sequential preview to your understanding of this Blog.  The life insurance sale associated with Blog #133 is even more of a slam-dunk when coupled with the information in this Blog.

Case Study

Harry and Angela’s daughter, Caroline, is currently age 25.  Let’s assume she will inherit either retirement plan in 38 years at her parents’ joint life expectancy of ages 92/87, which will be Caroline’s age 63.

Below is the comparison of Caroline’s Inherited IRA vs. her Inherited Roth IRA (both inherited versions have required minimum distributions).

Image 1
Inherited IRA vs. Inherited Roth IRA
Caroline Dorsey Baker at age 63
Assumed Yield 7.00%

blog-134-img-2-Inherited-IRA-vs-Inherited-Roth-IRA

The Inherited Roth IRA provides Caroline with 595% greater after tax cash flow for her retirement than the Inherited IRA.  Once shown the difference, most parents with sufficient liquid assets to fund the income tax on the Roth Conversion are eager to convert an IRA to a Roth.

If you are not including the giant impact on heirs of inheriting a Roth IRA in your presentations, you are missing out on a major benefit for your clients that they likely have never considered or been shown.

Why is there such a discrepancy between the two options?

By Harry and Angela’s joint life expectancy of ages 92/87, the required minimum distributions from their IRA have reduced its value to $1,413,691.  When inherited by Caroline, it produces cumulative after tax cash flow for her retirement of $2,186,963 from her age 63 to 84 at which point required minimum distributions have exhausted the Inherited IRA.

Conversely, by her parent’s joint life expectancy, the Roth, with no required minimum distributions, has developed an initial value for Caroline’s Inherited Roth IRA of $5,891,839 which produces cumulative after tax cash flow for her retirement of $13,020,861 from her age 63 to 84 at which point required minimum distributions have exhausted the Inherited Roth IRA.

Click here to review all the illustrations and graphics from the Inherited IRA vs. Inherited Roth IRA comparison calculated using the InsMark Illustration System.

What about the difference in cash flow for her parents during their retirement years?  Doesn’t ending up with much more in the Roth IRA means Caroline’s parents are short-changing their own retirement?  No – in the Roth analysis in Wealthy and Wise in Blog #133, both scenarios (IRA and Roth IRA) provide the identical level of after tax retirement cash flow -- $150,000 a year indexed at 3.00% as an inflation offset.

In Wealthy and Wise, except for occasional cases where cash flow is not a consideration, required cash flow is the dominant consideration for all scenarios.  When cash flow from an IRA’s required minimum distributions disappears because the IRA has been converted to a Roth which has no distribution requirements, Wealthy and Wise provides the missing cash flow from another asset based on the user’s prioritization1 of assets.  It could come from or another liquid asset or even the Roth itself.  If there is no other liquid asset available, the program advises you of it.

1Note to InsMark’s Wealthy and Wise licensees and prospective licensees: It is critical for sound retirement planning to prioritize which assets to access for cash flow and in what order.  To do so, activate the following selection on the “Prioritize the Use of Assets” sub-tab located on the Illustration Details tab (after you have entered desired cash flow, expected cash flow, retirement plans, and liquid assets).

Maximize-Net-Worth-Image

Click here to see an 8-minute video, the first 4 minutes of which highlights the logic of the Maximize Net Worth selection.  The last four minutes discusses gifts to a trust for the purchase of life insurance trust and a Roth conversion.

Source of the Inherited IRA and Inherited Roth IRA Calculations

Three calculators from the InsMark Illustration System (InsCalc tab) were used to produce the Image 1 graphic above:

  • Inherited IRA Calculator
  • Inherited Roth IRA Calculator
  • Comparison of Inherited IRAs Calculator

Once your data entry is complete for both Inherited Calculators, the results can be easily imported into the Comparison of Inherited IRAs Calculator (follow the prompts on the first screen).

To establish the initial inherited value for each calculator at Harry and Angela’s joint life expectancy at ages 92/87, click the following reports from the Wealthy and Wise® evaluation in Blog #133 (Part 1 of 2).

In the Wealthy and Wise system associated with Blog #133 (Part 1 of 2), both reports are the last ones shown in the “Selected reports” listing on the Report Selections tab in the first and third Scenarios.  The digital Workbook file from Wealthy and Wise Blog #133 (Part 1 of 2) showing complete data input is available below.

This data from year 38 in each of the Wealthy and Wise reports for the parents noted above was entered into Caroline’s Inherited IRA Calculator and Inherited Roth IRA Calculator located on the InsCalc tab in the InsMark Illustration System.  Don’t forget, Caroline is assumed to be age 63 at this point (current age 25 + 38 years).  The results from each of her calculators were then easily imported into the Comparison of Inherited IRAs Calculator (InsCalc tab) which is source of Image 1 above.  The digital Workbook file from the InsMark Illustration System showing complete data input for each of the three calculators is available below.

Note:  To prepare reports similar to the ones featured in this Blog, you will need access to both the InsMark Illustration System and Wealthy and Wise.

Video of the Logic

To study videos of these IRA/Roth IRA concepts (or if you have staff that could benefit from viewing them), click on the 12-minute video below which highlights all the features of Stretch IRA vs. Charitable IRA vs. Roth Conversion.  Included in the second half of that video is a comparison of an Inherited Roth vs. an Inherited Roth IRA.  The video deals with slightly different case data; however, the principles involved are identical to those discussed in Blog #133 (Part 1 of 2) and Blog #134 (Part 2 of 2).

Three Smart IRA Strategies
Steve Savant, Syndicated Financial Columnist
Don Prehn, Senior Adviser to InsMark

Steve-Savant-Syndicated-Financial-Columnist-Don-Prehn-Senior-Adviser-to-InsMark

Licensing InsMark Systems

To license the InsMark Illustration System and/or Wealthy and Wise, visit us online or contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or (925) 543-0513.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

New Zip File Downloaders
Watch the video.

Digital Workbook Files For This Blog

Blog133_134.zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

InsMark’s Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

Testimonials

“The InsMark software is indispensable to my entire planning process because it enables me to show my clients that inaction has a price tag. I can’t afford to go without it!”
David McKnight, Author of The Power of Zero, InsMark Gold Power Producer®, Grafton, WI

“InsMark provides incredible tools to give clients a visual of how they can optimize their wealth.  It’s great for deciding which road to go down.”
Jim Heafner, MBA, CFP, Heafner Financial Solutions, Inc., Charlotte, NC

"InsMark has important marketing information for every one of the producers in my firm — from the newly licensed to the veteran producer."
Gary Curry, President and CEO, ORBA Insurance Services Inc., InsMark Platinum Power Producer®, Gold River, CA

 

Important Note #1:  The hypothetical IRA and Roth IRA values associated with this Blog assumes the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.

Important Note #2:  The information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

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More Recent Blogs:

Blog #133: Best Strategy for an IRA (Part 1 of 2)

Blog #132: The Calculation Magic of Wealthy and Wise®

Blog #131: Don’t Burn the Nest Egg™

Blog #130: Should I or Shouldn’t I?

Blog #129: Leveraged Executive Bonus Plan with Bank-Funding of the Income Tax (Part 3 of 3)

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive

 

Blog #133: Best Strategy for an IRA (Part 1 of 2)

(Click here for Blog Archive)
(Click here for Blog Index)

(Presentations in this blog were created using Wealthy and Wise®.)

Getting Started with InsMark Training Video

spacer image

Strategy 1:  Stretch IRA
Strategy 2:  Charitable IRA
Strategy 3:  Roth Conversion

Bob Ritter's blog 133 image the best strategy for an IRA

Lion all mine image
Zero-Split-Case-Premium-Financing-click-here-to-receive-more-information
spacer image

Editor’s Note:  The term “IRA” is used generically in this Blog as comments about an IRA also apply generally to similar techniques for 401(k)s, Keoghs, and Profit Sharing Plans.

Harry and Angela Dorsey are ages 55 and 50, respectively, and plan to retire in 10 years.  At retirement, they want $150,000 a year in after tax cash flow indexed at 3.00% as inflation offset.

Below is a summary of their current net worth:

Net Worth
Harry and Angela Dorsey

blog-133-image-2-net-worth-asset-description-harry-and-angela-dorsey

1Plans are to sell the primary residence at retirement and live year-round in their Florida Townhouse.

As you will see, of the three strategies discussed below (Stretch, Charitable, or Roth), there is no best choice for an IRA as each one has its own advantages.  The worst choice is to make no selection at all as this guarantees the IRS an income tax windfall at the death of the second-to-die of Harry and Angela when income tax on the entire remaining value of the IRA is due.

Stretch IRA

Below is a graphic of the Dorsey’s overall net worth using a Stretch IRA after accounting for their retirement cash flow needs:

Image 1   
Stretch IRA   

blog-133-img-1-stretch-IRA-net-worth-after-required-cash-flow

Note:  A Stretch IRA is accomplished by naming heirs as the final beneficiary of the IRA after the death of the second-to-die of Harry and Angela.  The advantage of a Stretch IRA is that the tax deferred values of the IRA continue as tax deferred assets for heirs.

Charitable IRA

Below is a graphic of the Dorsey’s overall net worth using a Charitable IRA after accounting for their retirement cash flow needs:

Image 2   
Charitable IRA   

blog-133-img-2-charitable-IRA-net-worth-after-required-cash-flow

A Charitable IRA is accomplished by naming a qualified charity as the final beneficiary of the IRA after the death of the second-to-die of Harry and Angela.  Prior to that event, values in the IRA are freely available to the Dorseys without any interference by the charity.

While providing a generous gift to a favored charitable cause (the Red Cross in the Dorsey’s case), their children are short-changed by the amount of the gift of the IRA.  We offset this by providing for $1.5 million of indexed survivor universal life coverage bearing a $25,000 annual premium and paid for by withdrawals from their Muni Bond Fund.  Since projected estate taxes should not be an issue with the Dorseys, we kept the policy inside the estate where its cash values add to net worth and the children are beneficiaries of its tax free proceeds.  With larger estates, you will likely want to have the policy owned by an irrevocable life insurance trust formed on behalf of the children.

Roth Conversion

Below is a graphic of the Dorsey’s overall net worth using a Roth Conversion after accounting for all retirement cash flow needs including the income tax on the conversion:

Image 3     
Roth Conversion     

blog-133-img-3-roth-conversion-net-worth-after-required-cash-flow

To minimize the income tax on the conversion, we converted the IRA to a Roth IRA in $100,000 increments over 10 years and withdrew the income taxes caused by the conversion from their Muni Bond Fund.  The net worth numbers include the cash values of the same survivor life policy included in the Charitable IRA analysis.

Below is a graphic of the net worth of all three strategies including a comparison of the after tax cash flow supported by each strategy:

Image 4 
Net Worth Comparison 

blog-133-img-4-net-worth-comparison-after-required-cash-flow

As you can see from the breakdown of Strategy 3 net worth below, values in the Roth and the survivor life policy total $11,372,938 ($6,544,718 + $4,828,220) which is 71% of the total net worth of $16,010,258 – superb asset allocation considering the tax advantage of these two financial instruments. Serious amounts of additional cash flow are available to Harry and Angela throughout their retirement without tax using withdrawals from the Roth and loans on the survivor life.

Strategy 3 Net Worth

blog-133-image-3-strategy-3-net-worth

Below is a graphic of the wealth to heirs from all three strategies:

Image 5     
Wealth to Heirs Comparison     

blog-133-img-5-wealth-to-heirs-comparison

Below is a graphic of the charitable component Strategy 2, the Charitable IRA:

Image 6       
Charity Comparison       

blog-133-img-6-charity-comparison-wealth-to-red-cross

If the Dorsey’s charitable interests are significant, Charitable IRA may be hard for them to resist since, in addition to the generous gift to the Red Cross, both the long-range net worth and wealth to heirs results of Strategy 2 are substantial (see Image 4 and Image 5).

Reminder:  In all three strategies, the net worth and wealth to heirs is accomplished after accounting for all the cash flow requirements, including retirement cash flow, life insurance premiums, and income taxes.

Click here to review 69 pages of reports from this InsMark Wealthy and Wise® evaluation.  It is a large number of reports; however, with a Wealthy and Wise presentation, I recommend that you have all the reports for a given analysis with you when you are visiting with a client or client’s attorney or CPA.  The system backs up every number shown, and you never know which report you’ll need to have handy to answer the inevitable question, “Where did this number come from?” That’s why I provided all of them to you in this Blog.

Most Wealthy and Wise users select a few key illustrations for the main report and put the balance in supplemental sections or an Appendix.  More elaborate report organization can be accomplished (Table of Contents and Section pages) through use of the following prompt -- which I used for this Blog -- located on the bottom right of the Main Workbook Window:

blog-133-image-4-preview-or-print-client-presentation

Coming Attraction

Next week in Part 2, I’ll provide you with an irresistible additional reason that will make virtually all clients want the Roth conversion.

Licensing InsMark Systems

To license Wealthy and Wise, visit us online or contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or (925) 543-0513.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

New Zip File Downloaders
Watch the video.

Digital Workbook Files For This Blog

Blog133.zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

InsMark’s Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

Testimonials

“Major cases we are developing have all moved along successfully because of the sublime simplicity and communication capability of Wealthy and Wise.  I guarantee that the proper use of this tool will dramatically raise the professional and personal self-image of any associate who dares to take the time to understand it . . .”
Phillip Barnhill, CLU, InsMark Gold Power Producer®, Minneapolis, MN

“InsMark helps us help our clients understand their money and their choices.  I always learn something new that changes what we do and how we can do it more efficiently.  That translates to a better bottom line for us and for our clients.  It’s making more money for everyone -- just by pushing InsMark buttons on the computer.”
Kay Corbin, CLU, ChFC, InsMark Platinum Power Producer®, Phoenix, AZ

“I am writing to give you a ringing endorsement for the Wealthy and Wise System.  As you know, I am a LEAP practitioner.  The Wealthy and Wise software has helped me supplement my LEAP skills in the over age 60 client base.  I have been paid for many cases using Wealthy and Wise as support, the smallest of which was $27,000, the largest was $363,000.  With those type of commissions, you would have to be nuts not to buy it.”
Vincent M. D’Addona, CLU, ChFC, MSFS, AEP, InsMark Platinum Power Producer®, New York City, NY

 

Important Note #1:  The hypothetical life insurance illustrations associated with this Blog assumes the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.  Actual illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.

Important Note #2:  The information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

seperator bar

More Recent Blogs:

Blog #132: The Calculation Magic of Wealthy and Wise®

Blog #131: Don’t Burn the Nest Egg™

Blog #130: Should I or Shouldn’t I?

Blog #129: Leveraged Executive Bonus Plan with Bank-Funding of the Income Tax (Part 3 of 3)

Blog #128: Leveraged Executive Bonus Plan with Bank-Funding of the Income Tax (Part 2 of 3)

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive