Blog #153: Smart Alternatives to
Traditional Retirement Plans (Part 3 of 5)

Solo 401(k) Plans — Great for Retirement or
Is There a Better Solution?

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My good friend, Wayne Weaver, a principal with First Financial Resources, uses a wonderful phrase when referring to retirement planning, “Tax the seed, not the harvest”.  Wayne is making the distinction between 1) deducting contributions in exchange for taxable retirement cash flow versus 2) using after tax dollars to fund either indexed universal life (“Indexed UL”) or indexed survivor universal life (“Indexed SUL”) in order to obtain tax free retirement cash flow using participating loans.

We’ll examine Wayne’s logic in this Blog using one of the most dynamic of qualified plans, a Solo 401(k), a strategy used by self-employed and owner-only companies.  The conclusions you can draw are applicable to any form of deductible 401(k), 403(b), IRA, Keogh, Section 457, or profit sharing plan.

Contribution Limits for a Solo 401(k)

An eligible employee can stash away as much as $18,000.  The company can contribute an additional 25% of compensation up to a maximum of $54,000, including the employee contribution – and $6,000 more if age 50 or older.  The amount can double if a spouse is also employed (think of doctors).  These contributions are discretionary, so the maximum can be saved in flush years and nothing in tougher times.

Below is a summary of the Solo 401(k) plan limits for 2017:

Bob Ritter's blog 153 image-2-summary-of-the-Solo-401(k)-plan-limits

Case Study (both doctors are in the same practice)

David Bennett, MD: Vascular Surgeon, age 50
Lily Bennett, MD: Anesthesiologist, age 50
Retirement age: 70
Marginal Tax Bracket: 40%
Plan: Max Solo 401(k) for each – assumed yield: 7.00%
Max contribution: $60,000 each ($54,000 plus $6,000 catch-up for a total of $120,000)
Annual after tax cost of both Solo 401(k)s: $72,000
Alternative funding: Indexed SUL at 7.00% – Premium: $72,000

Note:  In the illustrations that follow, I have combined both David and Lily’s numbers into one Solo 401(k) and one Indexed SUL.  If you use the logic of this Blog, you should probably do individual plans for each of them (due to likely personal preferences).

Below is the comparison showing a significant advantage to the Indexed SUL where the participating policy loans starting at age 70 produce annual after tax cash flow of $248,296.  If the Solo 401(k) matches that after tax cash flow, its values are depleted by age 86.

Solo 401(k)
vs.
Indexed Survivor Universal Life
Image 1

Bob Ritter's blog 153 image-3-Solo-401(k)-vs-Indexed-Survivor-Universal-Life

Click here to review the comparative year-by-year numbers and associated graphics from the Other Investments vs. Your Policy module in the InsMark Illustration System.

In addition to the difference in retirement cash flow, the Indexed SUL has several other advantages:

  • Unlike the 401(k), the Indexed SUL provides a significant life insurance death benefit for Robert and Lily’s family.
  • Unlike the 401(k), a waiver of premium can be attached to the Indexed SUL in the event of disability.
  • Unlike the 401(k), tax free cash flow from the Indexed SUL can be accessed prior to age 59 1/2 with no 10% premature distribution tax.
  • At the conclusion of the illustration, the Indexed SUL contains $1,141,336 of residual cash value and death benefit; the Solo 401(k) has $0 residual value.
  • If it turns out that a significant income tax hike will be required in the future to deal with the federal deficit, the 401(k) will be seriously impacted, and the Indexed SUL will be unaffected.  Below is an example of what the comparison looks like if a 70% income tax bracket were to occur at the Bennetts’ retirement in ten years (not a farfetched assumption).  It’s not a pretty picture.
Solo 401(k)
vs.
Indexed Survivor Universal Life
Retirement Income Tax Bracket Increases to 70%
Image 2

Bob Ritter's blog 153 image-4-Solo-401(k)-vs-Indexed-Survivor-Universal-Life-Retirement-Income

Click here to review this variation.

Takeaways

“Compared to What” remains a benchmark of any sound financial analysis.  And always remember Wayne Weaver’s advice: “Tax the seed, not the harvest.”

Cash value life insurance is an exceptional alternative to a deductible 401(k), 403(b), IRA, Keogh, Section 457, or profit sharing plan.  InsMark can really help you convey this to your clients and prospects.

The only exception to this point involves plans where an employer is making a matching contribution – such as a 401(k).  In that instance, the employee should continue with a contribution large enough to max out the employer’s match and direct an amount equal to the after cost of the difference to an indexed life insurance policy.  Blog #61: Sacrificing Cash Flow with a 401(k) Plan discusses this approach in detail.

Another approach is to ask this question of a client who is maxing out a contribution to a deductible 401(k), 403(b), IRA, Keogh, Section 457, or profit sharing plan:
“If you could contribute more to your deductible plan, would you?”

You will be surprised at the answers you get.  For those that indicate they would contribute more, ask “how much?” To see how to present this concept, read Blog #68: A Pretend 401(k) Plan vs. Indexed Universal Life.

 

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.

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Digital Workbook Files For This Blog

Blog153.zip

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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.

If you obtain the digital workbook for Blog #153, Click here for a guide to its content.

 

Licensing InsMark Systems

To license any of the InsMark software products, visit our Product Center 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.

For help on how to use InsMark software, go to The Quickest Way To Learn InsMark.

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

“The reason I use InsMark products is because they are so good at explaining financial concepts to all three parties: 1) the producer trying to explain the idea; 2) the computer technician trying to illustrate it; 3) the customer trying to understand it.”
Rich Linsday, CLU, AEP, ChFC, InsMark Power Producer®, Top of the Table, International Forum, Pasadena, CA

“InsMark’s Checkmate® Selling strategy is still one of the most compelling tools to bring a client to a definitive decision, based on their best case alternatives!!!  Solid mathematical comparisons that prove the validity of our insurance solution!!!”
Frank Dunaway, III, CLU, Legacy Advisory Services, Carthage, MO

 

Important Note #1:  The hypothetical life insurance illustration 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:  Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner.  Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.

Important Note #3:  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.

“InsMark” is a registered trademarks of InsMark, Inc.

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More Recent Blogs:

Blog #152: Smart Alternatives to Traditional Retirement Plans (Part 2 of 5)

Blog #151 – The Trump Presidency: How It Will Impact the Sale of Life Insurance Retirement Plans

Blog #150: Smart Alternatives to Traditional Retirement Plans (Part 1 of 5)

Blog #149: New Technology That Creates Radical Opportunities

Blog #148: More New Logic for Permanent vs. Term (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 #152: Smart Alternatives to
Traditional Retirement Plans (Part 2 of 5)

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

(Presentations in this blog were created using the InsMark Illustration System)

Getting Started with InsMark Training Video

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The case study in this Blog involves an extension of Blog #150: Smart Alternatives to Traditional Retirement Plans (Part 1 of 5) in which we introduced a conversion of $600,000 in IRA funds to a Roth IRA coupled with Indexed Universal Life (“IUL”) in order to amplify retirement planning for Robert and Ann Baxter, both age 60.  The results were powerful as we were able to meet their annual retirement cash flow goal of $150,000 after tax -- indexed at 3.00% -- while also providing an increase of almost $4 million in their long-range net worth.  You can review the results below in one of the Wealthy and Wise® graphs from Blog #150:

Strategy 1: Status Quo - Keep the IRA
vs.
Strategy 2: Convert the IRA to a Roth IRA
vs.
Strategy 3: Convert the IRA to a Roth IRA and Add IUL
Image 1

Bob Ritter's blog 152 image-1-strategy-1-vs-strategy-2-vs-strategy-3

This was all accomplished without requiring any additional out-of-pocket cost to fund the income tax on the Roth conversion and the $70,000 of premium on the $951,000 of IUL.  These costs were covered using withdrawals from the Baxter’s taxable account.

Inherited IRA vs. Inherited Roth IRA

There is another significant aspect to this analysis involving a potential inheritance alternative that Robert and Ann can provide for their son, Scott, currently age 35.

For the purpose of this evaluation, let’s assume that Scott inherits either the IRA or the Roth (as calculated in Blog #150) at his age 65, 35 years hence.  Examine the huge difference below.

Comparison of Inherited IRAs
for Scott Baxter
InsMark Illustration System
Image 2

Bob Ritter's blog 152 image-2-comparison-of-inherited-IRAs

Click here to review the reports for this comparison.

Not only does the Roth add considerably to the parents’ net worth as described in Blog #150, it ends up providing Scott with over $11 million of after tax, retirement cash flow, a gain of $9.6 million over the Inherited IRA.

Click here for a discussion on obtaining the numbers necessary for the Image 2 comparison.

Conclusion

The next time you have parents considering a Roth conversion, be sure to bring the issue of inherited IRAs to their attention as it is truly a showstopper.  The impact on heirs of an Inherited Roth makes the original decision to convert to a Roth almost irresistible.

Afterthought

In Blog #151, we discussed the sales opportunities that a Trump presidency provides.

Let’s assume Donald Trump is able to convince the Republican-led Congress to reduce income tax brackets.  In that case, assume that Robert and Ann’s son, Scott, finds himself in a lower pre-retirement tax bracket; however, by the time he retires, the Democrats manage to hike his tax rate to 70%.  In this case, how does the Inherited IRA vs. Inherited Roth IRA comparison look?

Comparison of Inherited IRAs
for Scott Baxter
Retirement Tax Bracket: 70%
InsMark Illustration System
Image 3

Bob Ritter's blog 152 image-3-comparison-of-inherited-IRAs-retirement-tax-bracket

Wow!  After tax cash flow from the Inherited IRA is reduced by 57%.  Anyone want to guess which is more likely to occur – long-range increases or decreases in income tax rates?

Some in Congress (the Senate Committee on Finance) are now weighing the elimination of stretch IRAs to any one other than a spouse thereby requiring distributions over, say, five years. My friend, Gonzalo Garcia, CLU, Partner, AgencyONE, had an interesting comment about this in his January 12 Blog:

For years, we have heard “save for retirement, take advantage of the IRA deduction, take advantage of your employer’s 401(k) match” and for what? So that Congress can conveniently change the laws at their discretion to accelerate the taxes due.

Both Roth IRAs and cash value life insurance avoid this issue – but keep your powder dry as we may have to fight this battle in years to come.

 

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

Blog152.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.

If you obtain the digital workbook for Blog #152, Click here for a guide to its content.

 

Licensing InsMark Systems

To license any of the InsMark software products, visit our Product Center 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.

For help on how to use InsMark software, go to The Quickest Way To Learn InsMark.

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:  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.

“InsMark” and Wealthy and Wise are registered trademarks of InsMark, Inc.

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More Recent Blogs:

Blog #151 – The Trump Presidency: How It Will Impact the Sale of Life Insurance Retirement Plans

Blog #150: Smart Alternatives to Traditional Retirement Plans (Part 1 of 5)

Blog #149: New Technology That Creates Radical Opportunities

Blog #148: More New Logic for Permanent vs. Term (Part 3 of 3)

Blog #147: New Logic for Permanent vs. Term (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

 

Blog #145: The $23 Trillion Market

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

(There are no InsMark presentations used in this blog.  It is a an informational blog only)

Getting Started with InsMark Training Video

Bob Ritter's blog 145 the 23 trillion dollar market

As of 2016, there are approximately $23 trillion dollars located in IRAs and qualified plans.

For high net worth individuals, the total taxes on IRA and qualified pension plan dollars can be as much as 70% (when you count income tax and estate tax).  That said, most economists believe that these tax rates will go higher (maybe much higher).  There are two main reasons for this.  First, our government has run up huge amounts of unfunded liabilities (i.e. Social Security and Medicare) that demand higher tax revenues from U.S. citizens in future years.  Second, taxing IRA and qualified plan dollars of the wealthy is one of the easiest ways that politicians can increase tax revenue (without the corresponding political cost to them in terms of votes).  So, even if you think there’s only a 50% chance that overall tax rates will go up on these pension plan dollars, it would be wise to help your wealthiest clients diversify some of their retirement assets into tax free investment alternatives.

Oh boy, do we have an exciting strategy for you.  It’s called the Qualified Leverage Strategy (“QLS”) and this plan can be used to substantially reduce the tax bite on these retirement plan dollars (as well as diversify away from the risk of higher taxes in future years).  For a quick 4 minute summary of the QLS concept, check out the video below:

Scheduled Webinar

To learn more of the details of the QLS plan and how you can implement it with your clients, there will be a LIVE one-hour Webinar on Thursday, November 17th at 11 AM (Eastern).  This Webinar is entitled “Learn How To Substantially Increase The After Tax Income From IRA And Qualified Plan Assets”, and it’s FREE.  Simply click here to register.  You’ll receive all of the following details:

  • How to transfer pre-tax IRA and pension dollars into tax free life insurance contracts;
  • How to unlock your client’s retirement plan assets;
  • How to unlock your retirement plan assets;
  • How to protect against the tax rate increases that are likely to come;
  • How to become one of the very few advisors who know this strategy;
  • How to show your clients you have the capacity to greatly increase their after-tax retirement income;
  • How to show your clients they can greatly increase their charitable endowments without any decrease in their current cash flow;
  • How to show clients they can increase the net wealth transferred to heirs.
  • ALL WITHOUT PAYING UNCLE SAM! LEGALLY!

Chris Jacob will be presenting the Qualified Leverage Strategy during the webinar.

Chris is one of the top life producers in the country and has an ability to analyze these plans that is truly remarkable.

More About Chris Jacob

Chris Jacob imageChris Jacob, CFP is President of Cadeau, a wealth management firm located in St. Louis.  A graduate of the University of Illinois with a degree in economics, he has been in the financial services industry for thirty two years.  Chris is a Platinum Power Producer and has incorporated InsMark as an integral part of his practice since 1987.  Chris is a member of Dan Sullivan’s Strategic Coach Program.  He employs a sophisticated array of retirement and estate planning strategies for High Net Worth clients and advisors for preserving, protecting, and perpetuating family wealth.  He is past president of the International Association of Advisors in Philanthropy and has spoken at Top of the Table twice in the last four years, most recently at this September’s meeting in Quebec.  Chris has been married to his wife Geralyn for twenty nine years and has three children and two grandchildren.

Licensing InsMark Systems

To license any of the InsMark software products, visit our Product Center online at 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 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

“Thanks to InsMark, we recently set business goals in our firm that I basically thought were ridiculously unachievable – until now.”
Brian Langford, InsMark Platinum Power Producer ®, Plano, TX

“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 is the Picasso of the financial services world – their marketing savvy never fails to amaze me.”
Doug Peete, Past President, Top of the Table, InsMark Silver Power Producer®, Overland Park, KS

“I really thought I knew all the sales techniques that affect my business, but I do now, thanks to InsMark.”
Sam Keck, MBA, CLU, CFP, LUTCF, InsMark Platinum Power Producer®, Financial Planner, Denver, CO

“InsMark is an absolutely mind blowing experience.”
Larry Gustafson, InsMark Platinum Power Producer ®, Denver, CO

 

Important Note:  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 #144: Don’t Burn the Nest Egg®

Blog #143: Premium Financing Opportunities In The Small Case Market

Blog #142: Increased Taxes Are Coming

Blog #141: Strategic Philanthropy

Blog #140: Zero Taxes for Social Security - InsMark Style

 

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