4 Places For Money and Their Tax Consequences

 

In general, there are 4 places where money (assets) can be kept.  I'm going to leave out precious metals and cryptocurrency since the majority of people don't hold these assets, or if they do, it's an extremely small part of their net worth.

The most popular places people build wealth are:

Banks, Wall Street, Government (401k, IRA's), Life Insurance companies, and Real Estate so let's stick with these for the purposes of this discussion.

The 401k is under Uncle Sam’s control even when rolled over into an IRA.  Both are considered Qualified Retirement Accounts (QRP) --- that is, qualified with the government.  Rollovers (401k to IRA or IRA to IRA) don’t create a taxable event but eventually the government forces liquidations of these accounts thru Required Minimum Distributions at age 72.   

At the time of death, beneficiaries of 401k/IRA must withdraw all assets from an inherited IRA within 10 years following the death of the account holder according to the SECURE Act in December 2019.

Note: I  recommend looking at solutions that will help transition the account balance in an IRA rollover account to life insurance policies on your kids – or perhaps yourself if you might still be insurable - in order lower their future tax bill and also to create a multigenerational transfer of wealth.

Here's something to considering if you plan on doing a rollover from a 401k to an IRA (or IRA to IRA) to purchase an annuity:

With an annuity, the account balance equals the death benefit.  I mention this because the term death benefit in an annuity sometimes creates confusion for the public. Since an annuity is a contract with a life insurance company, the account balance upon on death is technically called a death benefit but there is no increase in the account value upon on passing like with a life insurance policy where cash values mushrooms and instantly becomes a much larger death benefit at the time of passing. (For example, a Whole Life policy pays a death benefit substantially larger than the cash value.)  

 

The life insurance death benefit does get included in your overall estate unless it’s in an Irrevocable Life Insurance Trust (ILIT) but the death benefit is income tax-free which makes it a superior distribution and transfer vehicle for beneficiaries.  A discussion on ILIT's will be important if your overall estate will in time exceed estate tax exemption.  In 2020, the estate tax exemption is $11.58 million for a single person.  Multiple this exemption by 2 for married couples.

 

Note:  If you've had a spouse that has passed, it's important for your advisor to know if you file IRS Form 706 at the time of his death to make an election to add his unused estate tax exemption to yours.

 

Let me know if this helps or if you have questions about your situation.  Here's my calendar to request a consultation:  www.IBC.guru

 

Thank you,

 

John Montoya

You Insure Your Most Valuable Assets. Why Wouldn't You Insure Your Retirement?

Most economists are saying that income taxes must rise just to pay off our national debt. Why would anyone take a tax deduction today at these historically low income tax rates, let your money grow tax deferred for a number of years, and then when you need your money in retirement have every dollar subject to income taxes? And the taxes due will most likely be on a larger sum of money and at a higher tax bracket?

The proper structuring of a life insurance policy provides substantial benefits over qualified retirement plans, such as:

• Eliminate market risk while enjoying guaranteed contractual growth

• Liquidity-- you don't have to wait until age 59 1/2 to access your money

• No forced withdrawals beginning at 70 1/2

• Virtually unlimited contributions

• A tax free death benefit paid to your heirs or named beneficiaries

• A TAX-FREE income at an age that you select.

This concept is not new. In fact the majority of Fortune 500 companies and major accounting firms use life insurance to fund their executive retirement plans. The key is having the right type of permanent life insurance and having a professional design the policy to eliminate as much as 70% of the commissions normally associated with these products. For more information, watch the video at www.CashValueBanking.com or request a free analysis by calling (925) 386-6639.