The SECURE Act requires most inherited IRAs (individual retirement accounts) to be liquidated by the end of the 10th year causing condensed income tax payments for beneficiaries. Prior to this Act, inheriting an IRA was beneficial in that the required minimum distributions (RMD) schedule reset (stretched) to the age of the person inheriting it. Now, individuals must plan on where to apply the inherited funds. The result is a lower total amount for the beneficiary when compared to the prior law where distributions could be stretched out.
Life insurance offers the ability to accumulate cash value in the policy on a tax-deferred basis while allowing withdrawals of basis and loans thereafter generally income tax-free.[1] Additionally, the future withdrawals and loans from the life insurance policy are not subject to the IRA 10-year rule.
Replicating the old stretch provision with life insurance can be an attractive alternative and, if structured correctly, may include the following benefits:
Adds flexibility to retirement assets
Defers the use of required distributions
Reduces taxable income in retirement
Build an estate plan by funding life insurance with IRA distributions
How to Use Inherited IRA Distributions
Let’s look at a hypothetical example of an individual who inherited IRA assets.
Meet Kimberly, Age 50.
She inherited a $1,000,000 IRA
Is currently enjoying a comfortable standard of living
Wants to defer additional income until she’s at retirement age
Kimberly uses $50,000 of each after-tax 10-year distribution from her inherited IRA as a variable life insurance premium. Variable, or sometimes referred to as separate account, life insurance offers Kimberly death benefit protection with growth potential through investment options. She uses the remaining after-tax IRA distribution dollars for reinvestment and other financial planning needs.
This plan allows Kimberly to defer income inside of the life insurance policy until it’s needed and receive it during her retirement years.
By repurposing some of the IRA distributions, she transitions a portion of the after-tax inherited IRA distributions to a tax-deferral strategy with non-reportable income while retaining a death benefit larger than the total premiums paid. This allows some of the benefits from the original inherited IRA to transfer to the next generation.
Summary of the Strategy
Life Insurance Premiums
Annual Premiums of $50,000 for 10 years
Total Premiums paid equals $500,000
Life Insurance Policy Distributions
Annual distribution of $133,333 per year for 15 years (age 70 to 84) for a total of $2,000,000 in distributions
Death Benefit
Projected net death benefit at age 85 of $460,496
If Kimberly did not need to take distributions from the life insurance policy, the projected death benefit at age 85 transferred to the next generation is $4,910,097.
If you have questions about your inherited IRA or interested in evaluating how life insurance can help maximize your inheritance, please schedule a time to discuss.
This material and the opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. The tax and legal references attached herein are provided with the understanding that neither TRC Financial, nor M Financial are engaged in rendering tax, legal, or actuarial services. If tax, legal, or actuarial advice is required, you should consult your accountant, attorney, or actuary. Neither TRC Financial, nor M Financial should replace those advisors.
Variable life insurance products are long‐term investments and may not be suitable for all investors. An investment in variable life insurance is subject to fluctuating values of the underlying investment options and entails risks, including the possible loss of principal.
All Examples are hypothetical based on a 7.5% earnings assumption and for illustrative purposes only and may not reflect the typical clients experience and are not intended to represent or guarantee that anyone will achieve the same or similar results.
Investments in securities involve risks, including the possible loss of principal. When redeemed, shares may be worth more or less than their original value.
Securities offered through M Holdings Securities, Inc. A Registered Broker/Dealer, FINRA / SIPC. TRC Financial is independently owned and operated.
[1] 1 Provided the policy is not a modified endowment contract (“MEC”).
File # 6469572.1