Situation:
Mark (65) is ready to retire. He has been investing in his retirement fund diligently since he was 25. In his fifties, he rolled all of his 401k’s from various employers into an IRA. This IRA has a balance of $2,400,000. Working with his financial planner, he has set aside investments and liquid cash so that when he retires, he can live for at least seven years without needing the funds currently in the IRA. They have discussed the tax liability when funds are withdrawn from the IRA and have decided to implement a plan that will reduce the taxes owed during IRA distributions.
Solution:
Mark decides to participate in a Tax-Free ERISA strategy. By participating in the process, he can avoid paying approximately $1,050,000 in taxes on distributions from his IRA over time. By working with a law firm, his financial planner introduced him to, and as part of this program, they will create a business he will work for. This company will open a 401k for Mark. The current IRA that Mark has will roll into the new 401k. Mark’s new 401k will purchase a specialized financial product. The 401k will transfer $480,000 to the product annually for five years. Once the 401k balance is at zero, the 401k will distribute the specialized financial product to Mark.
Result:
After the five-year funding period, when Mark receives the distribution of the financial product, he will owe a one-time tax on the balance in the financial product. The taxes he owes in year five will be discounted by approximately 40% compared to the taxes on distributions from a traditional IRA/401k. Mark will utilize two tax mitigation strategies to achieve this result.
The financial product that Mark now owns outright in his name maintains the tax characteristics of a ROTH IRA, including tax-free gains and distributions. The financial product mitigates risk in investments, offers the potential to earn on interest rate arbitrage, and guarantees no loss of the principal balance. The financial product also provides a death benefit independent of the cash balance.
Mark also learns that a special rider allows him to access the death benefit in an accelerated fashion in case of a chronic illness, creating an additional independent financial source of income. Along with the tax savings and the ability to generate tax-free income through harvesting the cash value and death benefit, the typical result is an income two or three times larger than a traditional IRA.