401(k) contribution
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[quote=deekay][quote=B24]DK, I understand your point. However, 401K’s are not bad wealth transfer options if done correctly, and it is one place where he can shelter some income. Now, if the heirs pull it all out day 1, then yes, it was a bad option. But with stretch options available, it can really defer taxes for 2 generations.
What's the point of building wealth if you or future generations can't enjoy it? When you stretch the QP, all you're doing is deferring taxes, not avoiding them. At some point, they will be due. If the amount of money he had inherited was not so large, and was in qualified accounts, I would say yes, he needs to keep more outside of his 401K. But I think he's got so much NQ money that why not get some "tax diversification" but pumping up his 401K and deferring a lot of those taxes. Either way you aer sort of gambling on tax rates, future events in the family that are not yet known, what the clients will do with their money, etc. I just think spreading it among taxable and tax deferred accounts is wise. But only putting 3 or 4% per year into the 401K seems rather meager compared to his overall wealth. But generally speaking, I think you could arrange his investments either way and come out just fine. I see what you are getting at. You are correct: none of us know what taxes will be in the future. All things being equal, if you had a choice between maintaining control and not maintaining control over my money, I'll keep control. You lose access in a 401k until you're 59 1/2. The government has the power to change the rules at any time. You are limited to the investment choices offered. Unless you yourself are the rep on the 401k, you legally cannot give advice on the specific offerings. One other thing - if you put it into the 401K, you have more freedom as far as the type of assets you use. You do not have to be concerned about dividend paying funds, bond interest, etc., as it is tax deferred. With the taxable money, you have to be a little more particular about the investment classes you use in order to keep taxes down. With that amount of money (I think all-in, he said it will be over $20mm??), you could be looking at losing a large chunk of your gains to taxes. Again, without knowing their real intentions, you can't come to a finite conclusion. There are some great ways to arrange trusts if they are charitable that will help with taxes. I'm assuming you are referring to CRTs. By themselves, the donor loses all control, but gets a tax credit. However, the legacy suffers. My clients would rather have the biggest estate available to them net of taxes.[/quote] Ultimately, there is more that needs to be addressed. All-in-all, there are other more efficient ways these folks can invest for the future than a 401k. I'm not saying that 401ks are bad. However, if you're investing in them just to lower taxes today, you're setting yourself up for a rude awakening. If taxes stay the same when they withdraw money, there will be no tax savings. If taxes are higher when they retire, they lose. Yes, if taxes are lower when they retire, they win. We are at the lowest income tax rate in history (other than when the income tax was originally set up). What are the chances they'll be lower in the future? I would argue slim to none. [/quote] It's illegal to help folks with their asset allocation in their 401k if we're not the rep for the plan?[quote=Borker Boy][quote=deekay]
I'm not a big fan of 401k's outside the match.
[/quote] Would you elaborate on this, please. As with nearly every other topic in this industry, if I asked five Jonesers about how they would advise a particular client regarding contributing to their 401k, I'd get at least seven different opinions. Is there no hard and fast rule?[/quote] Do you see what I mean about all the conflicting opinions. Geez...my head hurts.Sure, your head hurts, but threads like these are why I spend too much time here. Given this couple’s probable tax profile, it’s hard to imagine a 401(K) working well for them in most scenarios. That being said, I like Old lady’s solution the best (you can always spot a CFP in the crowd…). Contrbute enough to get the match and name charitable beneficiaries. Given what they have outside of the 401(K)s, they surely have sufficient charitable inclination to give away the 401(K)s. As an aside, is the provision to send RMDs directly to charities still in effect? In the back of my mind, I seem to recall some expiration date for this strategy…
Has anyone mentioned life insurance? LIRP…They could use the annual gifting they are gettting and fund some rather large face cash value insurance to cover future estate taxes while creating a potential for non taxable withdrawals in the future. If they don’t need the cash withdrawals, they will have created a non taxable legacy for their heirs and/or covered future estate taxes.
I would think a LIRP with some term insurance would be helpful. More so than investing in a 401K. In addition....the commissions on the insurance would be awesome!!!!!
[quote=babbling looney]Has anyone mentioned life insurance?
That is exactly what I was getting at. LIRP...They could use the annual gifting they are gettting and fund some rather large face cash value insurance to cover future estate taxes while creating a potential for non taxable withdrawals in the future. Explain your thoughts on a LIRP vs. a regular WL policy. I have my ideas on both, but I would be interested in hearing other viewpoints. Correct me if I am wrong, but LIRPs usually utilize VUL/UL, correct? If they don't need the cash withdrawals, they will have created a non taxable legacy for their heirs and/or covered future estate taxes. No question about it. The beauty is, the CSV can be accessed before 59 1/2 and, in many cases, withdrawn/loaned tax-free. Plus, if you're using WL, the dividends are tax-free up to basis and can be used just like a dividend from an investment (reinvested for PUA, taken as cash, reduce premiums, etc.)I would think a LIRP with some term insurance would be helpful. More so than investing in a 401K. Depending on premiums, insurability, and convertability of term, this is a great idea. In addition....the commissions on the insurance would be awesome!!!!! FACT. Let's hope anon doesn't have to put 'em through the grid (somehow I think he won't have to [/quote] Folks, this case is a perfect example of why an advisor with a lot of knowledge of how life insurance works adds value to their clients.
[quote=deekay][quote=B24]DK, I understand your point. However, 401K’s are not bad wealth transfer options if done correctly, and it is one place where he can shelter some income. Now, if the heirs pull it all out day 1, then yes, it was a bad option. But with stretch options available, it can really defer taxes for 2 generations.
What's the point of building wealth if you or future generations can't enjoy it? When you stretch the QP, all you're doing is deferring taxes, not avoiding them. At some point, they will be due. If the amount of money he had inherited was not so large, and was in qualified accounts, I would say yes, he needs to keep more outside of his 401K. But I think he's got so much NQ money that why not get some "tax diversification" but pumping up his 401K and deferring a lot of those taxes. Either way you aer sort of gambling on tax rates, future events in the family that are not yet known, what the clients will do with their money, etc. I just think spreading it among taxable and tax deferred accounts is wise. But only putting 3 or 4% per year into the 401K seems rather meager compared to his overall wealth. But generally speaking, I think you could arrange his investments either way and come out just fine. I see what you are getting at. You are correct: none of us know what taxes will be in the future. All things being equal, if you had a choice between maintaining control and not maintaining control over my money, I'll keep control. You lose access in a 401k until you're 59 1/2. The government has the power to change the rules at any time. You are limited to the investment choices offered. Unless you yourself are the rep on the 401k, you legally cannot give advice on the specific offerings. One other thing - if you put it into the 401K, you have more freedom as far as the type of assets you use. You do not have to be concerned about dividend paying funds, bond interest, etc., as it is tax deferred. With the taxable money, you have to be a little more particular about the investment classes you use in order to keep taxes down. With that amount of money (I think all-in, he said it will be over $20mm??), you could be looking at losing a large chunk of your gains to taxes. Again, without knowing their real intentions, you can't come to a finite conclusion. There are some great ways to arrange trusts if they are charitable that will help with taxes. I'm assuming you are referring to CRTs. By themselves, the donor loses all control, but gets a tax credit. However, the legacy suffers. My clients would rather have the biggest estate available to them net of taxes.[/quote] Ultimately, there is more that needs to be addressed. All-in-all, there are other more efficient ways these folks can invest for the future than a 401k. I'm not saying that 401ks are bad. However, if you're investing in them just to lower taxes today, you're setting yourself up for a rude awakening. If taxes stay the same when they withdraw money, there will be no tax savings. If taxes are higher when they retire, they lose. Yes, if taxes are lower when they retire, they win. We are at the lowest income tax rate in history (other than when the income tax was originally set up). What are the chances they'll be lower in the future? I would argue slim to none. [/quote] DK, Our disagreement is really just risk and perspective. A couple things: if this is truly "never" money, then the 59.5 rule doesn't matter in the 401K. 2nd: deferring taxes has a huge affect on wealth building. It happens all the time in real estate. 3rd: Depending on what is done with the rest of the money, you may have very low taxes in retirement. What if it is all invested in muni's and non-div stocks? AND you save the QP for the next generation? In that case you are paying VERY little in taxes. Add on top of that CRT benefits (if this is an option in their case), and you have very good tax treatment. 4th: What about taking some of the NQ money and buying a large life policy (2nd to die). There's a huge NT legacy. Leverage it up. So you can defer current taxes thru 401K deducts, invest in non-taxable investments for the NQ stuff, and buy life insurance to gross up the estate. Hey, I don't know these people, and their personal wished will drive much of the decision. I am just throwing out ideas.One of the other things they should consider actually, is an annuity for current income needs (in retirement). It would be easy to guarantee some tax-advantaged, annuitized income (or Lincoln I4L) so they don't have to be concerned about loss of principle on their bills. Sounds strange when you have that much money, but it makes income planning much easier for them. You could carve out a piece of their NQ money now and invest it aggressively inside a deferred annuity. Outside the annuity you are taking too much risk, and throwing off too much current income (maybe). Just another thought....
Explain your thoughts on a LIRP vs. a regular WL policy. I have my ideas on both, but I would be interested in hearing other viewpoints. Correct me if I am wrong, but LIRPs usually utilize VUL/UL, correct?
LIRP is a technique of overfunding a life insurance policy as much as possible. Generally VUL or UL because of the ability to generate significant cash value I'm not a big fan of VULs because of the unpredictablity and the possiblity of having to jump premium contributions in a down market. However, if these people can overfund the policy and stand the volitility this wouldn't be a problem. I would suggest that the OP contact a couple of insurance wholesalers and companies, have them run some scenarios and get contracted. Hancock and Hartford have some nifty literature on this http://jh1.jhlifeinsurance.com/JHPortal/Common/JHPortal_Article_Master/0,2443,2072913_2079747_2873230,00.html For a really big case you might even be able to get the wholesaler or your upline( if that's how you are structured ) to sit in with you and present the insurance concepts. My upline guy would be all over a case like this. As an Indy, I don't have a grid for my insurance sales that are not on the VA side. Variable, you need to check with your B/D and find out who you are contracted with. These prospects are perfect for a good estate planning program. Off the top of my head, depending on the ages and health of the clients and the figures that are being tossed around I would say several policies would be in order.Forget the 401k contributions. Education for the kids is taken care of so no need there. Set up an ILIT with children as bene. Buy an annuity inside the ILIT, trust is owner and bene, children are annuitants. Funds grow tax defered, when client dies, IT IS NOT A TAXABLE EVENT TO THE CHILDREN as you just re-register the annuity. Now you have pulled assets out of the estate, avoided the tax issue there, and your children’s retirement is taken care of. Use the annuity to defer taxes for the next 50 years when the deferal benefit will actually overcome the fee. And if the children don’t feel they will need it, when they register the contract, they can designate their children as beneficiary of the annuity, completely skipping a generation and extending the tax deferal.
[quote=B24][quote=deekay][quote=B24]DK, I understand your point. However, 401K’s are not bad wealth transfer options if done correctly, and it is one place where he can shelter some income. Now, if the heirs pull it all out day 1, then yes, it was a bad option. But with stretch options available, it can really defer taxes for 2 generations.
What's the point of building wealth if you or future generations can't enjoy it? When you stretch the QP, all you're doing is deferring taxes, not avoiding them. At some point, they will be due. If the amount of money he had inherited was not so large, and was in qualified accounts, I would say yes, he needs to keep more outside of his 401K. But I think he's got so much NQ money that why not get some "tax diversification" but pumping up his 401K and deferring a lot of those taxes. Either way you aer sort of gambling on tax rates, future events in the family that are not yet known, what the clients will do with their money, etc. I just think spreading it among taxable and tax deferred accounts is wise. But only putting 3 or 4% per year into the 401K seems rather meager compared to his overall wealth. But generally speaking, I think you could arrange his investments either way and come out just fine. I see what you are getting at. You are correct: none of us know what taxes will be in the future. All things being equal, if you had a choice between maintaining control and not maintaining control over my money, I'll keep control. You lose access in a 401k until you're 59 1/2. The government has the power to change the rules at any time. You are limited to the investment choices offered. Unless you yourself are the rep on the 401k, you legally cannot give advice on the specific offerings. One other thing - if you put it into the 401K, you have more freedom as far as the type of assets you use. You do not have to be concerned about dividend paying funds, bond interest, etc., as it is tax deferred. With the taxable money, you have to be a little more particular about the investment classes you use in order to keep taxes down. With that amount of money (I think all-in, he said it will be over $20mm??), you could be looking at losing a large chunk of your gains to taxes. Again, without knowing their real intentions, you can't come to a finite conclusion. There are some great ways to arrange trusts if they are charitable that will help with taxes. I'm assuming you are referring to CRTs. By themselves, the donor loses all control, but gets a tax credit. However, the legacy suffers. My clients would rather have the biggest estate available to them net of taxes.[/quote] Ultimately, there is more that needs to be addressed. All-in-all, there are other more efficient ways these folks can invest for the future than a 401k. I'm not saying that 401ks are bad. However, if you're investing in them just to lower taxes today, you're setting yourself up for a rude awakening. If taxes stay the same when they withdraw money, there will be no tax savings. If taxes are higher when they retire, they lose. Yes, if taxes are lower when they retire, they win. We are at the lowest income tax rate in history (other than when the income tax was originally set up). What are the chances they'll be lower in the future? I would argue slim to none. [/quote] DK, Our disagreement is really just risk and perspective. A couple things: if this is truly "never" money, then the 59.5 rule doesn't matter in the 401K. What if they want access to the money before then? 2nd: deferring taxes has a huge affect on wealth building. It happens all the time in real estate. Agreed. 401ks are fantastic vehicles to help you accumulate wealth. Real Estate too. But as Steven Covey once said: "Begin with an end in mind." What are the consequences of plowing tons of money in a QP? Real estate? 3rd: Depending on what is done with the rest of the money, you may have very low taxes in retirement. What if it is all invested in muni's and non-div stocks? AND you save the QP for the next generation? In that case you are paying VERY little in taxes. Add on top of that CRT benefits (if this is an option in their case), and you have very good tax treatment. The government is not going to change how withdrawals from QPs are to be taxed. If you believe they will, you've got another thing coming. Why do you think we as consumers are encouraged to put as much as possible in 401ks? Because the government has a HUGE check waiting for them in the end. They're not going to all of a sudden become charitable and forego all that revenue. Like I've mentioned before, marginal income tax rates are at an all-time low. There is a good chance our clients will retire and live in a higher tax bracket than they are today. And for those of you who feel these retirees will live on less income - shame on you. Taking less income in retirement runs contrary to what retirement is all about. 4th: What about taking some of the NQ money and buying a large life policy (2nd to die). There's a huge NT legacy. Leverage it up. So you can defer current taxes thru 401K deducts, invest in non-taxable investments for the NQ stuff, and buy life insurance to gross up the estate. Why not just take what was going to go into the QP and put it in permanent life insurance? Same tax-deferral as a 401k, tax-free withdrawals up to basis, a way to pay for an impending estate tax issue, all the while allowing the client to maintain control vs. deferring until age 59 1/2. An added benefit is now the CRT can be used without sacrificing the value of the estate. The permanent DB replaces the asset placed in the CRT. Hey, I don't know these people, and their personal wished will drive much of the decision. I am just throwing out ideas. [/quote] B - this is very healthy discussion. I think we are on the same page, just with conflicting viewpoints. My experience, both in my own experiece and with clients, is that 401ks are not the panacea that most in our industry think they are.Babs - how does overfunding a UL affect the DB? Seems to me there’s a good chance a significant estate tax issue is looming. Also, anon mentioned this is a young couple. Could they be better served using WL? My experience is that UL tends to work better with older folks where DB is the only concern. UL over long periods looks more like “permanent term”. CSV just isn’t there later in life becuase the cost of insurance is increasing every year.
Well that depends on if you have a level DB or increasing DB and then the corridor rule would kick in once the cash value got large enough.Babs - how does overfunding a UL affect the DB? Seems to me there’s a good chance a significant estate tax issue is looming. Also, anon mentioned this is a young couple. Could they be better served using WL? My experience is that UL tends to work better with older folks where DB is the only concern. UL over long periods looks more like “permanent term”. CSV just isn’t there later in life becuase the cost of insurance is increasing every year.
If they were to use a LIRP plan in lieu of a 401K (which was the original question), whole life would not work because the whole point of a LIRP is to voluntarily overfund the policy to the maxium to create more cash value that they can then borrow against. If they don't need the income in the future and will still be in a high tax bracket, then they shouldn't be doing a LIRP plan or a 401K for that matter because the 401K could be a tax headache. The advantage of the LIRP is that the income/loans they take from the policy are non taxable as long as the policy doesn't collapse. They couldn't do this LIRP plan in an ILIT. Oustide the ILIT death would/could create a significant estate tax bump up. They would need to plan for how much that would be and cover it with additional insurance from the ILIT plan. However, Primo is correct too in that they need estate protection. I would encourage them to have a guaranteed WL or UL in an ILIT for that purpose. This is why I said several policies. LIRP, either a VUL or UL. ILIT with a nice second to die for estate purposes. With a case like this I would definitely rely on the help of an insurance specialist whether you went UL VUL or WL.
Maybe I am reading it wrong, but I wasn’t saying do a LIRP in the ILIT. Use an annuity. If the client doesn’t need the $150m that is being gifted to them, have the grandparents gift to the ILIT directly. Point is, no payment on death need be taken when the client dies as you just re-register the annuity.
I don't believe that is correct about the annuity. If it is, then please give me a reference so I can look this up. Or how this is structured. I assume the ILIT is the owner and beneficary with joint annuitants? The ILIT for life insurance merely removes the item from the estate, however the annuity would have to have a beneficary even if the beneficary is the ILIT itself. It can't merely be re registered at death The ILIT wouldn't change the taxation treatment of the annuity or the character of the investment, but would only remove the value from estate taxation.Maybe I am reading it wrong, but I wasn’t saying do a LIRP in the ILIT. Use an annuity. If the client doesn’t need the $150m that is being gifted to them, have the grandparents gift to the ILIT directly. Point is, no payment on death need be taken when the client dies as you just re-register the annuity.
children are the annuitant on the original annuity policy, so it is just a matter when the trust dissolves to change them to the owner line, no taxable consequence. Brendan Buckingham, John Hancock Annuity Advance Marketing Team is the source.
Can we all agree that this is a REALLY nice problem to have?
These people can probably afford to do all of the above: Fund an ILIT Fully fund 401K's Fund a LIRP (I never mentioned that in my entry, but I do like that idea - it's got almost the same affect as funding and then annuitizing an annuity, though not quite as tax efficient) Fund a CRT and.... live very nicely.Thanks. I'll look it up. Never too late to learn something newchildren are the annuitant on the original annuity policy, so it is just a matter when the trust dissolves to change them to the owner line, no taxable consequence. Brendan Buckingham, John Hancock Annuity Advance Marketing Team is the source.
Interesting responses. First of all, I have to beat up on any "max the 401(k)" idea. Maxing the 401(k) can be worse than giving all of the money to the government. Nobody questioned me on my claim that the tax rate can be more than 100%. When a rich person dies with qualified money or non-qualified annuities virtually all of the money is going to the Government. Look at what happens with $1,000,000 of qualified money for someone who dies with a net worth of $20,000,000:
This $1,000,000 is part of their taxable estate. With today's laws, that would be $500,000 in estate taxes. Depending on the state, there can also be state estate taxes. For my clients, this will be another $160,000 of taxes for a total of $660,000 of taxes. The beneficiary, the children, will still inherit $1,000,000. This (and any subsequent gain) will all be taxed as income. Between federal, state, and local taxes, they are paying over 40% in taxes. This is another $400,000+ in taxes. The combined taxes are over $1,000,000!!! Rich people should not die with money in IRA's and NQ annuities. The taxes take it all. This phenomena occurs because both the estate taxes and income taxes are both on the gross amount. If instead, the person takes the money out of their 401(k) while they are still living, at least taxes won't get the whole thing. Better yet, don't put the money into a 401(k) in the first place (or a nq va). This way, at death, no income taxes will be due on the unrealized gain. For the most part, the best solution in this case is old fashioned whole life life insurance. Putting money into the 401(k) will very possibly lead to $0 (or less) of additional wealth for the beneficiary. Funding a couple of ILIT's with this money instead will lead to a WORST CASE SCENARIO of $2,500,000 for the beneficiary and more likely $8,000,000+ with absolutely no taxes.Set up an ILIT with children as bene. Buy an annuity inside the ILIT, trust is owner and bene, children are annuitants. Funds grow tax defered, when client dies, IT IS NOT A TAXABLE EVENT TO THE CHILDREN as you just re-register the annuity. Now you have pulled assets out of the estate, avoided the tax issue there, and your children’s retirement is taken care of. Use the annuity to defer taxes for the next 50 years when the deferal benefit will actually overcome the fee. And if the children don’t feel they will need it, when they register the contract, they can designate their children as beneficiary of the annuity, completely skipping a generation and extending the tax deferal.
Primo, I don't know that you are wrong, but I believe that you are on shaky uncharted territory with this. If my client was the annuitant, and the trust was the owner the money would grow tax deferred, but at death, the gain would be all taxable. If the kids are the annuitants, with the trust as the owner, it is questionable as to whether the annuity will grow tax deferred. I would not trust your source on this one. I think that he is offering an opinion that isn't set in stone. However, let's assume that you are correct. I still don't see how this beats life insurance. Life insurance will obviously be much better if death occurs soon. Even if the person lives to life expectancy, the beneficiary will probably be better with life insurance. The annuity might have more money, but the cost basis will be zero and all gains will come out first and taxed as income. Ex. At death, the life insurance death benefit is $3,000,000. The annuity has a value of $3,500,000. What's better...$3,000,000 with no taxes or $3,500,000 that will all be taxed as income? Let's not forget that the life insurance has no investment risk. (Typically, the annuity would have to get a return in the 9% range and the person would have to live past life expectancy for this option to come out ahead. It doesn't make sense to me.)I cannot comment on the life insurance as I farm out that business. Notice you never see me post in those threads. As for the above scenario-
1) I have seen the opinion letter from the IRS and right now it can be done. 2) I thought of this as when the client dies, plenty of other money will go to the children, this is money that most likely will not be used. Assume client is 35 with 5 yr old child. They start contributing now and money comes out in 55 years for the childrens retirement. That is a lot of time to make up the taxes. Plus if the child does not need it, they can simply name their children as bene when the reregister the contract upon the clients death. Now you could be looking at 75 years of tax deferal, while still controlling the assets in case cash is needed. Just a suggestion that you don't hear about often.