“Tax uncertainty!” “Mortality rates!” “Market Volatility!” “Co-Morbidities!”
When we reflect on this year, with respect to industry-relevant headlines, 2020 has certainly brought the heat! As a result, many clients have been looking for ways to protect their retirement, as well as refreshing beneficiary designations to get their affairs in order. And collectively, we’ve all been helping clients navigate an uncertain market within a new, complex and often virtual environment.
Let’s rewind to the very first day of 2020, when a piece of retirement legislation went into effect that brought insurance planning solutions into the headlines in the biggest way since the Pension Protection Act more than 15 years ago. When we combine the impact of this legislation with an election year and a pandemic, right now could be the best time in a long time for us to take advantage of several planning opportunities.
More specifically, here are two simple ways to start the conversation about assets having enjoyed tax-deferred growth. As you help your clients analyze their needs into and throughout retirement, we often find that clients’ goals change, and we may have some of best solutions in the financial marketplace right now to meet the moment – delivering peace of mind, leverage and the relationship-building necessary to grow your practice into the future.
Opportunity #1: Clients WITH an income need from defined contribution plans such as 401(k)s.
To some savers, seeing hundreds of thousands of dollars in a 401(k) account may provide a sense of confidence that may not actually represent how likely they are to outlive their retirement planning. The SECURE Act passed in December 2019 by Congress, and with the goal of taking a better snapshot of participants’ reality, now requires plan administrations to project and illustrate your clients’ 401(k) account balances as both a single life annuity (ending monthly payments upon death of the participant) and qualified joint/survivor annuity (ending monthly payments for a married couple upon death of second spouse).
The 401(k) disclosure language is teeing advisors up nicely to have a conversation about using in-service withdrawals from 401(k)s to fund annuity solutions your clients may not have otherwise thought about without your help.
Consider having your clients bring their 401(k) statements to your next appointment to use as a starting point for discussing any concern about transitioning into retirement. Simply ask: “Based on your goals, what percentage of this projected monthly income should be guaranteed for life?” A client’s percentage goal may give you a target to begin quoting annuities as a solution on a guaranteed basis to make sure they are not outliving that portion of savings.
Opportunity #2: Clients WITHOUT an income need from tax-deferred assets such as individual retirement accounts.
Generally, the intent of the SECURE Act is to create tax advantages for Americans by giving more of us access to tax-favored retirement planning than we had prior to the legislation. However, what was able to create enough tax revenue neutrality to the proposed favorability (and ultimately generate such overwhelming bipartisan support) is the elimination of a concept called stretch IRA maximization. To put it simply, most IRA beneficiaries used to have a choice of recalculating required minimum distributions based on their life expectancy to enjoy or “stretch” another generation’s worth of tax-deferred growth.
Although there are exceptions (spouses, minors and several others), the SECURE Act ruling requires an inherited IRA to be spent down within 10 years of the date of inheritance.
If you have clients with IRAs and they won’t need the income to fund a comfortable retirement, consider having a conversation about their current goals for that asset. IRA contributions are tax-deferred, and these assets may be subject to both estate and income taxes at death – meaning only a fraction may be left to heirs as intended, especially considering the new 10-year spend down ruling. Consider driving education around the following solutions to help hedge against this significant tax-inefficiency upon death.
Opportunity #2a: Disinheriting the IRS by funding life insurance.
While reviewing their beneficiary designations, your clients may wish to maximize their legacy. There are many strategies to deploy when funding life insurance to maximize a tax-deferred asset such as an IRA, but when income from and/or liquidity of the asset is unimportant to planning, clients most frequently will roll over some or all of an IRA into a single premium immediate annuity, using the after-tax lifetime income stream as premium to fund a permanent life insurance policy – most commonly owned by an irrevocable life insurance trust. When structured properly, ILIT ownership keeps the death benefit out of a client’s estate upon death and the tax-free death benefit creates significant leverage – typically on a guaranteed death benefit basis.
Opportunity #2b: Protecting against the cost of care.
If you were to ask your clients what assets they might have earmarked to pay for a long-term care event, how many would point to an IRA? If they’re well positioned for income without the IRA, we can leverage those dollars into really strong benefits to help pay for that care when it’s needed. Many advisors are unaware these funds can be rolled directly into asset or annuity-based linked benefit LTC contracts on a single-pay basis. Another common strategy is to put required minimum distributions from an IRA to work as funding on a multi-pay basis.
The SECURE Act now requires all 401(k) statements to include a lifetime income disclosure. If you’re not already asking your clients for this, have them bring their statement to an appointment. It’s a simple way to start a conversation about protecting these assets with increased control.
And if you’ve discovered they no longer need income from a qualified asset such as an IRA, how are you helping reposition those assets. IRAs were already one of the least tax-favorable assets to die with, but with new legislation, it is more important than ever to help create tax efficiencies for legacy planning at life expectancy, as well as reviewing extended care planning as a living benefit. Simply having the discussion to revisit their goals with tax-deferred assets will strengthen your relationship and put you in better position to engage with the next generation of your clients.
Ken Diltz is sales director, national accounts, with Crump Life Insurance Services. He may be contacted at email@example.com.
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