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Could Tax Changes to Qualified Funds Demand more Life Insurance Sales

Reviewing part of the recent Retirement Enhancement and Savings Act legislation (RESA for short, H.R. 6757) one may be alerted to some potentially negative effects this legislation could have on ‘stretch’ IRAs. While this bill is not yet a law, and may change dramatically if it moves forward, it does demonstrate that Washington is looking at qualified funds and how to accelerate getting revenue from this source. This bill proposes that for any qualified account with a balance above $450,000, the amount over $450,000 would have to be taken as a distribution within five years of death (and of course pay taxes on those accelerated distributions).

As we know, qualified funds grow tax deferred until the individual takes a distribution. At the time of distribution, the individual is taxed on the funds received as ordinary income. What ‘stretch’ IRAs allow someone to do is literally stretch the distribution of those qualified funds over their lifetime when they inherit an qualified account. Thus, the taxes are delayed to the government even further with a stretch, as often a younger individual inherits the qualified account. Many times the younger individual’s expected lifetime could be forty years or greater.

According to Fidelity Investments regarding their Quarter 1, 2018 retirement data, there are some more interesting facts from this data:

  • Average individual 401(k), 403(b), and IRA account balances increased year-over-year with the average balance at $102,900.
  • 401(k) savings rates continue to increase, to a record high of 13.2% (both employee and employer contributions).
  • IRA contributors grew by double digits.

Here what is very interesting, especially when considering how the government may accelerate taxes on ‘stretch’ IRAs:

  • 10-year account balances reached $290,100
  • 15-year account balances reached $379,600
  • Fidelity now has 157,000 people who have over a million dollars in their 401(k), up 45% from 2017.

All of these above numbers are at record numbers

Thus, since balances are now growing in these qualified assets, and the government is now interested in accelerating the taxation of these assets, what should individuals do?

One easy and simple solution is to purchase a life insurance policy that can immediately (at completion) pay part or all of the potential taxes on these qualified assets. Since the death benefit on life insurance policies is tax free, the death benefit payment can be used to pay the taxes on the qualified funds, especially with those accounts that have large balances. There are several types of permanent policies that can be used to solve this potential problem.

Are you talking to your clients about the potential changes in laws that could greatly affect what they leave to loved ones? Are we doing enough as an industry to communicate to clients the real benefits of life insurance? For more information on having these conversations and helping clients find solutions, contact Simplicity Life today! 800.921.3100






The information contained herein is for general information purposes only. Simplicity Life is not to be held responsible for the accuracy of this information. Neither Simplicity Life nor its employees provide tax or legal advice. As with all matters of a tax or legal nature, your clients should consult their own tax or legal counsel for advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax adviser.

The information, statistics, and opinions reported herein are from sources believed to be reliable. However, Simplicity Life and the author of this blog do not guarantee the truth, accuracy, and reliability of any source, fact and/or statistic cited and no do necessarily agree with any opinions expressed by such sources.

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