For Producer Use Only
IRD, NUA and Life Insurance
IRA Tax Fundamentals and Strategies
Presenter Title
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70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 1000%
2%
4%
6%
8%
10%
12%
14%
16%
18%
RMD as % of Account Value
RMDs vs. Account Value
6%8%
10%12%
14%
3.6%
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Projected IRA Values
$100,000 IRA; 7% hypothetical annual return
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
70 75 80 85 90 95 100 105 110 115
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RMD Table
Age
Uniform Table
Divisor
Single-Life Table
Divisor Age
Uniform Table
Divisor
Single-Life Table
Divisor Age
Uniform Table
Divisor
Single-Life Table
Divisor
70 27.4 17.0 86 14.1 7.1 102 5.5 2.5
71 26.5 16.3 87 13.4 6.7 103 5.2 2.3
72 25.6 15.5 88 12.7 6.3 104 4.9 2.1
73 24.7 14.8 89 12.0 5.9 105 4.5 1.9
74 23.8 14.1 90 11.4 5.5 106 4.2 1.7
75 22.9 13.4 91 10.8 5.2 107 3.9 1.5
76 22.0 12.7 92 10.2 4.9 108 3.7 1.4
77 21.2 12.1 93 9.6 4.6 109 3.4 1.2
78 20.3 11.4 94 9.1 4.3 110 3.1 1.1
79 19.5 10.8 95 8.6 4.1 111 2.9 1.0
80 18.7 10.2 96 8.1 3.8 112 2.6
81 17.9 9.7 97 7.6 3.6 113 2.4
82 17.1 9.1 98 7.1 3.4 114 2.1
83 16.3 8.6 99 6.7 3.1 115 + 1.9
84 15.5 8.1 100 6.3 2.9
85 14.8 7.6 101 5.9 2.7
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IRD: The Bad News Is. . .1. No step-up in basis at death
2. Beneficiary pays income tax at owner’s death– Taxes are calculated at Beneficiary’s tax rate
3. Deceased IRA owner must include the entire IRA value in his / her estate for estate taxes– Even though the $$ pass directly to the designated
beneficiary!
This is what’s known as the “Double-Tax”
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IRD: The Good News Is. . .You can overcome these problems
The IRS gives you tools to do it!
1. Stretch the inheritance to spread the taxes over many years and continue tax deferral
2. Consider charitable beneficiaries
3. NUA – more about this in a few minutes!
4. Beneficiary receives an income tax deduction for estate taxes paid by owner
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Estate Taxes & IRD IRA values included in decedent’s gross estate
– Decedent’s estate pays the estate taxes– Beneficiary pays the income taxes
Unlimited Marital Deduction (since 1982)– Allows first-decedent-spouse to pass IRA to surviving spouse
without incurring estate tax
IRD income-tax-deduction for beneficiary’s– For the estate taxes attributable to the IRA
The Problem? ? ?– Decedent’s CPA vs. Beneficiary’s CPA
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IRA Value: $1,000,000
Estate Tax (40%): – $400,000
To Be Income Taxed: $600,000
Income Tax (40%): – $240,000
Net Inheritance: $360,000
Total Taxes: $640,000
% Lost to Tax: 64%
IRA Estate Tax Example:Theory vs. Reality
Net Remaining
Income Tax
Estate Tax
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Decedent Beneficiary
IRA Value: $1,000,000 $1,000,000
Estate Tax (40%): – $400,000 – $0
Net Value: $600,000 $1,000,000
Income Tax (40%): – $0 – $400,000
Total Taxes: $800,000
% Lost to Tax: 80%
IRA Estate Tax Example:Theory vs. Reality
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IRA Estate Tax Example:Theory vs. Reality
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
Net Remaining
Income Tax
Estate Tax
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Net Remaining
Income Tax
Estate Tax
Net Remaining
Income Tax
Estate Tax
IRA Estate Tax Example:Theory vs. Reality
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Estate Tax Exclusion:Then and Now
1997:$600,000
Per Person
2013:$5,250,000Per Person
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Stretching The IRD Deduction Recall the previous example:
– IRA Value = $1,000,000– Estate Tax (40%) = $400,000
Children inherit $1,000,000– Stretch = $80,000 per year for 30 years (over-simplified)– Estate Tax Deduction = 40%
• Calculation: $400,000 Estate Tax / $1,000,000 IRA Value– So 40% of each stretch payment is excused from income
tax until the deduction is used up
Each stretch payment is 40% income-tax-free for 12.5 years!– Unlimited deduction carry-forward– Can amend prior 3-years’ tax-returns
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Stretching The IRD Deduction
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
Taxable Tax-Free
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NUA – What is it? It’s the appreciation on the “employer stock” in your 401(k)
Upon separation from service, you can distribute your employer stock (in-kind distribution) from your 401(k) your brokerage account.
When you distribute your NUA, you only pay income tax on the value of the stock when it was originally purchased in your 401(k)
If you then hold the NUA stock for more than one year, you receive Long-Term Capital Gains tax treatment on any appreciation in the shares you sell
You can still roll the balance of your 401(k) into a Rollover IRA
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NUA – Benefits
Long-term capital gains tax treatment– All gains in excess of “basis” are taxed as Long-
Term Capital Gains– There ARE Step-Up-In-Basis opportunities with
NUA!
There is no “RMD” on NUA stock– No requirement to sell it after age 70½ – Defer the growth for the rest of your life!– Pass it on!
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NUA – 3 Components
Appreciation Outside the
Plan
Appreciation Inside the
Plan
Original Stock Price
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NUA – 3 Components
Any appreciation on your NUA stock that occurs after you’ve removed it from your 401(k) DOES
get a step-up in basis at your death
NUA appreciation that occurred while the company stock was in your 401(k) does NOT get a step-up in basis at your death, but is taxed at
long-term capital gains tax rates when sold
The original stock price becomes “cost basis” when withdrawn from the 401(k) and taxed
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NUA – 3 Components
Appreciation Outside the
Plan: $400,000
Appreciation Inside the
Plan:$400,000
Basis:$200,000
Long-Term Capital Gains
Tax Rates
No RMD’s
Step-Up in Basis
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NUA – Caveats Be careful about selling the employer stock in
your 401(k) and investing it in something else
– Even if you later “buy back” some employer stock, the newly purchased stock will have a new “basis”
• Functionally eliminates the value of the NUA distribution
– Continually remind your clients of the importance of NUA:
1. Before they roll their 401(k) into an IRA; and
2. Before they sell employer stock inside of their 401(k)
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Cross out the one you would least liketo get your money when you’re done with it.
XL.O. C G
Your money can go to threeplaces when you’re done with it:
3 Circles
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Client Questions & Value PropositionTwo questions:
1. Mr. & Mrs. Jones, if things go the way you have planned, what’s going to happen to your IRA?
2. Why don’t you give it to them right now?
Three-point value proposition:
3. We’ll keep your IRA in your Care, Custody and Control;
4. Potentially double, triple or quadruple the value to your beneficiaries; and
5. Take no additional investment risk in your portfolio
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1. IRA Income Tax Offset
IRA
RMD’s
Life Insurance(equal to taxes)
Taxes
Beneficiaries
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1. IRA Income Tax Offset
IRA$500,000
RMD’s
Life Insurance$200,000
Taxes
Beneficiaries$500,000
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2. IRA Income Tax Elimination
IRA
RMD’s
Life Insurance(equal to IRA)
Beneficiaries
Charity
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2. IRA Income Tax Elimination
IRA$500,000
RMD’s
Life Insurance$500,000
Beneficiaries
Charity$500,000
Tax-Free Total:$1,000,000
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The “Soft” Close
“I know you qualify for this program financially, but. . .
I don’t know if you qualify medically.”
You have time to think about it.
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Important Information
Policies issued by American General Life Insurance Company (AGL), a member of American International Group, Inc. (AIG)
The underwriting risks, financial and contractual obligations and support functions associated with the products issued by AGL its responsibility. Guarantees are subject to the claims-paying ability of the issuing insurance company. AGL does not solicit business in New York.
Policies and riders not available in all states. Keep in mind that American General Life Insurance Company and their distributors and representatives may not give tax, accounting or legal advice. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. Such discussions generally are based upon the company’s understanding of current tax rules and interpretations. Tax laws are subject to legislative modification, and while many such modifications will have only a prospective application, it is important to recognize that a change could have retroactive effect as well. Individuals should seek the advice of an independent tax advisor or attorney for more complete information concerning their particular circumstances and any tax statements made in this material.
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