Posts

Stop Kowtowing To Your Banker

/in /by

The Daily Herald Business Ledger

BANKING AND FINANCE: published July 19, 2019

by Chris Everett

Last week while listening to a client complain about the hoops his banker makes him jump through for an equipment loan, I asked him why he doesn’t do his own financing?

“I don’t have $125,000 laying around,” he said.

But he DID have it. He just forgot.

He forgot about the $300,000 growing in his cash value life insurance policy.

“But that’s for my retirement!” he said. “I’m going to get a tax-free pension out of that when I retire!”

I told him it was possible to have those insurance dollars do more than one job simultaneously. In fact, every dollar he was contributing to his cash value life insurance policy was already doing more than one job: It was creating a growing tax-free death benefit for his beneficiaries.

A lion’s share of the death benefit was available to him for long term care expenses. If he became disabled, the premium would be paid by the insurance company. If he needed a cash withdrawal or loan, he could get it in about 5 days. This safety cash was earning at least 4% plus a dividend tax free. Banks are not paying that. And when interest rates rise, the rate on this cash-stash would rise as well.

But for the immediate issue at hand, his need to borrow $125,000, I reminded him that a loan against his life insurance cash value is not a loan of that cash value. It’s a lien. Therefore, his cash value would continue to enjoy uninterrupted compounding. That’s “breaking news” right there. But I digress.

He smiled when I reminded him that the borrowing cost in his insurance policy was lower than the bank rate.

And while a lower interest rate may be enough motivation, the beauty of this strategy goes further than that.

Most obvious — You don’t have to kowtow to a bank any more to get the money you need. If the money’s there, the insurance company doesn’t care why you want to borrow. They don’t even care if you ever pay the loan back. The loan is collateralized by your cash value. Of course, it’s in your best interest to pay the loan back. Especially, in his case, since he wants to access his cash values in retirement as tax-free income.

Retirement Advantage — What if he ends up not needing to or wanting to take tax-free retirement income from the policy as planned? Those cash values give him another advantage.

What if he set up regular withdrawals from his market-based retirement account and the market corrects? He can call us to stop the regular withdrawal and instead, take the cash from his life insurance policy … tax free. Because it’s tax free, he can take less than what he needed to take from his Taxable Retirement Account.

Now he can wait for his retirement account balance to recover before he takes another withdrawal.

Most attractive — You can design the payback any way you want. For example, you might decide on a five, 10 or 15-year payback structure or even longer. You can even amend the payback structure any time you want — a great business advantage if or when you experience a cash flow challenge.

If you die during the loan, the insurance company would simply deduct the remaining debt from the death benefit.

Tax deduction — You can still deduct the cost of the loan as a business expense in the same way you would if you borrowed from the bank.

Interest Rate Changes: The policy loan rate remains constant, at least in his case. There are policies with variable rates, therefore understand your policy.

My client thanked me and walked out of the office with a bit of a pep in his step. I love what I do!

The “Not So Secure” SECURE Act

/in /by

JOURNAL & TOPICS

Journal & Topics Media Group | Serving Chicago’s Great Northwest Suburbs

THIS WAY TO WEALTH: published May 2020

by CHRIS EVERETT

The SECURE Act, enacted January 1, 2020 stands for Setting Every Community Up for Retirement Enhancement.  Sounds positive, right? 

PRO: You used to be forced out of your pre-tax accounts like IRAs, 401ks, TSPs, etc. when you were 70½ to take required minimum distributions, commonly referred to as RMDs.  That was either good or bad depending on your other income.  Now, you can wait until you are 72 before taking required minimum distributions. You have until April 1st following the year you turn 72.

This only applies if you turn 70 ½ in 2020 or later.  If you turned 70 ½ in 2019, you will not be able to delay until 72. And, if you turn 70 ½ in 2020 and are still working, you can make IRA contributions.  When you reach 72 though, and are still working, you will be required to take an RMD.  For example:  Lois is 72 in 2020 and working, earning $55,000 per year.  She has an IRA worth $400,000.  In 2020, she can make contributions of $7,000, but she is still required to take an RMD.

CON: Politicians are such master manipulators. According to https://usdebtclock.org/current-rates.html, As of  May 3, 2020 every tax payer owes $314k for their share of the U.S. public debt.

The SECURE Act is just a way to get your beneficiaries to give up more of their inheritance.  This should have been called:  The Way We Get More of Your Money And Don’t Care If It Impacts You Negatively Act. 

The stretch provision has been eliminated for non-spouse beneficiaries.  That means inherited pre-tax retirement accounts must be distributed within 10 years, instead of over the beneficiary’s life expectancy.  This change will likely increase taxes for beneficiaries since distributions from these accounts are taxed as ordinary income.

While there is no distribution requirement within those 10 years, giving some flexibility on timing of your distribution, be careful.  Remember, when you take the distribution, it’s taxable.  If you are a non-spousal beneficiary, you have several things to consider.  Your own income for one.  Those distributions are added to your regular taxable income.  If you inherit $500,000, and decide to spread your withdrawals over ten years, that’s an extra $50,000 of taxable income, not accounting for growth.  That will place most beneficiaries into a higher tax bracket. If you are parents of college bound students, that inheritance distribution may cause you to lose out on need-based financial aid.  On the bright side, if you inherit after you retire, it may be a welcome ten-year supplement. 

Some beneficiaries are excluded from the 10-year rule. Spouses are because a deceased spouse’s IRA becomes the property of the surviving spouse. If you are disabled or chronically ill, you can still stretch distributions over your lifetime.  If you are less than 10 years younger than the decedent, you can also stretch distributions. If you inherit the pre-tax account as a minor child, you can stretch distributions until you reach the age of majority, which in Illinois is 18.  Imagine an 18-year-old inheriting $500,000.   God help them.

Obviously, get good tax counsel and hire a fiduciary to help you mitigate the negative impact of The Secure Act on your family.  Yes, there’s help but you need to do some strategic planning.