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Convert Your IRA Into A Gift To Heirs

Tis the season for giving.  Well, here is an idea that some folks may really love.  How to multiply what their non-spousal relatives can inherit from an IRA.


What is one of the frustrating things about IRAs?  Getting them out of the IRA without paying a huge pile of taxes in the process.


Over the years, I’ve suggested strategies such as multi-year ROTH conversions.  The secret is to maximize withdrawals to hit lower tax rates.  If you take out too much all at once, it can bump you into high tax rates and make the conversion process painfully tax expensive.


Another strategy I’ve discussed was using a CRT (commonly called “CRAT”) where a designated charity receives the remainder of the IRA at the owner’s death and the designated beneficiaries receive annual distributions (like annuities).


Well, here is another unique solution.  Life Insurance.  And no, I was not prompted by Life Insurance Agents to write this article, although I bet many will print it and use it for marketing.


There are some key issues.  First, you want to be between 59 ½ and 73 years old.  The younger the better and the better health you are in works to your advantage.  You take out distributions from the IRA, pay the tax and use the net proceeds to purchase some LARGE life insurance policies.  Put enough in so the future dividends will pay all future premiums.  The industry calls this “Single Premium Whole Life Policies.”


Think of the multiplying factor here.  Let’s say you’re 60 years old and you take out $100,000 in IRA, pay $25,000 in tax and use the remaining $75,000 to purchase a Single Premium Whole Life Insurance policy.  At your death, that policy would pay about $400,000 to your named beneficiaries … TAX FREE!!!!


There are some pitfalls to this.  There is no guarantee that the single premium is really all that’s needed to cover that policy for the rest of your life.  Also, if you are not in good health when purchasing the policy, the coverage amount may be less.  But, even if the payout is only $200,000 instead of $400,000, that is still a good deal, especially if your health is poor and you may not live that long anyway.  Obviously, the older you get, the smaller the policy payout will be, so this works best for younger old folks.  If you live long enough, inflation will eat into the buying power of a fixed life payout.


Have you heard?  Isaiah 9:6-7 says, “For a child is born to us.  A son is given to us; and the government will be on his shoulders.  His name will be called Wonderful Counselor, Mighty God, Everlasting Father, Prince of Peace.  Of the increase of his government and of peace there shall be no end, on David’s throne, and on his kingdom, to establish it, and to uphold it with justice and with righteousness from that time on, even forever.  The zeal of Yahweh of Armies will perform this.”

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