IRA Rescue Using 72t
If you have not read the summary on IRA Rescue Using a three (3) pay Cash Value Life (CVL) policy, I recommend you read that first. I have a lot of information in that summary that is not included in this summary because it would be redundant. Click here to read.
Also, this isn’t the lightest reading material. If you don’t understand something you’ve read, please feel free to e-mail me at firstname.lastname@example.org or call me at 269-216-9978.
What is 72t? 72t is an exception in the tax code that allows people to remove money from an IRA before age 59.5 without incurring a 10% penalty on withdrawals.
In a nutshell, if you take a “series of substantially equal periodic payments” from your IRA that are typically calculated based on life expectancy, you only have to pay regular income taxes on the withdrawals and not the 10% early withdrawal penalty for withdrawals taken before age 59.5.
So, unlike the three- and five-pay IRA Rescue examples on this site, annual withdrawals from a 72t sales pitch will be smaller and made over a longer period of time.
Example—let’s see how this works by using an example. This example is a bit different than the others because, unlike other sale’s presentations I’ve reviewed, this one I couldn’t duplicate. I did a little research and found out that it was wrong from the get go. I decided to put the example on this site to warn readers that, even though you see numbers on paper, there is NO guarantee that they are accurate (my point being that you should always find a qualified expert you can trust to review any financial or insurance plan pitched to you).
-Client is 53 years old (under 59.5 which is why a 72t plan is used)
-$100,000 in an IRA
-72t withdrawal that “nets” an annual EIUL premium of $6,892.47 (leaving a balance in the IRA of $81,614 at age 60)
-EIUL premium (Cash Value Life premium) is paid every year until age 70
–$20,238 is borrowed tax free from the policy every year from ages 71-100
The remaining money in the IRA is assumed to grow at 5% annually. The total amount of taxable withdrawals from the IRA equals $301,967 (leaving a balance of $54,051 at age 100).
The total borrowed from the EIUL policy = $586,902, and there is a death benefit of $249,200 (tax free to the heirs at death).
What’s wrong with this example? The math is flat out wrong.
1) Using their numbers, to “net” $6,892.47 from taxable withdrawals from the IRA when assuming a 5% net rate of return during the 72t payout period, the client would have to be in the 11% income tax bracket. This is total nonsense.
If you make it more real world (like putting the client who is probably still working in the 25% income tax bracket), the amount available in the IRA at age 60 would be approximately $70,000 (not $81,614 as listed in the PowerPoint presentation).
2) The EIUL numbers in the presentation can’t be recreated. I called the insurance company the marketing organization used for this presentation and spent 20 minutes on the phone with them trying to recreate the numbers. We tried everything. In the presentation I reviewed, it states that the cash surrender value of the policy is $140,326 at age 70. To get that type of cash value, we had to use a low crediting rate (below 6%). When keeping that crediting rate, we could only generate only $9,549 in borrowing from ages 71-100.
In order to create $20,238 in borrowing used in the sales presentation, we had to use “default” numbers (an 8.5% crediting rate and a 4.25% borrowing rate). These numbers are about as aggressive as you can get (the 4.25% lending rate is not fixed and assumed for 29 years of borrowing a 4.25% positive loan arbitrage on borrowed funds. Considering that the historical average of lending rates on these types of policies is over 7%, this is essentially lying to clients to make this sale).
3) I tried to recreate the taxable IRA distributions from their presentation, and I couldn’t come anywhere close. I started with their given (and artificially high) value of an IRA balance of $81,614 at age 60. Keeping in mind that $47,072 has already been removed as RMDs (Required Minimum Distributions), the sales presentation said that a total of $301,967 in RMDs are taken out from ages 53-100.
That means that from ages 71-100 $254,895 had to be removed from the IRA. Oh, but let’s not forget that the presentation also said that there was a balance of $54,051 left at age 100.
I don’t know what fantasyland creator of this presentation was in when he/she created it, but there is no way to mathematically make these numbers work with their 5% net assumed rate of return on the balance left in the IRA. When I ran the numbers, the IRA ran out of money around age 81 (not age 100 with a $54,051 balance).
The IRA-rescue presentation discussed on this page came directly from an insurance company; and it was not only wrong, it was way wrong.
The presentation was posted on the website for an insurance marketing organization who marketed it to tens of thousands of insurance agents.
The above should tell you a lot about the insurance industry. It is not regulated well enough when it comes to “advanced” sales strategies, and many times the sales presentations or the life insurance illustrations you are looking at are flat out wrong (but sold as though they are accurate).
I hope you take two things away from reading the content of this website.
1) That IRA Rescue using life insurance does NOT work.
2) That insurance companies put out sales concepts for insurance agents to sell that are not always accurate.
3) That the consequences of believing insurance agents, insurance marketing organizations, and/or insurance companies can have devastating financial consequences.
4) That you better find someone you can trust who knows what he/she is doing to make sure you are not making one of the biggest financial mistakes of your life.
If you’ve been pitched an IRA Rescue plan, e-mail me at email@example.com or call me at 269-216-9978; and I’d be happy to further discuss why you shouldn’t use this strategy.
If you were already talked into and implemented this strategy, contact me; and I’ll refer you to a personal injury attorney who specializes in these cases who will try to get your money back.