IRA Rescue Using a Five Pay Cash Value Life Policy (CVL)
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.
How does IRA Rescue work?
1) Take some, if not all, of the money out of your IRA over a five-year period (try to do so in equal installments).
2) Pay taxes (and penalties if under 59.5 years old) on the distributed money from the IRA.
3) Take the remaining money each year and fund a Cash Value Life (CVL) policy.
4) Let the money grow in the CVL policy tax free.
5) Remove money tax free from the policy when needed for retirement income.
On paper, I can make this work. However, in the real world, it will be an epic failure that will cost thousands of unsuspecting people some of or most of their retirement savings.
Example—the client is age 61, and she has $500,000 in an IRA. The goal is to show the client why it is better to cash in the IRA over a five-year period at $100,000 a year and fund a Cash Value Life policy (with the after-tax remainder) vs. letting the money grow in the IRA and take taxable distributions from ages 77-86.
Once I had an agent forward me this illustration, it only took me a few minutes to run the numbers illustrating why this is a terrible idea.
Where do you get the money to pay taxes on the distribution? Well, of course, you take “tax-free” loans from the life insurance policy to pay the taxes. This way an insurance agent can sell the concept without any other out-of-pocket costs and with the full amount of money from the IRA going into the life insurance policy.
Therefore, the client would borrow $40,000 a year from the life policy in years 2-6 to pay the taxes on distributions from the IRA (assuming a 40% income tax rate).
Then the client would let the cash in the policy grow and would be able to borrow out $40,000 a year tax free from the life policy from ages 77-86 (ten years).
Selling IRA Rescue in a Vacuum—one of the reasons that this piece of garbage concept can be sold to unsuspecting clients is because it’s sold in a vacuum many times. By that, I mean that the client is not given anything to compare the life insurance illustration to; and, if they are, the life illustration is so aggressive in its assumptions that it’s not worth the paper it’s written on.
Is IRA Rescue for this client a good idea? Absolutely NOT; the math is crystal clear!
What if the client took the $500,000 in the IRA and put it into the best Fixed Indexed Annuity (FIA) with a guaranteed income rider?
If you are not familiar with FIAs with guaranteed returns that are couple with guaranteed income for life riders, click here. Some of these products are fantastic but sadly are not used by most advisors who work for a broker dealer like Wells Fargo, Ameriprise, Mass Mutual, Guardian, Merrill Lynch, Edward Jones, etc.).
How much could my example client receive starting at age 77 as her guaranteed income-for-life benefit?
Approximately $113,000 a year every year pre-tax for the rest of her life (not just for 10 years).
If the example client is still in the 40% tax bracket in retirement (which may or may not happen), she would have $67,800 left after tax (every year for life).
Which do you like better?
$40,000 tax free from ages 77-86 (NON-GUARANTEED from an IRA Rescue strategy or
$67,800 every year for life GUARANTEED (which could be until age 100+).
There is no comparison. But the sales pitch made so much sense right?
-IRAs are tax hostile
-It’s prudent to move the money now to something that can grow tax free and where the money can come out tax free.
-Money in an EIUL is protected from market downturns.
Etc. Etc. Etc.
I don’t care how good it sounds in theory. In the real world, this concept is a sure fire loser.
The quick summary with this concept is that it’s a piece of garbage and should not be used. It’s a disaster waiting to happen; and if you’ve been pitched this nonsense, e-mail me at firstname.lastname@example.org 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 case who will try to get your money back.