Solving the Challenge of a Stretch IRA

While the recently passed SECURE Act 2.0 is generating a lot of conversation in retirement planning circles, it has not had near the impact in the life insurance segment that the original SECURE Act did when it was passed in late 2019. The primary impact of SECURE 1.0 in the life insurance sector was the significant change to Stretch IRA rules, making inherited IRAs even more of a tax challenge for beneficiaries. Read on to learn more about a strategy to work with both G1 and G2 for a comprehensive solution!

Challenges Faced by G1 IRA Owners and Beneficiaries

In an ironic twist, planning opportunities stemming from SECURE 1.0 focus not as much on the taxes paid by beneficiaries but on the “G1” IRA owner who has had the good fortune to accumulate a sizeable qualified plan balance and the ability to fund a traditional IRA Maximization strategy involving current distributions to fund a life insurance policy with far more favorable tax treatment. This presents some planning obstacles for all involved, including:

• G1 IRA owners, who may not be concerned about the tax implications for their beneficiaries, believe that they are “getting enough” simply by inheriting any assets not consumed during G1’s lifetime net of any taxes.
• Even if G1 owners do care about the tax issue, they may not be insurable, eliminating the viability of the strategy.
• For those clients that execute traditional IRA Maximization, there will almost certainly be a remaining qualified plan balance that will be heavily taxed upon passing to G2.

This last issue, the remaining balance inherited by G2, has two components:

• Income taxes due on the inherited amount over the ten-year period mandated by SECURE 1.0.
• Taxation of any gains on the net proceeds that are then invested.

How Life Insurance Can Offset Stretch IRA Taxation

Fortunately, a life insurance strategy focused on G2 can easily solve many of the challenges above. Establishing a permanent life insurance policy as part of G2’s retirement planning approach can avoid the taxes that would be due on gains from other asset types. A portion of the inheritance funds this policy, and several design elements must be considered to render it maximally effective.

Choosing the right face amount

Consider using a face amount over the minimum required to accommodate the portion of the inheritance allocated to the strategy. The “balanced” approach to the design will also increase any amounts available via accelerated benefit provisions included in the base policy or added via rider, strengthening G2’s care planning strategy.

Using participating loans for tax efficiency

The availability of participating loans early in the policy could allow for higher funding levels. Subsequently, a policy loan could be used to pay taxes due in April of the following year rather than holding a portion of the proceeds back in anticipation of future taxation.

Addressing timing and insurability

While the fact that there is a future inheritance may be known relatively early on, the timing of the event is unknown. This could present a problem if there are insurability issues for G2 that present themselves at the time of the inheritance. The solution to this challenge is to put the insurance in force on G2 early in the process, anticipating future inheritance. Doing so eliminates insurability as a future unknown and would also become part of G2’s overall retirement planning.

The Long-Term Benefits of Combining IRA Maximization and Life Insurance

Having a tax-favored source of retirement income above and beyond the ability to accommodate the inheritance strengthens the resilience of their overall retirement plan. If this approach is pursued, using a policy that faces an amount higher than the minimum required for G2’s premium budget at inception creates the capacity to accommodate future inheritance.

While this strategy has been described as a way to solve the issue of being unable to execute a traditional IRA Maximization strategy, using these two strategies in concert would be maximally effective in reducing IRA taxation and minimizing G2’s tax burden on a forward-looking basis. This “second sale” to G2 in an IRA Maximization strategy can also be used to prospect up or down the family tree, depending on where the original client relationship lies.

Taking the Next Step in Strategic IRA Planning

Planning for the impact of SECURE Act 1.0 and 2.0 requires a proactive approach that balances tax efficiency and wealth transfer strategies. At LIFE Brokerage, we specialize in exactly that — helping advisors craft personalized, tax-efficient retirement and estate planning solutions. With expertise in medical underwriting, policy structuring, and tax-efficient wealth preservation, we help you provide clients with strategies unique to their specific financial goals.

Want to explore how more precise planning can strengthen retirement goals? Contact LIFE Brokerage today to learn more about turning complex financial hurdles into complete peace of mind.

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