READY? EVERYBODY ON your feet. A long, standing ovation for the Internal Revenue Service. For my entire professional life – 50 years – I have been convinced that the guys who write IRS regulations have only two buttons: complex and more complex. Finally, hurrah! Someone invented a simple button.
The new proposed regulations, involving the distribution rules for all qualified plans and IRAs (collectively “plans”), are a delight. Simple. And best of all, very beneficial whether you:
1) are 70 years old (the age at which you must start taking distributions) or older, or
2) are still accumulating funds in your plans.
What you are about to read should change your financial and tax planning for life, and for the better. Make copies of this column and pass it on.
The IRS has created a new easy-to-use table that shows how to determine the required minimum-dollar amount of your distribution each year (after you reach age 70). Here’s a sample of this all-important table:
Example: Joe reached age 75 in 2001. He was taking distributions under the old rules. The balance in his IRA (actually an old rollover IRA) at the end of 2000 was $400,000. Joe’s minimum distribution for 2001 is $18,349 (21.8 divided into $400,000). Hey, that’s only 4.587% of his $400,000 account balance. So, if Joe’s IRA earns more income than the distribution amount, his IRA balance will grow,not shrink.
The rules determine the smallest amount that must be withdrawn each year. You can withdraw more (but not less) in any year. If your spouse is 10 years younger than you, you can lower the dollar amount to be distributed.
More good news: As of Jan. 1, 2002, you must use the new rules.
OK, now the big question. What should you do now with your plans? Whether you are 35, 75 or any other age? I must confess, we began to search for an answer even before the new regulations fell in our lap. Why? Because, the uncertainty of the stock market (not to mention the market’s devastating downturn) caused readers of this column to call for new ideas.
Following is a two-step plan that typically will multiply the dollars ultimately distributed by your plans 10 times or more:
Step 1. Invest all or a portion of your plans funds so that the plans are guaranteed an income with a larger percent return than the required minimum distribution percent (see table above).
Is there such an investment? Yes! Insured Viatical Settlements. Viaticals guarantee annual returns of 7% to 11% per year depending on the number of years the funds are invested. Minimum investment is $100,000; no maximum. Actuarial returns of 18% to 26% are available for larger investments ($5 million on more).
Diversify your portfolio. The older you are – particularly age 70 or older – the more you should lean in the direction of a guaranteed investment return (like a viatical) that exceeds the required minimum distribution percent.
Step 2. If you are insurable or need life insurance you can reap a bonus. For example, it is easy to multiply $500,000 in plans to $5 million (or more), depending on your age and insurability.
The concept is simple: Use the guaranteed income to pay the insurance premium (ultimately, creates tax-free wealth at your death), yet your plans continue to grow in value. The new distribution rules assure you the funds will be there, to take care of your premiums and your retirement payments
You owe it to yourself and your family to retain an experienced professional to help you explore how to bring insurance coverage (it can be second-to-die) and viaticals into your qualified plan and IRA life.
Irving Blackman is a partner in Blackman Kallick Bartelstein, 300 S. Riverside Plaza, Chicago, Ill. 60606; tel. 312/207-1040, or via e-mail at [email protected]