From: "Brent D. Gardner, ChFC" 
Newsgroups: misc.invest.financial-plan
Subject: Re: Taxes on 401k into Rollover IRA
Date: Sat, 10 Jan 2004 09:30:23 CST
	iQBVAwUAQAAaj/l/I4+O31e5AQH27wH/TJNKjbdmrRz48zoL7c9Yb/86HDF8RXpi
	mQTyU11OQqQ2OKI6Y/3MXkw+F2UgHPCEMQx0SkBPPVPTdDlMRjUsUA==
	=mtP7

"Rich Carreiro"  wrote in message
news:uoetboobn.fsf@animato.arlington.ma.us...
> I'm not Brett, but...

Sometimes I wonder if some readers make my n's look like t's.  =)

> If that account has only been funded with rollover (i.e. no annual
> contributions have ever been put into that account), you retain the
> ability to roll the monies in that account back into a 401(k), etc.
> The primary tax advantage of that in some cases it can give you a way
> to make arbitrary withdrawals at age 55 without penalty instead of
> having to wait until age 59.5.  But that's irrelevant to you, as
> you're 67+.
>
> The benefits of rolling an IRA back into a 401(k) are:
> * Generally better creditor protection.
> * Being able to take a loan against the money
>   (one can argue if this is really a benefit :-)
> * Potential ability to make arbitrary withdrawals
>   as soon as age 55.
> * Ability to play the Net Unrealize Appreciation game
>   with company stock in the account.
>
> The costs of doing this are:
> * Limited to what the plan allows you to invest in.
> * May be unable to withdraw money without quitting
>   the company, even if there's an emergency.

Good summary. I'll add two points, one minor, one major.

Minor point: Newer plans are allowing brokerage windows or portals, so one
can invest in just about anything, if they don't mind paying some additional
fees.

Major point: One advantage that people rarely think of in advance, and why I
discourage commingling under any circumstance, is the ability to purchase
life insurance in a qualified plan. When one is young, and saving for
retirement, this might not be much of an issue.

But, if you're already retired, and you have accumulated a high net worth,
say $3,000,000 or more, and you want to pass on to your heirs the bulk of
your estate, you probably need some permanent life insurance. One of the
problems life insurance agents have in this market is "Finding the premium."
At older ages, life insurance costs more than it does when one is younger.

For example, a male age 35, who doesn't smoke cigarettes, can buy $100,000
of whole life for $1,197 per year. That seems expensive, compared to term,
but the whole life premium never goes up, and for estate liquidity purposes,
we need a permanent solution. At age 75, that same policy will have a
premium of $10,616 per year. At age 85, the premium is $22,179 per year (and
that's assuming one can even qualify at those ages -- ratings are not
uncommon, which makes the premium even higher). That's a little bit more
than the premium for the 35 year old.  =)

Even people with a high net worth may find those premiums steep, especially
when they come out of income, or one must pay taxes on a distribution from
an IRA or QP to pay it.

Fortunately, there is an alternative -- using money in a qualified plan to
purchase a policy. Generally, one can use up to 50% of contributions to the
plan to purchase whole life (or 25% to purchase term and universal life),
but this doesn't help when one is already retired, and not making any
contributions. Using an often forgotten tax code, one may use upwards of
100% of "aged money" in the plan to purchase whole life insurance. Various
ownership transfer strategies, such as a sub-trust, can remove the "net
amount at risk" (that's the death benefit, less any cash surrender values,
or interpolated policy reserves) from the qualified plan, eliminating double
taxation of death benefits.

How does one accomplish this when they are retired and only have an IRA?
They set up a small business, and establish a Profit Sharing plan under IRC
Sec. 401, and then roll the IRA into the plan. There's some hoops one needs
to hop through, but nothing extraordinary or difficult. I'm just summarizing
here.

But what if you've commingled money?  Then this strategy won't work for you,
at least not with the commingled money.

A lot of people don't know this, but one can buy life insurance inside a
403(b), as well. They can also purchase it inside a 457 deferred comp plan,
and a Keogh, or HR-10 plan.

Qualified plans are often the best source of premium dollars in these
situations, because of tax leverage. If you're going to have to pay an
expense, pay for it with the cheapest dollars (lowest tax). A dollar in the
bank is worth 50 cents at death, roughly. A dollar in a qualified plan (or
IRA) is worth 20-30 cents at death, because of double taxation at death.

I have some really neat software that illustrates how one can leverage
qualified plan / IRA assets where one has an estate liquidity problem. There
are some fantastic planning strategies one can employ, as long as they
haven't commingled IRA money along the way.

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(ChFC), designations owned and exclusively offered by The American College,
signify the highest standards of academic study and professional excellence
in the financial services industry.