How "The Retirement Plan Rescue" Saves a Ton of Taxes, Yet Creates Tax-Free WealthNovember 1, 2007
Raise your hand if you have a substantial amount in a qualified retirement plan (typically an IRA 401(k), profit-sharing plan or the like). For our purposes, substantial amount means $300,000 or more. The larger the amount, the bigger the problem or the better the opportunity (to apply the Retirement Plan Rescue and create tax-free wealth).
This is a bad-news/good-news article. First, the bad news, in the form of an example: Joe has $1 million (substitute your own real number) in his 401(k). Two taxes destroy Joe’s $1-million plan wealth. When Joe takes out just $1, income tax (state and federal) grabs 40 percent ($0.40), leaving $0.60. At Joe’s death (using 2011 rates) the estate tax steals 55 percent ($0.33) of the $0.60. What’s the result? The family gets only $0.27 out of every $1; the tax collector gets $0.73. If Joe dies with funds still in his 401(k), the tax collector still double-taxes the balance (as described above).
So, dead or alive, the tax collector will get $730,000 of Joe’s $1 million in his 401(k), the family only $270,000.
To make matters worse the IRS has, without warming, refused to favorably rule on a strategy called the “subtrust.” The use of this subtrust allowed us—depending on the client’s marital status, age and health—to turn that $270,000, as in Joe’s example, into a range between $2 million and $6 million, all taxes paid