Super-Charged Distribution Solution® for Qualified Money

Michael C. Crawford  -  Mar 23, 2017    

The situation inevitably arises for every executive with a qualified plan. What is the best strategy to mitigate the tax impact of distributing qualified money? What provides a known guaranteed life-long benefit? An answer: create a new profit sharing plan, rollover the existing money and purchase an indexed universal life insurance in the new plan. The strategy is more fully outlined below.

Why put a tax shelter in a tax shelter?

The answer is simple and straightforward. First, qualified plans are fully includable for estate tax purposes, so removing those monies reduces the estate tax impact. Second, the idea of this concept is to eliminate tax on approximately 35-40% of the asset, not grow the asset to produce greater taxation.

At the time of retirement, a plan participant has three basic options:

  • Distribute the plan benefit
    • Distributing the plan benefit causes an immediate taxable event and benefit becomes non-qualified and remains part of the estate for estate tax purposes.
  • Rollover the plan benefit into an IRA
    • Rolling over the qualified money into and IRA causes no immediate tax event, but the tax obligation significantly increases over time and minimum distributions must be taken at age 70 ½.
  • Rollover the plan benefit into a new qualified plan
    • Rolling over the existing plan benefit into a new plan and purchasing a unique Indexed Universal Life (“IUL”) product results in:
      • No immediate tax event,
      • Greatly reduced tax obligation,
      • Guaranteed benefit and
      • Proceeds are excluded from estate tax (assuming policy transferred to an ILIT).

It is important to note that the IUL policy has a market value, calculated using the IRS safe harbor P.E. R. C. calculation, that is lower than the premiums paid.

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Michael C. Crawford, CFP® CLU® ChFC®

Michael Crawford of Red Bank NJ is the strategist for this article. For more information on this strategy and a customized analysis, please contact Michael Crawford CFP, CLU, ChFC at 1-888-399-5169. Michael Crawford has experience servicing Middletown, NJ, Red Bank, NJ and surrounding areas. Crawford the founder of Nationwide Wealth Management and a principal of Nationwide Valuations.

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