Life Insurance: Is It Right for Your Estate Plan?

Insurance salesmen are often maligned and are frequently the butt of some pretty bad jokes. At the risk of being categorized with those poor men and women, I’ll tell you that I don’t hesitate to recommend life insurance to many of my own clients after evaluating their estate planning needs. Why? Because when it is appropriate and structured properly, life insurance has a number of benefits that make it an excellent and possibly the best wealth transfer strategy.

If you read the earlier chapters, you learned that legislative changes since 2009 mean that federal estate tax is an issue for far fewer taxpayers than in the past. The IRS wasn’t feeling guilty about charging estate tax on your assets, they just gave more people a reason to worry about a completely different problem called federal income tax. Chapter 12 of Retire Secure! delves into some techniques that show how life insurance can be used to help minimize the damage to the estate caused by income taxes at death. It also discusses how life insurance can be used to provide liquidity for a number of estate settlement needs, and also how it can be used to benefit the estate if there is a disabled beneficiary. While life insurance can be extremely beneficial it is important to remember that in situations where taxes and other estate needs aren’t a concern, the cost of the life insurance – especially for a senior citizen – might not be worth it.
Life Insurance, Retire Secure, James Lange

In earlier chapters, there are several references to the possibility that Congress may eliminate the benefits of the Stretch IRA. Chapter 12 introduces some new ideas regarding the inclusion of a Charitable Remainder Unitrust (CRUT) in certain estate plans. How do you think your children would react if you named a charitable trust as the sole beneficiary of your retirement plan? They might react very favorably when they find out that, in the long run, they could end up with a lot more money.

This is a very complicated estate planning technique that is not appropriate for everyone. Under the right set of circumstances, though, life insurance can be a very effective addition to an estate plan – especially if the owner of the IRA has always supported charities. Would you like to endow a chair at your local university or symphony orchestra, or perhaps provide financial support for your favorite hospital or religious organization long after your death? Read Chapter 12 to learn the basics of this strategy, and how life insurance can play a key role.

Stop back soon for an update on some really big news about the possible death of the Stretch IRA.


Jim Lange, Retirement and Estate Planning A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

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Tax Free Roth IRAs: Don’t Believe Everything You Read

Tax Free Roth IRA, Don't Believe Everything You Read, James Lange, The Lange Financial GroupMy wife recently told me that she didn’t think that there was anything that could keep me from blogging about my upcoming book, Retire Secure!  While she was joking, she was also right, I thought. But then, an article that was published in US News and World Report yesterday (April 20, 2015) was inaccurate on so many points that I could not let it go without commenting on it. I submitted a comment to the article and asked that the article be retracted. I can only hope that the magazine will publish a retraction, and quickly, before an unsuspecting reader takes the writer’s recommendations to heart.

The writer is a certified financial planner and registered investment advisor, as well as a published author, from Virginia. He begins by telling readers about Roth IRAs. He says that you can contribute $5,000 to a Roth IRA – that limit was increased $5,500 in 2013. If you have a Roth account in your 401(k), he claims you can add $6,000 to it if you are over 50 years old. (If you are over 50, you can add $24,000 to a Roth 401(k) in 2015this is made up of the $18,000 basic contribution limit plus a $6,000 “catch-up” contribution limit.) He claims that, if you contribute to a Roth, “the money you invest will be taxed”. (Everyone knows that, if you follow the rules, Roth accounts aren’t taxable, right? I sincerely hope that what he was trying to say was that there is no tax deduction for Roth contributions!) Then he tells readers that, after age 59 ½, “when you begin to take distributions” from the Roth, they will be tax-free”. That statement is not inaccurate, but it does omit the very important fact that your contributions can be withdrawn from a tax free Roth IRA before age 59 1/2.  (Earnings on your contributions are treated differently.) It is the traditional IRA that, in most cases, you cannot withdraw from without penalty until age 59 1/2.

The worst advice, though, came when he tried to present the pros and cons of Roth conversions.

He recommends that you take one of your existing IRAs or qualified plans and convert the entire thing to a Roth, but then warns you that you will need to pay tax on that entire conversion at once.What is omitted here is that, if you convert your entire account at once, your tax bill may be so large that you move up in to a higher tax bracket. It would be imprudent to make such a recommendation to a client! What generally makes more sense is to make several smaller conversions, in amounts that ensure that you stay in the same tax bracket. He recommends not making tax free Roth IRA conversions later in life, on the basis that you will not live long enough to enjoy the tax-free benefits. Tongue in cheek, I might argue that that’s a risk at any age, but even if you don’t live long enough to enjoy them, the tax-free benefits to your heirs, who are likely much younger than you, are indisputable. The strangest statement against Roth conversions, I thought, was that “you will potentially have to write a big check to the IRS”. It is true that you will have to pay tax on any amount converted from a traditional to a Roth IRA. But even if you don’t need your retirement money to live on, you will have to start taking withdrawals from your traditional IRAs every year once you turn age 70 ½. Those mandatory withdrawals will be taxable, and at that point you will be writing a big check to the IRS. The question is, does it make more sense to make Roth conversions while your retirement account balance is likely to be smaller, pay tax on a smaller amount of money, and generate tax-free income on all of the future earnings on the converted amount? Or, does it make more sense to wait twenty or thirty years, let the taxable traditional IRA grow as large as possible, and then pay the tax on the larger mandatory withdrawals?

In this age of electronic communications it’s easier to offer opposing points of view, and I have to admit that I wasn’t surprised when I saw the sheer volume of dissenting opinions that the article produced within hours of its publication. I also wondered if there were other individuals who read it and took the advice to heart. That made me think of another question – what would my readers have thought about that article, especially after receiving such dramatically different advice from me? Who are you supposed to trust?

My advice to you is this – trust yourself first. If a financial professional says something that does not make sense to you, ask for clarification. If the answer you are given still doesn’t make sense to you, trust your instincts. Get a second, third, fourth or fifth opinion before you act. Or, look up the answer yourself. There are number of resources that my staff and I use all the time, that are also available to you.   These include the Internal Revenue Service’s website (, the Social Secure Administration’s website (, and the website established by Medicare ( Educating yourself about your options is the best defense against making a potential mistake that you have available to you.

I’ll get off my soapbox now. Stop back soon for another update on my book.




Important Tax Birthdays

The “Happy Birthday” song is traditionally sung to celebrate the anniversary of someone’s birth. In 1998, the Guinness Book of World Records proclaimed that very song as the most recognized song in the English language, followed by “For He’s a Jolly Good Fellow.” Its roots can be traced back to a song entitled, “Good Morning to All,” which was written and composed by American sisters and kindergarten teachers, Patty and Mildred Hill in 1893.

Throughout the years, many other versions and styles of the “Happy Birthday” song were created. One of the most famous versions of this song was sung by Marilyn Monroe to then U.S. President John F. Kennedy in May 1962. Another famous version of the song was sung by John Lennon and Paul McCartney. They shifted the melody to a traditional rock song and increased its complexity and style on their unforgettable double album, “The Beatles” (commonly referred to as the “White Album”) in 1968.

Traditionally, birthdays are fun events, but when it comes to taxes, birthdays have a special place. From a tax standpoint, birthdays are not always “fun” and very often are different and not created the same.

The table below contains some important tax birthdays (after the age of 50) that can dramatically affect your income taxes:

It is very important that as you plan for or reach any of these milestone birthdays that you are working with a qualified financial advisor who can review your specific situation to determine what tax reduction strategies would be best for you.

Contact us today to discuss some of these strategies. If you are a Western Pennsylvania resident, schedule a free initial consultation with us by calling us at 412-521-2732.  Residents outside of Southwestern Pennsylvania should call for more information. Jim’s services are available via the phone or through the Internet. Send an e-mail to

Important Tax Birthdays

Some things to consider about your Retirement Plan

In 2013, the maximum 401(k) contribution is $17,500 (plus a $5,500 catch-up contribution for those 50 or older by the end of the year). If you are self-employed, you have other retirement savings options. We will review these alternatives with you when you come in for your appointment. One of my favorites for many one person self- employed businesses is the one person 401(k) plan.

In light of the new increased tax rates effective in 2013, plus the addition of the new Medicare surtax on Net Investment Income, higher income taxpayers may want to consider switching from Roth 403(b) and Roth 401(k) elective deferral contributions back to tax deductible contributions. The current savings may outweigh the benefits of tax-free growth on the Roth accounts. As mentioned earlier, the focus moving forward for higher income taxpayers is toward reducing adjusted gross income.

You can also contribute to an IRA for 2013 up through April 15, 2014. The maximum is $5,500 with a catch-up (for taxpayers 50 or older) provision of $1,000.

– Excerpt from Jim Lange’s 2013 Year-End Tax Report


The Clear Advantage of IRA and Retirement Plan Savings during the Accumulation Stage

If you are working or self-employed, to the extent you can afford to, please contribute the maximum to your retirement plans.

Mr. Pay Taxes Later and Mr. Pay Taxes Now had identical salaries, investment choices, and spending patterns, but there was one big difference. Mr. Pay Taxes Later invested as much as he could afford in his tax-deferred retirement plans—even though his employer did not match his contributions. Mr. Pay Taxes Now contributed nothing to his retirement account at work but invested his “savings” in an account outside of his retirement plan.

Please look at Figure 1. Mr. Pay Taxes Later’s investment is represented by the black curve, and Mr. Pay Taxes Now’s, by the gray curve. Look at the dramatic difference in the accumulations over time—nearly $2 million.

There you have it. Two people in the same tax bracket who earn and spend an identical amount of money and have identical investment rates of return. But, based on the simple application of the “Pay Taxes Later” rule, the difference is poverty in old age versus affluence and a $2 million estate.

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Retirement Assests, IRAs vs. After-Tax Accumulations

Retire Secure! Pay Taxes Later – The Key to Making Your Money Last, 2nd Edition, James Lange, page. xxxi

Roth vs Traditional

It’s been said that one of the two things that are certain in life is taxes. What the aphorists never provide, though, are the details. Understandably so: The push and tug of politics can make future tax rates unpredictable—as the “fiscal cliff” drama of late 2012 reminded us yet again.

Knowing what future tax rates will be would make life easier for retirement savers who wonder whether to contribute to tax-deductible traditional IRAs or to Roth IRAs. When it comes time to withdraw from an IRA, one type of account can be superior to the other, depending on what those future rates turn out to be.

The same dilemma applies to those saving in tax-advantaged “defined contribution” employer plans—such as 401(k), 403(b), and 457 plans—who are considering whether to contribute to a Roth 401(k) plan, if available.

And then there’s the question of whether to convert an existing account to a Roth IRA or a Roth 401(k). An insight into the future would help here, too.

But what do you do if your crystal ball is cloudy, as most are? You could consider diversifying the tax treatment of your retirement accounts.

Three “ifs”

The first step is to understand the IRS rules.

If a tax-deductible traditional IRA is of interest, you must meet income (and other) requirements: Details are at With this type of IRA, contributions reduce your taxable income and taxes on earnings are deferred. When you withdraw from the account in retirement, you’ll pay taxes on both the original contribution and the earnings. The same tax-treatment rules apply to tax-deferred employer plans.

If your income level disqualifies you from a deductible IRA, you can contribute to a “nondeductible” version. As its name implies, your contribution is after-tax; that is, it doesn’t lower your taxable income. Taxes, however, are deferred on earnings in the account until withdrawal.

If your income meets the guidelines for a Roth IRA, or if your employer plan includes a Roth option, you would also contribute with after-tax dollars. But you’d owe no taxes (including the new Medicare surcharge) on qualified withdrawals. And you won’t have to take “required minimum distributions” from your Roth IRA after reaching age 70½, or from your Roth 401(k) if you roll it over to a Roth IRA.

Three more “ifs”

If you believe your tax rate will decline in retirement, a traditional deductible IRA would be best. By reducing your taxable income, you’d minimize what you owe at the higher current tax rate and withdraw funds at a lower tax rate in the future.

On the other hand, if you believe that your tax rate in retirement will be the same as now or higher, consider a Roth IRA. You’d pay taxes on your income at the current rate and fund the IRA with after-tax dollars. But there would be no taxes on withdrawals.
But if you don’t have a strong view about future rates, you may want to diversify by holding both types of IRAs. “Future tax rates, like market performance, are difficult to predict accurately,” says Maria Bruno, a Vanguard investment analyst. “That’s why an approach that combines both traditional and Roth accounts is worth consideration. In retirement, you could then withdraw from whichever account minimizes the tax bite in any given year.”

A conversion conversation

The least painful way to achieve tax diversification is by setting up the accounts you want and contributing to them; you can have more than one type. Another option is to convert an existing tax-deferred retirement account to a Roth (assuming, in the case of employer plans, that this option is available).

For individual accounts, there are no income restrictions on the ability to convert some or all of a traditional IRA to a Roth. If you don’t qualify outright for a Roth, a two-step maneuver allows you to open a “backdoor” Roth IRA: First contribute to a nondeductible IRA; then convert it to a Roth.

The newest change, in January 2013, allows you to convert some or all of your balance in a tax-deferred employer retirement plan to a Roth 401(k). Be aware, however, that this is likely to be a distant choice: Plan amendments are required, which may not be implemented soon.

There is a price for conversion: taxes.

If you are converting an IRA or employer-plan account that has been funded with pre-tax contributions, you’ll owe tax on the amount converted. For backdoor Roths, no tax should be due on the conversion amount, assuming the conversion was done so quickly that earnings did not accrue. However, if you own other IRAs that you aren’t converting, you will owe tax based on a proration that factors in the balances in your other tax-deferred IRAs, including traditional, SEP, and SIMPLE IRAs, but not inherited IRAs.**

“To get the most benefit from a conversion strategy,” Ms. Bruno cautions, “you should pay the tax bill with funds outside of your retirement accounts.”

To Roth or not to Roth? That is the question 

How does today’s tax rate compare with the tax rate you expect when you make withdrawals? Here’s a rule of thumb.

Higher todayConsider a pre-tax traditional IRA or tax-deferred defined contribution plan account.
Lower todayConsider a Roth IRA or a Roth 401(k), if available.
UncertainConsider diversifying between account types.

Source: Vanguard.

* Withdrawals from a Roth IRA or a Roth 401(k) are tax-free if you are over age 59½ and have held the account for at least five years. Withdrawals from an individual Roth IRA taken prior to age 59½ or if you have held the account less than five years may be subject to ordinary income tax or a 10% federal enalty tax, or both. For withdrawals from a Roth 401(k) taken before age 59½ and less than five years from the first contribution, the portion of the withdrawal that is attributable to earnings would be subject to ordinary income tax and a 10% federal penalty tax.

**Coverdell education savings accounts are not mentioned because they are not technically IRAs. They are intended to support saving for education, not retirement.


  • All investing is subject to risk, including the possible loss of the money you invest
  • We recommend that you consult a tax or financial advisor about your individual situation.

Source: Vanguard

Mistake 10: Not Reviewing the Costs Before Splitting the IRA into Inherited IRAs

We have seen many cases where the IRA is held in the form of an annuity product, with the insurance company as the custodian. I have read many contracts that  impose costs or other expenses to split the account into Inherited IRAs for multiple beneficiaries. Please review your contract carefully to make sure there is no penalty before you make this election.

In the event you find out that there is a potential penalty, at least there is usually a solution:

  1. Retitle the account as an Inherited IRA with multiple beneficiaries, but keep it as only one IRA.
  2. Open up a self-directed IRA at a brokerage firm with the same title.
  3. Transfer the Inherited IRA from the insurance company in kind via a trustee-to-trustee transfer over to the new self-directed Inherited IRA account.
  4. Liquidate the annuity product that is held by the self-directed Inherited IRA account (there should be no penalty or income taxes because the annuitant passed away and it is being paid out all at once and into another IRA).
  5. Once the proceeds come into this new self-directed Inherited IRA, then split it into the various Inherited IRAs for each of the beneficiaries.

Sounds like a lot of work? It is, and that is the reason why you need an advisor you can trust to guide you through the process and you will most likely want to review all of your IRAs at this time in order to avoid having all these problems in the future.

Mistake 9: Waiting until the last minute to make changes on the IRA.

Many advisors think that the IRA custodian will act promptly when dealing with these matters.  However, many of these custodians are not familiar with all of these new rules and tax laws and will consider them an “exception.” They will often run these “special cases” through their legal department and it often takes a lot longer than you might think in order to finalize all of the paperwork. It often takes three months or longer for the IRA custodian to transfer the accounts and get everything retitled properly. This is especially true if you have multiple IRA accounts. Therefore, it is wise to make the decisions and final changes regarding the splitting of the IRA as soon as possible after the person passes away in order to give the  IRA custodian enough time to process all this paperwork.

Mistake 8: Improper funding of the Exemption Trust, Martial Trust, Q-Tip Trusts, or and other Trusts.

While the following point is much less likely to occur due to the portability of exemption amounts between spouses it is still important to know the possibilty exists.  It is also important to know just how easy this is to avoid by speaking with your advisor about your situation.

Let us assume that the beneficiary of the IRA was a revocable living trust (RLT) and that this trust states that upon the death of the first spouse, a new trust should be established and funded up to the current exemption equivalent. I have seen many cases where the attorney has “carved out” this exemption amount from the IRA in order to fund this exemption trust, and then suggested rolling over the difference into the surviving spouse’s IRA. Although this can be done, it has to be done properly!

I have seen countless examples where the exemption was in fact carved out and paid out directly into the exemption trust! One hundred percent of this money was subject to income taxation in one year, and if that isn’t bad enough, it was all taxed at the trust income tax rate brackets, which are usually much higher than individual income tax rates!

What should be done is to establish an Inherited IRA for the benefit of the exemption trust.  Please remember that many attorneys and accountants have not heard of an Inherited IRA and believe that the exemption trust beneficiary would have to receive the money in order to have it funded. Please make sure that your financial advisor is aware of these complicated rules.

Again, this is an easy mistake to avoid based on new portabilty laws, but a situation involving funding of trusts for minors can come up.  Remember that when people set up trusts for minors it is important the trust contains both the proper language to qualify for the stretch IRA and that the financial advisor properly titles the inherited IRA for the benefit of the trust established for the minor.

Information provided by MD Producer

Mistake 7: Not establishing the Inherited IRA properly.

There are a number of rules that must be met in order to properly establish an Inherited IRA:

  1. Notification must be made to the custodian in writing.
  2. The first minimum distribution must be taken no later than December 31st of the year following the year the person passes away. Note: if the decedent was receiving lifetime RMDs, the beneficiaries must ensure the RMD has been taken for the year of death.
  3. The IRA must be retitled properly showing the following information (something that Jim has covered on the radio show more than once, due to the number of times mistakes are made on this key point):
    1. The decedent’s name, with “deceased” or “decedent” after the name.
    2. It must show that it is still an IRA.
  4. Retitling must be done by December 31st  after the year of death.

If these requirements are not met, then most beneficiaries will be faced with the following consequences:

  1. If the orginal account owner was RMD age or older, the IRA must be distributed over the owner’s remaining life expectancy, based on the single life table.
  2. If the orginal owner was under RMD age, the entire IRA account must be distributed no later than December 31st of the fifth year after the person passed away.
  3. If the account title is not worded properly the entire account could also be subject to immediate taxation all in one year!

Make sure you discuss all the vaious laws and titling issues with your advisor when establishing an inherited IRA.

Information adapted from MD Producer material