Female, 71, Frustrated with Returns of her 457 Plan

[calbear]

The client has $57k in a 457 plan. She is frustrated with the essentially 0% return. She also doesn't like fact that she is in the forced withdrawal period and has to pay income tax on the withdrawals. She doesn't need the money for daily expenses. She wants wants to purchase a burial plot that costs $30k.

Is there an insurance product she could purchase within her plan that would improve her ROI? How do you deal with required minimum withdrawals?

What about taking everything out of the 457 plan, paying the taxes and putting the remaining money in an SPWL? She would have liquidity via policy loans and the death benefit could be used to cover expenses for the burial plot.

 

[HoosierLife]

The client has $57k in a 457 plan. She is frustrated with the essentially 0% return. She also doesn't like fact that she is in the forced withdrawal period and has to pay income tax on the withdrawals. She doesn't need the money for daily expenses. She wants wants to purchase a burial plot that costs $30k. Is there an insurance product she could purchase within her plan that would improve her ROI? How do you deal with required minimum withdrawals? What about taking everything out of the 457 plan, paying the taxes and putting the remaining money in an SPWL? She would have liquidity via policy loans and the death benefit could be used to cover expenses for the burial plot.

I don't know what a 457 plan is, but couldn't she 1035 exchange into an annuity and a single premium policy?

 

[JFS55]

That's an expensive plot. It could be more expensive in 10-15 years or may not be available. Maybe she can buy the plot and pay for it in installments with her annual distributions. She has to pay the taxes. It's either in a lump sum or over time.

 

[LostDollar]

I don't know what a 457 plan is, but couldn't she 1035 exchange into an annuity and a single premium policy?

It's a governmental related plan. Sitting in an information meeting with a friend a few years back, I gathered the big driver of it was retirement at age 55, particularly benefiting the high risk employees like police and firefighters-then all the other employees get to benefit from the earlier retirement age as well.

 

[calbear]

I don't know what a 457 plan is, but couldn't she 1035 exchange into an annuity and a single premium policy?

A 457 plan is just like a 401k except for government employees

 

[LostDollar]

What about taking everything out of the 457 plan, paying the taxes and putting the remaining money in an SPWL? She would have liquidity via policy loans and the death benefit could be used to cover expenses for the burial plot.

I think that's a pretty iffy first line strategy for any unneeded pre tax money and will essentially make a $30K plot considerably more expensive than that.

That might also create some significant unanticipated tax consequences if it is done with out considering her whole financial picture.

As far as the returns in the plan, you could look at the assorted investment options of the plan with her too, if she has the lowest risk "retired" type investment group and she is willing to assume more risk, she may be able to get some increase in return on those assets.

 

[calbear]

I think that's a pretty iffy first line strategy for any unneeded pre tax money and will essentially make a $30K plot considerably more expensive than that.

That might also create some significant unanticipated tax consequences if it is done with out considering her whole financial picture.

Regarding the iffy first line strategy, are you saying that because she will be earning interest on a much smaller principal base? How would it make the plot more expensive?

Regarding unanticipated tax consequences, is this because taking out the entire amount could push her in to a higher marginal tax rate?

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I like the idea of looking at other investment options in the plan.

 

[Baseball7]

Single Premium some of that? Use RMD's to fun other whole life product? Give it to me?

 

[bboman23]

Single Premium some of that? Use RMD's to fun other whole life product? Give it to me?

Don't think you can move money from that into a single pay. Will need to be from an insurance type vehicle.

 

[LostDollar]

Regarding the iffy first line strategy, are you saying that because she will be earning interest on a much smaller principal base? How would it make the plot more expensive?

Regarding unanticipated tax consequences, is this because taking out the entire amount could push her in to a higher marginal tax rate?

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I like the idea of looking at other investment options in the plan.

I don't think I have ever met an income tax accountant that did not take the approach that: "my job is to help a client (legally) minimize taxes and/or tax exposure". Taking tax deferred money out of a retirement vehicle as a first choice of action without evaluating other possibilities would seem to violate that thought pattern.

In regard to my (small) 401(k) I have had some investment advisors suggest they would like to have that money under their control. However, none of them has suggested that I take an action like converting to a Roth IRA that would require payment of income taxes. bboman is also suggesting that the 457 plan has different types of allowable non-taxable to non-taxable transfers. you are going to have to investigate those types of options.

If the only reason to withdraw the money from the plan is to buy a cemetery lot: $57,000 added to taxable income at a 30% tax rate is going to add $17,000 in cost to the decision to buy the lot and fund it in that manner.

A marginal tax rate may just be the first of your concerns. I am not a tax person-I am just suggesting that you need to be cautious of advising someone to do something that has tax consequenses(sp) without knowing their whole financial picture.

Two additional things that come to mind are: 1) Something called an alternative minimum tax-I've not had to pay this so I don't know it's rules but somewhere in increased income, it starts coming into play. 2) There are things that are based on taxable income. I have no clue what they might all be, but one I just became aware of is Medicare Part B and Part D premiums. Your client will not be happy with you a couple of years from now if you advise her into an action that puts her over some Medicare premium threshold she does not currently have to deal with.

Were this my personal situation and I was speaking to an advisor such as yourself, I would first find out if I could buy that lot on a contract with payments related to my RMD's, with an option to pay it off completely at any time without penalty and somehow pledge the retirement plan against that balance, so the cemetery company could get the balance due them when/if I die before the lot is paid for. I would then ask you to present me with the insurance/annuity option which you consider appropriate for my situation and help me evaluate the 2 choices.