Female, 71, Frustrated with Returns of her 457 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.

If you decide to get your license your clients will be in good hands. Your thinking beyond the commission to the consequences of your recommendations.
 
You're correct, they have to pull the money out, then buy the single pay.

Just remember, if you do a 1035, the money must go from like account to like account. In other words, it has to go from a life product to a life product, or an investment/annuity to and investment/annuity.

In this case it sounds like it's qualified funds, so she would have to 1035 it to a qualified annuity.

Other than that, just like has been said, she would have to pull the money, pay the taxes and then buy that SPWL.
 
Just remember, if you do a 1035, the money must go from like account to like account. In other words, it has to go from a life product to a life product, or an investment/annuity to and investment/annuity.

In this case it sounds like it's qualified funds, so she would have to 1035 it to a qualified annuity.

Other than that, just like has been said, she would have to pull the money, pay the taxes and then buy that SPWL.


I did that recently with a 401K. She pulled out $5,900 to buy a $10K policy. Well worth the $590 penalty.

A 1035 is for non-qualified funds. The Direct Custodial Transfer's for qualified.
 
These last discussions bring up another issue which I had forgotten about. (I'm pretty sure my actions since "retirement" were a consideration/cause in this decision) My former employer amended the 401(k) plan to no longer allow partial withdrawals-so when I get to some point I want/need more than the annual RMD, I will have to create a plan to take out the whole amount. That's another thing the op will need to learn about the 457 plan-since they have special rules, they may be required to allow partial withdrawals-I don't know.

As far as an insurance product being better or worse than the current investment-I haven't the knowledge to comment on that. I just know that income taxes and the effects of unusual spikes in income have the potential to create "situations" and should be considered in a "wise" financial decision, whatever its other parameters are.
 
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.

You say she is in the "forced withdrawal" period, which I assume is 70 1/2 and older. Why not fund a large life policy with withdrawals from the retirement account? Assuming she's healthy. Otherwise get someone who has done annuities for years (like myself) and have them put a plan together for her. I have done several joint cases with out of state agents who needing help finding the right product, and don't mind discussing the case for free of course if someone just needs direction. On larger cases usually it involves more time and effort than a simple phone call to make sure its done right, so partnering makes more sense.

Regardless, I would not advise her to cash it out and pay the taxes on the entire amount., unless she was converting to a ROTH (which is not what we are speaking of here). Either fund a life policy with it on a monthly/annual basis, or transfer it to an annuity with a death benefit so she can minimize or eliminate risk while capturing gains.
 
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