Slashing taxes on IRAs, Pt. 1 of 3Article added by Michael Reese on February 19, 2009
Michael Reese

Michael Reese

Traverse City , MI

Joined: August 21, 2010

Imagine that you are in your first meeting with a new prospect named Joe. Everything about Joe indicates that he would make a "perfect client." He's 65 years old, in decent health, has just retired and has $1,000,000 in his 401(k), and he's looking for a financial advisor. He's been married to his wife Mary for 40 years, and they now have three successful grown children and eight wonderful grandchildren.

Thanks to Social Security and a nice pension, he doesn't need to take income from his 401(k). He's a conservative investor. He would like to get 5 percent to 8 percent returns per year if possible, and he definitely doesn't want to lose any money. He and Mary have no long term care insurance because they feel they can "self-insure." And to top it all off, you get along with the two of them beautifully. They're great people!

Sound like a pretty good prospect to you? It sure does to me, too. But then a tough question comes up. You see, Joe and Mary have been talking to a few different potential financial advisors in their quest to find the right fit for them. And they ask you a very simple, yet important, question. It goes like this: "Tell me, , what area do you specialize in?" Or maybe they ask, "What's different about you and your firm?" Or maybe they just come right out and ask, "Why should we work with you?"

They are all the same question, as in essence, they are simply asking what's so great about you. Why should they work with you? Working with you means that they are leaving their comfort zone. Remember, Joe has worked at the same company for 30 years. He's dealt with the same 401(k) company (probably Fidelity) for the past 30 years. He's received communication from them for 30 years. He's gotten their statements for 30 years. He's been on their Web site for 15 years. He knows them. He sees their name everywhere. Do you think that he is at least comfortable having his money with them?

Meanwhile, who are you? He's just met you. Sure, you seem nice, but what can you offer him that Fidelity, or Vanguard, or any of the other big 401(k) companies can't? And don't tell me that you can offer an indexed annuity that guarantees his principal and gives him a decent return as your separation point, because to Joe and Mary, it sounds like you are simply saying the same thing that everyone else says, which is, "My investments are better than what you have currently."

If you want to bring Joe and Mary into your company, you've got to give them an overriding reason why. You've got to make them understand that you can help them in ways that nobody else in your marketplace can. You've got to set yourself apart from your competition, in a manner that is attractive to people like Joe and Mary.

Think about what everyone else is saying to them as to how they are different. Tell me if you think they might hear one of the following from your competition:
  • We specialize in "safe money."

  • We specialize in total financial planning; the accumulation, preservation and distribution of your estate.

  • We specialize in working with people who are either in or near retirement.
Let's face it, if you are saying these things to your prospects, then guess what? You sound like everyone else. But what if you had another message? What if instead of saying the same thing everyone else said, you said something like this: "I specialize in helping my clients eliminate taxes on hundreds of thousands -- if not millions -- of dollars, of retirement plan distributions."

What do you think? Would that get Joe and Mary's attention? Would that separate you from your competition?

Think about it from Joe and Mary's perspective. They know that at some point they are going to have to take money out of Joe's 401(k). And they know that it will be taxable. But is Fidelity (or any of its brethren) talking to them about tax planning? Of course not. Can you? Yes.

So now that you have their attention, how can you go about actually saving them from paying all those taxes? It all starts with the road they are on.

I've heard it said that financial planning is nothing more than making sure the road you are on is leading you to the destination you want to reach. Below, we will take a look at the road Joe and Mary are on currently. You'll notice that I've made two assumptions. First, I assumed a 6-percent rate of return. Second, I assumed that either Joe or Mary will survive to age 90, a pretty reasonable expectation given today's longevity numbers.


What are the results of the current "road" that Joe and Mary are on? First, we find that if all they do is withdraw their RMD, they end up distributing -- and paying taxes -- on a bit more than $1.8 million. How much did they need or want to withdraw? Nothing. But nevertheless, they are forced to pay tax on $1.8 million.

Further, when they have both passed away, their children get a bit more than $1.4 million -- more if they stretch it. But is that tax free? No! So Joe and Mary pay tax on more than $1.8 million, and their children pay tax on more than $1.4 million. Add it up and you find that the IRS collects tax on more than $3.2 million on an IRA that started out in retirement at a value of $1 million.

What would you expect the tax to be on $3.2 million of IRA distributions? Is it safe to say around $1 million? And that's assuming that tax rates don't increase. So the IRS gets to collect about $1 million in taxes on an IRA that's worth $1 million today. What's that effective tax rate?

But, what if you could help Joe and Mary eliminate tax on roughly $2 million? What if, instead of paying tax on $3.2 million, they only paid tax on $1.2 million? Do you think that might benefit them? How eager do you think they might be to learn how to do this?

That's how you set yourself apart. In the next two articles of this series, I'll show you two different ways that you can help Joe and Mary save those taxes, and gain terrific new clients at the same time.
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