Instead of taking a large lump sum from an IRA
and putting it into a Roth IRA
, consider the possibility of taking 5 to 10 distributions from your IRA and funding a non-modified endowment contract life insurance policy. The smaller distributions may keep the tax bracket down as you distribute the money over time.
If the client dies early the heirs get both the remaining IRA and the death benefit
. The client may purchase living benefits such as long term care type benefits, as well.
A couple of life insurance companies will allow you to borrow the money in the life policy immediately even if the cash value would normally be too low to cover the tax so that the taxpayer does not have to find cash elsewhere to pay the tax. This same indexed life policy allows the policyholder to keep the collateral amount in the indexed account while paying a variable rate on the loan balance.
If the indexing pays higher returns than the cost of the loan, the numbers look very nice. Of course the leverage could actually hurt the policyholder if loan costs rise above the indexed interest income received in the policy.
Clients under 59½ could use this concept in conjunction with the section 72 (t) exemption to avoid the 10 percent early withdrawal penalty to fund the life insurance.