MBK Beat Ep. 11 | Case Example Breakdown Series | Qualified Plan & IRA Conversion Strategies

In the 11th episode of the MBK Beat, we introduce our first new case example breakdown! You can learn the intro to the 10 plays of the playbook by going back and listening to any of the first 10 episodes, as now we start to give real life John Doe examples of the plays. 

In this episode we talk about IRA Conversion Strategies to help earn you tax-efficient income at retirement. If you have a traditional IRA or Roth IRA, we have a policy that will really help by converting to enhance your returns. 

Hear Mark breakdown every step of the program, and be sure to check out the video on YouTube to see everything Mark is demonstrating!

Transcript

Speaker1: [00:00:01] This is the MBK beat with Mark Sheff's MBK and Associates, Inc. Your place for finding all you need to know about life insurance and how you can give more your money. Recorded live here in Buffalo, New York. It's time for the MBK beat with Mark KUCZEK. Hello, folks, welcome back. We're here at the MBK beat with Marczewski. This is the first episode of the second series of first ten of our episodes you can find on YouTube anywhere you listen to podcasts where we broke down about 10 different plays of the playbook. And now what we're going to do is we're going to go back in to each of them and break them down into a real case study, sort of a John Doe approach, where we're going to look at some real, real case examples and break it down a little bit more for our viewers out there. So today we're going to we're going to start with the IRA conversion and compare a few things between traditional Ira Roth, IRA and a better mousetrap. As you noted. So I'll turn it over to the expert, Marczewski, to introduce our our 11th episode today.

Speaker2: [00:01:08] Thank you, Jeremy. And morning, everybody. Today we're going to talk about. IRA conversions and options. And what are the issues people facing retirement are getting ready for retirement have to deal with? And to set the stage, what I'd like to say, first of all, is that when you know, when you're earning years starting in your mid 20s, right up to age 60, 55 or 60, the focus is on making money, making contributions. Getting tax deductions and growing that asset from an investment perspective. So the focus is, you know, Covid contributions, tax savings and growth. Contributions, tax savings and growth. But as we approach retirement and 55 to 60s, when this becomes because it starts becoming a bigger issue, the focus becomes a little different. What do we mean by that? Well. People start thinking about. Not making money. They start thinking about income, retirement income becomes the focus as people approach retirement. And the people want to know how much money can I take out and am I going to run out of money? Everybody hears about, am I going to run out of money at retirement? How long will my money last? How much can I take out? How much risk do I have? Can I handle in retirement? Those become the, you know, the the the talking points in people's minds about their retirement accounts. And we've boiled it down to really four basic issues in which we've from a priority standpoint.

Speaker2: [00:02:56] The first is. Future tax risk on distributions. What am I going I've got all these tax deductions. Everyone said I'm going to be in a lower tax bracket, but is that going to happen? We'll talk about that a little bit more. What about investment risk? You know, I've been through a couple downturns, a couple market crashes of most people that suffered through the 2008. Market crash took five some cases 10 years to get back to where they were in 2008. I can't afford that when I'm retired. How long am I going to live? People say, gee, it can only take three or four percent of my money out, I've got a million dollars in my pension account. I can only take out. Thirty or forty thousand dollars, and that's before tax. I can't live on that, and I've saved a million dollars. And then, you know, will there be anything left for my spouse or for my children? So those are the four issues that people are confronting every day as they get into retirement. Now. We basically have three options. As we plan for retirement and how we're going to take our qualified plan, our IRA money, we can keep it as a quote, you know, keep it as an IRA. Basically, if you have a qualified plan or a 401k, when you retire, you can roll it into an IRA and then start taking income or you can take that money and convert it to a Roth IRA.

Speaker2: [00:04:34] And thirdly, we have an index to the versal life alternative to a Roth that we think does a better job. So those are your three options. Now, how do these options help you deal with those four issues? Well. Traditional in a Roth IRA, a traditional Roth IRA does not solve any future tax issues and what do I mean by that? When you go to retire? We don't know what tax rates are going to be. The concern is. Especially today when we've spent. Six trillion dollars. We have 30 trillion of debt. We have we've printed 12. Well, if we we now have 19 trillion dollars of money circulating in the banking system to a year and a half ago. Two trillion is we're going to be inflation. Is there going to be taxes to cover this? How do we pay for our debt? Most people believe taxes long term are going up. So that's a traditional IRA doesn't solve that problem. You pay your taxes. If you go a Roth IRA. Oh, yes. Well, we'll solve the tax problem. Convert it now as you get to be before retirement. Typically people, once you get to age 60, you can you can convert without any tax penalty and start taking distributions.

Speaker2: [00:06:01] We typically do it over three to five years. And then you've covered the tax and there's no more tax on your money or your buildup or your income. So in our option, does the same thing. We'll talk of an example walk through. But from a tax standpoint, a Roth IRA and our solution solve the problem with traditional IRA does not. Let's talk about investment risk. Typical IRA and Roth IRA accounts invested in the stock market always have risk. You can manage that risk, you can asset allocate, you can hire an investment adviser. But the bottom line is you're still in the stock market. You still have risk. With our product, you do not have the risk. What about longevity? I want to take five percent out. How long will it last? If I want to take 10 percent out, how long will it last? That's an open ended question. We have a product that will guarantee you an income for life. So we can solve their problem. And finally, will there be anything left for my children, my grandchildren, charity, whatever, we don't know. With a Roth or traditional IRA, with our product, there was always a tax income tax free death benefit to somebody, no matter when you die. Let's go through some examples here. I'm going to highlight a few points here, Jeremy. Perfect. So this is a Thibeault, this is a standard qualified plan.

Speaker2: [00:07:38] And each one of these have a million dollars. And this is an actual case and a physician on a more a substantial amount of money in pension accounts. And he took a portion of it in and converted it to our Roth alternative. Now, at age 60, and he just did this with within the last year he converted. But we showed him these options. He said, if we said, if you don't do anything and you continue to be in this tax bracket and you continue earn this kind of money on on your investment account at age 70, how much money can you take out, assuming you continue to earn that five percent, which many some people feel is too high, but that's what they wanted us to use. You'll be able to take out roughly one hundred thousand dollars a year after tax that 60000 a year. So you're not distributions to age 100 would be a million eight. And he would have paid about a million to in taxes. All right. Well, let's talk about doing a Roth conversion over the next five years. Well, you're still a 40 percent bracket, so you're going to pay 400 thousand dollars in tax if six hundred thousand dollars left. And using the same interest rate in the same tax, the tax bracket doesn't really matter anymore. We can eliminate that. You've already paid your taxes, but now you're going to get just about the same.

Speaker2: [00:09:12] Well, you're going to get roughly sixty thousand dollars, but there's no tax on that money. So assuming if taxes stay the same, it doesn't matter what you do. Taxes go up. You're going to you're going to pay. You're going to have more spendable income with the Roth. And to age 100, the distributions are about the same, but the tax was a lot less. And we have to argue all alternatives. I'm just going to focus on the second one and I'll explain to you why in a minute. Excuse me. So let's just talk about this. And this is what the doctor did. We took the million dollars and over five years. He wrote he took two hundred thousand dollars a year out, and I'll show you that in the example we cover the tax and I'll show you how we did that in our illustration, where we are able to project five point six seven based on regulations are actual performance is much better than that. But we can't show that. Know I'm OK with that, but based on that, without any enhancements, using that interest rate in this product, we're able to pay out one hundred and eight thousand in it's tax free. By law, so the net income is one hundred and eight thousand versus 60000. That's a big difference.

Speaker1: [00:10:34] Yeah, it certainly would make a difference in lifestyle.

Speaker2: [00:10:38] To his one hundred, it's three point two million dollars. And this needs to be corrected, the actual taxes you would have paid here are 400000 thousand dollars. Let's make that correction. I just noticed that. But by the way, there's also an estate benefit at age 100, which you don't have with a Roth or the traditional IRA. Three million dollars.

Speaker1: [00:11:05] And that would be for anyone, essentially family, spouse, anybody.

Speaker2: [00:11:10] Income tax free. So there's a lot more value in our approach. And that's just on the first page. What I want to spend the rest of the time explaining is how can we do this? It's the sounds too good to be true story. We'll show you why this is very unique to any other financial product available in the Western world today. And then what are the what is the additional upside that we can't even show in this product? OK, so this is an actual policy illustration summarized. Well, he's taking the strategies to take a distribution from the IRA. Two hundred thousand dollars a year for five years. And he's going to pay that money to the insurance carrier. In this case, it's Pacific life there again, where we almost we can we illustrate today based on regulation five point six, seven percent, you know, performance. Projected performance in. Each year we're going to distribute 80000 to covers tax liability. So he makes these annual distributions and at the end of the year, we give them the money to cover US tax. But we want to put this money in the policy as much money as soon as possible. We can't do it all at once, because, first of all, you know, they could use taxes to cover this. And two, we have limitations in the tax law called the modifying Darwood rules that limit how much we can put in here for a given amount of insurance. We're not trying to load up on the insurance.

Speaker2: [00:12:55] We're trying to put as much cash in the contract with the least amount of insurance the law allows. All right. So. That's what's going to happen in at age 70, we're able to pay this income distribution that goes all the way to our tax, your lifetime income goes to 120, actually. But and here's the death benefit immediately. It's 2.8 million. Once we start taking out the money, it goes down. We reduce it as much as possible, but it fluctuates and, you know, life expectancy, it's up to a million one. And at age 92, it's two million, as I said, age 100. It's over three million. All right. How can we do that? How in God's name can financial product do that? Well, this is the key to the answer. It has to do with something called policy loans and specifically alternative policy loans, because we're funding this with a life insurance contract policy loan distributions are nontaxable. That's why we get tax free distributions. But up until this product was invented, when someone took a policy loan on a contract, they would get credit at three or four percent on the money. But they would that they actually take it out and then they would be charged five or six percent. So it was costing them two or three percent to borrow that money. And if people didn't pay that money on top of the distribution for retirement, for example, they just sucked it out of the policy. So was a real drag on the cash values and risk lapsing the policy, which can't happen here for another reason.

Speaker2: [00:14:46] But when this part was invented around 1997, 98. Pacific Life was the company that invented this product. They structured their policy loans differently in what you need to understand on all policy loans. When you take a policy loan, you're not borrowing from your policy. Your cash stays in the policy. When you see the surrender value, it nets out the loan because the loan has to be paid at some point. It is in our example to pay to death in those death benefits. I would assume the loans been paid, and that's the net death benefit, you see. But you're not borrowing your cash. You're using your cash as collateral. And borrowing from the insurance company. So your money is still in the policy, earning whatever it was that you're earning now in a whole life, policy was two or three percent when they were charging four or five or six. Doesn't work that way here. What happens when you start making distributions for it's to cover the taxes or to start taking out income? The the amount of money that you're earning interest on is not the net value after any distributions here or in the future. It's the full accumulated amount because all that money stays or so. The reason we we we want the money in the policy early and we refund. We make a refund to cover the taxes is because we're able to build more accumulation value early.

Speaker2: [00:16:21] So by the tenth year, instead of having just five or six hundred thousand dollars in the account to earn money on like you would have in a mutual fund. Roth. We have a million one hundred two thousand seven hundred ninety three dollars. Because we have that we can pay more income out. That's one of the reasons. So when when the illustration projects at this interest rate of five point six, seven percent, what are we going to be able to pay? It comes out to be one hundred and eight thousand four hundred one hundred forty three dollars, not sixty. The loan strategy, because, by the way, how what's what's happening this loan in this example, we're assuming of a net on net cost of zero loan. Along the law, provisions in these contracts are vastly different than they were for 100 years and policies. So we're not we don't have a negative drag and distribution's. It's either zero or it can be positive. I can't show the positive here. But without the positive, we're able to show one hundred and eight thousand one hundred forty three dollars forever. Because look at what happens in year 30 when you keep adding the value accumulating at five point six, seven percent in. The distributions are coming from the bank, not from the policy. You have a huge Acal builds. Huge. All right. That's what makes that's the secret sauce that no other financial product in the world has. Available to it.

Speaker1: [00:18:06] And this is some of the the the the there no downside or the no risk that that's it.

Speaker2: [00:18:12] No, that's no, that's a that's not that's that's something else. Got it. That's something else. This is just the mechanical contractual provision that triggers when you take policy loans to create retirement distributions on a non taxable basis. It's unique. You know, nobody thought much about this when the part was invented. It was like the Internet. What's the Internet in 1996? You know, what's a cell phone? Well, let me tell you, the cellphone and the Internet have changed the world. This is changing the financial world. This is how big this is how big this is. And that's just the contractual what are the contractual the basic contractual provision and how it works. But in addition to that, though, there are three things that provide upside to the client that I can't even show on that illustration by regulation. There are three things that provide upside. And when we do take this money out, we are allowed to either create what's known as a Lorsch loan, where you're going to get two percent of the money that you collateralize for the bank loan from the banks inside of the house or in. They'll charge you two. So to wash. That's what I'm showing. Or we can implement what's known as an alternative loan strategy, where we're going to charge the jury is going to charge you four or five percent. But you get to keep the money in the index. The index account now we're illustrating five point six, seven percent. Well, historically, we have averaged in our basic one year account that's been there from day one. We've averaged seven point four, three percent. That's what they call a positive, arbitragers what they actually earn versus what they charge. It's almost three percent difference in the client's favor in. If we add that to the illustration, if I was to do that, that number would be multiple times higher, multiple the

Speaker1: [00:20:14] Annual hit hundred thousand.

Speaker2: [00:20:15] Oh, yeah, we're talking significant increase if you're able to project that that average arbitrage over 30 years. It's huge, as Billy Forcillo used to say, it is dealerships. It's huge. So that's that's upside. You know, that's the first piece of the upside. That's called the alterable strategy. And that's something the client decides if they do or don't want to do. But that's you know, that's pretty pretty positive. The second is actual performance. The actual performance in the one year count has been seven point six, three percent. This is actually up to last month. OK. And I'm actually in one of these accounts and I'm in the one year high cap. That historical performance has been nine point three percent. I can't show that. OK. We have an unlimited account that's averaged fourteen point three. I mean, we're the only one that hasn't done better than projections is the international. All our other accounts, our index accounts have outperformed, have outperformed. Projections. So as opposed to, you know, every whole life policy in the Western world, they show their performance and they project their historical performance, very actual performance has been less than the projections over the last 15 years.

Speaker1: [00:21:40] And that's something we've talked about in the past. And some of these older

Speaker2: [00:21:43] People, I'd rather, you know, OK. They show performance and they don't get their. We show projections versus performance. And, you know, we're kicking butt with these products, especially with this carrier.

Speaker1: [00:21:58] And just so the just for the viewer, when you say like you can't y just, you know, touch on that a little bit, you like why you can't show that, not that seven percent, because it's it's fiscally responsible.

Speaker2: [00:22:10] There's there's an illustration regulation that the National Association of Insurance Commissioners that kind of regulates us nationally and illustrations that doesn't allow carriers that you can only project. They're trying to level the playing field with projections. And that's I get that totally. So I'm comfortable with that. So you have to take your projection, your performance and back it down by one and a half or two percent. That's how we get there. No, I just showed you, based on the accounts are showing the one year accounting, this example, and they don't allow you to show the other contractual enhancements. And that's more of an industry issue, because a lot of carriers that don't have these enhancements and they've pretty much ganged up on Parklife to that to kind of tilt the scales. Mm hmm. Which to me is a quote unquote political manipulation type thing. But the reality is, I know in my contract to my customers contract, these provisions are in there and I know they will make a huge difference. On top of what we can

Speaker1: [00:23:23] Project and what we can project is what we talked about first. And that's the baseline. That's that's sort of out of the box. That's what we're going to get. But well, that

Speaker2: [00:23:31] I can't guarantee that either. We have a guaranteed account is two and a half percent. Right.

Speaker1: [00:23:36] Ok, gotcha. Four.

Speaker2: [00:23:37] Ok, we'll talk about that more in a minute. But, you know, for 20 years, this contract has averaged the baseline account that's been there seven and a half percent. We can only project five point six, seven. I like, you know, what are we going to do in the future? I'm comfortable with that projection. I think we know that we'll get there because there's something else in here that I'll talk about. The fact that you can't lose money, that also helps. But so anyway. We have. We have this long provision that creates the additional value in the contract, because the money never leaves there because of the way the loan is structured. You you're going to get the one 08 or you're going to get more depending on which loan option you take, because you can't lose on the loan option. You can only do what we told you is going to do. It's going to do better if you take a pair of loan and we make money for you. And secondly, we have you know, we're only showing we're showing substantially lower projection based on what we've actually done. Which is the antithesis of what the insurance industry does, what their other products. So those are two upsides. OK. The third one is the multiple I call it the multiplier, and it's the ability in the contract to you actually purchase. This is the only out of pocket costs.

Speaker2: [00:25:07] So the only downside to the client and I don't I don't have this example here, but I have a client that had a huge trust policy and a whole life contract that I sold a many years ago. And it was only when he was learning less than two percent. Cash on cash. They said it was only three, but when you took out the mortality charges, it was one point something and you had a million too of cash value on the policy. I think it was like a seven or eight million dollar death benefit. And I told them, John, you know, what do we do in exchange you trust to this and will we'll get it. You know, I'm pretty comfortable we can get at least five or six percent. It will probably do better than that. He said fine. So we did that. It was healthy to qualify for all the money in first year was the and his own had to go into one of the accounts. That is the one year uncapped account. So the one year account, there is no cap on the on the index. All right. And but in order to be able to buy that option package, the cash they earned on his million, too, wasn't enough to justify the uncapped. So they charge the client, and that changes every year. The first year, first two years he did it.

Speaker2: [00:26:21] They charged him 60000 dollars out of his million to to buy the secondary option. In that year, the S&P went down 40 percent because of Covid. So his account actually lost 60000 dollars. So what do you want to do? It counts at home. I want to keep it in there because he's going to make it all. So he paid the 60000 dollars again and he wish I brought it with me. But this march from April, he gets a statement for the year and he says, if emails it to me, Spike, is this correct? OK, so the S&P March 2019 to March 2020 went up 66 percent. So we got to keep 61 percent of it. Mm hmm. So he his cash value went up 800000 dollars. So he went from a million two to two million. But that's not the end of the story. He had this multiplier that he paid that for and that multiplier added another. One point two million I'm sorry, one million dollars. OK, so so multiply the one point two to more than more than 66 percent. But, you know, I'll keep the calculation in my head. But he made eight hundred thousand on the upside on the index and the multiplier. He made another one point two. So his cash value went from one point two million to three point two million on a life insurance policy in one year.

Speaker1: [00:28:01] And how long did he have that traditional one before? To get to the one point two.

Speaker2: [00:28:06] Well, he had that for seven or eight years, and then

Speaker1: [00:28:09] And then in one year basically almost tripled that that cash back.

Speaker2: [00:28:13] What he did. Yeah. Yeah. Yeah, yeah. And by the way, so that's what this and this performance plus is all about. And you know, it it it creates an additional return in this example here. In his case, it was huge. But this is the third, third upside. So we've got performance versus projections. You've got the loan strategy and then you have this multiplier. And what's interesting is that all of this was upside down with the fact that you have a downside flaw in this product. If you're in the index now, even if you're only guaranteed account, there's a minimum interest rate. Now it's two and a half percent. But on the indexes, your floor is zero unless you buy the secondary option. So, you know, when there was in 2008, when there was a huge correction, people with this contract didn't lose a dime. They didn't lose all this money. And the people in the S&P had to go from 2008 to 2016 until they got even again. And guess what? Clients of this product were. They were all the way up here. So in addition to the numbers work to begin with, and you have three upsides. You also have a floor so you can never lose. So we saw the tax risk when we did the conversion.

Speaker2: [00:29:46] We saw the income with the product. Income payable for life. We solved the investment risk. With the zero flaw and you have all this upside and all, by the way, there's going to be money left to your state. Not bad. I mean, there's so much going on, it's hard, hard to keep track of in, you know. These are the caps, the different accounts, and I'm a big boy. I like the one year high cap. That's my wife. And I have I have a couple Roth conversions, and that's what we're in. And because of what happened last year, I'm actually suggesting to my clients that we split it between that in this one. So my wife and I just split 50/50 and I'm inviting all my clients to do that. OK, because if you have a bad year. You know, you got to get to eight or 10 percent to get to the no camp. So I said, well, you know, keep your head up your money and get eight or 10 percent. And if you don't get above the 10 percent or, you know, then you're going to at least hit the baseline projection of five, six, seven. So there's a little rationale behind it, but that's what we're doing.

Speaker1: [00:31:04] And that would be almost a little bit of just a little bit of a safety net to that risk, just kind of balancing that risk a little bit.

Speaker2: [00:31:10] Well, I like you know, you don't have you don't have to you know, you don't have to triple your money for this to work.

Speaker1: [00:31:17] Right.

Speaker2: [00:31:18] Right. So if you're the one year high cap, if you're getting, you know, something above five or six percent every year and at least half your money you're going to do, you're going to be there. And if every so often you hit a homerun, I mean, this case, the reason we have this distrust was so he could start distributing money to his children and grandchildren and he was going to have to wait 10 or 15 years to do it in. He said, Mark, now that I have three point two million in there, one, can I start giving money out to my kids and how much can it be if I did that? We went back to the home office. We had the numbers he could start taking based on a like a six percent projection, five or six percent projection going forward. No more big wins. He can start taking 250000 out a year now. OK, so I mean, you know,

Speaker1: [00:32:10] That's with no projections. That's at the five that the.

Speaker2: [00:32:13] Yeah, that was at the whatever we're allowed to project.

Speaker1: [00:32:15] Right. That's at the projection.

Speaker2: [00:32:17] Because when we put those kinds of numbers and project them in an illustration, we have to use what the regulations tell us. Right. So and I'm comfortable with that. But, you know, he was pretty happy. Yeah. And I've got a dozen customers who hit home runs like that. I mean, I, I had the bonus and I like my my wife's my contract. We may 22 percent. Hmm. So and I'm just trying to get six, five or six. Right? Right. So so this product really does you know, the conversion strategy takes care of the tax problem to a Roth type product. But with this an indexed universal life overfunding, well, we are eliminating investment risk because of the zero flaw, with the exception of the secondary option if you buy it. We are creating lifetime income for a much higher amount because you're not spending the money with us when you take the take it out. You're collateral I it and the money is still there to create income. And it's for a lifetime and it's tax free. And you have a zero flaw. There's no investment risk here, and you have tremendous upside. You don't have you know, you don't have a multiplier with a mutual fund, you don't have an alternative loan strategy. You know, it's really there's nothing I've been doing this for a long time, you know. You know what kind of bank product? What kind of stock? Product investment product. Alternative investment. There's nothing close to this, in my opinion. In the company that, no, this company does a great job. You know, when we started these contracts, we only had three or four accounts.

Speaker2: [00:34:05] Now they have eight, you know, a lot of carriers. You want the new account. You've got to buy the new product. We're going to subsidize or we're going to change your cap and lower your caps. We can give the people we're selling to a higher cap for bait and switch technique. It's a dirty secret of a lot of carriers. This company doesn't do any of that. They treat everybody the same. They are the gold standard and customer treatment. They're so well respected, by the way, by their financials are you know, their financials are outstanding across the board. They're in the upper tier financial ratings. But interestingly enough, Forbes rates every insurance company that sells cash value policies every year. And guess who's number one? OK. Pacific life. You want to know why? Because what I just told you. Because of the story I just laid out, so. You know, do I sound a bit like a a zealot or a prophet? Maybe I do. But, you know, I've been doing this for 40 plus years. I've seen the industry and all the products and well, you know, I know where the bones are buried in this company does a great job in this product taste. You know, the conversion strategy gets rid of future task force. But this product absolutely takes care of investment. Longevity in the state was better than anything. I could talk to you about. Plus, all the upside. So that's my story, Jeremy, and I'm sticking to it.

Speaker1: [00:35:50] I appreciate it, Mark. This is, as always, extremely, extremely beneficial. And again, that's why we've decided that this is a great platform for these things, because it's so complicated again. Obviously, Mark is always available. Please reach out if you have any questions regarding IRA conversion strategies or any of the programs that we've talked about here. I appreciate your time today. Mark, this was awesome. I'm looking forward to the next one. So we will see you again on the next episode of the MKB.

Speaker2: [00:36:20] Looking forward to it. There are a lot of work, but I think they're worth it.

Speaker1: [00:36:22] Oh, definitely. I'm looking forward to it.

[00:36:25] Go Bills. Amen.