Wealth Management Group Newsletter – Summer 2015
Frank L. Washelesky

Managing Retirement Savings After a Job Change

When Matt decided to switch careers and leave his employer of 10 years, it was not without much consideration. Matt had a sizeable balance in his 401(k) plan and decided to meet with his financial advisor to help him effectively manage his retirement nest egg. If you are in a position similar to Matt’s, there are a few options to consider.

Taking No Action

By law, if your qualified retirement plan with your previous employer has a balance of at least $5,000, the plan is required to allow you to leave your money there. While it may be the simplest course of action, it might not be the best.

Once you become a nonactive participant, your former employer can restrict your ability to make changes to your portfolio, to take distributions and to update beneficiaries. Some plans require nonactive participants to be charged higher fees. Also, you are limited to the investment options the plan provides.

However, some plans offer appealing and unique investment options that are difficult to find elsewhere, so it may make sense to keep your money there. Those investment options might include a high-yielding guaranteed investment contract or a stable value plan.

Rolling Over Funds

An alternative to keeping with your old plan or tracking multiple plans is rolling over your savings to your new employer’s plan. Be sure to review the available investment options in your new employer’s plan as well as any associated fees. If you find the investment options from your new employer’s plan are not very attractive, consider keeping your existing savings in the old plan — or rolling them over to an IRA (see the next option) — while also contributing to your new plan.

If you decide to rolling over your retirement savings to your new employer’s plan, first confirm that the new plan accepts rollovers. If so, request a direct trustee-to-trustee rollover.

Otherwise, your old employer will mail a distribution check to you, less mandatory tax withholding of 20%. You only have 60 days to deposit these funds in your new plan along with the 20% that was withheld for taxes. This means you must find cash elsewhere, as you will not get your withholding back until after filing your annual tax return.

Failing to meet the deadline or not having enough cash available to cover the taxes that were withheld means you must pay income tax on the amount that was not rolled over. If you are under age 59½, you could also incur a 10% early withdrawal penalty.

Opening an IRA

There are several advantages of transferring your retirement savings into an IRA. Typically, 401(k) plans offer limited investment options for you to choose from. An IRA, however, usually offers a wider array of investment options, such as mutual funds from a variety of companies, as well as individual stocks and bonds. Additionally, holding all of your assets in one account or with a single financial services company makes it easier to get a clear view of your entire retirement savings portfolio.

To make it simple for you, most financial services companies accept a direct transfer of your retirement savings. Additionally, assets can typically be transferred “in kind,” meaning you do not need to sell the investments and then repurchase them in your IRA. Keep in mind that you may be charged an annual fee.

Cashing Out

There are exceptions, but generally speaking, cashing out your retirement savings is not recommended. If under 59½, most retirement distributions will be taxed as ordinary income and you’ll be assessed an additional 10% penalty.

In cases of economic hardship or separating from service after age 55, there are exceptions to the 10% penalty. But in both cases, you will still owe income tax. Additionally, while IRA distributions are not subject to the 3.8% net investment income tax (NIIT), they are included in modified adjusted gross income (MAGI), and could trigger or increase the NIIT on other income as the thresholds for that tax are based on MAGI.

Making the Right Decisions

If a job change is in your immediate future or if you’ve changed jobs recently, don’t forget that you have options regarding your retirement savings. Making the right moves at this transitional time is essential to keep your nest egg growing well.

For questions, contact Mark Anderson at 312.670.7444. Visit orba.com to learn more about our Wealth Management Group.

Charitable Remainder Trust with Life Insurance


What Is It?

People are often reluctant to make substantial gifts to charity because they fear they will be unable to leave sufficient assets to their heirs. By using life insurance as a wealth replacement tool, the amount given to charity can be replaced with an equal (or even greater) life insurance death benefit. Thus, your heirs may receive at least as much as they would have if you hadn’t made a charitable gift, and you’ll be able to give freely to your chosen charities, while gaining some tax benefits at the same time.

This discussion will focus on a very effective way of using life insurance as a wealth replacement tool. This method involves setting up both a charitable remainder trust (CRT) and an irrevocable life insurance trust (ILIT).

How to Do It

Setting Up a Charitable Remainder Trust (CRT)
First, establish a CRT and name yourself as the non-charitable beneficiary. You will also need to choose your charitable beneficiary (who will receive the trust assets at the end of the trust term) and set various other terms of the trust.

The next step is to decide what to contribute to the trust. The best asset to contribute is often highly appreciated stock. This stock can be sold within the trust without creating an immediate taxable gain. The assets can then be re-invested in a diversified portfolio designed to provide you a set annuity payment during life with a remainder for charity.

Setting Up an Irrevocable Life Insurance Trust (ILIT)
An ILIT is established to hold a life insurance policy which is sufficient to replace the assets you have placed in the CRT. To create the ILIT, you will have to choose a trustee to manage the trust and name beneficiaries to receive the life insurance proceeds. To remove the proceeds of the life insurance policy from the insured’s taxable estate, the insured must not possess any incidents of ownership in the policy. All ownership rights must be held by the trust and exercised by the trustee.

Using CRT Distributions and Tax Savings to Fund Wealth Replacement Trust
The CRT will make periodic payments to you which can be used, along with the tax savings resulting from the charitable gift, to make cash gifts to the ILIT. The trustee of the ILIT will use these cash gifts to pay the premiums on the life insurance coverage on your life.

Life Insurance Proceeds Will Replace Value of Assets Given to Charity
The result of this strategy is that the proceeds from the insurance policy will pass to the named beneficiaries of the trust, your heirs, in place of the asset that was given to charity.

What Are the Advantages of This Strategy?

Heirs Do Not Suffer as a Result of the Charitable Gift
Children and grandchildren may worry about their inheritance when they see family assets being given to charity. However, using an irrevocable life insurance trust as a wealth replacement tool ensures they will receive their inheritance intact. In fact, they may receive more than they otherwise would, because the proceeds from the life insurance policy will not be included in the donor’s taxable estate.

Proceeds from Insurance Policy Held by Irrevocable Trust Not Included in Taxable Estate
One of the main benefits to using an ILIT is that the proceeds from the life insurance policy will not be included in your taxable estate. Thus, the life insurance policy will provide liquidity free of estate and income taxes to your heirs.

Cash Gifts to Trust, Up to Certain Limits, to Buy Life Insurance Can be Made Without Incurring Gift Tax
If the irrevocable life insurance trust is drafted properly, cash gifts made to the trust will qualify for the annual gift tax exclusion. The annual exclusion allows any individual to give $14,000 annually to any other individual and not pay federal gift tax. A married person can make a gift of up to $28,000 in the couple’s name if they file a joint return. Depending on the number of individual beneficiaries of the ILIT and other gifts you make, a substantial amount can be given to the ILIT annually without a gift tax.

Trust Protects a Young or Irresponsible Heir
A similar result could be obtained if you simply gift an insurance policy or give cash to purchase a policy directly to your child. However, many people use a trust to hold the policy it allows you to select an independent trustee who understands your intentions, and who can make distributions from the trust when it is in the best interest of the beneficiary.

What are the disadvantages of this strategy?

Trusts Must be Irrevocable
As mentioned previously, both the CRT and the ILIT must be irrevocable. Once you have made your charitable gift, you can’t change your mind and take it back, although you may change the charitable beneficiary if the trust document so provides. Similarly, once you set up and fund the ILIT, you cannot change its terms.

Strategy May be Expensive to Execute
Setting up the charitable remainder trust and the ILIT both require the help of a qualified attorney. You may also incur administrative costs and other expenses of managing the trusts. Finally, the life insurance policy itself could be expensive, depending on your age and/or your health.

While this strategy is not right for everyone, it can work very well in the right situation.

For questions, contact Frank Washelesky at [email protected] or call him at 312.670.6235. Visit orba.com to learn more about our Wealth Management Group.

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