1. You can use money from your non-qualified annuity for long-term care premium payments in a tax-free exchange.

This tax-free exchange enables a tax efficient mechanism and less expensive vehicle to use funds that would been taxed to pay for regular long term care payments. Had normal distributions been taken prior to annuitization those distributions would have investment gains coming out first and subject to ordinary income tax rates.

2. Retirees can leave a tax free legacy for a beneficiary through a Roth IRA.

A retiree earning wages below the tax threshold has an intriguing opportunity that many people don’t know about. They may choose to baby sit their own grandchildren and receive wages over time. Those wages allow them to make a Roth contribution. In many cases this additional income will have no negative tax consequence for them. They can choose perhaps a grandchild as a beneficiary and on their death provide a significant tax free earnings compounded account over the beneficiary’s lifetime.


Grandma Brown, a widow age 66, wanted to leave a legacy to her grandson on her death. She desired to leave a Roth account but needed current income to make a Roth contribution. Initially, except for a modest social security pension award ($1,500 per month) and a small investment account she had no wage income. She decided to baby sit for her grandson and some neighbor children to obtain earned income. This earned income allowed her to make a Roth contribution. She earned $7,000 a year for babysitting. Even with this income she still was not subject to any income tax. Being over age 50 she was able to make a $5,500 Roth contribution each year plus a $1,000 catch up contribution. After five years contributing a total of $32,500 into her Roth account she died. At that time having earned 5% annually on her account it was valued at 37,713 at her death. {Future value calculation from Number Cruncher Software}.

Grandma Brown named her 10-year-old grandson Roth as the sole beneficiary of her Roth account. After her death, the $37,713 was transferred into an inherited Roth IRA for the benefit of grandson Brown. He began taking annual distributions over his life expectancy (year one his life expectancy is 71.8 years).  It is hoped that account will continue to grow at 5% per year.  If the grandson only takes his required minimum distribution (RMD) each year over his lifetime (assuming life expectancy of 82), he will have total tax free withdrawals of $338,530. {Lifetime stretch IRA distributions calculated with Cetera’s Netx360 stretch IRA calculator}

3. Take advantage of Net Unrealized Appreciation.

If you own your employer’s company stock in your 401k you have a great opportunity. When taking an eligible lump sum distribution from the account, you only pay ordinary tax on the original cost basis of the stock when it initially went into the plan. Any gain between that original cost and the market value when removed from the plan will receive capital gain treatment when ultimately sold. This would allow you to take personal possession of the company outside the plan while rolling over the remaining assets into an IRA. Without using this opportunity normal distributions from a 401k are taxed at ordinary tax rates.

Stanley R. Smiley, Esq. is senior vice president of the Advanced Planning Group department at Cetera Financial Group.


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