shares many of the tax-free attributes
of traditional retirement accounts, such
as the Roth IRA. Not only are distributions 100% tax-free, but they also do not
contribute to the income thresholds that
trigger the taxation of Social Security.
When utilized properly, the L.I.R.P. has
additional attributes that make it a surprisingly attractive alternative for tax-free retirement accumulation.
No income restrictions: When I meet
with clients, I often ask them, “Can Bill
Gates contribute to a Roth IRA?” The
answer, of course, is no. His income far
exceeds the $173,000 threshold at which
Roth IRA contributions are phased out.
I then ask, “Can my children contribute
to Roth IRAs?” The answer, again, is
no. In order to contribute to a Roth IRA,
you must have earned income. My kids
work; I just don’t pay them! For clients
who either earn too much or lack the
necessary earned income to contribute
to a Roth IRA (e.g., retirees), the L.I.R.P.
can be a powerful alternative.
No contribution limits: Currently, the
IRS restricts the amounts that can be
contributed to tax-free accumulation accounts, such as the Roth IRA. In 2012,
those who are under age 50 can contribute
$5,000 per year, while those over 50 can
contribute $6,000 per year. There are no
such limitations with the L.I.R.P. For clients who are looking to reposition highly
taxable assets into tax-free accounts but
feel limited by the contribution limits of
the Roth IRA, the L.I.R.P. can help.
No legislative risk: Because tax-free
accounts cost the government billions
of dollars per year, they are an ever-growing target for revenue-hungry legislators. If history serves as a model,
however, the L.I.R.P. will likely be immune to the impact of tax law changes.
When Congress changed the rules on
the L.I.R.P. in 1982, 1984 and 1987, existing L.I.R.P. arrangements continued
to be taxed under the old laws. Such
grandfather clauses give the L.I.R.P. a
much longer shelf life than traditional
Multiple accumulation strategies:
Another benefit of the L.I.R.P. is the
flexibility it provides in choosing how
“For clients who
either earn too
much or lack
to a Roth IRA
the L.I.R.P. can
be a powerful
Is your client better suited for a Roth
IRA or a L.I.R.P.? Take our quiz at
to grow dollars within the tax-free accumulation account. Clients can choose
between one of three basic accumulation strategies at the outset of the program. Determining the right one for your
clients will depend on their individual
goals and objectives.
1.Insurance company investment
portfolio: Clients can opt to grow
their money within the general investment portfolio of the insurance
company that administers their program. Because insurance companies
are in the business of managing risk,
these types of returns tend to be safe
but very modest. Typical returns can
range anywhere from 3% to 5%.
2. Stock market: Alternatively, clients can pass their contributions
through insurance companies and
into mutual fund portfolios called
sub-accounts. While this approach