The Retirement Tax Time-Bomb is Ticking!

Sam Payne, RICP, VP Business Consultant


As Americans continue to march toward, enter, and enjoy their retirement years, many are unaware of the full impact taxes will have on their retirement income.  We call this the Retirement Tax Time-Bomb.

Like most Americans, many of your clients and prospects recognize that one of their most valuable assets is their retirement savings. They diligently put money away for years, yet most do not know how to avoid the costly mistakes that can occur when it comes time to use it. A good chunk of that retirement can be needlessly lost to taxes unless you help them plan.

What are the consequences of failing to plan, and how can you help them defuse this ticking time bomb?  These are the questions I hope to shed light on in this article.

First, what is the Retirement Tax Time-Bomb?

The tax time-bomb is the tax liability accumulating within your individual retirement account (IRA) or 401(k). For most Americans, the fact that a portion of their qualified retirement accounts already belongs to the government does not even register. I say a portion because the real question is how much.   Unless we pay the tax today we really don’t know what portion of the account belongs to the IRS.

I would bet most of you, like the rest of America including myself, believe with our current government financial situation at the federal, state and local levels, taxes must go up to make ends meet. Today we are at historic tax rates…historically low tax rates.  I believe this year is the year to act to help your clients and prospects take advantage of these historic rates.  I do not believe this opportunity will last long.

Reaching retirement with an income plan that has tax-efficiency built in certainly makes sense.  Diversity of income sources in retirement makes a world of a difference in the amount of money your clients get to keep and spend.  Here is a simple example of a couple needing to pull an additional $20,000 from accounts to fund their retirement lifestyle*.  

*This example is illustrating today’s tax rates.  Keep in mind that the problem only escalates when you look at tax increases, income bracket changes, capital gains tax-bracket changes, and Medicare premium bracket changes.  Then comes the big one…one of the couples becomes single.  Now you have all the issues below based on a single filer tax rate.  This is a huge hit and often a very unpleasant surprise to the remaining spouse.

Diverse retirement income sources may help you pay less tax
As a reminder, each couple needs a total of $120,000

The question is, how are you helping your clients understand and plan for the effect of the tax time bomb?

Here are a couple of suggestions.

First, start having a ROTH conversation with every client and prospect.  A ROTH conversion is not right for everyone, but beginning the conversation puts you in the position of valued advisor identifying and educating on topics that have the potential to have a major impact on the retiree’s future.  Ask when and how they intend to use the IRA assets to see if a ROTH conversion makes sense.  Show the value for those needing income 5 – 10 years down the road of a tax-free pension type income that they cannot outlive, with guaranteed growth via an FIA with an income rider.

Second, for any client or prospect who liked the idea of the “Stretch IRA”, reach back out to them and explain how the SECURE Act eliminated the stretch ability, and show them the financial tool that allows the best tax break in the IRS code…Life Insurance with its tax-free death benefit.  Illustrate rolling a portion of their account into an annuity, turning on income and using the income to fund a permanent life insurance policy often giving the beneficiaries substantially more benefit, tax-free!

These two quick suggestions have the potential of making a major difference to your clients, prospects and your business this year.  Be sure to have the conversation with them before someone else does.  Remember, these tax rates will not last forever!  Act today!

Are Your Clients Going Green?

Mia Dempsey – Manager, New Business


Something we are seeing more of in life insurance underwriting is marijuana use by applicants. Let us look at how the carriers view this risk.

For medical marijuana users, the insurance carriers will be more concerned with the underlying condition for which it was prescribed rather than the marijuana use itself. They will also be looking to see that the applicant has a ‘recommendation card’ (Rec) signed by physician. Click here to download our general health questionnaire to help uncover the applicants’ health risk(s).

For recreational users, the underwriters will consider a few things:

  • Are you in a state that has legalized the use of marijuana?
  • How old is the applicant?
    • The legal age for recreational marijuana use is 21. However, the carriers are underwriting applicants that are 25 and older. Any younger than that and they typically will not offer coverage.
  • How often does the client smoke? Or ingest edible marijuana?
    • A few times annually? Monthly? Daily?
    • The more often an applicant smoke/ingests, the bigger the risk
  • Will THC show up on their lab work?
    • THC, or tetrahydrocannabinol, is the chemical responsible for most of marijuana’s psychological effects. 1
    • Not all carriers will test for THC during the paramed exam

Some carriers consider any marijuana (medicinal or recreational) use as smoker/tobacco even if they do not smoke cigarettes or use any form of tobacco.  Fortunately, we do have a few carriers that will offer non-tobacco rating for marijuana users.

When filling out the application, make sure to disclose the marijuana use. You do not want the carrier to uncover it during the underwriting process.  Carriers do not look favorably on cases where it is not admitted up front and can result in a decline or smoker/tobacco health classes.

Contact your AMS dedicated case manager for any questions or to request a risk assessment for your client.

1 https://www.livescience.com/24553-what-is-thc.html