Ed Slott Shows His Ignorance about IRAs and Cash Value Life
If you didn’t read last week’s newsletter titled: IUL as an Asset Class…How Has it Performed; How Will it Perform?, click on the following link to do so:
In that newsletter I allude to the IUL comparison software (compares IUL to mutual funds and IUL to 401(k) plans) I’ll be rolling out in the next 10 days. You can get a jump start on learning more about it by clicking on the following link:
For the record, I think Ed Slott has done a lot for the industry when educating advisors on the technical issues that surround the complex world of IRAs. However, while he may be seen by many as the IRA “guru,” this is the second time I’ve had to run an ‘Ed Slott doesn’t know what he’s talking about’ newsletter. The first was back in 2009 when I ran my newsletter titled: Even Ed Slott is Wrong About Roth IRA Conversions. To read my old newsletter about Roth conversions, click on the following link:
I had an advisor email Ed’s article with the following title:
2 good reasons to move IRA funds to permanent life insurance
The ideal time to transition funds from an IRA to permanent life insurance is in a client’s 60s
Part of Ed’s article endorses one of the most abused life insurance sales in the industry today. What’s that? IRA “rescue” using cash value life. To read Ed’s article, click here.
What is IRA “rescue” using cash value life? IRA “rescue” is when a client moves money from a “tax-hostile” IRA to a cash value life insurance policy where the money can then grow tax-free and be removed tax-free in retirement.
On its face, the concept of paying taxes now and moving money to a cash value life policy where the money can grow tax-free and be removed tax-free through policy loans sort of makes sense.But the “real world math” of removing money from an IRA, paying taxes on it (and sometimes penalties) is crystal clear. It does NOT work!
To read my past article on why IRA rescue using cash value life for income doesn’t work, click on the following link: www.strategicmp.net/ira-rescue-strategy-to-avoid.
STOP IRA RESCUE-I was so disturbed a few years ago when I saw some IMOs pitching this concept to insurance agents, I did the following:
1) I started writing warning newsletters about it.
2) I put up a consumer protection website www.stopirarescue.com
3) I contacted the insurance companies that were allowing their policies to be sold in this structure and implored them to stop allowing their policies to be sold in an IRA rescue sale.
The bi-product of my actions were:
1) Many insurance companies added a question to their life insurance application asking if the funds to pay the premium came from an IRA or tax-deferred qualified plan. If the answer is yes and if the sale is to generate income from the life policy, these companies will now reject the application.
2) I’ve been called by law offices for guidance on cases against insurance agents who sold their clients this IRA rescue scam and I’m currently an expert witness on one such case.
3) One company, due to my intervention, returned the entire premium to a client who was duped into an IRA rescue structure even though the policy was more than a year old.
Did Ed really write that article? I would say that he did NOT. My guess is that a promoter of IRA rescue using life insurance talked Ed into writing the newsletter and that he didn’t really understand the math. I say guessed because I reached out directly to Ed and have had no response.
Don’t always trust the “expert”– this newsletter points out a good life’s lesson. Do not always take the word of an expert as the gospel truth. Sometimes they are wrong.
A good example of being too trusting and NOT doing your own due diligence and research is Section 79 Plan life insurance sales. Agents blindly trusted Pacific Life and National Life (as well as the primary TPA who administered these plans). I’ve been warning advisors to stay away from Section 79 Plans for several years. Many agents didn’t listen because they trusted the big insurance companies and they were greedy (these were big commission plans). That’s certainly their prerogative, but the bi-product of selling Section 79 Plans for many agents right now is lawsuits. After the IRS came down on these plans a few years ago, the lawsuits started flying. And by the way I’m an expert witness in a Section 79 Plan case right now as well.
To sum up this newsletter, try to do your own critical thinking when an “expert” is telling you to pitch a tax concept or particular product. If the expert has proven to be reputable over time, the chances are that he/she will continue to be on the money, but you should still avoid blindly taking the advice of any expert (even me).
Roccy DeFrancesco, JD