Will Obama’s Budget Force Wealthy Investors to Hide Here?
The budget for 2014 that President Obama unveiled on April 10 included a provision to cap tax-preferred retirement accounts — including IRAs and 401(NYSE:K)s — at approximately $3.4 million in order generate higher tax revenues for the federal government. Preventing savers from adding to these accounts indefinitely, which allow them to defer taxes until the funds are withdrawn — is part of a $3.8 billion budget that rests on top-earning households for funds to cut the deficit. Obama’s administration has projected that the account limit will raise $9 billion over the next decade.
The cap has been set at $3.4 million because that amount has determined to be adequate to fund a $205,000 annual annuity for a 62-year-old, and would be adjusted for the cost of living.
But already, potential strategies to avoid this restriction have been proposed. As Bloomberg reported Monday, Obama’s proposal could potentially push savers to another product that limits payments to the government: life insurance. Instead of using retirement accounts, wealthy savers can sink cash into life insurance — as death payments are typically exempt from federal taxes, and life annuities, in which case taxes are deferred, Walter White, chief executive of Allianz’s (AZSEY.PK) North America life insurance business, told the publication.
“In our industry, in many ways, that could be helpful, because then you’ll start to look for tax advantages in other ways, and some of our products are geared toward that,” he said. In the United States, MetLife (NYSE:MET) and Prudential Financial (NYSE:PRU) are the largest life insurers, while Allianz is the tenth largest annuity seller, according to data compiled by the National Association of Insurance Commissioners. However, to what degree these firms will benefit is debatable. “What you get in one hand, you give back in the other,” ValMark Securities vice president Caleb Callahan told Bloomberg…
Multimillion-dollar retirement accounts were first earmarked as possible sources of tax revenue when Republican presidential candidate Mitt Romney disclosed that his IRA had a maximum value exceeding $100 million, bringing retirements accounts to the forefront of the national debate, according to the publication.
Life insurance policies have long been used by wealthy investors to limit the amount taxes they pay and pass on their wealth to their heirs. But the cap proposed in Obama’s budget will likely cause such investors to transfer more assets and annuities than ever before as part of their strategies to limit tax burdens, Union Square Financial Partners Chief Executive Ron Rubin told Bloomberg. “We’re going to see a massive swing over to the after-tax, tax-deferred asset classes like annuities and life insurance,” Rubin said in a phone interview.
Life insurance policies can be described as tax-free loans. Not only do they allow policyholders to pass on savings to an heir, they also enable living policy holders to withdraw premium payments from some forms of permanent coverage without triggering tax payments. The loans are then repaid with the benefit when the person dies.
“There are substantial income and estate tax advantages to certain life insurance products,” Jay Messing, a senior director of planning in the Northeast for the private bank unit of Wells Fargo, told the publication “Any time you get tax increases, whether it’s income or estate, the efficiency of those life insurance products tends to increase in value.” However, there are drawbacks, as coverage is purchased with after-tax dollars, diminishing the value of that type of investment compared to a retirement account, according to Rubin. Furthermore, if wealthy individuals accumulate “excessive assets” in life insurance, the products’ tax treatment may draw the federal government’s attention.
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