A new report by a government agency calls for a crackdown on large IRAs—and it may be a cause for concern for accountholders with substantial balances.

The report, by the Government Accountability Office, urges the IRS to tighten its enforcement on multi-million dollar IRAs, and it calls on Congress to provide the direction that would allow it to do so.

“The accumulation of these large IRA balances by a small number of investors stands in contrast to Congress’s aim to prevent the tax-favored accumulation of balances exceeding what is needed for retirement,” the GAO report says.

At Anderson Financial Advisors, our view is that the growing scrutiny of IRAs may make alternative retirement-funding vehicles attractive for some investors. One of the best is customized permanent life insurance, which we will explain in a moment.

According to the GAO, about 600,000 taxpayers had IRA accounts worth more than $1 million for tax year 2011. Approximately 9,000 had IRAs worth over $5 million.

Outsized IRAs came under the spotlight during the 2012 presidential campaign, when candidate Mitt Romney’s IRA assets were disclosed.
The fact that there is no upper limit on IRA accumulations costs the Treasury millions in tax revenue, the GAO report says. The report, requested by Congress, comes as the government is reviewing retirement tax incentives as part of tax reform.

The government may or may not crack down on what it considers to be overly large IRA balances. But the important point is that Washington has the ability to change the rules that most retirement savers are playing by. Given the size of the budget deficit, Congress may look wherever it can to gain more revenue, including retirement plans.

One of the reasons that permanent insurance policies may be preferable to IRAs is the fact that the government does not have the legal authority to tinker with them. (Click here to order a copy of “The Private Vault,” which will walk you through the benefits of customized permanent life policies.)

While insurance policies are funded with after-tax money, insurance benefits are paid out tax-free. Washington can’t change that because life insurance is a private contract between you and your insurance company. It’s not a “qualified plan” with the government’s seal of approval. Court rulings have affirmed that the government cannot undo the terms of a private contract.

We’ve blogged several times about the many benefits of permanent life as a
retirement solution. Specially designed policies allow you to quickly build a cash value that can generate a fixed rate of return or track a market index.
These solutions let you dial the risk and potential reward up or down as you wish. And that can create valuable peace of mind as you navigate toward your long-term goals.

Another major benefit to using customized permanent insurance is the ability to borrow against the account’s cash value. Many of our clients do this to fund large expenses, such as vehicles or even retirement—without relying on banks. These loans are technically taken from the insurance company, while your account balance serves as collateral. Thus, your account balance continues to generate interest or potential market growth.

Of course, with a permanent life insurance, a death benefit is provided for your beneficiaries. In all, the strategy can help to bring financial independence within reach. Please contact us if you’d like to explore whether a customized permanent life policy makes sense for your situation. Meanwhile, the team at Anderson Retirement Solutions wishes you the very best during this holiday season.