Regardless of your financial situation, for most of us, saving the right amount of money for retirement can be difficult. Establishing sources of replacement income that will allow you to consistently maintain your expected lifestyle after your working years often requires careful planning, financial discipline, and if those are not attainable, some creative solutions.
The government limits contributions to tax-favored qualified plans, such as IRA(s), 401(k), 403(b), or 457(b)(f), and for most executive level employees this limits their ability to save enough to offset their salary when retired. And, more importantly, many executives have more pre-tax savings than Roth (after-tax), leaving them with less options to control their tax liability and health care costs in retirement. (Listen to Sapers & Wallack Medicare Podcast to learn how taxable income effects Medicare premiums).
Traditional work-based Non-Qualified Executive Deferred Compensation (“NQDC”) programs require employees to distribute the full amount of their account balance when a program vests or if they separate from service. Unfortunately, the pre-tax saving distributions of NQDC assets carry the full tax burden for those monies to be paid in the year in which the vesting or separation occurs. Executives often like the ability to save more than traditional retirement programs allow, but when it comes time for distribution, they are left scrambling for tax planning options. But that doesn’t have to be the case. For executives with a large financial footprint who may have maxed out all of the tax-advantaged ways to save, new innovative methods for diversified retirement savings are necessary.
The SARP Solution:
Recognizing the growing need for expanding the arsenal of executive benefits tools to attract and maintain top talent, Sapers & Wallack has created a Supplemental Alternative Retirement Plan (SARP), that uses life insurance to create a “Roth look alike” program to diversify a tax-advantaged retirement strategy. A SARP is a creatively designed deferred compensation program which helps bridge the retirement income gap by providing employees the ability to contribute additional funds (above the government contribution limits) to a portable life insurance policy which can be invested in the markets. A SARP allows for both tax-deferred accumulation and the flexibility to take tax-free income distributions whenever someone wants to in retirement.
Life insurance may not be the first thing that comes to mind when thinking about how to live better in retirement. But for Sapers & Wallack, who understand the tax advantages of insurance products, life insurance policies offer a surprisingly elastic means to save, allocate premiums to various market segments, and withdrawal when the time is right—not when the plan document states you must.
As a benefit offering, executive employees can elect the amount to be withheld from pay. This amount becomes an after-tax contribution as premiums paid into an institutionally priced life insurance policy in their name. Earnings grow tax-deferred and monies may be distributed from the policy tax-free to provide supplemental retirement income.
Consider the following SARP advantages for your executives:
- Portability – they own the life insurance policy and it goes with them when they leave
- Tax-deferred Accumulation – cash value accumulates on a tax-deferred basis
- Investment Choice – premiums may be allocated among different fund choices within the product
- Tax-preferred Distributions – cash values can be accessed via income tax-free withdrawals and loans to supplement retirement income
- Tax-free Death Benefit – may provide heirs with a residual income tax-free death benefit
- Tax-risk Diversification – compliments pre-tax retirement plans that are taxable at distribution
- Benefit Security – what is funded is theirs and cannot revert to the company
- Asset Protection – in many states, including Massachusetts, properly structured life insurance policies are a protected asset.
At Sapers & Wallack, we are most concerned not with what people earn but what they are able to keep. The biggest beneficiary that all Americans have on their pre-tax retirement accounts is the Internal Revenue Service. So, we set out to build a program that carries the benefits of executive deferred compensation AND allow the employee to keep as much of that money as possible.
To learn more about what employers are doing to attract, retain, and reward top executives in the most tax-advantaged way, contact us for a deeper dive into what may be the ultimate retirement savings program.