David becomes very uneasy when advisors recommend that their clients take the money in their IRA and convert all of it into an LIRP. The LIRP has a lot of benefits, but it really should be used in conjunction with other streams of tax-free income.
The LIRP is powerful only to the extent that it’s used in collaboration with, in most cases, four to six other streams of tax-free income. That’s when it really shines.
An LIRP conversion is something that you would use with a client when there are no other opportunities for Roth or Roth conversions available.
Most annuity companies are okay with you doing a Roth conversion, as long as you do it all in one year. What do you think the tax implications of that might be?
There are some companies that allow what is known as a midair conversion, where you take a distribution from the IRA and then you convert it to a Roth IRA on the other end. This isn’t very common though and most companies shy away from this.
With the LIRP we get as little death benefit as the IRS requires of us and stuff it with as much money as the IRS allows in order to mimic all of the tax free benefits of the Roth conversion. As your annuity balance goes down, you will have to structure the LIRP just the right way, but if you do, your money will be able to grow in a completely tax-free environment.
The average expenses over a year over the life of a LIRP are about the same or a little less than a typical IRA or 401(k). Not only are you able to grow your money in a tax-free environment, but you’re also able to get a death benefit that doubles as long-term care.
The second scenario where an LIRP conversion makes sense is in a situation where you are a non-spouse inheritor of an IRA. If you are a spouse that inherits an IRA, you can do a Roth conversion without any issue, but that’s not true for a non-spouse. They will be required to take RMD’s on that IRA over their life expectancy.
You can’t convert an inherited IRA and turn it into a Roth IRA. You can put that money into a traditional IRA, but there are limitations and that’s where a LIRP conversion can be very useful.
If you believe tax rates are going to be higher in the future and have inherited an IRA, the natural place to put that money may very well be in a LIRP.
An LIRP conversion is not an officially recognized term, but the idea is very useful. If a Roth conversion is not available, an LIRP conversion is your next best option. With an annuity with a 10% withdrawal limitation, that is a great place to start shifting money to an LIRP.