Using qualified retirement plans to re-invest annuity cash flows

In part six of my summer series on " Investing and saving in a low interest rate/high tax rate world" I discuss the concept of using qualified retirement plans as the most appropriate vehicle for allocating taxable damage awards and cash flows into tax deductible accounts.

This concept, of using taxable cash flows to fund tax deductible retirement accounts, was first formulated for our trial lawyer clients. The object in those early cases was to take a large taxable fee, structure it over a period of years so as to avoid the big lump sum cash tax it, and then dedicating a part of those future payments to fund defined benefit retirement plans.

In its simplest form, we would take $500,000 for example, spread it out over 5 years in lump sums of $110,000 for five years, with some or all of those funds paid each year into a tax deductible qualified retirement program. The math is more than compelling. You can either pay up to 50% of your $500,000 in taxes immediately, OR, you can spread it out over 5 years and make it fully tax deductible and put the entire $500,000 into your own pocket. You make the call, $250,000 now, or $500,000 in your retirement plan where it grows tax deferred. Not a tough decision is it?

So, once we saw the merit of that approach, my office at Wahlstrom & Associates began adapting it to the other taxable damage cases we work on, such as wrongful termination, wrongful imprisonment, breach of contract, environmental or property loss claims, etc. In each of these it became abundantly clear that the ability to structure payments over time into tax deductible accounts provided the greatest amount of leverage for the least amount of investment risk of any competing strategy.

I cover this in general terms in today's video, but if you want to know more about how to convert taxable damage awards and lump sum settlements into future income and tax deductible accounts, please contact me at my office at Wahlstrom & Associates and we will be happy to explain how this can be done safely, conservatively and using insured or guaranteed rate products.

Posted on August 11, 2010 .