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Rolling Up the Rollovers

Advisors who specialize in helping older clients deal with retirement plan conversions may be able to build an extremely lucrative practice

A taciturn investor met with John Neyland, an independent representative, after becoming unhappy with her broker's regular pitch to roll over her large 401(k) plan into an IRA. Neyland told her that if she ever wanted to open an IRA, he could save her a boatload of taxes. In short order, she switched to Neyland and did a rollover through him.

“Her previous broker was a generalist who had her as a client for 10 years,” explains Neyland, who runs JCN Financial and Tax Advisory Group in Baton Rouge, La. “But his business model was to collect assets while mine is to solve problems.”

Neyland's particular brand of problem solving is called IRA-distribution planning, and advisors who have embraced this niche say the potential payoff is tremendous. “It's the last frontier and there is no competition, so you can set yourself heads and shoulders above the competition,” says Jack Keeter, an independent rep at Pacific Estate and Retirement Planning in Anaheim, Calif.

Since immersing himself in IRA rules a half-dozen years ago, his assets under management have grown 35 percent a year and he's graduated from one office and an assistant to three locations in Southern California with five full-time staffers.

He's now aiming for one of the biggest retiree markets in the country, opening a $1.4 million office surrounded by the Del Webb retirement communities outside Las Vegas. “If you become an IRA-distribution specialist and get the word out about your specialty,” Keeter says, “you can prospect yourself out of prospecting.”

It's, of course, no secret that the retirement market is huge. “This is where all the money in America is and where it is going,” observes Ed Slott, CPA, the principal of E. Slott & Company in Rockville Centre, N.Y. “If you are going to pick one thing that you are good at it, it should be the one place where the money is.” Add to this money trail the record-breaking transfer of wealth that's now under way and the retirement dreams of the roughly 80 million baby boomers and advisors have what Slott calls the “perfect storm of IRA opportunity.”

Getting started is easy. A quick tour of the Internet reveals a variety of educational sources, from books to seminars given by experts, Slott among them, and they all cover pretty much the same territory. The most important lesson is how to lower or eliminate taxes for clients on their IRAs when a 401(k) is rolled into one, distributions are taken and when an heir inherits an IRA. Savvy advisors will also learn how to deal with insurance and beneficiary issues and to develop the marketing approach that works best with IRA clients.

Tax Break

One of the smartest strategies for reducing or eliminating IRA taxes is called net unrealized appreciation (NUA). That was what Neyland used with the woman who left her old broker for him. She had a large chunk of appreciated company stock, in this case ExxonMobil, in her 401(k) plan, and he explained how she could ultimately shrink her tax bill dramatically by paying her taxes on the shares and moving them into a taxable account when she rolled over the rest of her 401(k) into an IRA.

By doing this, she would pay immediate income tax only on the original cost of the ExxonMobil stock rather than its significant appreciation. If she ever sold the stock, she'd only owe long-term capital gains tax on the profit, or NUA. The tax can't be more than 15 percent. If she sold the stock inside her IRA, she'd owe income taxes that reach as high as 35 percent. Her former broker had never discussed NUA with her. “I got her 401(k) after visiting for four hours,” Neyland says.

Sharing the NUA strategy with prospects can be a huge help in reeling in large accounts, Slott says. “I find that advisors pick up the biggest accounts right away with NUA since other advisors never mention it.”

Family Matters

Advisors will increase the chances of handling an investor's assets after death if they introduce themselves to the rest of the family long before this milestone occurs. David Buckwald, who is an independent rep at Bellmare Financial Group in Cranford, N.J., arranges family meetings with agreeable clients and their grown children so that their best-laid plans aren't ruined when heirs become mesmerized by dollar signs. “I know in my own planning, I would not want to count on my kids knowing these IRA rules. Most kids say, ‘Give me the money.’”

In shepherding this future wealth transfer, Buckwald asks clients if they have copies of their IRA beneficiaries forms and, if they do, keeps them in their files. With so many mergers in the financial-services industry, the forms may get lost. If beneficiaries can't produce mom or dad's form after a death, an IRA will have to be disbanded and taxes paid. Of course, advisors need to make sure the client has written down the right beneficiaries, too. If they've named their “estate,” this will force the ultimate beneficiaries to prematurely cash in the IRA — rather than potentially stretch the distributions over their lifetimes.

Buckwald also makes sure family members understand what's involved in preserving a stretch IRA rather than blowing the money and paying taxes. One way to achieve the maximum stretch is to make sure an IRA gets divided either before or after the owner's death. Loved ones who inherit an IRA have until Dec. 31 of the year following the death to split an IRA between them. If the IRA isn't divided into separate shares, all the beneficiaries are stuck with an IRA payout schedule that is based on the age of the oldest beneficiary.

Sweating the Details

Mistakes can be costly. For example, Harold Rogers, a registered representative at Retirement Services in Jacksonville, Fla., noticed a fatal flaw in a rollover account that a son had established after inheriting an IRA from his father. “When I asked where he had rolled the money over from, he said it was a rollover from when his dad died. I said, ‘Wait a minute. Time out.’”

Rogers knew that only a spouse can roll over an inherited IRA. All other beneficiaries must keep the IRA in the deceased owner's name and add their own name to the account. Because of the error, the son had to pay tax on his dad's IRA and lost its tax protection.

Even advisors who check beneficiaries often fail to scrutinize the lengthy custodial forms, Rogers says. When reading this document, advisors want to make sure that the custodian will allow an IRA's beneficiaries to stretch their inherited IRA. Advisors also want to check to make sure the current custodian would allow a non-spouse beneficiary to move an inherited IRA from his or her institution to another. In addition, advisors should look to see if the custodian will allow an IRA to be split among the beneficiaries after the owner's death.

Insurance Matters

IRA planning provides an increased opportunity to sell life insurance policies, especially for older investors who have the bulk of their estate in IRAs. Insurance coverage, while costly when policyholders are elderly, can be a godsend to heirs because the policy provides tax-free cash to beneficiaries to pay eventual income and estate taxes. A good rule of thumb, Slott suggests, is to buy enough life insurance to cover at least 50 percent of the projected value of a client's estate at his death. Buckwald uses insurance to help clients keep as much of their IRA as possible while still passing along a substantial inheritance. One way he accomplishes this is by urging certain clients to use part of an IRA to buy an immediate annuity to provide a steady income for their lifetimes and to use a portion of those payments to buy life insurance that will provide heirs with a bigger estate. A 70-year old who buys a $1 million immediate annuity, Buckwald says, might receive $100,000 a year for life and use roughly $28,000 to pay the premium for a $1 million life insurance policy. He suggests that guaranteed universal life insurance works best for this strategy. The man in his example receives guaranteed income for life and his children inherit $1 million when he dies.

Learning the IRA Ropes

A variety of ways exists to become an IRA expert, starting with books. Among the available titles are attorney Natalie Choate's Life and Death Planning for Retirement Benefits (Ataxplan Publications, 2003). Slott has two books: The Retirement Savings Time Bomb and How to Defuse It (Penguin (Non-Classics), 2003) and Parlay Your IRA Into a Family Fortune (Viking Adult, 2004). Another resource is Barry Picker's Guide to Retirement Distribution Planning, which is available on the certified public accountant's Web site ( Any one of them might provide the opening to a new business line.

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