By Andy Ives, CFP®, AIF®
IRA Analyst

Many years ago, my wife and I went to lunch at a pizza joint in a strip mall. The friendly gray-haired host in sensible shoes (whom I pegged for mid-to-late 60’s), tucked two menus under her arm, grabbed a couple sets of silverware wrapped in white paper napkins, and led us to our booth. Since the noontime rush was yet to hit, our host decided to chat. She asked how our day was going, made a pleasant comment about my wife’s shirt, and told us she was a bit tired because, “after this I need to run over to my second job at Kohl’s. Just trying to keep a roof over my head. Been pretty busy since my third husband died.”

Record scratch. Music stops.

She said she hoped we enjoyed our lunch, smiled, and returned to the front where another group was waiting to be seated. I contemplated what I just heard. Either she burned through three husbands who are now all deceased, or one (or both) of the first two are still alive and just husband number 3 is dead. Regardless, I think somebody messed up.

My financial brain started to spin. This woman should be playing canasta with her friends, not showing a stranger and his wife to their seats by a window. She could be hitting golf balls or taking care of her grandkids while the parents run errands. One husband has assuredly passed on, potentially two others have also died. Did anybody think to buy some life insurance?

When a person reaches the magic age of 59 ½, they have full access to their IRA dollars, penalty-free. While taxes will be due, they can withdraw as much as they wish. One common tax strategy for IRA owners (of any age) is to convert a portion of their IRA each year to a Roth IRA. Roth conversions enable IRA owners to pass tax-free dollars to beneficiaries. (Of course, this assumes they can afford the conversion taxes and that they actually have a traditional IRA.)

Yet another and more advanced strategy typically reserved for those over 59 ½ is to draw down a traditional IRA and use those distributions to pay the premiums on a life insurance policy. Taxes will be due on the withdrawals, and the person must be insurable. But if these two hurdles can be overcome, an individual can potentially pass an even greater sum of tax-free dollars to their beneficiaries. Furthermore, both the Roth conversion and life insurance strategies reduce (and potentially eliminate) future IRA required minimum distributions.

I don’t pretend to understand the personal financial details of the host at the pizza place. I didn’t ask for her annual income or inquire about investment risk tolerance. And it certainly would not have been appropriate to question her about current cash flow needs or future goals. However, at one point in her past I am sure there was an appropriate time to ask these questions. Did anyone broach the subject? Was any thought given to her care should tragedy strike?

Current circumstances indicated no. Even if husband 3 was the only death and 1 and 2 divorced, I have to think there was some sort of estate planning or life insurance option that could have helped. Mortality is not a fun topic of discussion, and some flat-out refuse the conversation. Oftentimes this leads to post-death beneficiary money squabbles, unnecessary dollars lost to the IRS…and a friendly little lady in sensible shoes working two jobs to keep a roof over her head.