Using Funds in Your IRA to Purchase Life Insurance

You made savings for retirement a priority, putting as much money into your IRA or other qualified plans as the law allowed. However, like many other successful individuals, you may have accumulated other financial assets for retirement and do not need your IRA or other qualified plans to support your current lifestyle.

Although you would like to leave your IRA or qualified plan asset intact for your heirs, it may not be possible due to tax issues associated with this transfer and may actually end up passing more to the IRS than to your family. Furthermore, prior to age 59 ½, distributions are subject to an additional 10% tax. Once you reach age 72, you will be required to start taking Required Minimum Distributions (RMDs) from your plan, whether you need the money or not. By using an IRA maximization approach, you can transfer wealth to your heirs and grow a legacy for your family.

How It Works

With this IRA maximization strategy, you purchase a life insurance policy and use after-tax distributions from your IRA or other qualified plan to pay the premiums. Upon the insured's death, the IRA or qualified plan will pass to the designated beneficiaries and the life insurance death benefit will be paid income-tax free to the named beneficiaries.

Benefits

• Life insurance can increase amount of money left for heirs.
  
• Life insurance provides an income tax free death benefit.
  
• Life insurance cash values grow tax-deferred.
  
• Life insurance, depending on the state, can offer creditor protection.
  
• If life insurance is owned by an ILIT, the proceeds can help reduce estate taxes.
  

Considerations

• Evidence of insurability is needed to qualify.
  
• You must pay income taxes on IRA withdrawals.
  
• The life insurance policy could be subject to medical and financial underwriting requirements.
  
• The purchase of life insurance and the creation of ILIT have costs associated with them.
  

We’re Here to Help

Using an IRA or other qualified plan assets to fund a life insurance policy can help manage taxes and potentially increase the total amount passed to your beneficiaries. In addition, life insurance offers both a tax-free death benefit to beneficiaries and tax-deferred growth of cash value.

If you have questions about how to use your IRA funds to purchase life insurance, contact a member of our team today.