This type of planning could become more advantageous if the President’s plan moves forward.
Retirement planning strategies based on life insurance could receive a considerable boost if the pitch that President Obama has made to cap IRAs at $3.4 million is able to move forward.
Individuals who have a large amount of money within their retirement accounts could benefit most.
The reason is that those individuals would be able to withdraw funds from those accounts, pay the taxes that would be applicable to having made the withdrawal, and then purchase a life insurance policy using those funds.
This life insurance strategy is highly appealing to those who are aiming to protect their beneficiaries.
The reason is that assets from retirement plans are typically deemed to be “bad assets” when it comes to being vehicles for estate planning. The reason is that beneficiaries may find themselves faced with income taxes that need to be paid. At the same time, life insurance provides beneficiaries with a payout that is not subject to income tax. If the benefits are structured within the form of an irrevocable trust, it could also pay out to beneficiaries without estate taxes, as well.
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According to BNY Mellon Wealth Management estate planning strategist, Jeremiah W. Doyle IV, “You are converting a bad asset to a good one.” A Matauro LLC managing partner, Matt Klein, also pointed out that another reasonable savings alternative can include cash value life insurance, as its growth is tax deferred. Klein’s company specializes in planning through these policies.
Whether indexed or variable, universal life insurance can be designed in a way that the money from premiums could primarily be sent toward the accumulation of cash. In this way, according to Klein, the sole reason that the policy exists isn’t necessarily its death benefit. Instead, the policy’s tax deferred growth capability, as well as the fact that withdrawals from the cash value can be made by policyholders, tax free, can make these policies very valuable funds sources upon retirement.
At the same time, it is important to note that there remain risks in using life insurance policies in this way, so it is recommended that an expert be consulted before making any decisions of this nature.