Are you familiar with Roth IRA conversions?
- You can take advantage of the enormous potential of indexing to grow and develop your funds safely
- Take advantage of tax-free income via policy loans
- Take advantage of access to your funds without the impact of a market value adjustment.
- Create and leave a financial legacy for your heirs above the account value.
What Exactly is an IRA to IUL Conversion?
An IRA Rollover which is the process of transferring the money in one IRA account to another or a Roth Conversion, which is a process of moving money from a qualified account to a new tax-free Roth IRA account are both very similar processes.
When you go though an IRA rollover to life insurance, (we recommend IUL), you can eliminate the IRS rules that can impact your income stream during retirement.
Is IRA to IUL Considered a Sound Investment Strategy?
The answer to this question is yes, under certain conditions.
Like most financial strategies, deploying an IRA to IUL conversion can be advantageous for some investors, while not the best strategy for others. Furthermore, like with any strategy using a life insurance product, it’s essential that the policy is structured properly to make certain that your financial goals are met.
It is also important to know which IUL company is the best for your situation. There are over 40 life insurance companies offering indexed UL, but I would only recommend 6 or 7 to handle the IRA to IUL conversion.
It’s worth mentioning that although some previous attempts at converting an IRA or 401k to an IUL have been considered to be controversial because in some cases the strategies were dependent upon IUL illustrations that were simply unrealistic. Suffice it to say, with any investment strategy and product, there’s a right way and a wrong way to obtain what many people call IRA insurance.
Knowing this, the following to qualifiers will help in the decision-making process:
- Would it be more beneficial for you to invest in a tax-deferred investment product or a tax-free investment product? If so, then convert an IRA to diminish your tax liability.
- Are you at least 59 1/2 years of age?
- Are you healthy enough to qualify for indexed universal life insurance?
- If your answer is the tax-free income option and your are healthy and older than 59 1/2, then IUL could be an option to consider.
Here is what You should Consider before converting your IRA
- Since your new IUL will take time to accumulate the funds you desire, it makes good sense to use only a portion of your IRA funds when you start the conversion. Especially if you will need funds for an income stream in the next 10 years.
- Analyze Your IRA for an Informed Decision. You should consider (along with the help of your financial planner) what the tax liability will be for your IRA over your lifetime. This will help you understand if your investment strategy should be tax-deferred or tax-free.
- Compare your analysis to an IUL illustration prepared by an insurance professional. This will allow you to compare after-tax growth in an IRA with the after-tax growth in an IUL. Your insurance professional should be experienced in designing an IUL, also known as a LIRP (life insurance retirement plan) that will illustrate legitimate returns so a legitimate comparison can be made.
- Tax Liability should be handled responsibly. You are going to have some tax liability when you move some of the IRA funds to the IUL so make certain you have a strategy to accommodate the tax liability. And, do not use funds in your IUL to pay the taxes due on your IRA.
The Structure of Your IRA to IUL Conversion is Critical
The two primary elements to structuring your IUL are how it is funded and what the death benefit should be. It’s essential that your IUL is funded in the most efficient manner:
Funding
- Move the funds to the IUL policy quickly to speed up the cash value accumulation
- Do not over-pay into the IUL because it could be a risk of becoming a modified endowment contract (MEC). MEC loans are not tax-free and so you would be defeating the purpose of the conversion.
- Consider funding the IUL using a 5-pay premium plan. Using the 5-pay plan allows you to fund the IUL quickly and will help the policy from becoming a MEC. A 5-pay also lessons the impact of having to pay the taxes when you withdraw the funds from your IRA by spreading your tax liability out over 5 years.
Death Benefit
- Selecting an appropriate death benefit is just as important as funding your IUL. Although most investors are tempted to select a minimum death benefit and forget that they can use this benefit as a legacy for the heirs or a favorite charity. The good news is that you can lower the death benefit at a later date but remember that it cannot be less than the total premium you’ve paid into your policy or you could defeat the purpose of having IRA insurance.
The Responsible IRA Conversion
Your financial advisor is responsible in designing and monitoring your IUL to make certain your goals will be met. As the policyholder, you should take on the responsibility of reviewing the annual policy reports and speaking with your financial professional if you have concerns about the report or are confused about the process.
Because of the tax savings and the structure on the IUL, the IRA to IUL conversions have become extremely popular with the baby boomer generation across the U.S. This investment strategy provides a dynamic method to accumulate retirement funds and offers tax-free income during retirement.
Frequently asked Questions
Is it a good idea to convert my IRA to IUL?
Although it’s not appropriate for everyone, the IRA to IUL conversion can generate tax savings over your lifetime and increase your retirement plan substantially. By making the conversion you will no longer be subject to the constraints that the Fed places on the traditional IRA.
What exactly is an IRA to IUL conversion?
Similar to the IRA rollover, the IRA to IUL conversion moves money from one investment product to another. And, similar to the Roth IRA conversion process, the IRA to IUL conversion requires paying taxes no on funds removed from a tax-deferred account and investing the net funds into a tax-free investment product (the IUL).
Are some companies better than others for IRA to IUL conversion?
Currently, there are more than 40 life insurance companies offering IUL. After years of experience with converting IRA to IUL, we only recommend a handful of companies that we know will make the conversion properly.
Is an IUL a good strategy for retirement?
Currently, about 75% of CEOs in the top 500 companies use IUL for their retirement strategy. The IUL lets you invest in the market without being in the market and you can have peace of mind knowing you will not suffer loss because of the market.
