While you can use your 401(k) to purchase insurance, whether or not it’s wise depends on your unique situation. Recently, the IRS released new rules allowing for the purchase of annuities with tax deferred retirement plan funds. For many, the attraction of using their 401(k) to pay for life insurance comes from the partially tax-deductible premiums.
The Employee Retirement Income Security Act places some limits on the amount of life insurance you can buy; however, those limits fall away after a few years.
So, why would this now be an option, many wonder? The answer is simply because we’re living longer. Unfortunately, we didn’t necessarily plan for these longer lives or maybe we did and just underestimated what we might need. These policies are purchased at a small price and they’re left until you reach a certain age.
For many of us, as we approach retirement and knowing life expectancies are on the rise, these options are ideal for many Americans in their long term planning efforts while also ensuring they have a regular stream of income for as long as they live. Designed to deal with the shortcomings of the longevity annuities that often fall short in tax deferments, may say without this option, they faced an uncertain future.
Those with retirement plans, including 401(k) plans, IRAs and others can earmark up to 25 percent – though no more than $125,000 for routing to these plans with no requirements of making an RMD on the funds. Those enrolled must begin taking payments on these annuities no later than age 85.
The goal for providers is to keep it simple; they’re not designed to offer a lot of intricacies, though there will be some leeway in terms of additional options, including even refunds for the purchase of the annuity should the person die before reaching the age of being able to use it. This is where good estate planning comes in, too.
Not only that, but new rules will also protect purchasers who exceed the 25 percent or $125,000 limit on premium payments, allowing them to correct the error without disqualifying the purchase. This is an added safety feature that will mean peace of mind for some. The money grows, the return is predictable to a large degree and frankly, the risks are minimal.
There are those who advocate a more aggressive effort, but for many, this is a safer option that fits well with many baby boomers. It’s less about the aggressive risk taking and more about the consistency and peace of mind. Remember, not everyone approaches finances in the same way. Options are what make the difference.
If you’d like to learn more about how they fit into your estate planning efforts, give us a call. We’re happy to explore the many options these new vehicles offer. In place for around a year, there’s no denying the many benefits they offer and what they can mean for the futures of many baby boomers.
Daniel DeBruyckere
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