Distributions from a Life Insurance Retirement Plan (LIRP) are only tax-free if the money is taken out the correct way. If you take a normal distribution, as you might with a 401(k) or IRA, the money can be taxable. By taking money out by way of a loan, however, it is tax-free. Any time you receive a loan, whether from the bank or your rich uncle, that money does not show up on your tax return as income.
Here’s Why Your Distributions Are Tax-Free:
The IRS anticipates that you will pay the money back with dollars that have been taxed.
When you take money out of your LIRP, the life insurance company is actually giving you a loan from their own coffers.
How It Works:
You call up and say, “I need $10,000.”
They take $10,000 out of your growth account (with a balance of $100,000) and put it into a loan collateral account that earns 3% per year. Since you still have $10,000 in your loan collateral account, your bucket technically still contains $100,000. In the very same transaction, the life insurance company sends you a loan from their own coffers. For this loan, they charge you 3% interest. Remember, loans don’t show up on your tax return.
When you die, all the money in the loan collateral account is used to pay back the outstanding loan that you have with the company. Because the interest charged on the loan is the same as the interest being credited in the loan collateral account, the net cost to you over the course of your lifetime is zero.
In short, you asked for $10,000, you received $10,000 in the mail, and you never paid any tax. That’s how we utilize this bucket to take tax-free distributions.
Is a LIRP the Right Retirement Strategy for You?
The Secure Retirement Strategies team will help you develop a comprehensive plan to secure your financial future. Our services help you to grow your assets, preserve your life savings, and provide for the people and causes you care about.
To find out if a LIRP will help you achieve your ideal retirement, call Secure Retirement Strategies today at 610-983-8531.