Tax Free Conversions- Conversion Taxes Paid

Roll Out

Tax-Free conversion is a carefully engineered transformation from qualified tax deferred money to tax free.

To convert a tax-deferred retirement account like a Traditional IRA (401K or other Qualified Retirement accounts) to an Indexed Universal Life (IUL) insurance policy, you’ll need to withdraw funds from the IRA, pay taxes on the withdrawn amount.

IRA-to-IUL Conversion ROLLOUT Strategy

Any Qualified Retirement Account Including ROTH

Converting retirement funds from a tax-deferred status to a tax-free status is nothing new. Over the past decade, more and more Americans – helped by financial advisors – are realizing deferring taxes may not be in their best financial interest. But while in the past most Traditional IRAs were converted into tax-free Roth IRAs, today funds from a growing number of IRAs are being placed in Indexed Universal Life (IUL) insurance policies. And it's easy to see why: IUL can provide four powerful benefits to today's savers:

Four Powerful Benefits of IUL for Today's Savers

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The power of indexing to grow funds securely

Market-linked growth potential with downside protection.

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Tax-free income through policy loans

Access tax-free income during retirement through policy loans.

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Access to funds with no market-value adjustment

Flexible access to your funds without penalties or adjustments.

👨‍👩‍👧‍👦

A legacy for heirs above the account value

Death benefit provides additional value beyond account balance.

Thanks to these benefits, IUL has become a key component of holistic planning for a growing number of Americans. Advisors understand that IUL can deliver a package of features not found in other savings vehicles.

Is an IRA-to-IUL Conversion Strategy Sound?

The answer is yes, with important qualifications.

Like many financial strategies, IRA-to-IUL conversions can be beneficial for some clients, while not appropriate for others. Additionally, as with any insurance strategy, proper structuring of the policy is critical to ensure the client's best interests are met.

When a client has been properly qualified and an IUL policy has been properly structured, an IRA-to-IUL conversion strategy can be an integral part of retirement planning. In fact, the approach recommended has been reviewed and approved by "knowledgeable" CPAs. Unfortunately, vast majority of CPA’s have absolutely no experience in the implementation of tax free. Their standard motto is defer taxes, defer taxes, defer taxes! Inadvertently creating a huge tax liability in retirement, makes no sense they are not safeguarding your money…………

Structuring: Structuring the IUL policy appropriately

There are two key components to structuring an IUL policy appropriately:

Component	Description	Key Considerations
How the policy is funded (premium pattern)	Premium funding strategy	Balance speed vs. MEC avoidance
How the death benefit is set	Death benefit structuring	Minimize while maintaining compliance

Premiums

It's important your client fund his or her IUL policy in the most efficient way. This means balancing two interests:

Getting funds into the IUL policy quickly, to maximize accumulation
Ensuring the premium pattern does not cause the IUL policy to become a MEC, as loans from a MEC are not tax free.

A 5-pay premium is generally the ideal structure for an IRA-to-IUL conversion strategy.

Premium Structure Options

5-Pay

IDEAL

Generally the ideal structure for IRA-to-IUL conversion

7-Pay

Alternative

May be appropriate to avoid higher tax brackets

10-Pay

Conservative

Spreads tax impact over more years

      Why 5-Pay is Often Ideal:
      
          5-pay moves premiums into the policy quickly while ensuring the policy
          does not become a MEC.
        
          It also distributes the impact of paying taxes on withdrawn IRA funds
          over more years, compared to a more rapid funding pattern.
        
          In some cases, a 7-pay or even 10-pay may be appropriate to avoid
          moving the client into a higher tax bracket in any given year.

Death Benefit

The death benefit is an important consideration. After all, IUL can deliver something your client's IRA cannot: A legacy above and beyond the account value.

Critical Death Benefit Guidelines:

In an IRA-to-IUL conversion strategy, it will often make sense to set the death benefit at the minimum allowed by IRS guidelines (available in your carrier illustration software). This minimum death benefit will ensure the policy does not become a MEC, and the tax status of your client's funds will not be at risk.
You should not dramatically lower the death benefit after the first few policy years. Doing so risks making the policy a MEC. If you choose to lower the death benefit in future policy years, be sure the reduction does not result in a death benefit less than the total amount of premium paid.

Compliance & Professional Guidance

In today's compliance environment, it is critically important to handle an IRA-to-IUL conversion optimization strategy with an experienced financial and retirement planning specialist.