new kid on the block
I just saw Ed Slott on the public television. He spoke about three ways to keep our IRA from the government. 1. life insurance
2. estate tax exemption 3. stretch IRA.
I didn’t really understand how the life insurance one worked. Can anyone help the new kid on the block understand how this tax exemption works.
Thanks. 🙂
Permalink Submitted by Bruce Steiner on Tue, 2008-04-22 02:07
The policyholders collectively will receive a return equal to the return the insurance company earns by investing the premiums, less the cost of running the insurance company. But each individual policyholder’s return will vary, mainly on how long he/she lives. If you die substantially before your life expectancy, you’ll come out ahead by buying life insurance. Like buying a put option, life insurance protects against the risk of dying too soon.
Permalink Submitted by R Best on Tue, 2008-04-29 23:08
Here’s how. Say you have an IRA as part of an estate. If the IRA is subject to federal estate taxes, state estate taxes and income taxes, it can reduce the IRA by 50% or more.
If you have life insurance on the owner for an amount to cover these taxes, you insure a larger part of that IRA will pass on. You could set the insurance up outside of the estate if necessary so it is not subject to taxes as well.
You have to take into the cost of insurance and the owner needs to be insurable. This is why planning ahead is so critical. For penny’s on the dollar, you’ve paid those taxes.
If there is a spouse and kids, you could leave the spouse the insurance benefits and make the kids the IRA beneficiary. Now they can stretch it over their life and the spouse gets the life insurance money, generally, income-tax free. Again for cheap you could have doubled the $ that gets passed on.