Large IRA distribution technique
Has anyone seen a new technique for large IRA distribution? Supposedly, you can take a large distribution, purchase a life policy, and three years later re-fund the IRA with no tax implication?
Has anyone seen a new technique for large IRA distribution? Supposedly, you can take a large distribution, purchase a life policy, and three years later re-fund the IRA with no tax implication?
Permalink Submitted by Alan Spross on Thu, 2010-03-04 04:23
The large distribution would be taxable and possibly subject to early withdrawal penalty. Those funds could then be used in any way desired including purchasing life insurance. What would be interesting is how the IRA could be funded again, other than making regular contributions or rolling over other retirement plan assets.
Permalink Submitted by Al Fry on Thu, 2010-03-04 16:14
I think this is a scheme from a few years back where the IRA would invest in an LLC that would purchase springing Cash Value Life Insurance on the Partner, which would be rolled out to the partner or an ILIT in a few years with little or no taxation. I believe the IRS has put valuation techniques in place that pretty much eliminates this plan as a viable option (if it ever was).
Permalink Submitted by mk foss on Thu, 2010-03-04 17:22
A very recent court case dealt with this specific issue. Matthies v. Commissioner (134 T.C. No 6) Mr. Matthies rolled his IRA into a new profit sharing plan (for a newly created S corporation) which purchased a $80 million life insurance policy for $2.5 million in premiums. The plan sold him the policy a year later for $315,000 – the next year he exchanged the policy for a $1.3 million dollar one. The Tax Court agreed with the IRS that it didn’t work. The taxpayer had to recognize over a $1 million in income in connection with his bargain purchase.
In 2005 IRS issued regulations to value life insurance policies so that this couldn’t happen in the future. The 2010 tax court case related to transactions occuring in 1999-2001.