could life inssurance in 401(k) be rollover over to IRA

Submitted by Shahpar Naghshineh on Thu, 2009-10-29 22:14

Hi,

we have a client who is retiring and has life insurance in a 401(k) and want to roll that into his IRA. is that possible?

what are his options?



Submitted by Alan Spross on Thu, 2009-10-29 23:20

The policy itself cannot be rolled over to an IRA because life insurance in an IRA is a disqualified investment. However, there are various options for surrender of the policy or distribution that are best addressed by someone with experience in that area.



Submitted by Ralph Varland on Wed, 2018-04-25 13:57

When a life insurance policy is surrendered in a 401 k plan, can the cash value be rolled into the mutual fund side of the 401k for the participant with no tax liability?



Submitted by Alan - IRA critic on Wed, 2018-04-25 19:18

I believe so, but check with the plan. If the cash value is distributable, it could also be rolled over to an IRA.



Submitted by Nathan Kastner on Thu, 2018-04-26 16:04

Life insurance cannot be rolled into an IRA. They are considered disqualified assets. You can typically: 1. Surrender the policy. Since the policy is owned by the 401k trust, the cash surrender value will be remitted to the 401k trust and added to your participant balance. It can then be invested along with your other 401k assets, or it can be rolled into an IRA. 2. Purchase the policy from the 401k trust. The life insurance policy is an asset and it does have a value. You can “buy” the life insurance policy out of the 401k using non-qualified cash for the policy’s fair market value. The cash goes into the 401k and the policy comes out. If the trade is made at FMV, then there is no taxable event. There are varying opinions on how to properly value an insurance policy. Some argue that the cash surrender value is a good proxy for value and others argue that you need to use the interpolated terminal reserve, which must be obtained from the insurance company. For cash value policies, those two numbers are often similar. 3. Simply distribute the policy. Have the ownership changed from the 401k trust to the plan participant. This is considered a taxable distribution from the 401k. Talk to your CPA before doing this. But what you do with the policy after that is no longer a concern of the 401k. 4. If the policy is one that allows for loans to be taken against the cash value, you could distribute the policy (see #3), take a loan from the cash value, and then turn around and contribute that loaned cash to an IRA. If done within 60 days of the original distribution, this will qualify as your once-per-year indirect IRA rollover. This option is complicated. Taking loans from insurance policies can cause the policy to lapse and is not to be done without consulting a qualified insurance specialist. You will need illustrations showing how the loan will affect the future of the policy, and you’ll need to fully understand the potential tax and premium implications of your actions.Lastly, you didn’t ask this, but I’ll offer a word of warning – life insurance inside of a 401k is rarely a good idea. Like alternative IRAs, this strategy is full of landmines that are almost never explained well (or at all). People that sell these strategies understand insurance, but typically have no understanding of 401k regs. Things like “incidental benefit rules” are frequently violated by the insurance agent and/or participant. And I’ve yet to meet a participant or plan admin that was aware of the regulations that prohibit a 401k from owning insurance on someone that is not a plan participant. In other words, the policy CANNOT continue to exist in the 401k after your seperation from service.Good luck on this one. You are advancing through dangerous territory. Ask lots of questions. “Measure twice and cut once”.



Submitted by David Mertz on Thu, 2018-04-26 17:17

#4 is not permitted.  One is not permitted to keep the distributed property (the insurance policy in this case) and roll over cash in its place.



Submitted by Nathan Kastner on Thu, 2018-04-26 17:39

Really? I would like to know more. I’ve never tried #4: I’ve only read about it. Under what regulations is it prohibited? And how would the IRS be able to police such a transaction? It seems to me that the distribution of the policy from a 401k would generate a 1099-R showing a taxable distribution of X. If, within 60 days, I make an indirect rollover contribution of X, the receiving custodian will generate a 5498 that confirms receipt of X as a rollover. How in the world would the IRS know that life insurance was even involved in the transaction? Does the 1099-R somehow indicate such? Another example: we agree that I can purchase the policy from the plan for FMV, yes? So what if I get a draw from my HELOC, purchase the policy, take a loan once I become the owner, and use the loan proceeds from the policy to repay some/all of the HELOC? Is that any different?Again, I’m really not trying to being argumentative. You are very likely correct, and this is an area in which I do not frequently dabble. But, on it’s face, the logic for prohibiting 4 (but not 3) seems counterintuitive and I still don’t see how the Service would ever be able to enforce such a prohibition. Thanks,



Submitted by David Mertz on Thu, 2018-04-26 18:58

  • See IRS Pub 590-A page 26, “The same property (or sales proceeds) must be rolled over.”
  • If you did do #4, the IRS would not be able to detect the impermissible rollover without an audit.  The form 1099-R and Form 5498 only report the FMV distributed and rolled over, respectively, not the type of property rolled over.  If it ever was detected, there would be excess contribution penalties for each year that it was in the account (generally with no statute of limitations).
  • I suspect that #2 is a prohibited transaction due to self-dealing.  If so, you can’t effect the same result by having the 401(k) sell the policy to yourself and subsequently rolling cash from the 401(k) to the IRA.


Submitted by Nathan Kastner on Thu, 2018-04-26 18:03

Upon further reading, there is another option – an option that produces the same end result as #4 (above) but takes a slightly different path. From the Journal of Pension Benefits: “The trustee of the plan could take a loan against the cash surrender value of the policy, leaving just enough cash surrender value to equal the policy’s P.S. 58 costs. The plan could then distribute the policy to the participant income tax free. The amount borrowed by the trustee from the policy could be rolled over into an IRA. The participant could then cash in the policy or continue to maintain it using after tax money or withdrawals from the IRA to repay the loan. The participant, of course, would also be responsible for the payment of future premiums due under the policy, as well as repayment of the policy loan.”  Either way, you’d still end up with no taxable transaction at that time, and private ownership of a life insurance policy with a substantial loan balance against it.



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