How to Move a 401(k) to Life Insurance

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A 401k account is a tax shelter designed to help you save money for your retirement. Since it is a government plan, the government places certain rules and restrictions on the plan. For example, 401k plans have contribution limits. In exchange for accepting these contribution limits, you get the benefit of tax-deferred growth inside of the 401k account. If you no longer want to use a 401k plan to accumulate money for your retirement, however, you can take the money out of your 401k and buy a cash value life insurance policy.


Step 1

Fill out and submit your application for life insurance. For the purposes of supplementing your retirement income, choose a high cash value life insurance policy. A limited pay whole life, or a universal life insurance policy that allows you to minimize the death benefit and maximize cash value growth is appropriate for this strategy.


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Step 2

Gather your 401k statements. Make sure you know the total balance of each 401k account you have.

Step 3

Transfer any 401k balances to an IRA. This will allow you to use IRS rule 72(t) to remove money from your retirement account and into a life insurance policy without incurring a penalty from the IRS. If you have a 401k at your current employer, you normally won't be able to move this account until you leave your job.


Step 4

Contact your brokerage and inform them that you want to make withdrawals from your IRA under IRS rule 72(t). They will send you the necessary paperwork to fill out to make the withdrawals. Make sure you indicate which accounts you will be withdrawing from.


Step 5

Withdraw funds from your IRA to pay your life insurance premiums. Make sure that you pay the tax due on your withdrawals. Because you are withdrawing money from a retirement account, you'll still need to pay ordinary income tax on all withdrawals.



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