One of the most-asked questions we got on last week’s “Ask a Bank On Yourself Advisor” live online event was…
“Can I roll over funds from my 401(k)/IRA/403(b)/TSA into a Bank On Yourself plan – and what are the tax consequences?”
Moving money from a conventional tax-deferred retirement account into a Bank On Yourself plan is a common method people use to fund a policy. It’s not technically a “rollover,” since you can only do that from one 401(k) or IRA to another. Here’s how it works…
There’s no getting around paying income taxes on money you withdraw from a tax-deferred plan like a 401(k), IRA, 403(b) or TSA. But there are ways to potentially reduce your lifetime tax bite, as well as avoid paying the 10% early withdrawal penalty. The specifics of how this is done depend on whether or not you’ve turned age 59-1/2 yet.
If you’re 59-1/2 or older…
Once you’re 59-1/2 or older, you can simply withdraw funds from your tax-deferred plan, pay ordinary income taxes on the amount you withdrew, and use the money to fund your Bank On Yourself policy.
TAX TIP: If you believe tax rates are likely to go up over the long term (as most people we’ve surveyed believe), paying taxes on your retirement savings now makes a lot of sense. The money you take from a Bank On Yourself policy can be accessed with no taxes due, under current tax law.
TAX SAVINGS BONUS: Moving money from a government-controlled retirement plan into a Bank On Yourself policy can also reduce the taxes you may owe on your Social Security benefits.
Many people are surprised to discover that it’s possible that up to 85% of your Social Security benefits might be taxed. After all, you paid into the system for a long time – shouldn’t every penny of what you receive from it belong to you?
We think it should, which is another reason the Bank On Yourself method makes so much sense! The income you take from a Bank On Yourself policy does NOT get counted in the IRS calculations used to determine how much of your Social Security benefit is going to get taxed.
If you haven’t turned 59-1/2 yet…
As you’re probably aware, taking distributions from a tax-deferred government-controlled plan before you’re age 59-1/2 requires you to pay income taxes PLUS a 10% penalty, in most cases.
As mentioned above, you can’t get around paying income taxes on withdrawals; however, if you believe tax rates are going up long term, you’ll come out ahead paying the taxes now and moving your money into a Bank On Yourself policy. You can access both your principal and growth in a Bank On Yourself plan with no taxes due, under current tax law.
How to avoid owing the 10% early withdrawal penalty…
You can avoid paying the 10% early withdrawal penalty by taking advantage of Internal Revenue Code 72(t). That’s shorthand for a provision in the tax code that allows you to take early distributions from your retirement plan or IRA and avoid the 10% penalty.
You can avoid that penalty as long as the distributions are made as part of a “series of substantially equal periodic payments” (or SOSEPP for short).
Once you start taking these distributions, you have to keep it going for the longer of five years or until you reach age 59-1/2.
There are three different methods you may use to determine what your withdrawals would be. Rather than spell that out here, here’s a link to a list of 12 FAQ’s regarding the 72(t) on the IRS’ website.
Moving money from a retirement plan is only one of the 8 common ways to free up money to fund a Bank On Yourself plan
These range from restructuring debt, to reducing funding of your traditional retirement account, converting existing life insurance policies, and tapping your savings.
Moving some of your “safe” money into a Bank On Yourself safe wealth-building plan can result in your dollars working much harder for you, without losing sleep. The return is many times greater than you can get in a CD, money market or savings account – but without the risk of stocks, real estate or other volatile investments.
The Bank On Yourself Authorized Advisors are masters at helping people restructure their finances to free up more seed money to fund a plan (or to start additional plans) that can help you reach your goals and dreams in the shortest time possible – without taking any unnecessary risk.
Add the Bank On Yourself method to your financial plan today
To find out how you could enjoy guarantees and peace of mind by adding the Bank On Yourself method to your financial plan, request your free, no-obligation Analysis right here, if you haven’t already done so.