Employers have an opportunity to select a variety of ERISA plans for themselves as well as their employees. One plan often overlooked is a profit sharing plan. Its ability to use cash value life insurance is unique and can be converted almost tax-free. If a life insurance policy is designed as a non-modified endowment contract held in the profit sharing plan, an economic benefit will be annually assessed and trigger a relatively small ordinary income tax event each year it’s in the plan. Generally speaking the money must be staged into the life insurance policy 3 years or more to comply with the TAMRA regulations. When you purchase the life insurance from the profit sharing plan for its market value, generally the cash surrender value; you access your cash values in the policy via loans tax-free.
The monies used to purchase the life insurance out of the plan are now in the profit sharing plan. Those funds and any other funds in the plan can be converted to a Roth IRA over a select period of time, but that will generate taxes. So you can borrow from the life insurance policy and pay the annual taxes until the profit sharing plan has been disbursed. Now the Roth IRA withdrawals and the Life Insurance policy loans are free and don’t count as income for the provisional income test used to determine Social Security benefit taxation.
If the company doesn’t have a profit sharing plan, it’s fairly inexpensive to set one up. The key provision of the plan must permit the use of cash value life insurance. There are various crediting methods available. Most income tacticians are using indexed universal life that permits foreign and domestic indices in the policy. These types of policies have a built-in hedge that protects the crediting account from losing money. That being said, the policy has expense loads like any other investment, so even though you have a zero in your crediting account, you could have a negative balance because of the expense loads. Another key feature is participating loans where the index performs better than the policy loan cost. That feature could come in handy when you pay your taxes on the conversion of your profit sharing plan to your Roth IRA.
You need to consult your CPA or tax attorney before moving forward with this idea