TaxMelt - Getting Money out of your 401(k) and Paying Less Income Tax
Imagine being able to take money from your 401(k) and spend less on income tax. In order for this to work, the employee needs to participate in a 401(k) plan, having the right language in its plan document to allow for the necessary transactions. If the employee does not control making modifications to his current plan, he needs to have the ability to terminate participation in that plan or be able to take in-service distributions if he plans to continue with his current employer after setting up TaxMelt.
There are multiple steps needed to accomplish TaxMelt, and not all people are candidates for this process. In general, a person already needs to have substantial funds in his current 401(k) account (or one that he creates via distributions from his old plan). Since life insurance is purchased as an asset of his 401K plan, either he or his spouse needs to be insurable. The policy is eventually purchased from his plan, so he also must have outside liquid investments equal in value to half or more of the value of the 401(k) account value.
Done properly, TaxMelt may help the person buy assets from his current plan at a discount, having deposited them tax-free into a life insurance policy. Properly structured, this policy may be able to provide tax-free distributions to him as retirement payments. The outside non-qualified investments used to buy the policy from the 401(k) may subsequently be taken as a Roth conversion, and any income tax on the conversion may be able to be financed from the life insurance policy. Thus, the formerly taxable outside investment account ends up a "never-taxed" Roth IRA!
For details, and to see if this idea makes sense for you, please contact us and our TaxMelt team can provide you with feedback. (Back to IUL Table of Contents)