Can a Life Insurance Policy Be Rolled Over to an IRA?

Life insurance can help provide for your beneficiaries.

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You have many ways to provide for your retirement and estate. An individual retirement account can provide you income, while a life insurance policy can increase the money you leave to your beneficiaries. A life insurance policy may also allow you to build up a cash balance tax-deferred and borrow money tax-free.

IRA Prohibitions

IRAs and life insurance policies don't mix. You can't buy life insurance within an IRA. You also can't contribute an insurance policy to an IRA or roll a policy from an employer plan into an IRA. About the only way to get assets from an insurance policy to an IRA is to cash in the policy and contribute the money to the account. However, you'll have to treat the money as taxable income.

Individual Retirement Annuities

You can use an insurance company's services for your IRA. You can open an individual retirement annuity by buying an annuity or endowment contract from an insurance company. These contracts pay you monthly income for a set number of years or for life. In any year, you can contribute up to the deductible amount allowed for an IRA. You're not allowed to forfeit or transfer the annuity. Also, you must begin taking minimum distributions from an individual retirement annuity in the year you reach age 70 1/2.

Funding Roth Conversions

You can use a life insurance policy to help a beneficiary pay for a Roth conversion after your death. When your spouse inherits your traditional IRA tax-free, she can become the owner or roll the account into her existing IRA. She can also use the proceeds from a life insurance policy to pay the taxes on a Roth conversion of the inherited traditional IRA. This allows your spouse to withdraw the rollover amount at any time tax-free, although withdrawing earnings before the fifth anniversary of the Roth account may bring a 10 percent early withdrawal penalty. Another benefit is that your spouse won't have to take minimum distributions at 70 1/2.

Life Insurance Trust

You can use life insurance for estate planning. For example, you can create an irrevocable life insurance trust that owns a life insurance policy on you. By placing the policy in the trust, you exclude the proceeds from estate taxes. In addition, the money you give to the trust to pay the life insurance premiums reduces your taxable estate. You can give up to $13,000 a year without reducing your lifetime gift and estate tax exemptions. The policy's proceeds are free from income taxes when distributed, while the beneficiary of a traditional IRA must pay taxes on distributions.