📄️ 7.0 Federal Tax Considerations and Retirement Plans
Learning Objectives
📄️ 7.1 Taxation of Personal Life Insurance
Premiums
📄️ 7.2 Taxation of Group Life Insurance
Premiums Paid by the Employer and the Employee
📄️ 7.3 Modified Endowment Contracts (MECs)
Before 1988, individuals could deposit large amounts of money into a cash value life insurance policy, often as a lump-sum payment. The funds inside the policy would grow on a tax-deferred basis, and when the insured died, the death benefit would be paid to the beneficiary income tax free. If the policyowner needed access to the funds during their lifetime, they could take tax-free policy loans or withdrawals. Because of these advantages, some people used these policies primarily as tax-advantaged investment vehicles rather than for insurance protection.
📄️ 7.4 Life Insurance Transfer-for-Value Rule
The transfer-for-value rule was enacted by Congress to prevent individuals or businesses from transferring ownership of life insurance policies simply to benefit from the tax-free nature of death benefit proceeds.
📄️ 7.5 Section 1035 Exchanges
Section 1035 of the Internal Revenue Code allows policyowners to exchange an existing insurance policy or annuity contract for another policy without triggering current taxation on any accumulated interest or investment gains. These transactions are known as 1035 exchanges and are often used when a new policy offers improved features, benefits, or more suitable coverage than the existing contract.
📄️ 7.6 Taxation of Annuities
Individual Annuities
📄️ 7.7 Federal Tax Considerations for Retirement Plans
Qualified vs Nonqualified Plans
📄️ 7.8 Individual Retirement Accounts (IRAs)
Individual Retirement Accounts (IRAs) are retirement savings arrangements established by individuals rather than employers. For this reason, IRAs are not classified as qualified retirement plans. Instead, they are governed by Section 408 of the Internal Revenue Code, which establishes the rules and requirements for how these accounts operate.
📄️ 7.9 Qualified Retirement Plan Types, Characteristics, and Purchasers
Qualified retirement plans are generally classified into two primary categories:
📄️ Recap of Chapter Seven
1. Premiums paid for personally owned life insurance policies are not tax-deductible for income tax purposes. (7.1)