Investing in Life Insurance with: Solo 401k| Individual 401k| Solo k| Individual K

Though restricted, you may use your Solo 401k to invest in Life Insurance. This makes sense in the following cases:

  • You may not otherwise qualify for life insurance because of health reasons;
  • don’t have other disposable funds; or
  • want more protection for your beneficiaries.

General Guidelines for investing in Life Insurance with Solo 401k: In general no more than 50% of Solo 401k or Individual 401k plan contributions may be used to purchase “whole” life insurance (i.e., policies with both nondecreasing death benefits and non increasing premiums), and no more than 25% may be used to purchase term or “universal” life insurance.

Different treatment for Solo 401k contributions used to purchase life insurance: when a self-employed business owner invests her Solo 401k in Life Insurance, she does not receive a tax deduction for Solo 401k contributions attributable to the purchase of a life insurance benefit, therefore, she does not pay taxes on P.S. 58 costs (that is, life insurance premiums) for the year of contribution. By denying the self-employed individual the Solo 401k contribution deduction, she is effectively including the PS-58 costs in income like the common-law employee.

Issuing life insurance policy: A group or individual life insurance policy purchased by the Solo 401k Plan may be issued on the life of an Owner-Employee, an Owner-Employee’s spouse, an Owner-Employee’s child or children, a family member of the Owner-Employee, or any other individual with insurable interest.

Ownership of Life Insurance Policies: The Trustee of the Solo 401k is the owner of any life insurance policies purchased under the Solo 401k plan. Further, any life insurance policy purchased under the Solo 401k Plan must designate the trustee as owner and beneficiary under the policy. The insurance premiums are paid with funds from the Solo 401k’s checking account.

Reasons not to invest Solo 401k plan assets in life insurance: Although IRC 501(a) provides tax-exempt status to a qualified plan, including a Solo 401k, resulting in tax-deferred investment accumulation on the Solo 401k plan assets, a life insurance vehicle is tax-deferred on its accumulation outside of the plan as well. As such, the assets in the Solo 401k plan that are used to purchase life insurance are not getting any special income tax benefit on the accumulation in the contract by being held in the Solo 401k or Individual K plan.

Less Solo 41k funds to invest: The purchase of life insurance will reduce the amount available for investing in other assets such as real estate. Although life insurance may have an investment element (i.e., cash value accumulations), you may be foregoing higher returns by not investing all your Solo 401k plan in other investments.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>


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