Funding Life Insurance with IRA Distributions

Taxes Incurred When Dying with an IRA

Qualified plans and IRAs are great ways to save for retirement. However, those accounts may suffer a heavy tax burden following your death. Assets in your retirement accounts are subject to ordinary income tax when they are withdrawn by your beneficiary. Also, the value of your retirement accounts will be included in your gross estate and may be subject to federal estate tax following your death, although your exclusion from the estate tax (for 2023, $12.92 million per person; $25.84 million per married couple) may offset this tax. (State taxes are not considered here.)

Accordingly, when planning for what your family will receive following your death, remember that any amount they receive from your retirement accounts will be reduced by income tax and possibly federal estate tax.

Strategies to Reduce Tax

There is more than one way to reduce the tax cost associated with passing a retirement account at death.

One of the ways to alleviate the otherwise full tax cost of transferring a retirement account to your family following your death, while transferring comparable or greater wealth to them, is to replace a portion of the highly taxed retirement account with the death benefit from a life insurance policy insuring your life.

Generally, unless certain exceptions apply, the death benefit from a life insurance policy is not subject to federal income tax, and if the policy is owned by someone other than the insured (such as an irrevocable life insurance trust) and the insured has no incidents of ownership in the policy, the death benefit is also not subject to federal estate tax.

How Does This Strategy Work?

This wealth replacement strategy uses funds distributed from your retirement plan to pay life insurance premiums. Upon your death, the life insurance death benefit replaces the amount of the retirement plan lost to taxes (or provides an even greater amount to your family).

Before undertaking this strategy consider the following:

Distributions from your retirement plan are subject to income tax. Be sure you can pay the tax from non-retirement plan assets as withdrawing assets from a retirement plan to pay income tax on a distribution, causes another income tax.
You do not want to do this if you have not attained age 59 1/2 as distributions before you attain that age are subject to a 10% penalty.
If you will need your entire IRA to maintain your lifestyle during retirement, then this strategy should not be used.
This strategy may not work when applied to your unique situation. The premium cost for a policy of life insurance is dependent upon many factors, including your age, your health and your family’s health histories, and your lifestyle (such as whether you use tobacco). Thus, the insurance company’s review of such factors may make the cost of life insurance unacceptable to you. In fact, your risk factors may be such that you cannot purchase life insurance at all.
You should prepare a financial plan illustrating the impact of any investment strategy on your financial situation. A PNC Private Bank^®wealth strategist has the tools to help prepare these illustrations.

Should You Do This?

Each family’s financial position and planning goals are unique, and not every planning strategy is appropriate for each family.

Nevertheless, replacing “high tax” IRA assets with “low tax” insurance death benefits can be a good way to transfer greater wealth with less tax following your death.

Before engaging in any wealth transfer strategy, you should determine if it is right for you and your family. A PNC Private Bank wealth strategist can work with your legal and tax advisors to illustrate how such a strategy would apply in your individual circumstances.

If you would like to learn more about the strategy presented herein, please contact any member of your PNC Private Bank team.

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Important Legal Disclosures and Information

Insurance transactions may be placed through M Financial Group (together with any successor or subsequently selected third party broker general agency firm, (the “BGA”)). Insurance Strategists are employees of PNC Bank and licensed agents of PNC Bank’s affiliated insurance agency, PNC Insurance Services, LLC, (“PNCIS”) and PNC Bank’s affiliated broker-dealer, PNC Investments LLC, (“PNCI”). Insurance Strategists will refer potential clients for offered products which include certain non-variable, long-term care, and disability insurance products to the BGA through PNCIS. Insurance strategists will refer potential clients for variable insurance products to the BGA through PNCI. Insurance products offered by the BGA are not deposits or other obligations of, or guaranteed by, PNC Bank or any of its affiliates. Insurance products are not insured by the Federal Deposit Insurance Corporation or any Federal Government Agency. Insurance products are subject to investment risk, including possible loss of principal amount invested. Insurance products are obligations of unaffiliated insurance companies and any payments under the policies will depend upon the financial condition of those companies. We do not undertake to analyze or report to you on the financial condition of those companies. Your decision to purchase, or not to purchase, insurance products from the BGA will not affect the cost or availability of any products or services from PNC Bank or any of its affiliates. Insurance that is required in connection with any loan from PNC Bank may be purchased through the BGA or any other insurance agency. You are not required to purchase insurance through PNC Bank or its affiliates. If you choose to purchase insurance and finance the premium, you may choose to finance through PNC Bank or any lending institution. You are not required to finance through PNC Bank or its affiliates. Only licensed representatives of the BGA may offer insurance Footnote on page/slide: Indices are unmanaged, not available for direct investment, and not subject to management fees, transaction costs or other types of expenses that an account may incur. Footnote on page/slide: This hypothetical is for illustrative purposes only. Tax calculations have been simplified for illustrative purposes and do not take into account any tax attributes that may affect a taxpayer's particular situation (for example state and local taxes, marital status, exemptions or other withholdings, such as flexible spending accounts). PNC does not provide tax advice. Consult with your tax and legal advisors regarding your individual situation. Footnote on page/slide: [PNC] does not provide legal, tax or accounting advice. The stories and accounts presented in these materials represent hypothetical scenarios and are intended for illustrative purposes; the persons described are fictional and not actual clients, but the scenarios are intended to reflect typical and/or previously experienced client situations. Actual client experiences and outcomes may vary and future performance or success is not guaranteed. Revised November 2020 Page 7 of 14 products and advice. In effecting your insurance transaction, the BGA and its agents represent the issuing insurance company as an appointed agent. The BGA will receive compensation for any insurance transaction that it places for you. The compensation that PNCIS or PNCI receives from the BGA will be dependent on the type of insurance product sold and the relationship that the BGA has with the companies issuing the insurance products you purchase. Different types of insurance products, and different insurers, may provide different compensation amounts and structures. The insurance compensation paid to the BGA and PNCIS for nonvariable life, long term care, and disability insurance products or PNCI for variable insurance products by the insurance companies will be in addition to the fees that you pay to PNC Bank under your investment management agreement or other governing instrument that are related to insurance assets. Affiliates of PNC Bank and PNCIS or PNCI may receive separate and additional compensation for investment advisory or other services provided to funds that may be included as investment choices underlying variable life insurance products. Under their incentive compensation programs, Insurance Strategists or other members of the PNC Private Bank or PNC Private Bank Hawthorn teams may receive incentive credits or other discretionary credit related to insurance transactions. The incentive credits or discretionary credit could, along with a number of other factors, lead to incentive compensation payments to Insurance Strategists or other PNC Private Bank or PNC Private Bank Hawthorn team members. PNC Private Bank and PNC Private Bank Hawthorn team members will not receive any direct commission split based on any insurance transaction that you enter into through the BGA. The compensation described above related to insurance transactions creates a conflict of interest between PNC Bank’s fiduciary duty to you, if you are an investment management client or a settlor or beneficiary of a trust of which PNC is a trustee, and the financial benefits that PNC Bank, PNCIS or PNCI and the Insurance Strategist or other PNC Private Bank or PNC Private Bank Hawthorn team members receive that relate to those insurance transactions.

The PNC Financial Services Group, Inc. (“PNC”) uses the marketing names PNC Private Bank^® and PNC Private Bank Hawthorn^® to provide investment consulting and wealth management, fiduciary services, FDIC-insured banking products and services, and lending of funds to individual clients through PNC Bank, National Association (“PNC Bank”), which is a Member FDIC, and to provide specific fiduciary and agency services through PNC Delaware Trust Company or PNC Ohio Trust Company. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. PNC Bank is not registered as a municipal advisor under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

"PNC Private Bank" and "PNC Private Bank Hawthorn" are registered marks of The PNC Financial Services Group, Inc.

Investments: Not FDIC Insured. No Bank Guarantee. May Lose Value.

Funding Life Insurance with IRA Distributions: Learn More

Taxes Incurred When Dying with an IRA

Strategies to Reduce Tax

How Does This Strategy Work?

Should You Do This?

Important Legal Disclosures and Information