No. of Recommendations: 0
TooOld asked...

"A CPA suggested buying a Variable Universal Life policy (?) with the IRA money which we don't really need but must take out at regular tax rate. CPA says after a time we could borrow against the policy tax free if we need $$. Never heard this idea discussed... What is a VUL? Is this a good idea?"

A lot depends on what you have and what you want. VUL are basically life insurance with a twist. This may make some sense if your networth is in the millions and you want to shelter inheritance to heirs other than your spouse from oppressive estate taxes. Very few people really benefit from this technique.

If your estate is in the millions, this technique, if set up correctly and there are so many ways to do this wrong, may be used to fund the taxes due on the estate after you both pass on. There is no estate tax on assets passed to a spouse upon death.

This is a very lucrative product for most agents and is sold using a variety of techniques without telling the customer the cost of the product and the limitation if you later decide that it is too costly or doesn't fit your needs.

To fund the VUL from your IRA distributions you will have to pay taxes on your distributions 1st. If you are concerned with taxes on the interest of investments you make with your IRA because that is all that will be sheltered, you would probably be better served with either an indexed mutual fund or tax exempt bonds.

A VUL has expenses of 2 to 3% per year. So if you invest $100,000 per year the agency gets $2,000 to $3,000 per year whether your investment grows or shrinks. If you invested $100,000 in a mutual fund which paid out all gains per year as cap gains and the gains averaged 11%, then you'd make $1,100 and pay $2,200 in taxes. The cost of an index fund is about 0.2% or $200/year so the tax cost would be about $2,500/year. But remember you only pay taxes if you make money. On a VUL they get their expenses and fees yearly whether your investment goes up or down. This does not include the upfront fees to start the VUL.

Except in very special cases, these are a bad idea.

Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.