What Does LIRP Mean?
Retirement Benefit #3: No Contribution Limits
Common retirement planning vehicles like a 401(k) and IRA have contribution limits. But what if you want to save even more for retirement? You could stash that money in a savings account, but it’s going to languish there, earning little to nothing in interest.
On the other hand, you’re allowed to overfund your life insurance policy and you’ll earn your policy’s stated rate when you add extra money to your cash value account. Some clients who don’t need the death benefit use a cash value policy specifically to create a tax-free income stream during retirement.
There is one caveat here: if you’re using the account for retirement purposes (as opposed to estate planning), you want to stay under the IRS’s rule (7702) for an overfunded account. If you pay too much into it during the first seven years, it may be reclassified as a modified endowment contract (MEC), which means your withdrawals would be subject to income tax no matter how much you’ve paid into the policy. The goal would be to wait out those first seven years, and then contribute as much as possible to your account to grow your cash value into a viable income stream. Your life insurance agent can help you set up your policy properly to avoid the extra tax burden that comes with a MEC. Most insurance companies will help you with this too, often refunding money that would cause your policy to be reclassified as a MEC.
What does LIRP mean for your financial future? At LifeQuote, life insurance is all we do – and we love to share all the little-known ways cash value policies can strengthen your financial portfolio. Call us at (800) 521-7873 or email us at info@lifequote.com and let’s talk about how cash value could give your retirement a boost!
