---
title: Cutting Taxes on Retirement Plan Distributions
description: Retirement Plan Tax Minimization
image: https://info.ongandcompany.com/hubfs/Tax%20Cutting.jpg
---

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# Cutting Taxes on Retirement Plan Distributions

[Richard Ong](https://info.ongandcompany.com/blog/author/richard-ong) / March 01, 2020 /

[Retirement Savings](https://info.ongandcompany.com/blog/topic/retirement-savings), [Tax Planning](https://info.ongandcompany.com/blog/topic/tax-planning)

![](https://app.hubspot.com/settings/avatar/89ca6f67445537c2c631f1fe9d43c977)

Cutting Income Taxes on Your Future Retirement Plan Distributions:

If you are a participant in your company's 401-K or qualified profit-sharing retirement plan and are reasonably healthy, you have an opportunity to drastically reduce the income taxes you would otherwise be facing when withdrawing these funds in retirement and/or leaving a legacy to your heirs. This is especially true if you are within ten years of retirement.

Federal and state income taxes can take as much as 40% or more of the funds you have accumulated today, as well as the future growth of these funds, if distributed to you or your heirs in the traditional manner. I am 65 years old 500 index and looking to retire at age 70. Using my personal case as an example, and assuming an average future growth factor of 6%, re-directing $750,000 of my 401-K balance into this plan ($150,000 per year for 5 years) would yield in excess of $2.1 million in retirement benefits over the remainder of my life at a tax cost of approximately $170,000 - an effective income tax rate of approximately 8%. Compounding returns are achieved by not having to withdraw plan assets to pay income taxes.

This strategy involves the purchase of an individual life insurance policy by your qualified plan, generally 5-10 years prior to retirement. If you are not insurable, then this plan will not work for you. As an aside, I was diagnosed last year with low grade prostate cancer but am otherwise healthy and was underwritten at standard rates.

Upon retirement, this policy is distributed to you by the plan. This policy distribution is a taxable event based upon the value of the policy on the date of distribution and policy loans can be taken to pay this income tax - in my case the tax is currently estimated to be approximately $170,000 and I am planning on paying this tax with a policy loan. My plan is to let the policy grow for another five years and begin to take monthly draws from the policy as return of premium and policy loans (neither of which are taxable) over the remainder of my life. Using my 6% growth assumption, I expect my monthly tax-free draw to be approximately $8,600.

Please note that this strategy requires a very specific type of life insurance product (generally indexed universal life) and premiums and fees can vary widely. These policies generally feature cash value growth based upon the annual returns of the S&P 500 Index with a cap of 10% and a floor of zero. In an earlier life, when I was just starting my CPA practice, I moonlighted by enrolling employee groups in universal life payroll-deduction plans for my brother-in-law in exchange for office space. I have recently reinstated my life insurance license to assist clients with this strategy. Also, your 401K and/or profit-sharing plan document must permit the purchase of life insurance (or be amended to do so) and be managed by a third party administrator that has experience working with these plans. Based upon my recent experience these changes can take some time and effort to accomplish.

As with any income tax strategy, your specific situation must be analyzed carefully to determine if this would be right for you.

 

 

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