Life insurance in 401(k)

I never deal with this issue.  can the plan purchase life insurance with Roth 401(k) deferrals?  everything i read says premiums are purchased with pre-tax dollars and PS 58 costs are taxable each year.  what would happen if you used Roth?  would you still have to pay PS 58 costs?

Yes. There is still an "economic benefit" and the taxable term costs would be reported. In other words, even if premiums paid from a Roth account, the TTC is not a "qualified" Roth distribution. I have a note here in my file from some time ago, referencing 1.402A-1, Q&A -11.  I haven't (thankfully) had to deal with life insurance in plans for a number of years now, so you should probably look this up to make sure it is still valid (and that I haven't misrembered).

Also be aware of the different "mechanics" on TTC if you are dealing with an unincorporated owner, as opposed to a common law employee.

By the way, it occurs to me that I didn't specify above, but only the portion that represents earnings on the Roth account, that is used to purchase life insurance, would be taxable - not necessarily the entire amount. Gosh, I'm glad I don't have to mess with this stuff any longer!!

1 hour ago, Belgarath said:

Yes. There is still an "economic benefit" and the taxable term costs would be reported. In other words, even if premiums paid from a Roth account, the TTC is not a "qualified" Roth distribution. I have a note here in my file from some time ago, referencing 1.402A-1, Q&A -11.  I haven't (thankfully) had to deal with life insurance in plans for a number of years now, so you should probably look this up to make sure it is still valid (and that I haven't misrembered).

Also be aware of the different "mechanics" on TTC if you are dealing with an unincorporated owner, as opposed to a common law employee.

By the way, it occurs to me that I didn't specify above, but only the portion that represents earnings on the Roth account, that is used to purchase life insurance, would be taxable - not necessarily the entire amount. Gosh, I'm glad I don't have to mess with this stuff any longer!!

its terrible. i hate when i get questions.  what does TTC stand for?

Taxable Term Cost. Often referred to as PS 58.

2 hours ago, Belgarath said:

Yes. There is still an "economic benefit" and the taxable term costs would be reported. In other words, even if premiums paid from a Roth account, the TTC is not a "qualified" Roth distribution. I have a note here in my file from some time ago, referencing 1.402A-1, Q&A -11.  I haven't (thankfully) had to deal with life insurance in plans for a number of years now, so you should probably look this up to make sure it is still valid (and that I haven't misrembered).

Also be aware of the different "mechanics" on TTC if you are dealing with an unincorporated owner, as opposed to a common law employee.

By the way, it occurs to me that I didn't specify above, but only the portion that represents earnings on the Roth account, that is used to purchase life insurance, would be taxable - not necessarily the entire amount. Gosh, I'm glad I don't have to mess with this stuff any longer!!

if it is just the earnings on the roth that would be taxable isn't it the same if it you used pre tax money?   meaning you only have to pay tax once either way.  

Why would someone use Roth money in a plan to pay life insurance premiums?

6 hours ago, Belgarath said:

Taxable Term Cost. Often referred to as PS 58.

You may also hear it called "table 1" or "table i" costs; all the same thing.

I agree with Bill, it absolutely makes no economic sense to purchase life insurance with after-tax dollars in a Roth 401(k).  Your paying premiums with after tax dollars same as you would outside of the Plan.  Any cash value increases (dividends or interest) grow tax deferred with potential income-tax free distributions (for Non Modified Endowment contracts) via return of basis and loans.  It is also my understanding that the taxable term cost to the participant (the Table 2001 or the old PS 58 costs) are applied to the participants cost based on the employer's payment of premiums, the case of a qualified plan the plan's payment of premiums, no tax or economic benefit on the inside buildup.  Considering the participant is paying tax on the entire premium in a Roth, I don't understand how there could be a taxable term cost.  I cannot find a specific site on this and I'm only going on the affect of a pre-tax taxable term cost.

15 minutes ago, Larry Starr said:

Because the agent wants to sell life insurance, silly!

 

Well, there is that.

On 7/10/2020 at 5:10 PM, Larry Starr said:

Because the agent wants to sell life insurance, silly!

 

The classic "man with only a hammer"...