Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Exploiting the 1035 exchange rules
Old 06-20-2014, 06:25 AM   #1
Recycles dryer sheets
BrianB's Avatar
 
Join Date: Jul 2011
Location: Minneapolis
Posts: 358
Exploiting the 1035 exchange rules

I haven't seen any discussion of this on the boards; my apologies if it has already been discussed elsewhere.

In the book "This is not your parents retirement" author Patrick Astre offers an unusual tax saving strategy that I might be able to use. I'm wondering if any of our experts has heard of or used it:

The IRS recognizes "1035" tax deferred exchanges that allow a person to move cash value and cost basis from one life insurance policy to another, or to an annuity (Hold the grenades - I know annuities are generally not good especially in low interest times.)

I have a 10-year level term policy that will expire in October 2014.
Total premiums paid (cost basis) = $5280.00
Cash value = $0.00 (it's a term policy)

So if I "exchange" my term policy for an immediate fixed annuity for $50000 I can add the $5280.00 for a total basis $55280.00.

This would allow me to shelter most all of the return - effectively making my old term policy premiums tax-deductible. The funding would be helpful to make our "bridge" to age 59.5

What do you think?
BrianB is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 06-21-2014, 03:32 PM   #2
Recycles dryer sheets
 
Join Date: Jun 2014
Posts: 100
My wife had an endowment mortgage in the UK. This was a strange beast where you just paid the interest on the loan and instead of paying principle it got invested in the market to pay the principle at maturity. They lost popularity when people discovered they didn't work.
While trying to reduce my FBAR and 8938 exposure I considered using 1035 exchange to try and get the money into the US without tax consequences. The policy matures in 2018 but I might be able to get out early if they will talk to a 'US Person'.
I found a pro that understands this and his view was that it only made sense with the costs if I had a legitimate need for some insurance in the US. So I left it at that until it matures or something comes up.
This was all a couple of months ago.
I think this could well be a good strategy sometime to trade costs for tax deferment. Have to get out the spreadsheets.
Neill is offline   Reply With Quote
Old 06-21-2014, 04:03 PM   #3
Recycles dryer sheets
thefinancebuff's Avatar
 
Join Date: Dec 2008
Posts: 299
Quote:
Originally Posted by BrianB View Post
I have a 10-year level term policy that will expire in October 2014.
Total premiums paid (cost basis) = $5280.00
Cash value = $0.00 (it's a term policy)

So if I "exchange" my term policy for an immediate fixed annuity for $50000 I can add the $5280.00 for a total basis $55280.00.
I don't think 1035 applies to a term policy with no cash value.
thefinancebuff is offline   Reply With Quote
Old 06-21-2014, 10:20 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,264
+1 1035 allows one to effectively transfer the tax deferred inside buildup from one contract to another and avoid taxes. Since a term policy doesn't have any tax deferral (value = tax basis = 0) the concept doesn't apply.

Quote:
There are several policy types that allow for the transfer of your cash value, but term life insurance is not one of them. Term life insurance has no cash value for the insured. Additionally, you cannot avoid income taxes by purchasing a term policy with the cash value from an existing whole, variable, universal or indexed life contract.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56
pb4uski is offline   Reply With Quote
Old 06-21-2014, 11:20 PM   #5
Recycles dryer sheets
robertf57's Avatar
 
Join Date: Jun 2014
Posts: 337
there is no value to exchange in a term policy! afraid this doesn't work.
robertf57 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
If you do a 1035 exchange do you need to file a tax return? FANOFJESUS FIRE and Money 7 02-15-2013 08:08 PM
1035 Transfer smooch FIRE and Money 1 02-19-2006 04:56 PM
Using Exchange-Traded Funds JLP FIRE and Money 18 01-26-2005 09:42 AM
More Free Exchange? consejo Other topics 12 12-01-2004 04:32 AM
Foreign Exchange Moves- how do you deal with them? Saver FIRE and Money 18 08-30-2004 03:13 PM

» Quick Links

 
All times are GMT -6. The time now is 01:58 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.