Can I Move My 401(k) to an IUL Account?

A common inquiry involves transferring funds from a 401(k) retirement account into an Indexed Universal Life (IUL) insurance policy. While a direct transfer between these two distinct financial vehicles is not permitted under current tax law, an indirect pathway exists. This involves an intermediate step that requires careful consideration of tax implications and financial objectives. This article will explain the characteristics of both accounts and the specific steps involved in moving funds indirectly, along with important factors to evaluate.

Characteristics of 401(k) Accounts

A 401(k) is an employer-sponsored retirement savings plan, established under Internal Revenue Code Section 401(k), designed to help employees save for retirement with tax advantages. Contributions and earnings grow on a tax-deferred basis. Annual employee contribution limits for 2025 are $23,000, with an additional catch-up contribution of $7,500 for those age 50 and over. Total contributions from both employee and employer cannot exceed $69,000 in 2025.

There are two types of 401(k) plans: traditional and Roth. Contributions to a traditional 401(k) are made with pre-tax dollars, reducing current taxable income, but withdrawals in retirement are taxed as ordinary income. Roth 401(k) contributions are made with after-tax dollars, meaning qualified withdrawals in retirement are tax-free. Employer contributions are subject to vesting schedules, which determine when an employee gains full ownership of those funds.

Funds in a 401(k) are intended for use in retirement, after age 59½. Withdrawals taken before this age may be subject to a 10% early withdrawal penalty, in addition to being taxed as ordinary income. The IRS mandates Required Minimum Distributions (RMDs) from traditional 401(k) accounts once the account holder reaches age 73, ensuring funds are eventually distributed and taxed.

Characteristics of Indexed Universal Life (IUL) Insurance

An Indexed Universal Life (IUL) insurance policy is a type of permanent life insurance that combines a death benefit with a cash value component. An IUL provides lifelong death benefit protection to beneficiaries while accumulating cash value that policyholders can access. This cash value grows based on the performance of a selected stock market index, such as the S&P 500, but it does not directly invest in the market. Interest is credited based on the index’s performance, with a guaranteed minimum interest rate (a “floor” of 0%) to protect against market downturns and an interest rate “cap” that limits potential gains.

Policyholders can access the accumulated cash value through policy loans or withdrawals. Loans against the cash value are tax-free, provided the policy remains in force. Withdrawals are tax-free up to the amount of premiums paid into the policy; amounts exceeding this “cost basis” are subject to income tax. The death benefit paid to beneficiaries from an IUL policy is received income-tax-free under Internal Revenue Code Section 7702. IUL policies offer flexible premium structures, allowing policyholders to adjust payment amounts within limits. IULs are insurance products, not qualified retirement plans or direct investment accounts like 401(k)s or IRAs.

The Indirect Path: 401(k) to IRA Rollover

Directly transferring funds from a 401(k) to an IUL policy is not permitted by tax law because they are fundamentally different financial products. A 401(k) is a qualified retirement plan, while an IUL is a life insurance policy. To move funds from a 401(k) to potentially fund an IUL, an intermediary step is required: rolling over the 401(k) funds into an Individual Retirement Account (IRA).

There are two methods for conducting a 401(k) rollover: a direct rollover and an indirect rollover. A direct rollover, also known as a trustee-to-trustee transfer, is the preferred method. In a direct rollover, funds are transferred electronically or via a check made payable directly to the new IRA custodian. This transfer is tax-free and avoids immediate tax liability or withholding.

An indirect rollover involves the 401(k) plan administrator issuing a check directly to the account holder. The individual has 60 days from receipt to deposit the funds into an eligible IRA to avoid immediate taxation and penalties. A drawback of an indirect rollover is that the 401(k) administrator must withhold 20% of the distribution for federal income taxes. To complete the rollover and avoid a taxable event, the account holder must deposit the full original amount, including the 20% withheld, into the new IRA within the 60-day window. This often means using other personal funds to make up the difference until the withheld amount is recovered through a tax refund. Rollovers can be made to either a traditional IRA or a Roth IRA, with a pre-tax 401(k) rolled into a Roth IRA being a taxable conversion.

Funding an IUL Policy with IRA Withdrawals

Funds cannot be rolled over or directly transferred from an IRA into an IUL policy. An IUL is an insurance product, not a qualified retirement account, and does not accept direct rollovers from retirement plans. The only way to use funds from an IRA (which may have originated from a 401(k) rollover) to pay IUL premiums is by taking a taxable withdrawal from the IRA.

When funds are withdrawn from a traditional IRA, all pre-tax contributions and earnings are taxable income in the year of withdrawal. This can increase one’s taxable income and push them into a higher tax bracket. If the IRA owner is under age 59½, the withdrawal is subject to an additional 10% early withdrawal penalty, on top of ordinary income taxes. Limited exceptions to this 10% penalty exist, such as for certain unreimbursed medical expenses or if distributions are taken as part of a series of substantially equal periodic payments (SEPP).

For Roth IRAs, qualified distributions are tax-free and penalty-free. Non-qualified Roth IRA distributions may be taxable on earnings and subject to the 10% penalty if certain conditions, such as the five-year rule and age 59½, are not met. Once funds are withdrawn from an IRA and any applicable taxes and penalties are paid, these become after-tax dollars that can then be used to pay premiums for an IUL policy or for any other purpose.

Important Factors to Evaluate

Before considering moving funds from a 401(k) to an IUL, several factors require evaluation. The primary consideration is the loss of tax-deferred or tax-free growth on funds once withdrawn from the IRA and used for IUL premiums. While IUL cash value grows tax-deferred, the initial IRA withdrawal triggers immediate taxation on pre-tax amounts, and potential penalties, diminishing the capital available for the IUL.

IUL policies also come with various fees and charges that can impact cash value growth. These include mortality and expense charges, administrative fees, and surrender charges if the policy is terminated prematurely, usually within the first 10 to 15 years. Understanding these internal costs is important, as they can reduce the net growth of the cash value. The purpose of a retirement account like a 401(k) or IRA is to provide income in retirement, while an IUL primarily offers a death benefit and a cash value component. These differing purposes mean that what is suitable for one goal may not be optimal for another. Consulting with qualified financial professionals, such as a tax advisor, a certified financial planner, and a licensed insurance agent, is recommended. These professionals can assess individual financial situations, explain tax implications, and help determine if such a strategy aligns with overall financial objectives.