Types of Retirement Plans - Unrelated Business Taxable Income and Life Insurance

Unrelated Business Taxable Income
Unrelated Business Taxable Income (UBTI) is usually generated by a tax-exemption that is related to its main function as being tax free. However, income not related to the main function of the entity may be taxable.

UBTI in an individual retirement account (IRA) is an alternative investment that can produce UBTI of $1,000 or more and may be taxable to the IRA owner. Examples of when UBTI is usually generated include when businesses that are owned by the IRA and when the IRA invests in a limited partnership.

Life Insurance
Life insurance for employees covered under a qualified plan can be purchased and owned by the plan with tax-deductible employer contributions. A qualified plan that is overfunded or close to full funding, may wish to add incident life insurance coverage to allow for higher deductible contributions to the plan.

Life insurance within a qualified plan can be used to help owners and other highly compensated participants to meet substantial estate taxes.

Life insurance may be used as a secure means of funding an employer-sponsored retirement plan.

Advantages:
Tax benefits.
Safe investment.
Provides predictable plan costs for the employer.
"Pure insurance" component of a qualified plan (death proceeds minus cash values) is free from income tax.

Disadvantages:
Low rates of return compared to other investments.
Policy expenses and commissions may be greater than other investments.

Introduction


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