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My husband, 47 yrs of age, is  self employed and has a safe harbor 401K where he can invest $15, 500 plus 3% of his income each year.  He would like to invest an additional $24,000 each year. Is there anyway to do that tax free?  It had been recommended to us to do a Variable Universal life policy where he could invest $2,000 month, $24,000 a year for 12 years( the number of years he wants to keep working).   And it would be grow tax free and he could draw it out tax-free for 20 years at $33,000 a year. That is modeled on a 8% growth rate. Obviously, there are fees involved.  

Is this a good option for us?  Could we do the same or bettter in a taxable vehicle?

Additional, we are looking at non-listed REITS like HInes or Wells.  Are they a good investment or should we use traded reits(stock or mutual fund)?

Thanks for your ideas on this.

Lana 

My husband and I were clients of an inverstment advisor who is based in Weatherford TX--he suggested we invest IRA money into Wells REIT several years ago. We have since moved our business to another firm and have found that we cannot sell our Wells REIT.  The trust was supposed to sell out its properties and return "significant" amount to the share holders. The directors used the sub-prime real estate debacle as a reason to restructure and keep trusts alive. We (and other share holders)  not not happy with the actions of the Wells directors (and not just because of that). The board/directors control so many shares, it is extremely difficult for contra-actions to occur. Because we can't readily sell shares if we disagree with their actions as investors can in regular mutual/bond funds, our money is basically held hostage...

Frankly we were mislead about why it was better to buy this type of REIT than say a Vanguard REIT fund and are paying the price. Wells makes redeeming shares EXTREMELY difficult. Mutual fund REITs won't invest in them, and we should not have knowing what we do now.

Lana,

First, check the comment from "Worried in Texas" on finding that their non-listed REIT investment isn't very liquid. I put a very high value on liquidity and like to know that I can sell any investment, at any time with little or no complication. I also think you'd find that the commission cost of getting in to a non-listed real estate investment is much greater than the cost of buying a REIT as either a mutual fund or ETF. When you can buy shares in an ETF REIT for $8.95, non-listed REITs look pretty silly.

Before you go ahead with any investment, you and your husband need to become a bit more familiar with the limits of tax deferred investing. This year the employee contribution limit on 401(k) plans is $15,500. An additional $5,000 is allowed for those 50 and over. So the maximum contribution is $20,500 plus whatever your employer kicks in.

This amount can be contributed tax-deferred. This is nice since it will reduce your taxable income for the year. But it is NOT to be confused with tax-free. Basically, your income goes in untaxed and is allowed to grow tax-deferred until it is withdrawn. Every dollar you remove from the account is taxable as ordinary income.

You could invest in a Variable Universal Life policy but you would have to do it with after-tax dollars since it isn't part of your 401(k). Also, the growth of your assets in the plan will be slowed by (1) the typically high expenses of the funds offered inside the policy and (2) the cost of the life insurance.

The advantage of variable universal life policies that is frequently mentioned by life insurance sales agents is that you can take out your original premium payments tax-free (because you've already paid taxes on the money) and you can borrow out some of the accumulated growth without creating a "taxable event."

If this was a horse race, the 401(k) plan and the life policy would be neck and neck at this point if the only consideration was taxes. You'd pay taxes coming out of the 401(k) plan and you'd pay taxes going in to the life policy. The 401(k) plan would probably win, however, because it would have lower expenses.

More important, the 401(k) plan would also have less risk. The risk in variable life policies that sales agents tend to soft peddle (if not absolutely ignore) is that while you can borrow your accumulated value out tax-free, if the values inside your policy shink too much your policy can require a massive payment to keep it from collapsing. Were you to allow the policy to terminate because it has no further money in it, every dime that you had borrowed out--- all that accumulated earnings--- would instantly become taxable income.

Trust me, you don't want that to happen, particularly at some tender age, like 83.

My suggestion: stick with the 401(k) plan. Be glad you've got a high taxable income. Lots of people don't and they'd love to trade places with you.

 Scott

Thanks for your reply, Scott.

So , if we want to save additional monies once we have maxed out our 401K, I guess we should do that through the "couch potato" portfolio system?  Any other suggestions or thoughts?

 Lana

There are a number of options you could consider if you are maxing out your 401K but you want to make additional investments and want to minimize taxes while doing so. 

One option that you are apparently looking into is purchasing a VUL life insurance policy and then making large contributions over the next 12 years.  As Scott noted, and I believe you noted in your original post VUL policies are generally more expensive because you are paying for insurance in addition to the costs of the investment fees, so unless you have a need for permanent life insurance this is likely not the most cost effective way to go.  The investment fees for the funds in many VUL policies are also generally higher than you would have to pay if you invested yourself in mutual funds or ETF's outside of the policies.  VUL policies can be very complex and as Scott mentioned there are potential tax disasters that can occur if you take to much out of the policy.  I also think there are also limits to how much you can invest in such a policy over the early years-- if you invest too much it may no longer qualify as an insurance policy and there may be tax problems there as well.   If you are going to go with a VUL policy I think you should only consider a VUL policy from either TIAA or Ameritas.  Both are lost cost providers that only sell their products directly and offer a good range of low cost mutual fund choices for investments.   We looked at VUL policies about a year ago for the very same reason, because we wanted some additional tax deferred space for investing and were initially intrigued by the tax deferral and potential tax-free withdrawals.  However, ultimately we decided not to go with a VUL, even from one of those two companies.  They just seemed too complex and seemed to make sense to separate our insurance purchases from our investment decisions.

Besides your 401K you could also invest some additional money each year in either a Roth IRA (unless you are over the income limits) or a traditional nondeductible IRA.  I believe the current limit is 5,000 per year, and if you are 50 or over you can invest an additional 1,000.  If you qualify for the Roth this would probably make better sense since withdrawals from the Roth wouldn't be subject to tax unlike the traditional IRA or your 401K.  You could invest the rest of your available investible funds in a taxable account.  If you use low-cost index funds from such as the total market index from Vanguard these funds are highly tax efficient and thus would not impose a significant tax drag on you.  Vanguard and a number of other fund companies also offer tax-managed funds that operate specifically to minimize the tax burdens for investors.  For your bond investments in the taxable account you could use municipal bonds.

We are not eligible for the Roth.  One investment advisor suggested that the traditional nondeductible IRA was not a good option..Outside of the fact that you have to report it on a form to the IRS every year , what is the issue?  I am not sure I understand.. It still grows tax exempt and there are taxes only on the capital gains when you withdraw, right?

I would like to get picky about a couple of terms.  The money in a traditional (deductible or non-deductible) IRA grows tax deferred, not tax exempt.  When you take money out of the non-deductible traditional IRA, the earnings are taxed as ordinary income.  So, if you sell appreciated stocks or mutual funds in the IRA, you convert tax favored capital gains income to ordinary income.  Dividends and mutual fund capital gains distributions also lose their tax favored status.  In a deductible IRA or 401k the initial deduction offsets these disadvantages.  If you intend to use this account only for interest earning assets, particularly those that produce "phantom" income such as TIPS, then this disadvantage goes away.  The only remaining pain is the additional paperwork during distribution of seperating the taxable earnings from the non-taxable return of your after tax deposits.

Bryan