I was doing some research on the largest employers in Quincy – Blessing Hospital, Knapheide Manufacturing, Titan International, Quincy Media Inc…. Just to name a few. They all offer 401k plans to their employees and most employees participate. I find this fascinating! I think it is great that employees are setting money back for retirement.
As you may know, you have the option to name a beneficiary to your 401k in the event of your premature death. Did you know that if money is paid to your beneficiary, it is considered taxable income? Have you considered how much money your spouse would be responsible to pay in taxes if this happened to you? How much money would be lost to the government?
The truth is that the tax owed on a 401k distribution could be significant. It could put your spouse in a different tax bracket (that is higher than the one you’re in now.) One way to offset the tax your spouse might be responsible for is to set up a life insurance plan that matches the value of your 401k. For example, if your 401k is worth $100,000, you would take out a life insurance policy for $100,000. Benefits paid to your survivors under the life insurance plan are not considered taxable income. So, your spouse would have $100,000 of non-taxable income in the event of your untimely death. This could help them pay the tax incurred by the 401k payout.
If you would like to look at how this might work for your family, contact your insurance agent and have them run a quote for you to see what it might cost you. The cost of the life insurance is far less than the tax you would incur on the income from the 401k plan.