Using Roth IRA Funds to pay off NML cash value loan

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jdc10909
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Using Roth IRA Funds to pay off NML cash value loan

Post by jdc10909 » Sun Jan 21, 2018 2:12 pm

Would it be advisable to use Roth IRA funds (I am over 59.5) to pay off a Northwestern Mutual Life (NML) cash value Life Insurance loan of approx. $68,000 with Roth Funds (invested in SP500 index fund).

The NML loan is 8% and the NML dividend on the remaining cash value $100K balance is approx. 5%. I currently pay the interest due on the NML loans out of pocket and have over $100K in the Roth IRA?

Any ideas would be welcome – thanks in advance

PFInterest
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Re: Using Roth IRA Funds to pay off NML cash value loan

Post by PFInterest » Sun Jan 21, 2018 3:09 pm

I would not touch a rIRA.

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BL
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Re: Using Roth IRA Funds to pay off NML cash value loan

Post by BL » Sun Jan 21, 2018 4:07 pm

I would first request an in-force illustration from the ins. company so you can look at guaranteed numbers.

Consider whether you need life insurance. Is someone dependent on you? If you have grown children and retirement savings, the answer could be "no".

That is a bad rate for the loan. Nevertheless, I don't believe I would raid the Roth IRA, which is very valuable.

There could be tax advantages in doing a 1035 exchange to annuity. Not recommending, but it may be worth checking. If so, I would contact a low-cost annuity like you might get through Vanguard, but not your current insurance company, as your salesman would be delighted to sell you another expensive product and reap a huge commission.
I Googled, and got this page with some description of the exchange:
http://www.thinkadvisor.com/2008/04/01/ ... -annuities

123
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Re: Using Roth IRA Funds to pay off NML cash value loan

Post by 123 » Sun Jan 21, 2018 4:09 pm

The Roth IRA is the most precious money you can accumulate. I wouldn't touch it to pay off an insurance policy loan.

Edited to add:
Just curious about what was the purpose of the policy loan? Was it used to fund a Roth conversion?
Last edited by 123 on Sun Jan 21, 2018 4:18 pm, edited 1 time in total.
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Grt2bOutdoors
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Re: Using Roth IRA Funds to pay off NML cash value loan

Post by Grt2bOutdoors » Sun Jan 21, 2018 4:15 pm

No way! Roth IRA space is the most valuable asset you could hold. Earnings in that account can never be taxed, ever!

As far as NWM - 8% is a ridiculous rate to be charging to access your own money. Another reason why the "loan feature" is a joke. You have to pay a firm to borrow your own money? :oops:

Think about this ---> your remaining $100K in the cash balance account is yielding you zero, in fact, the return is negative after you account for your 8% at $68K. You are paying the firm $440 net of the 5% you think you are earning.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

jdc10909
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Re: Using Roth IRA Funds to pay off NML cash value loan

Post by jdc10909 » Sun Jan 21, 2018 9:25 pm

Thanks for the input.

What would be the cost of borrowing if the NML loan rate is 8% and the NML dividend rate is 4.9% (2018 rate).

With NML Direct Recognition (DR) would the actual dividend be higher maybe approximately 7.45% and the cost of the loan approximately .55% (8% - 7.45%)?

I agree leave the Roth funds alone. What would be the real cost of loan with DR figured in?
Last edited by jdc10909 on Sun Jan 21, 2018 10:03 pm, edited 1 time in total.

Grt2bOutdoors
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Re: Using Roth IRA Funds to pay off NML cash value loan

Post by Grt2bOutdoors » Sun Jan 21, 2018 9:32 pm

jdc10909 wrote:
Sun Jan 21, 2018 9:25 pm
Thanks for the input.

What would be the cost of borrowing if the NML loan rate is 8% and the NML dividend rate is 4.9% (2018 rate).

With NML Direct Recognition (DR) would the actual dividend be higher maybe approximately 7.55% and the cost of the loan approximately .45% (8% - 7.55%)?

I agree leave the Roth funds alone. What would be the real cost of loan with DR figured in?
What is NML Direct Recognition? Does it have a defined formula? How did you approximate 7.55% as being the actual dividend, when earlier you stated dividend rate is 4.9%?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

jdc10909
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Re: Using Roth IRA Funds to pay off NML cash value loan

Post by jdc10909 » Sun Jan 21, 2018 10:16 pm

I updated my prior post.

I found these on the web, one of them at the James Hunt site – pdf- the other NML:

Northwestern Mutual Life, Adjustable CompLife
: Current rate: 8.00% (Fixed); 5.63% (Variable), payable in arrears;
Credited Rate: 0.55% less than loan rate (e.g. 7.45% for loans with fixed 8.00% rate)

Over the years, NML has lowered the spread to 0.55%. In its dividend declaration for 2011, NML says that the dividend interest rate for unborrowed funds will be 6.00% (reduced from 6.15% in 2010) while the interest rate credited to borrowed funds will be whatever the loan rate is less 0.55%.

Thus, if one has an 8% loan rate at NML, the interest rate credited to borrowed funds will be 7.45%; the dividend will be higher than if no loan had occurred.

Just trying to figure the actual cost of the loan - thank again for the input

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BL
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Re: Using Roth IRA Funds to pay off NML cash value loan

Post by BL » Mon Jan 22, 2018 12:35 am

Yes, but if you die, they only get your death benefit, less the loan amount, none of the fancy "cash value", etc. Other than paid-up death benefit, you don't really gain much, if anything.

This is not great as a money-generating plan, only good if you really need death benefit. Do you?

jdc10909
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Re: Using Roth IRA Funds to pay off NML cash value loan

Post by jdc10909 » Mon Jan 22, 2018 10:34 am

I have some term, Not necessarily need the whole life. Kids are grown, I have some term and a large IRA. Just looking for a good option. The polices are from the late 80's.

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