I cashed in my life insurance and reinvested it in our retirement funds. How can I report this carryover as we are over the 70 1/2 age for a IRA?

[folkertsmamj]

Where can I enter the amount that we put into our retirement funds to counter balance the 1099 R we received from the insurance company?

[Coleen3]

You can't rollover proceeds from an insurance policy into an IRA.

What is a 1035 Tax Free Exchange?

A 1035 tax free exchange is the I.R.S. tax code that allows for the rollover of a non-qualified annuity (or transfer of a life insurance policy) to a new annuity or life policy of equal or greater value. Capital gains and/or income taxes will not be realized from this type of transfer when completed properly.

There are only three examples of a 1035 exchange:

• Annuity to Annuity
• Life Insurance to Life Insurance
• Life Insurance Cash Value to Annuity

The I.R.S. does not allow for a 1035 exchange from a tax deferred annuity to any type of life insurance policy. If you want to buy a life insurance policy with the proceeds from an existing annuity, you will first have to annuitize (or surrender) your annuity and pay taxes on any deferred gains.

IRA Prohibitions

IRAs and life insurance policies don't mix. You can't buy life insurance within an IRA. You also can't contribute an insurance policy to an IRA or roll a policy from an employer plan into an IRA. About the only way to get assets from an insurance policy to an IRA is to cash in the policy and contribute the money to the account. However, you'll have to treat the money as taxable income.

[flashjh]

Just want to add to this statement "About the only way to get assets from an insurance policy to an IRA is to cash in the policy and contribute the money to the account. However, you'll have to treat the money as taxable income". That is true, but only the net gain on the life insurance policy is income... if you've paid into the policy and the cash value is less than your cost base, you've realized a loss and therefore will not owe taxes. If you've realized a gain over the premiums you've paid into policy, then only gain is taxable. For example, you've paid in $20K and your cash value is $18K. You've already paid taxes on the $20K, so the $18K isn't new income. However, if you paid in $20K and your cash value is $24K, then $4K is taxable because that's over your cost base and will be considered income if you cash the policy out.

[Critter]

And contributions to any IRA are limited by the annual amount and by the earned income you have ... cashing out an insurance policy is not earned income for an IRA contribution.

[macuser_22]

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@flashjh wrote:
Just want to add to this statement "About the only way to get assets from an insurance policy to an IRA is to cash in the policy and contribute the money to the account. However, you'll have to treat the money as taxable income". That is true, but only the net gain on the life insurance policy is income...

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Proceeds from an insurance policy, taxable or not, is NOT taxable *compensation* that can be used to fund an IRA.   Taxable compensation is money that you worked for such as W-2 wages or self-employed income, with a few exceptions.  Also, for 2019, the maximum that can be contributed to an IRA is $6,000 ($7,000 if over age 50).

See IRS Pub 590A "What is compensation" for IRA contributions for details.

https://www.irs.gov/publications/p590a#en_US_2018_publink1000230355

[Carl]

I'm only going to talk about this:

I cashed in my life insurance

What you did with the funds is irrelevant. Most likely you paid your premiums on this policy with after tax dollars. (money you already paid taxes on.)The type of policy you're dealing with here is most likely what's referred to as a "whole life" policy.  I very seriously doubt your cash-out value exceeds the total of all the premiums you paid in. So for most (I stress *MOST*) they don't have a taxable gain.

However, (yes, for every rule there is an exception and when it comes to taxes, chances are high the exception applies to you.) if your whole life policy included something such as interest or dividends that accumulate over the life of the policy, when you cash out the policy that interest or dividend earnings are taxable income. The taxable amount is reported to you usually on a 1099-R. But it can be reported on a 1099-INT, 1099-MISC or other type of tax reporting document. You need to contact the insurance company and find out what type of tax document if any, they will be sending you. If possible to found out the amount, or at least a rough amount, that will help you determine if you need to send the IRS (and your state if applicable) an estimated tax payment. If you send the IRS at least 20% of the taxable payout, you'll be fine come tax filing time.