Q: My financial advisor has recommended that I reduce my contributions to my retirement account and put the money into a life insurance policy instead.

He told me that I should over-fund a life insurance policy because the tax benefits are far superior to my 403(b).

Although I cannot take a deduction for my deposits, my earnings will grow tax deferred and I can take tax-free withdrawals as a loan for retirement income.

Do you think I should reduce my contributions to my 403(b) and buy a life insurance policy?

David, Rancho Cordova

A: Unless you have millions in your tax-deferred retirement accounts, reducing your deposits to redirect your money into life insurance for the reasons outlined above does not make sense to me.

Life insurance policies that have savings and investment features, such as whole life and universal life, work great for those who need life insurance for their entire life. But most people don’t need a ton of life insurance for their whole life. They only need it while someone is dependent upon their income.

Money invested in life insurance will be reduced by insurance costs and other policy fees that will cost much more than the fees in your 403(b). The fees inside a life insurance policy cause a tremendous drag on the policy value.

Withdrawals from a life insurance policy have favorable tax treatment because tax law enables you to withdraw all of your deposits before you withdraw your earnings.

You can take a loan on your earnings and avoid income taxes, but like all loans, the loan doesn’t come without a cost. Furthermore, the policy will need to be in force on your dying day. I’ve seen cases where retirees have been hit with tens of thousands in income taxes because their “tax-free loans” on their life insurance policies didn’t work out the way they had planned.

If I were you, I would max out all retirement plans available to me before I even remotely considered buying a whole or universal life policy. While I own a universal life policy myself, the vast majority of my insurance needs are covered by a 20-year term policy.

Q: I am thinking about converting some of my IRA to a Roth IRA this year as both my husband and I have sizeable IRAs. I am not working and my husband started a new business this year. We anticipate that we will have a business loss to declare this year, not business income.

Do you think it’s wise to convert to a Roth IRA?

Deb, Rocklin

A: This year is the perfect year to convert to a Roth IRA. When you convert from a traditional IRA, the amount you convert is treated as ordinary income and is reported on your income tax return.

Because you’ll have business losses to report this year, you could convert the same dollar amount as your business losses and pay zero income taxes on the conversion. And once you hit retirement age and take withdrawals from the Roth IRA, your income will be tax-free.

Anyone who has a low income year due to unemployment, disability, new business, etc., should seriously considering doing a Roth conversion before Dec. 31.

Q: I sold my house last August because I thought home prices were going to fall. We've been renting for the past year.

I netted $30,000 from the sale and I've had the money set aside to use as a down payment for the next house we buy. I was thinking of taking $10,000 of the money and investing it in something to get a high return rather than putting all $30,000 down on a house. Where's a good place to put $10,000 right now?

Nino, Antioch

A: I think you should keep all $30,000 parked in a safe place and use all of it for a down payment on your next house purchase.

The mortgage environment is much different today than it was a year or two ago. For years, if a buyer didn't put down at least 20 percent of the purchase price, the mortgage company would charge the borrower mortgage insurance, which could cost sometimes hundreds of dollars per month.

Then, in the first part of this decade, lenders began offering piggyback loans, whereby a homebuyer would have one loan at 80 percent of the home's value and another loan at 20 percent.

This enabled the buyer to put no money down and avoid mortgage insurance.

The days of the piggyback loans are gone. And mortgage insurance, which used to be fairly cheap, is now expensive. Unless you put down at least 20 percent to purchase a home, you'll be stuck paying mortgage insurance.

If you take $10,000 out of your house money and invest it somewhere, you'll have less money for a down payment and will wind up paying more for mortgage insurance. The cost you'd pay would be much greater than any amount you could expect to earn on an investment.

– Scott Hanson is a registered representative with Hanson McClain, a registered broker-dealer, member FINRA/SIPC, with offices in Roseville. Send your financial questions to Questions@moneymatters.com