Most of you out there have heard about a Roth IRA. It is one of the most popular retirement savings options available today. When you set up a Roth IRA, your contributions are made with after-tax dollars and your withdrawals after 59 ½ are income tax-free. This is completely opposite from the traditional IRA where your contributions get a tax deduction but the income after age 59 ½ are taxable. According to US News and World Report, Roth IRA contributions now exceed traditional IRA contributions. The report also states that nearly 25% of all Roth IRA contributions are made by young savers between the ages of 25 and 34.
I believe that this is because of the income tax-free status of withdrawals.
The study also says that the average Roth IRA contribution is over $4000 per year. Keep in mind that your Roth IRA contribution does not earn you a tax deduction. But never mind that! Wouldn’t you rather pay taxes on the seed than the harvest?
I love the idea behind the Roth IRA. I prefer paying less taxes myself.
What you may not know is that there are more options available that offer the same benefits as a Roth IRA while at the same time allowing much more flexibility. I am referring to indexed universal life insurance. Depending on your situation, using indexed universal life insurance to help fund your retirement on a tax-free basis could be a great way to go.
What you didn’t know about a Roth IRA
In my opinion, the biggest drawback to the Roth IRA are the contribution limits. The most you can contribute to a Roth IRA is $5500 per calendar year, unless you are older than 50 and then it is $6500 per calendar year. Just think about it. $5500 per year is $458 per month. That is ok when starting out at a young age. But what about when your career and your finances start to click and you need to put away more than $5500 per year to build up enough money to retire on?
The indexed universal life insurance policy, on the other hand has no contribution limit. You can contribute as much as you like and you are not limited to the calendar year. We have clients putting in as little as $50 per month and some putting in more than $100,000 per year. You set the limit. We can put together a quote for you based on what you feel comfortable with.
I know what you are thinking – LIFE INSURANCE?
Let’s start with a quick introduction to these products for those of you who may not know the specifics. With a Roth IRA, you are setting up a personal account that is specifically for saving for retirement. The funds you place in a Roth IRA are already taxed, so you do not pay taxes on the funds when you withdraw. After you meet IRS guidelines, of course. You may invest your Roth IRA in many different investments vehicles. Some are subject to stock market risk while others are safe from market fluctuation.
An indexed universal life insurance policy functions similarly to a Roth IRA when it comes to taxes. The funds contributed are already taxed so you do not pay taxes on the income. Remember, we are talking about a life insurance policy so not only is your family guaranteed a death benefit payout, but you are also saving for retirement at the same time. A small amount of the premium paid into an indexed universal life policy goes toward the cost of insurance charges while the majority of the premium goes to the cash value account. This cash value account is credited with interest each year based on the gains of your selected stock market index. These indexes can be the S&P 500, NASDAQ, DOW and some international indexes.
So how do they stack up against each other? Let’s talk about risk. With a Roth IRA, you could be subject to stock market risk. We all know what happened back in 2000 and again in 2008. So unless your Roth is in a fixed annuity, you have no guarantees. The indexed universal life policies that we recommend are not only protected against this type of loss, they have a guaranteed minimum return that you can rely on. Imagine saving up for years, and then a market meltdown costs you half your retirement savings. Why would anyone want to subject themselves to this?
Don’t get me wrong, Roth IRAs can be a great tool for retirement savings. There are just some things that indexed universal life insurance does that I think most people need.
These are some of the benefits that the indexed universal life insurance we recommend has:
- Guaranteed death benefit
- Chronic and Critical illness benefits (pays you if you get sick)
- Guaranteed interest crediting no matter what the stock market does
- Access to your money before age 59 ½ without a penalty (a Roth IRA has a 10% penalty)
Guaranteed death benefit. When you choose indexed universal life, you start with a specific death benefit. If you choose the increasing death benefit option, this amount grows each year. This is important because if you were to die an early death, your family would receive so much more that they would if you only had a Roth IRA. This can also be important during retirement because as your Roth IRA balance decreases, there is less that is available to your family when you die.
Chronic and critical illness benefits – these are very important benefits. Chronic illness benefits allow you to access your death benefit if you become unable to perform 2 out of the 6 activities of daily living (very much like long term care insurance). Critical illness benefits allow you to access a portion of the death benefit should you suffer something catastrophic such as a heart attack, cancer or a stroke. I know of too many friends who have struggled through these problems at a young age. A Roth IRA has no insurance protection for any of these situations.
Guaranteed interest crediting – let’s talk about risk. With a Roth IRA, you could be subject to stock market risk. We all know what happened back in 2000 and again in 2008. So unless your Roth is in a fixed annuity, you have no guarantees. The indexed universal life policies that we recommend are not only protected against this type of loss, they have a guaranteed minimum return that you can rely on. Saving up for years of your life only to lose half of it in a stock market crash is a good thing to avoid.
Access to your money – when it comes to withdrawing funds prior to retirement age there are possible fees and penalties. If you choose to make a withdrawal on your IRA prior to the age of 59 ½ you will more than likely pay a 10% IRS penalty on your withdrawal. This penalty does not exist on the IUL. With an IUL, you can withdraw your funds until you reach the basis and then take loans. These loans do not have to be repaid but will be subtracted from your death benefit.
So how do they stack up against each other? Both offer strong benefits for retirement. Why not pay a little tax now in order to receive a much larger amount of income tax-free at retirement? Everyone’s situation is different. Retirement planning is not a one size fits all strategy. We are available to design a plan based on your answers to just a few questions. Our quote package will show you the Roth IRA and the indexed universal life insurance policy side by side so that you can make a well-informed decision.
Just use the quote request form on our page or call us for a free consultation at 1-800-712-8519.