Editor’s Note: The need for efficient retirement planning is evergreen, so we decided to re-publish this post from 2015. We’ve updated the numbers, but the conclusion remains: a few differences may allow high-income individuals to take advantage of Roth benefits through the purchase of cash-accumulating life insurance contracts.
But, has anyone really analyzed these comparisons and their validity? Let’s take a closer look at why life insurance is often compared to Roth IRAs with additional benefits.
To qualify for a Roth IRA, your clients have to fall under income certain limits established by the IRS. If they’re married filing jointly, their income has to be less than $184,000 to qualify for a full contribution. If filing single, their income has to be under $117,000. In addition to income limits, Roth IRAs also have annual contribution limits – currently the limit is $5,500, but people age 50 and over can contribute up to $1,000 extra per year to “catch up” before they retire.
Life insurance, on the other hand, isn’t bound by any IRS income or contribution limits. Instead, it’s bound by insurable interest and medical qualifications.
In a Roth, your clients always have access to the basis without penalty. However, if they’re looking to access cash in excess of the basis before age 59½, they’ll incur a 10 percent tax penalty. There are exceptions for first-time homebuyers and qualified educational expenses, however.
With life insurance, your clients may incur surrender charges in the first 10 to 20 years, depending on the contract. Outside of surrender charges, there’s no penalty for accessing the cash value in excess of basis before age 59½. It’s important that early withdrawals are closely monitored, however, as they could affect the performance of the contract and create a tax liability if the policy lapses.
Life insurance policies are self-completing and provide beneficiaries a tax-free death benefit – which is greater than the account balance – should the client die before retirement. (Please note that life insurance has cost-of-insurance charges to provide this benefit.) With a Roth IRA, the account balance passes to beneficiaries and may be subject to taxes.
Beyond age 59 ½, both contracts allow the client to access the gain without paying capital gains tax. Neither contract requires a minimum distribution at age 70½ like a traditional IRA.
Life insurance and Roth IRAs have several similarities. However, a few differences may allow high-income individuals to take advantage of Roth benefits through the purchase of cash-accumulating life insurance contracts.
© 2018 Ash Brokerage LLC.