Yes, you are surrounded by people who want to help you plan for retirement. In other words, want to sell you something. Admittedly we have the same idea. The difference is that we have some solutions that can save you money when you are dealing with your 401(k) and Roth IRA. We hope that you will find the information interesting and useful.
The difficulty with some traditional retirement vehicles, such as 401(k) accounts and individual retirement accounts (IRAs), is that if maximum marginal tax rates rise, as they have recently, these accounts may become less effective at preserving wealth. The benefits of making deductible contributions and enjoying tax-deferred growth may be
outweighed by high marginal tax rates when the need to begin making taxable, mandatory withdrawals (required minimum distributions, or RMDs) kicks in, currently at age 70 ½. (Keep in mind that all tax statements in this blog post are based on current tax law and that a qualified tax expert should be consulted when considering one’s individual circumstances.)
In addition, when IRA or 401(k) plan assets pass through inheritance to the owner’s (non-spouse) beneficiaries, they do so as regular income and often are taxed at high rates, as beneficiaries often are in their peak earning years and are subject to correspondingly peak tax rates.
Watching for Potholes
Some retirement plans address these problems by allowing participants to accumulate and distribute assets without paying taxes, although with a significant drawback: the initial contributions are nondeductible. The Roth IRA is an example of this type of plan. In addition to providing a vehicle for tax-deferred growth and zero taxation on qualified distributions, the Roth IRA requires no mandatory withdrawals by the owner, and the money passes income-tax-free to the beneficiaries after the owner’s death. But again, initial contributions are nondeductible.
The Roth IRA also has other drawbacks which may be significant for some people, particularly high-income earners. Single taxpayers whose modified adjusted gross incomes exceed $132,000 (and married couples who file jointly, with adjusted gross incomes above $194,000) are ineligible to contribute to Roth IRAs.
Even for people with incomes below those thresholds, the Roth IRA, like its traditional IRA cousin, limits maximum annual contributions to $5,500 (or $6,500 for people ages 50 or beyond). Also, people who skip making contributions to a Roth IRA in one or more years are not allowed to “make up” the contributions later; those potential contributions and the benefits that may have accrued to them are lost.
Finding A Way Forward
Despite their drawbacks, a 401(k) account, an IRA or a Roth IRA may be useful in retirement planning. However, their utility may be greatly enhanced when other financial products are utilized to help offset some of the limitations and add diversification to a retirement plan.
Life insurance is a prominent example. The IRS does not impose limits on the amount of life insurance premiums a person can pay or the amount of money someone can earn while still being allowed to fund life insurance premiums. Additionally, with a properly structured life insurance solution, the policy holder has the option to miss a payment, or make only a partial payment, and then contribute the missed amount anytime.
Furthermore, life insurance death benefits generally pass income-tax-free to beneficiaries after the policy holder’s death. And unlike a 401(k), an IRA or a Roth IRA, life insurance is a “self-completing” asset. If the insurance policy terms have been met, beneficiaries may receive the full death benefit even if the policy holder died before the contract was fully funded.
Here’s the Bottom Line
Leveraging multiple types of financial products in a long-term strategy may help achieve retirement readiness. With its tax-advantaged treatment, flexibility and other features, life insurance merits thoughtful consideration when planning for retirement and the leaving of a legacy.
Dean and Draper
For more information about the role of life insurance in retirement planning, please call our expert, Jerry Linville, 281-794-3783.
Dean& Draper is a Trusted Choice insurance agency representing over 200 insurance companies. For over 35 years we have offered a trusted freedom of choice to our clients. ContactUs.
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