A Better Roth
For many people, indexed universal life insurance (IUL) makes for a better Roth. A Roth IRA or a Roth 401(k) make sense for those who wish never to pay income tax on their retirement distributions. Foregoing the tax deduction on their contributions today are considered a good trade-off for getting tax-free treatment of the much larger payments received down the road. But Roth IRAs and Roth 401(k)s have several distinct drawbacks.
- Roth IRAs can only receive up to $6,000 in contributions as of 2019.
- Roth IRAs are not even available to those who earn over $122,000 in 2019 ($193,000 for married couples).
- Roths have no catch-up capabilities. If you fail to contribute the maximum allowable for this year, you can't add the shortage to next year's maximum.
- Roth funds are virtually inaccessible prior to age 59 1/2 without a penalty.
- Roth funds generally may not be pledged in order to achieve leverage for outside investments.
- Roth investments are vulnerable to investment loss.
- Any qualified retirement plans, including Roths, often need Target Date investment funds to reduce risk as one nears retirement age. This has can lower average investment return.
- Roth accounts are not self-completing if you die or become disabled.
On the other hand, indexed universal life insurance (IUL) provides the following advantages:
- Nearly unlimited annual contributions, so long as you can qualify for the requisite amount of insurance. If you wish to contribute more than what you personally can qualify for, you can purchase and own IUL on other family members.
- If you pay in less than the maximum this year, you are able to play catch-up, since IRS rules only limit cumulative contributions in order to keep maximum tax breaks.
- By using low risk leverage, IUL account values may be accessed at any time through participating policy loans without taxes, penalties, or interrupting investment performance.
- A special type of leverage - hyperfunding - may have the effect of enhancing investment yield.
- The investment component of IUL is hedged, and will never be subject to investment loss. No need for Target Date Funds when nearing retirement. IUL maintains potentially higher yield up to and through your retirement years.
- Since IUL has an insurance component, there would be a lump sum death benefit if you die before retiring, and might also include a rider to waive contributions should you suffer a long-term disability.
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