Retirement Investing Strategies and Articles

Have You Heard About the “Rich Person’s Roth?”

by Alli Thomas

May 12, 2024

Roth IRA

A Roth IRA is one of the best ways to minimize taxes. Many people earn too much to qualify for a Roth IRA. Not long ago, an alternative for high earners to minimize taxes while maximizing income came up that’s known as theRich Person’s Roth.”

What are the Income Limits for a Roth IRA? 

As we mentioned in our quick guide to Roth IRAs, eligibility begins to phase out if you make more than $161,000 (for singles) and $240,000 (for those married filing jointly). 

In that same post, we discussed the backdoor Roth conversion, which acts as a loophole to allow anyone, regardless of income level, to convert a traditional IRA to a Roth IRA. 

Cash Value

death benefit, tax deduction, after tax money

Despite the nickname, the “Rich Person’s Roth” isn’t a retirement account at all. Instead, it’s a cash value life insurance policy that offers tax-free earnings on investments as well as tax-free withdrawals. 

In certain cases, it’s possible to use the cash value of these policies to create a guaranteed stream of income, possibly for the rest of your life. 

How Does the “Rich Person’s Roth” Work?

Another advantage is there are also no annual contribution maximums. Depending on how the policy is set up, you may be able to contribute an endless amount of money each year, which will not only grow tax-free, but will also be tax-free upon withdrawal. That means your tax bracket won’t be affected. 

Considerations to Make

Your overall health matters since the core product behind the “Rich Person’s Roth” is still a life insurance policy. The worse your health is, the higher the cost of the life insurance will be. People in poor health may not be the best candidates for this strategy as they may end up underwater at the cost of the policy. 

Another consideration is the interest rate the insurance company charges on withdrawals from the policy. In order to withdraw money from the policy, you must take a loan against the death benefit from the insurance company, which will most likely charge you interest. Policies with zero net loans credit your interest payments as if the funds are still held in the policy, which acts almost like a wash on your interest costs. 

Do You Have to Be Rich to Benefit?

tax free dollars, tax rate, pay taxes, iul policies

High earners aren’t the only people who can benefit from the “Rich Person’s Roth.” It will consist of older workers in good health who are trying to play catch-up on their retirement savings. Those who are already hitting annual contribution maximums in other retirement savings vehicles could also benefit. 

Roth IRA vs IUL (Indexed Universal Life Insurance)

The difference between a Roth IRA and an IUL (Indexed Universal Life insurance) Policy is that both are tools that can be used to build and grow substantial retirement savings. Since both products have already been taxed, withdrawals can be made as tax-free retirement income.

The differences between IUL and Roth IRAs make each more popular for retirement planning for investors with different needs. You can determine the better fit by examining these differing needs. Either way, the policy grows based on the interest and dividends credited to the account owner.

Indexed Universal Life Insurance

IUL policies are tied to a specific stock index, such as the S&P 500, Dow Jones Industrial Average, and Nasdaq. The IUL provides returns based on market performance. Once you have earned a considerable amount, you can start taking tax-free withdrawals to supplement your income.

Only the premiums are not used towards life insurance coverage with an IUL. It is used to build a tax-deferred cash value. All money put into a Roth IRA will grow tax deferred. IULs can generate a considerable amount of cash value; they must be well funded by you for it to perform as intended. If you allow the policy to lapse, it can leave you with a large tax bill, so you should e advised that this is a long-term planning strategy with potentially significant penalties if the policy is surrendered or lapses. (ARC)

Roth IRA and Tax-Free Retirement Income

retirement income, life insurance coverage, tax free income, tax deductions

Roth IRAs make sense if you expect your tax rate to be higher during retirement. This makes Roth IRAs best for young, lower income workers who live in a lower tax bracket. They will benefit from decades of tax free, compounded growth that will result in a tax free income during the retirement years.

There is no minimum required contribution limits in a Roth IRA. Roth IRAs can give investors control over their goals and allow them to weigh the risk tolerance. There are no minimum required distribution at any age during the life of the policy of a Roth IRA.

The IRS does have strict caps for the amount that a policyholder can contribute to a Roth each year. This can make it difficult to accumulate a substantial amount in the Roth IRA if it is started later in life compared to the IUL. (ARC)

Financial planning and Retirement planning

Many retirees who invest savings early will find a Roth IRA more than sufficient. This will fulfill their retirement planning needs. For those seeking to leverage tax free withdrawals and income during retirement years, cash value life insurance can provide a very attractive supplemental income strategy.

Differing Needs for a Retirement Nest Egg

Before you purchase any insurance policy, be sure to make yourself familiar with all of the details and potential costs – and speak with a financial advisor first. Don’t have an advisor? We can he help. Request a complimentary, no-obligation conversation with one of our financial advisors today!

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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