Investment Strategies

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

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by Alli Thomas

Sep 25, 2018

A Roth IRA is one of the best ways to minimize taxes, but many people earn too much to qualify for a Roth. As we mentioned in our earlier blog post about Roth IRAs, eligibility begins to phase out if you make more than $120,000 (for singles) and $189,000 (for those married filing jointly).

 

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

 

Recently, another alternative for high earners to minimize taxes while maximizing income has come up: the so-called “Rich Person’s Roth.”

 

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

 

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.

 

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

 

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

 

Another consideration is the interest rate the insurance company charges on withdrawals from the policy. In order to get your 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. This acts almost like a wash on your interest costs.

 

Do You Have to Be Rich to Benefit?

 

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

 

Before you purchase any insurance policy, be sure to make yourself familiar with all of the details and potential costs. You’ll also want to make sure it fits with your financial plan, so speak with your financial advisor and/or planner first.

 

You may not even need any complicated insurance policies to reach your retirement goals. Sign up for a free Results In Advance Planning evaluation of your current plan with a member of our advisor network to see how it may perform in the future and get an idea of how it can be improved on.

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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