The numerous options for retirement savings make our decision truly difficult. Have you ever found yourself thinking that you don’t even want a retirement plan because it is so challenging?
We’ve been in the same place. We know how you feel, and that’s why we’ve come up with this in-depth comparison between life insurance and a Roth IRA.
Keep reading this article and find the answer to this all-time question: What is the best way to save for retirement?
Let’s dive in!
Understanding Roth IRAs
IRA is the shortened name for accounts used to save for retirement. The full name is “an individual retirement account.”
There are four types of IRAs: traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plan for Employees (SIMPLE) IRAs.
What Is a Roth IRA?
A Roth IRA is a special kind of tax-advantaged individual retirement account that allows after-tax contributions. The main advantage of a Roth IRA is that, if the account has been open for at least five years, your contributions and the returns on those contributions can grow tax-free and be withdrawn tax-free after the age of 59 1/2.
Roth IRAs vs. Traditional IRAs
In a Roth IRA, you pay taxes on money that goes into your account, and then all withdrawals in the future are tax-free. This is the biggest discrepancy compared to traditional IRAs, which are savings accounts where you pay estate taxes on the withdrawals rather than on the money you’re contributing.
Simply put, with a Roth IRA, you’re contributing after-tax dollars. It is more beneficial than having taxes on your growth money, but that doesn’t mean it is the best option.
It is not so lucrative when compared to a whole life insurance policy. With this policy, neither the money you invest in it nor the money you cash out from it is subject to tax.
Who Is Eligible for a Roth IRA?
Anyone with a source of income can start a Roth IRA. It is usually taxable money earned from an employer or net earnings if a person is self-employed, but also other income (like taxable alimony, nontaxable combat pay, and taxable non-tuition).
How to Open a Roth IRA?
You can open a Roth IRA with a company that has IRS permission to provide individual retirement accounts. Some examples of companies are banks, brokerage firms, federally insured credit unions, and savings and loan organizations.
Individuals typically work with brokers to open IRAs. One of the advantages is that you can open your account whenever it’s good for you.
Roth IRA vs. 401k
Roth IRAs and 401(k)s are the usual vehicles Americans use to save for retirement. They are both tax-advantaged accounts where your savings grow tax-free.
But the differences between them are in terms of employer contributions, investments, and tax status.
Contributions to a 401k are made pre-tax, which means they are deposited before your income taxes are deducted from your paycheck. The amounts are tax deductible, lowering your taxable income as a result. Withdrawals in retirement are subject to taxation at your prevailing income tax rate.
The opposite is the case with Roth IRAs: there is no tax deduction for contributions, and the contributions and earnings can be withdrawn tax-free when in retirement.
We’ve only covered the Roth IRA’s basics for a better understanding of the comparison between this account and life insurance. But if you’re interested in reading more about retirement planning, we suggest you look up our previous articles and learn more about:
- The benefits of a Roth IRA
- The difference between a Roth IRA and a 403B
- Is the mega backdoor Roth IRA a better option for you?
- Should you overcontribute to this account?
Now that we have the facts, let’s move on to understanding the basics of life insurance.
Understanding Life Insurance
Life insurance is such a large topic that we still haven’t covered it completely in our numerous articles so far, so it will be impossible to do so in this blog either. To make this comparison direct and not 50 pages long, we will focus on only one type of life insurance: a whole life insurance policy.
What Is Whole Life Insurance?
Whole life insurance is one kind of permanent life insurance, which means it offers life coverage as long as the premiums are paid. Or, in other words, whole life insurance lasts for the entire life of the policyholder.
The most significant advantage of whole life insurance policies is the cash value. It is a savings component where your money grows at a fixed interest rate.
Because of this feature, you can borrow money against your whole life insurance policy.
Whole life insurance is one tool for two different purposes. At the same time, it provides you with insurance coverage, which is the primary feature of life insurance. But it also permits you to use cash value during your lifetime to build and enhance wealth. So, it’s not strange that whole life insurance is the usual choice for people.
How Does Whole Life Policy Work?
When your life insurance policy has built up enough cash value, you can begin taking out loans against it. You can use the money for anything you need.
Moreover, you can even choose not to pay back your loan. This gives you more ways to utilize your policy, which we’ll talk about later in this article.
Unlike a Roth IRA, a whole life policy has many tax benefits. We will mention just a few of them:
- The death benefit is not subjected to federal income taxes.
- The cash value continues to grow on a tax-deferred basis while the funds remain in the policy.
- Withdrawals are considered tax-free returns.
- The loans you take against the whole life policy are also not considered to be taxable events.
So, the fundamental basis of both whole life insurance and Roth IRAs is the same: they are both wealth transfer tools that facilitate the valuable transfer of assets to your heirs and provide a tax-free legacy. Despite some parallels between these two retirement planning vehicles, there are many differences.
Roth IRA vs. Whole Life Insurance Policy
We will cover the three main discrepancies between a Roth IRA and a whole life insurance policy.
#1 Roth IRAs are always included in your estate
As we saw, an IRA is an individual account, meaning it’s always yours. But it also means the value of your Roth IRA is always included in your estate.
Even though we all think Roth IRA assets are tax-free, there are some exceptions. If your estate exceeds the federal estate tax exemption amount or the equivalent state estate tax exemption threshold, your beneficiaries may be required to pay estate taxes. Moreover, they can owe it at the federal level, the state level, or even both.
On the other hand, whole life insurance is outside of your estate. This ensures your beneficiaries have tax-free benefits no matter how much your estate is worth when you die. To put this simply: unlike a Roth IRA, with a whole life policy, you actually have the tax-free benefit.
#2 Roth IRA has a limitation on how much you can contribute
You have some limitations if you want to contribute to a Roth IRA annually. The maximum Roth IRA contribution for 2023 will be $6,500. There is also a rule on what type of income you need to have. With a Roth IRA, you can only put in money that counts as “compensation,” which is usually money you earned.
Another issue with the Roth IRA is that there is a maximum amount of income you can have. If you have too much income, you won’t be allowed to contribute to a Roth IRA. For 2023, the income limit will be $153,000.
On the other hand, with a whole life insurance policy, you don’t have any limitations on how much you will contribute to it. Furthermore, you can pay your premiums with any type of income, including interest, Social Security, or dividends.
And as you’ve probably assumed, with whole life insurance, you don’t have a limit on the amount of your income. In fact, if you have a higher income, you can qualify for more life insurance and overfund your policy.
#3 Whole life insurance doesn’t have required minimum distributions (RMDs)
If you decide to leave a Roth IRA to non-spouse beneficiaries (children, for example), they must receive the entire tax by December 31 of the tenth year following the beneficiary’s inheritance. These distributions must be taken even though they are often tax-free.
In contrast, when beneficiaries inherit life insurance, there are no RMDs to worry about.
Without further ado, let’s find the answer to the question we’re most interested in.
What Should I Choose for Retirement Savings?
The Roth IRA is the best individual account compared to others. But when it comes to the competition between a whole life and a Roth IRA, then it’s not so superior.
6 Reasons Why You Should Choose Whole Life Insurance Policy
- Funds in the policy’s cash value grow tax-deferred. If you want to take a loan from your policy or withdraw the money, you can do it at any time and totally tax-free.
- Contributions to a whole life policy are not limited to a small sum, unlike a Roth.
- The advantage that whole life insurance offers is the tax-free death benefit. Moreover, the death benefit is increasing over time.
- The cash account of a whole life insurance policy offers a guaranteed growth rate.
- If you purchase your whole life insurance from a mutual insurance company, you will have the opportunity to receive dividends.
- While funds in a Roth IRA normally cannot be withdrawn or accessed before the age of 59 1/2, funds in your whole life can be accessed at any time, without any limits placed by the government.
How To Use Your Policy For Retirement – Infinite Banking
We all know the future economy is unpredictable, but we still want to guess what it will be like so we can adjust our current investments to the best possible scenario.
When you put your money in a Roth IRA, when and how much money will you get? The truth is, we really don’t know that.
And we believe it is the most serious issue with these accounts. However, there is more. When you contribute to the Roth IRA, you’re paying the fund managers first instead of yourself.
With a Roth IRA, you’re paying the fund managers today, and they know exactly how much liquid cash is going into their pockets because they are managing the funds, not you.
What if we told you that this could be turned around? It’s possible and easy.
One of the main reasons why you should choose a whole life insurance policy over a Roth IRA is because it allows you to start your own infinite banking process. Infinite banking is the concept of using a high-cash-value whole life insurance policy as a storage facility to hold your money.
Why would somebody do that? As we mentioned, whole life has a cash value where your money continues to grow. Even if you borrow money for whatever needs you might have, the money still stays in your account.
In contrast to a Roth IRA, with whole life insurance, you’ll have the peace of mind that we all seek. You will know exactly how much money you’ll have in the future and will always pay yourself first.
Believe it or not, there is more. The term “banking” in infinite banking is not without reason. In fact, it is designed to copy the traditional banking system. As a result, you’re breaking free from banks and becoming your own banker.
The banks are making money on our money by charging us enormous fees and interest. But instead of helping banks get wealthier, with your money in infinite banking, you will keep it for yourself and even make more money!
You can use that money for every future plan, including retirement planning. So, if you have whole life insurance, you can use infinite banking to make your own financial system and be in charge of your money. That’s why we call it – Lifestyle Banking.
Retirement means something different for everyone, and that’s why we only need a personal system that works specifically for our needs. Lifestyle banking is a way to make sure that your retirement needs are met and that you have a happy old age.
What Is the Next Step?
Watch our free masterclass to get further information on how to create your own bank and meet your retirement needs.
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