by
Mark Peterson
Senior
Vice President, Independent Distribution, AIG Financial Distributors
Planning
for retirement can be a struggle. When seeking a strategic approach, it may be
helpful to think of each dollar that’s being put toward retirement as going
through three phases: contribution, accumulation and distribution. To help achieve
a financially solid base for retirement, the funds ideally would grow in each
phase. That doesn’t always happen, but leveraging life insurance is one way to
potentially counter obstacles on the road to retirement.
Bypassing Roadblocks
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.
For more information about the role of
life insurance in retirement planning, please contact MVP Financial Services, Inc.
Did you know that 43% haven’t bought life insurance or more
of it because they’re unsure of how much or what type to buy.*
