IUL or Roth IRA; Which is Best for You?
“Six in 10 workers report they have less than $25,000 in total savings and investments; including 36 percent who have less than $1,000.”
- Employee Benefit Research Institute and Greenwald & Associates
Concerns When Planning for Retirement?
Retirement planning is crucial to maintaining financial security and retaining a specific standard of living. Eighty-eight percent of all Americans are worried about “maintaining a comfortable standard of living in retirement,” according to a 2012 survey by Americans for Secure Retirement.
Based on recent statistics, this majority of Americans are justified in their concern. The U.S. Department of Labor estimates that an individual will need 70 to 90 percent of their pre-retirement income to maintain their current standard of living once they begin retirement.
Additionally, one-third of U.S. homeowners, between the ages of 30 and 59, will not be able to maintain their standard of living after retirement, even if they delay their retirement until age 70, according to a 2012 study by the Employee Benefit Research Institute.
This lack of preparation has left many retirees with unwarranted debts in the past. In 2010 more than 80 percent of those between age 50 and 61 held debt, according to the Social Security Administration (SSA). The average debt amount among this age group was more than $150,000. In the same year those aged 75 and older held an average debt of $27,409. Alarmingly, that figure had more than doubled since 2007 when the average debt was $13,665, according to the Employee Benefit Research Institute (EBRI).
One out of every six elderly Americans in 2012 was living below the federal poverty line, according to the U.S. Census Bureau. Furthermore, 56 percent of American retirees still had outstanding debts when they retired in 2012, according to a survey by CESI Debt Solutions.
What’s worse is that past research has shown debt among retirees has been on the rise throughout the past few decades. According to Boston College’s Center for Retirement Research, “Between 1991 and 2007 the number of Americans between the ages of 65 and 74 that filed for bankruptcy increased an astonishing 178 percent.”
The Difference Between Roth IRA and IUL
The Roth IRA and Indexed Universal Life (IUL) Policy are both tools that can be used to build substantial retirement savings. Because the money invested in these products has already been taxed, withdrawals can be made tax-free. These financial tools are similar in that they benefit policyholders who wish to generate savings at a lower tax rate than they may encounter in the future.
However, the key differences between them make each more attractive for people with differing needs. Determining which is better for you depends on your personal situation. In either case, the policy grows based on the interest, or dividends, credited to the account.
Indexed Universal Life
As you may already know, IUL policies are tied to a specific stock index, such as the S&P 500, and provide returns based on market performance. Once the cash value has built up to a substantial level, the client can begin taking tax-free withdrawals to supplement their retirement income.
With an IUL, only the premiums that are not used towards life insurance coverage is used to build tax-deferred cash value. In comparison, all money put into a Roth IRA will grow tax-deferred. And since an IUL is used for life insurance, as well as a cash accumulation tool, the owner’s age and overall health can have a huge impact on premium costs, which would ultimately hurt the accumulation. However, the added death benefit of the IUL, pays tax-free dollars to the designated beneficiaries should the owner die prematurely.
Although IULs can generate a considerable amount of cash value, this product must be well-funded by the owner in order for it to preform as intended. Allowing the policy to lapse can actually leave the policyholder with a large tax bill, so the owner should be advised that this is a long-term planning strategy with potentially significant penalties if the policy is surrendered or lapses.
Roth IRAs make the most sense if you expect your tax rate to be higher during retirement than your current rate. That makes Roth IRAs ideal savings vehicles for young, lower-income workers who reside in a lower tax bracket and who will benefit from decades of tax-free, compounded growth. Since there are no minimum required contributions, a Roth IRA gives investors control over their personal goals and risk tolerance. Additionally, there are no minimum required distributions at any age during the life of the policy.
Nevertheless, The IRS strictly caps the amount that your policyholders can contribute to a Roth each year. As a result, accumulating a substantial amount in the Roth IRA can be difficult based on the relatively low level of annual contributions that can be made, when compared to an IUL.
Which is Best for You?
Many policyholders who invest early will find a ROTH IRA sufficient for their retirement planning needs, but for those seeking to maximize tax-free income during retirement years, cash value life insurance can provide an attractive supplemental strategy.
Ultimately, a person who wants to invest in either of these products should consider all their options and seek the advise of an independent financial or insurance professional to decide which method is right for their personal situation.
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