Why are so many Americans unprepared for retirement?
- Did you know that the average American household only has about $135,000 saved for retirement? What should you do?
What if you could:
- Provide an income tax-free death benefit for the people who depend on you
- Defer taxes as your accumulated cash value grows, and
- Potentially access that cash value using income tax-free policy loans and withdrawals, to use for retirement income or other needs
Strategies to Save For Retirement
After Tax Strategy – when you set aside a portion of your after tax income into an account earmarked for retirement. Taxes are paid annually on any earnings. An example of this type of savings is a Certificate of Deposit.
Tax-Deferred Strategy – when you set aside a portion of your after tax income for retirement, earnings on the account grow tax-deferred. When retirement income is taken, taxes are due on the tax-deferred gain. A Non-Deductible IRA or an annuity is an example of this type of savings.
Pre-Tax Strategy – might include an Employer sponsored qualified plan, like a 401(k) plan. You don’t pay current taxes on contributions made to the plan and earnings grow tax-deferred. Later when you take retirement income the benefits are income taxable.
Tax-Free Strategy – is similar to the Tax-Deferred Strategy: you set aside a portion of your after tax income, and earnings grow tax-deferred. Retirement income is received income tax-free. A Roth IRA is an example of this type of savings. Another type of financial vehicle is permanent life insurance.
If you were a farmer, would you rather be taxed on the seed or the harvest?
When you save on a before tax basis, such as a Traditional IRA, your contributions are tax deductible. The trade off is all income received is taxed as ordinary income. If you make a withdrawal prior to age 59½ you may incur an additional 10% penalty. This leaves you exposed to potentially higher future tax rates.If you believe taxes are going up this could be devastating to your retirement income. In this example, you are taxed on the harvest. On the tax-free side, in our example of a Roth IRA, the contributions, i.e., (the seeds), are taxed before they are deposited and both the contributions and earnings may be tax-exempt, thereby insulating you from possible future tax rate increases.
What direction do think future tax rates are going to go?
Your outlook on The future may drive your retirement strategy.
- If you think future tax rates will be lower, then saving today on a pre-tax basis, such as a qualified plan or Traditional IRA, makes a lot of sense.
- If you think future tax rates will be higher, then you may want to consider a tax-free retirement strategy such as a Roth IRA or permanent life insurance.
Let’s take a closer look at tax-free retirement strategies.
Roth IRAs: Good choice…if you qualify. In order to contribute to a Roth IRA your adjusted gross income must be below a certain threshold. In 2011, contributions are limited to $5,000 per person unless you’re 50 or older and then you can contribute an extra $1,000 as a catch up provision.
What are your options if you don’t qualify for a Roth IRA, or if you want to contribute more?
Permanent Life Insurance: The primary purposes for purchasing permanent life insurance is for the death benefit protection that it provides. However, permanent life insurance offers the ability to build up tax-deferred cash value that can be accessed during your lifetime to generate a stream of retirement income – potentially income tax-free.
Additional Benefits of Permanent Life Insurance
Self completing
In the event of a premature death, the income tax-free death benefit would help fund your spouses retirement goals.
Access to funds in the event of Illness
Accelerated Benefit Riders are available at no additional cost and may allow you to access all or a part of your death benefit to help pay for costs associated with a terminal, chronic or critical illness.
Protection in the event of disability
For an additional fee, many policies offer an optional Waiver of Premium Rider that continues to pay your planned premiums if you became permanently disabled.
Permanent Life Insurance Provides:
- Income Tax-Free Death Benefit
- Tax-deferred build-up of cash value
- Potential for Tax-free retirement income
So what is best for you?
For many people, a Roth IRA is a great tool. However, as mentioned earlier, there are some restrictions as to how much you can contribute and how much income you are allowed to have in order to qualify for a Roth IRA.
Permanent life insurance may be the solution.
If you have someone who depends on you financially, then you may need life insurance. In addition to the death benefit protection, permanent insurance cash value can also serve as an accumulation vehicle, with some great tax advantages. Premiums are determined based on the amount of coverage you need and distributions, through tax-free w withdrawals and loans, can generally be taken after your first policy anniversary. Your insurance agent can help you determine the best coverage to meet your goals.
It may be that a combination of the two works best for you.
If you meet the income eligibility requirements for a Roth IRA, but want to set aside more than the contribution limits allow and you have a need for protection, you may want to do both a Roth IRA and Permanent Insurance. Contribute the maximum you can under the Roth and then apply the excess amount to your life insurance coverage.