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An Alternative Solution to the Roth IRA
By Aviva Sapers and Ed Wallack
Converting a traditional IRA to a Roth IRA might be one of the best decisions you could make in 2010. Paying taxes now, before the account grows any larger and before tax rates increase, might deliver excellent economics in retirement. However, in this economic environment, you should rightfully hesitate to make decisions on the basis of speculation alone.
For decades, advisors have reinforced the advantages of tax deferral, typically counseling that “deferring taxes is always a better strategy than paying taxes today.” Most individuals are reluctant to adopt strategies that look good by the numbers but generate current tax liabilities.
For many individuals, the Roth conversion decision revolves around income taxes. Since we are currently in a comparatively low tax environment (with government spending and borrowing at an all time high), the rush to Roth seems compelling. Not so fast! It is conceivable that the Roth account may not be a safe haven in the future if Washington targets that money as a source of revenue. In fact, it is possible that Congress could access that money indirectly by disqualifying taxpayers from tax breaks or credits on the basis of ownership of a large retirement account, including a Roth IRA.
Anticipating the future may be a good intellectual exercise; writing large checks to the IRS is a very concrete reality and an emotional one as well. Most people we know don’t often willingly fork over money to the IRS before they need to do so.
Paying the income tax due for a Roth conversion from an IRA account is not recommended since it would deplete some of the assets you were hoping to grow tax free in the Roth IRA. This means that individuals pondering the Roth conversion must have the equivalent liquid funds available in an outside account to use for payment of the conversion, which will cause a hit to their current net worth.
Since the bias for always deferring taxes is understandably compelling, Sapers & Wallack has designed and is offering an alternative solution that parallels the after-tax/tax-deferred/tax-free structure of the Roth IRA. This option can be just as effective and much more flexible to the individual considering a Roth conversion. We recommend you consider using money you would have spent out of non-IRA assets to pay the tax but without giving up that asset to the government today. Instead, place those dollars into a high cash value life insurance policy which remains part of your asset portfolio and when you are ready to retire, you can withdraw money income tax free from this policy to pay taxes due on your IRA income¹. In addition, this policy offers an income tax free lump sum death benefit².
For example, a 55 year old individual with a $1,000,000 IRA who plans to retire at age 70 would need to pay approximately $400k in current taxes to convert their IRA to a Roth. Instead, if they left their IRA intact and invested the $400k in the high cash value life insurance policy, this policy would provide the needed funds to pay the income taxes on the IRA funds withdrawn as well as provide a substantial income tax free death benefit. Would you rather pre-pay the government or maintain control of your own tax dollars until they are needed?
This article was written by Aviva Sapers, CEO of Sapers & Wallack and Ed Wallack, President of Sapers & Wallack. For more information about this unique and exciting life insurance solution, and how it can work for you, call 617-225-2600 or email asapers@sapers-wallack.com or ewallack@sapers-wallack.com.
This article discusses fixed insurance only. Guarantees are subject to the claims paying ability of the issuing insurance company. Hypothetical example for illustrative purposes only. Individual results may vary.
1. Distributions (withdrawals or policy loans) from life insurance policies treated as Modified Endowment Contracts (“MECs”) under Section 7702A of the Internal Revenue Code are subject to less favorable tax treatment than distributions from policies that are not MECs. If the policy is a MEC, distributions will be taxable to the extent there is any gain in the policy. In addition, if the policy owner is under age 59 ½ or is a corporation at the time of the distribution, there is a penalty tax of 10% on the taxable amount. Without regard to whether a policy is a MEC, a gain in the policy is taxable on full surrender of the policy.
2. Loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse.