When choosing where to put money aside for your retirement, you need to weigh your options carefully. You will likely move from one main income source to several smaller income sources when you retire. You may also want to buy security for your family in case you die unexpectedly. Sometimes these two goals can conflict with each other, which means you’ll have to figure out how to achieve both of them. One way to do this is to use a combination of a life insurance policy and a Roth IRA. Let’s see how these two products work and how you can use them.
For more help with insurance and retirement planning, consider working with a financial advisor.
Life Insurance Vs. Roth IRA
Life insurance and Roth IRAs are two different products. One is a policy that you pay for in exchange for a payout upon your death. The other is an investment account where you can store money that will grow with the market tax-free. Each has its pros and cons, with its own reasons for investing.
Advantages and disadvantages of life insurance
Life insurance works like any other insurance product. You pay a premium up front in exchange for a payment when needed – in this case, a payment to your family after you die. The cost of this premium will depend on many factors, such as your state of health and the type of cover you purchase. The money your family receives will be tax-free and can be used for funeral expenses, inheritance tax and other financial charges.
There are downsides to life insurance. First of all, premiums are expensive. Adults over 55 can expect to pay more than $1,000 per month for a $500,000 whole life policy. If you pay that for 20 years, it’s $240,000. You could have invested that money or spent it in other places where you needed it.
Another major downside is that this money is for when you die, which means it can’t help you in retirement. You can borrow against your life insurance policy, but this is generally not recommended. You can take advantage of a Life Insurance Retirement Scheme (LIRP), but any money you borrow will have to be repaid with interest. If you have a retirement account, you can use it to fund your retirement. This is not something you can do with a life insurance policy.
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Advantages and disadvantages of Roth IRA
Roth IRAs are great options for planning for retirement. They’re funded with money you’ve already paid income tax on, so any money withdrawn is tax-free. This means you can watch the funds grow with the market without having to worry about paying taxes on them when you go to withdraw. Your beneficiaries also won’t have to pay tax on your Roth IRA if they inherit it. After age 59½, there is no withdrawal penalty for your Roth IRA, so you can withdraw the money and do whatever you want with it.
The big disadvantage of a Roth IRA compared to a life insurance policy is that your beneficiaries will have to pay estate tax when they inherit an IRA. You also won’t have the protection of a policy in place when you die. Another downside to consider is the contribution limits. For 2023, you can only invest $6,500 in an IRA if you’re under 50, or $7,500 if you’re over 50.
Deciding Between Life Insurance and a Roth IRA
Deciding where to invest your money depends on where you are in life. A Roth IRA benefits those who plan for retirement now, especially for younger workers, and plan to live off those funds. They may not expect to leave a lot of money in their IRA when they die. Additionally, a Roth IRA can be attractive when there are concerns about taxes on retirement money withdrawals.
Life insurance can become more attractive the closer you get to death. Having the assurance that your beneficiaries will inherit a policy makes money spent worthwhile. In addition, the inheritance of the policy is exempt from inheritance tax. If you think you will leave a large estate, leaving it in an insurance policy can be beneficial for your heirs.
Given the many variations in types of life insurance, this approach offers many ways to pay for retirement. For example, a life insurance pension plan (LIRP) is a permanent life insurance policy that you overfund for the life of the policy. This creates value in what is known as the plan’s cash account. You can access this money by taking out loans from the account balance.
Of course, one option is to put some of your money in a Roth IRA and also take out a life insurance policy. This way there is tax-free money for your family after you die and you have money to live on while you retire.
The essential
When comparing a Roth IRA and life insurance, it’s easy to see that both are advantageous. Know that there is a wide variety of life insurance products. What’s right for you depends on where you are in life and how secure you want it. Roth IRAs are best for retirement income, but life insurance can provide other benefits, especially when you leave your estate to your heirs.
Retirement Planning Tips
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Industry experts say people who work with a financial advisor are twice as likely to achieve their retirement goals. SmartAsset’s free tool connects you with up to three licensed financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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Are you planning your retirement? Use SmartAsset’s retirement calculator to determine how much you’ll need to save to retire comfortably and confidently.
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If your employer offers a 401(k) match, you should take full advantage of it. This can be a way to quickly grow your savings. SmartAsset’s 401(k) calculator can help you estimate your total retirement savings based on your contributions and the amount of your employer match.
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