With increased federal spending in response to COVID-19, there is growing concern that personal income taxes will rise over the next few years, forcing high-net-worth clients to look for tax-efficient ways to invest their money. Many will look at a Roth IRA, but there are two primary limitations to this plan: maximum income limits and the maximum contributions limits.
What if there was an instrument that could provide the same benefits as a Roth IRA without imposing any restrictions? Impossible, right?
Enter the world of Indexed Universal Life (IUL). An IUL is designed to invest and generate market returns with no downside, due to a 0% floor.1 It also provides additional death benefit protection to the heirs of the insured, tax free. But what makes the product unique?
The “Super Roth”
An IUL—or “Super Roth”—appears to offer the same benefit as a Roth IRA: after-tax contributions, tax-deferred growth, and tax-free income. But what sets an IUL apart is its lack of limitations. The insured has the right to invest as much as he or she wants within the guidelines of insurance regulation. Therefore, the product is open to maximum contributions for the astute high-net-worth client.
Additionally, the “Super Roth” sets no income limitations on those who can contribute, and doesn’t affect other retirement plans; the client can max out a 401(k) or Simple IRA plan and still be eligible for the “Super Roth”.2,3 Additionally, because it is a life insurance policy, the insured may access tax-free income via withdrawals and loans throughout the life of the policy.
How It Works
The basis of the plan works as follows: the client decides what amount he or she would like to contribute to the plan each year. Let’s assume for example purposes that the client is a 45-year-old male who has $25,000 annually to invest, and wants retirement income from age 66 through age 86.
By investing $25,000 into the “Super Roth”, he can tax-defer a significant amount of after-tax income, resulting in an accrual of $867K inside of the policy by the retirement age of 65.4 The client elects to begin an income distribution from the policy over the next 20 years. Thanks to continued tax-deferred growth and the current tax laws, the client can access the policy’s cash value through withdrawals and loans, with an estimated $67,710 of annual tax-free income for 20 years, based on current assumptions.
Win-Win
With an IUL, the client is able to grow after-tax income on a tax-deferred basis, and then access tax-free income when he or she is best suited to take advantage of tax breaks. Additionally, if the client were to die during the accumulation phase, the death benefit is paid to the beneficiary tax-free. Even after the distribution phase is over, there is still a substantial tax-free death benefit to the beneficiary.
As a simple yet often overlooked concept, the “Super Roth” can provide your client tax advantages in both the current saving years as well as the retirement income years.
Call us today if you have a client that might fit these parameters: (844) 422-3375.
1 Index Universal Life Insurance participates in the movement of the selected index and not the actual purchase of stocks, bonds, or mutual funds. As such, the strategy is not exposed to the full downside of the markets and commonly include a 0% guaranteed floor. Please note that policy charges will be deducted from the contract regardless of product performance.
2 Roth IRA contributions are currently limited to $6,000. An additional $1,000 contribution may be made for ages 50+.
3 Roth IRA contribution eligibility is subject to an income phase out between $124,000-$139,000 of adjusted gross income (AGI) for single filers, and $196,000-$206,000 of AGI for joint filers in 2020.
4 Based on a 5.69% rate of return.