While most people are aware of using 401(k)s and IRAs to get tax advantages during their retirement, they have several limitations which often leaves people with less money to enjoy their retirement.
What most people don’t know about is that cash value life insurance can work as a powerful and less limited alternative to traditional plans, which can enable you to create more tax-free income for your retirement.
This article will cover the basics of traditional retirement plans and their limitations, as well as how cash value life insurance can work as a powerful alternative.
This article is written as general education, and should not be considered as personal financial advice. If you would like personal guidance with life insurance, you can schedule a time to talk with one of our experts.
Traditional Retirement Plans
Traditional 401(k)s and IRAs are generally funded with pre-tax income, and then taxed at personal income taxes during retirement withdrawals.
This exposes you to a huge tax risk, not only because taxes are likely to increase in the future, but also because you will have to pay more taxes on better investment results.
Roth 401(k)s and IRAs on the other hand, are generally funded with after-tax income, and then not taxed when withdrawn during retirement.
This puts you at a lower risk, as you will only have to pay taxes at the onset of the plan, and then never again during your retirement.
While this feature of Roth retirement plans is great, it does come with limitations:
- Limited Contribution Amount - in 2022 the yearly contribution limit to Roth IRAs is $6,000, which is not enough to build up larger retirement savings.
- Limited Eligibility - if you make too much money, you are not allowed to contribute to a Roth IRA. In 2022, this upper limit is $144k for single taxpayers and $214k for married couples filing jointly.
This means that while Roth IRAs present the most tax optimal way for retirement planning, they are too limited to be used by many.
Cash Value Life Insurance As An Alternative Retirement Vehicle
What many people don't know about is that life insurance policies with so-called cash value can be used as a retirement vehicle in a similar way to Roth plans.
With a cash value life insurance policy, you generally put money in with after-tax money, but can just like a Roth plan access money from the policy without paying taxes in retirement.
Unlike Roth plans, cash value life insurance has no contribution limits, and no limited eligibility - it is available for everyone, and you can contribute as much money as you like.
While the tax advantages on using cash value life insurance for retirement planning is great, it is much more than a rich man's Roth:
- Greater flexibility on withdrawals - while withdrawals from traditional retirement accounts come with penalty fees prior to age 59, withdrawals can be done at any age with cash value life insurance.
- Strong, guaranteed growth rates - many cash value life insurance policies help you achieve compounded returns through guarantees on yearly growth rates.
- Easier to leverage - while using traditional retirement plans as a security for loans is considered a taxable distribution, using cash value life insurance as a security for loans is not taxable.
- Additional financial security from a death benefit - cash value life insurances provide you with life insurance coverage for life which can increase over time and be paid out to your loved ones tax-free when the insured person dies.
- Protection against litigation risk - while your IRA is usually at risk if you are ever served with a lawsuit, cash value life insurance is in most cases protected against litigation.
In essence - while cash value life insurance is a great retirement tool, it is also much more than that, and can be used as a powerful backbone for the rest of your investment portfolio.
Are you interested in learning more about using cash value life insurance for a tax-free retirement?
We put together a free guide containing more detailed information about using cash value life insurance for a tax-free retirement, including valuable information like:
- A Step-by-step guide on how to use life insurance in your retirement planning.
- The different types of cash value life insurance, and how to find the best one for you.
- Strategies, tips, and tricks to use cash value life insurance in the best way possible.
- Example cases comparing the results between traditional plans and cash value life insurance plans.
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