There are a lot of retirement planning tools available for American's to save money and taxes in. Things like Traditional IRAs, 401Ks, 403Bs, 457s, and Roth IRAs. However all of these retirement savings accounts pose limitations which prevent people from plowing a lot of money into them in order to save a lot in taxes.
Introducing the "Rich Man's Roth"! This is an account that many wealthy people utilize in order to save large amounts of tax. The technique has been around for many years and is one we use often for our clients as a strategy to not just reduce their taxes but to also give them a way to protect their estate.
If you have any questions about it, just give us a call and we are happy to share the strategy (310) 935-4726.
What is the Rich Man’s Roth?
A Roth IRA is a great way to produce tax-free income in retirement, allowing you to contribute already taxed funds to an account that will compound over time and withdraw the funds later tax-free.
Unfortunately, Roth IRAs have a maximum contribution limit of only a few thousand dollars per year.
Your overall income determines your eligibility for Roth IRA contributions limits. These limits are determined by your modified adjusted Gross Income (MAGI) as well as your tax-filing status. The maximum contribution is $6,000 for most people and $7,000 for 50 years or older. And, if you earn a very high amount each year (over $100,000), you won’t be able to contribute to one at all. This is where the Rich Man’s Roth comes in.
The “Rich Man’s Roth,” or “Rich Person’s Roth” is an alternative to a Roth IRA. It is useful for saving taxes and generating tax-free income during retirement. Not many people use this strategy because it is somewhat complex so most consumers give up on making it work, however for the right financial advisor it's easy to set up and explain.
A Rich Man’s Roth utilizes a special permanent cash value life insurance policy to accumulate tax-free funds over time and allow tax-free withdrawal later. This strategy is best for high earners who don't want to utilize a Roth IRA or for those who are maxing out their other retirement accounts and want to save even more money to maintain a particular standard of living in retirement.
The Rich Man’s Roth has numerous benefits, including a reduced risk of taxes increasing over time and having to pay more later. Additionally, there are no contribution limits. Overall, this strategy has great potential for high earners.
Call us if you think this strategy can benefit you. We are happy to share with you the details of it!
Roth IRA: FAQs
How Roth IRA works
To utilize a Rich Man’s Roth, you’ll need to purchase a permanent life insurance policy that offers a cash value savings component. You’ll pay a premium for the policy, part of which covers the cost of insurance, and part of which goes toward a cash value account that accumulates interest and grows over time.
If you die before using your cash value, the insurance company pays out your death benefit but absorbs your cash value. This means that you should be using your accumulated cash value while you’re alive, so you don’t miss out on the funds. Usually, you can withdraw or borrow this cash value tax-free up to the amount of premiums you have paid into the policy.
There are three major ways to use money from the policy. First, you can take cash value out in a withdrawal, the amount and frequency of which will depend on the policy. Second, you can use the funds to pay your insurance premiums.
Third, and most common for this strategy, you can take a loan out against your death benefit. The insurance company may charge a small percentage for interest, but if you make sure you get a policy with a zero net loan, or one as close to it as possible, the interest you accumulate by taking out loans can be canceled out by the gains from investment.
The best way to utilize this type of tax-free income strategy is to give your policy around 10 or 15 years to grow before dipping into it.
Of course, the Rich Man’s Roth doesn’t come without drawbacks. Most importantly, your contributions aren’t tax-deductible. Additionally, if you have poor health, your premiums will be higher, and this plan may not be as useful for you.
To determine whether the Rich Man’s Roth is a good strategy for you to use as you plan for retirement, consult an experienced financial advisor in Los Angeles. Life insurance policies and utilizing them for tax-free income can vary greatly based on the individual and their financial portfolio as a whole, so you don’t want to jump into this strategy without considering all of your options beforehand. And, make sure you work with a Certified Financial Planner™ and fiduciary, so you know you’re getting expert opinions from someone who aims to serve you best.
How many Roth IRAs can you have?
There's no limit to the number of Roth IRAs you can have. Remember, the investment limit is $6000 or $7000 collectively; no matter how many accounts you have, you need to split the maximum amount amongst all of them.
Can I lose money in an IRA?
Rarely. Typical circumstances - sudden market lows, withdrawal penalties, etc. could at times make you incur a loss. Overall, investment accounts are divesrified; the more time you give them, the lesser are they prone to losses!
Withdrawal rules for Roth IRA
Roth IRA is one of the most popular tax-advantaged retirement savings accounts. As the contributions to the Roth IRA account are made with after-tax dollars (quite unlike the traditional IRA account) the funds in that account grow tax-free. Withdrawals are therefore tax-free and penalty-free too if you have approached after turning 59 ½. Also, you need to keep contributing to the account for a minimum of 5 years initially before you think of withdrawals.
According to Samuel Rad, even if the Roth IRA is passed on to your inheritors, they draw the amounts tax-free. RMDs (Required Minimum Distributions) are mandatory in the case of traditional IRAs. A Roth IRA is exempted from any such mandatory withdrawals, which means, the savings could keep growing in the retirement years too!
Now, what if you want to/need to extract the money before attaining the above-mentioned age? Normally, a penalty of 10% on the withdrawal amount applies. However, penalties can be forgone under certain circumstances, and they are –
While using the money for first-time home purchases (up to a maximum amount of $10,000)
If the money is used for qualified expenses related to birth, adoption, and education.
In the case of sudden physical disability or death.
If the money is spent on medical expenses that go without being reimbursed
For health insurance payments in case, the beneficiary is unemployed
Is the LASER fund legitimate?
The 401(k) or the IRA could push you to the tax trap that you’ve long been trying to avert. Money can both grow and accumulate tax-free and to feed this statement of mine I will introduce the LASER fund to you. LASER fund’s a thing that comes with a bunch of benefits for the investors.
You could take the money out for business investments, kids’ education, or other retirement expenses. The perks that you’d enjoy are…
No penalties for early withdrawal. If the money grows with time and you don’t take it out, it’s automatically transferred to your heir’s account completely tax-free!
The money is withdrawn is tax-free too.
So, if you’ve been hearing about laser funds for quite a while now and wondering if the laser fund is legitimate, yes, it is!
A Roth IRA Vs. IUL
When planning investments, you’ve certainly come across IUL. Indexed Universal Life is another retirement-income option for you. Coming to a comparative study between the Roth IRA and an IUL, let’s begin with the similarities first. Both the plans make a good retirement investment as both the withdrawals are tax-free (on-time withdrawals of course)!
The biggest difference is that in the case of an IUL, only the portion of the premium payment that’s not utilized for the policy coverage helps build the tax-free cash amount. On the contrary, all the money that you invest in the Roth IRA grows into a tax-deferred cash volume that adds on to your retirement income!