An Alternative to the ROTH IRA
By Steve Gaito
McDowell County
With the passage of the Secure Act in December, many in the financial planning world have been reconsidering how to plan for retirement. The truth is that retirement planning changed with the 2018 Trump tax brackets. This change created an opportunity to pay lower taxes now and reorganize where retirement assets should be kept. To illustrate this situation, would you prefer to pay lower taxes now to avoid higher taxes in the future. Or would you rather pay a lower rate on the qualified assets you have saved today to minimize the impact of a tax increase in the future? The answer to both of these questions is yes. It is time to think of the total tax burden you have in retirement accounts. You do not own all of your IRA or 401(k) plans. You are business partners with the IRS. Personally, I don’t believe they are a great partner. This is because the IRS controls the rules. This is where the Secure Act comes into play. The Secure Act changed how people have to take distributions from inherited IRAs. Before the Secure Act, you could spread the distribution out over the non-spousal beneficiaries’ life. This was known as the stretch provision for the IRA. It was a great strategy. With the passing of the Secure Act now these distributions must be taken in a 10-year period. So, the bottom line is that the government wants their money sooner. Given this situation, many people are considering converting qualified (IRA) plans to Roth IRAs. This makes sense as it pays the tax at the lower rate, eliminates the taxes on the inherited Roth IRA and there is no need to spread out the money over the 10 years since there is no tax consequence. You do have to consider the brackets when implementing this conversion. I run these calculations every day.
There is however an alternative to the Roth IRA that frequently flies under the radar. It is an insurance product known as Indexed Universal Life. Used properly it can provide tax-free income, growth without loss and a death benefit that can pass to the next generation tax-free. This product is not for everyone as qualifying will depend on a person’s health and need for either income or death benefit. These products can also provide for tax-free money should there be a need for either critical or chronic care. These are all great benefits that you do not get with a Roth IRA. For me, the best reason to use this product is that it can provide tax diversification. Most are aware of the need for investment diversification, but tax diversification is equally important. I cannot tell you with any amount of certainty what will happen with taxes, but what I can tell you is that tax-free is better than taxable. Given our current taxes and the likelihood that they will increase when the Trump tax law sunsets or goes away in 2026 that it makes sense to diversify the parts of your retirement plan that is subject to taxes. In most cases, I recommend that using an Indexed Universal life product for between 25-33 percent of your retirement assets. This way you have the flexibility to choose where to make your income withdrawals from to create the most tax-efficient plan.
I know this may sound complicated, but you worked very hard for what you have saved. In retirement, you get very few opportunities to save on the taxes you pay and right now there is a great opportunity to see what you can do to improve your situation. Call my office today to see how we can help.
(828) 559-0299 or send me an email to steve@retirerm.com
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Steve is owner of Faith Based Health Care and Retirement Resource Management. He is a National Speaker on the topic of Social Security optimization, quoted in national publications like Money Magazine, US News and World Reports and Fox Business. Steve loves to educate and teach on financial topics like taxation of retirement accounts, long term care, healthcare, and efficient savings plans for small businesses. He has provided financial planning for missionaries through the International Mission Board. You can find Steve at 68 South Main St. in Marion, NC by calling 828-559-0299, email steve@faithbasedhc.com or visit his website at www.faithbasedhc.com
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