Getting started on your retirement plans is an important step toward the future. There are many different options for income after retirement, each offering its own pros and cons. When comparing life insurance retirement plans vs Roth IRAs there are a few key considerations to consider.
How They Work
When considering the differences between the two retirement options, it’s key to understand how they work so you know how best to compare them.
Life Insurance Retirement Plan
Life insurance retirement plans work off the cash value of a permanent life insurance plan. Portions of your premium go toward a cash account that grows over time, and you can withdraw from it during retirement.
Life insurance retirement plans may also offer options like long-term care benefits to cover time in a nursing home or assisted living facility. Since these plans are founded on a life insurance policy, a death benefit is paid out to your beneficiaries after you die.
Roth IRA
A Roth IRA is a standard retirement option funded by taxed income. This money is then invested according to requirements you set and grows based on market conditions, which can then be used as a source of income in retirement.
Contributions
Contributions just means the amount you pay into a retirement fund. Many types of retirement plans and funds have restrictions on contributions that are important to keep in mind.
Life Insurance Retirement Plan
The limit on contributions to a life insurance retirement plan varies quite a bit depending on the specific plan. For example, some plans may limit contributions to a few thousand dollars a year, while others have no limit, allowing you to put as much as you want into their cash value. This can be particularly useful if you need to bulk up your retirement savings quickly.
Roth IRA
Roth IRAs have strict yearly contribution limits imposed. In 2022, the limit is $6,000 per year, or $7,000 if you’re over 50. Your employer can contribute to your Roth IRA, though it is also subject to the yearly limit. Additionally, your contribution limit will gradually decrease to zero as your income reaches a certain amount.
Earnings Potential
You want your retirement funds to grow over time, so the amount of earnings potential each option has is an important consideration.
Life Insurance Retirement Plan
Life insurance retirement plans have a moderate earnings potential and tend to have better earnings as the stock market does better. The largest benefit to a life insurance retirement plan is the protection against losses. While they do better with the stock market, they don’t experience the same decreases as the stock market when it takes a downturn.
Roth IRA
Since Roth IRAs are invested in the stock market, they have the potential for much higher earnings than a life insurance retirement plan. However, they are also much more subject to the inherent volatility of the stock market and may experience large losses as well. Over time, this tends to level out, though, leaving you with the potential for significant gains overall.
Distributions
One of the most important parts of retirement plans is how you can get funds out when you need them. In this aspect, there are some key differences.
Life Insurance Retirement Plan
Each company and policy has its limits and restrictions, but generally speaking, life insurance retirement plans have fewer restrictions than other types of retirement plans. For instance, you can withdraw funds anytime without early withdrawal penalties. However, withdrawing more than a certain amount can impact the other benefits of your life insurance policy.
Roth IRA
You can only withdraw funds from a Roth IRA after you turn 59 and ½. This is because early withdrawals result in penalties, making your funds take a loss.
Tax Benefits
Depending on your career path and expected retirement lifestyle, the tax status of your retirement funds can make a difference in both your expected income and how much you need to save.
Life Insurance Retirement Plan
Life insurance retirement plans have an interesting tax structure due to the combination of after-tax contributions and the accumulation of interest and capital gains. Because of this, they can either function as tax-free or tax-deferred. You can withdraw without additional taxes if you don’t withdraw more than you have paid into the plan. However, withdrawing more than that will make the money subject to a capital gains tax.
Roth IRA
Roth IRAs are funded entirely with after-tax contributions, and even though they also gain interest and capital gains, they can be completely tax-free during retirement. The only stipulation is that you must wait until after you’ve turned 59 and ½ and have the account for more than five years before making any withdrawals.
Setting Up Your Life Insurance Retirement Plan
Whether you plan to use it for retirement or not, having a good life insurance plan can help protect your loved ones from financial hardship in the event of your death.
It can be hard to decide on what plan would be the best for your family, especially with all the confusing terminology that goes along with insurance, but you don’t have to figure it out on your own.
Many professionals, like those at Matador Insurance Services, can help you decide what options would best meet your needs. To get started finding what options and coverage you need, you can request a quote by filling in a few pieces of information on their easy-to-use website. So don’t delay; schedule a consultation today!