If you’re self-employed and trying to save for retirement, tax and other issues may make life insurance products as retirement savings vehicles a more attractive option than an individual Roth or a Roth 401k.
A Roth 401k allows workers to contribute money to their retirement plan on an after tax basis, meaning that because you’ve already paid taxes on the money, you won’t be taxed on your retirement withdrawals. It sounds like a good deal, and for the most part it is, as the tax you’re likely to pay on the money when it comes time to start making withdrawals is likely to be much higher than that you would pay on the income you’re contributing to your plan.
That’s not to say that Roth 401k plans are not without some downside, particularly to the self-employed. Roth 401k plans have strict contribution limits, limiting your ability to save for retirement. Because self-employed workers and professionals can’t count on an employer to also kick in contributions to a 401k, the limits on contributions to your individual Roth 401k hinder your ability to save for retirement, particularly if you’re getting started saving late in life and need to play catch up.
Using life insurance policies as retirement savings vehicles may be a great alternative to individual Roth 401k plans for entrepreneurs. Many of these policies have high contribution limits, allowing disciplined and motivated investors to save as much as they like. Like Roth 401k plans, the money you kick into your retirement account is contributed on an after tax basis, and with shrewd financial management, this money can be channeled to provide you with a tax-free income stream after you retire.
Also, if you need to remove money from your retirement account, you’re severely hindered in your options should you have a Roth 401k plan. Insurance retirement savings plans have far fewer restrictions and are more lenient in withdrawals, allowing you to take money out of the account or borrow against it.
If you decide to use insurance products to save for retirement, you’ll need a skilled financial adviser with experience in setting up these policies. Experienced retirement planning professionals can help set you up with the right policy to help you maximize your retirement income and reduce your tax liability.
Tax policy for retirement planning is constantly changing as old rules expire and lawmakers create new tax breaks and deals. Trying to plan your own retirement is like doing your own dentistry – it’s going to be painful and cost you even more money in the long run. Be smart. Get a professional retirement planner to help you determine if life insurance policies with a retirement savings option are the best bet for your future.