Taxation Issues With 401K and IRA May Make Insurance A Better Bet


While many people will consider converting a 401k or IRA plan to a Roth IRA, this financial move can have some deleterious financial consequences. Looking at other investment options as a substitute or a supplement to 401k or Roth IRA plans may be a smart idea for many people saving for retirement.


In an uncertain world, having enough money to fund a comfortable retirement is an increasingly worrying issue for many Americans, even professionals who earn substantial salaries. Finding the most tax-efficient and profitable method of saving for retirement is vital to saving for your retirement years and providing help to your children as they go to college, begin families or start a business.


Lots of people use 401ks and IRAs to save for retirement and later convert them to Roth IRAs as circumstances may make it an advantageous or necessary move. Typically, people convert to Roth IRAs to allow their retirement savings to grow tax free instead of on a tax deferred basis. If you still have a substantial number of working years left before you retire, making a conversion may be the right move as it gives your money time to grow. However, if you’re on the verge of retirement and need to start tapping the Roth for income, a conversion may be a bad move when you consider the taxes involved.


The key downside of converting a 401k or IRA to a Roth IRA is that the amount you convert will be taxable at the time of conversion. This can push you up to an uncomfortably high tax rate when you convert, and take a chunk out of your savings or other income.


If you’re looking to avoid some of the tax hassles that come with traditional IRA and 401k plans, check out the recent innovations in life insurance that allow policy holders to save for retirement. A key benefit of these plans is a high ceiling on how much you can contribute.


Also, these life insurance retirement savings plans are designed to grow on a tax-deferred basis, and with careful planning you may be able to reap the values during retirement on a tax-free basis.


Equity indexed policies are a hot product in the insurance industry. They combine a guarantee of principal with a potential for returns tied to a market index like the S&P or DOW. The downside of this investment strategy is that you’re not able to deduct contributions to this plan from your current taxes.


There are a number of other benefits that make these contracts more flexible than 401Ks or IRAs. Unlike other retirement savings plans, an equity indexed policy will allow you to withdraw money from your account or borrow against it during the accumulation years. Also, if you become disabled, your premium payments for the insurance policy may be waived.