Rich Man ’ s Roth
Where can clients go to minimize this exposure , or hedge against his income tax risk ? Most high earners cannot qualify for a Roth IRA any longer and municipal bonds yields are not very attractive . An overfunded IUL or VUL has no income restrictions or contribution limits , yet from a taxation perspective , acts very similar to a Roth IRA : after-tax money going in , tax-deferred growth , and tax-free income withdrawals on the way out . That is why this strategy has always been called a Roth IRA alternative or the “ rich man ’ s ” Roth for supplemental income needs .
Which cost to assume ?
An easy way to phrase this with a customer is that you will always be assuming cost , and what cost would you like to assume ? You may choose either the cost of taxation or the cost of insurance . There are some other costs with any account or investment vehicle , but that is the primary trade-off to consider in this regard . This recent 7702 change has made the insurance wrapper less expensive , through a reduction in required insurance and thus , cost of insurance . Someone who is in a high tax-bracket will likely understand their cost of tax well , and it very well may be that their cost of taxation is substantially higher than their cost of insurance would be for a healthy person .
An overfunded IUL or VUL has no income restrictions or contribution limits- after-tax money going in , tax-deferred growth , and tax-free income withdrawals on the way out .
Hedging risk
Insurance tax planning is traditionally tied to estate planning considerations , but income tax planning around supplemental income needs is sure to gain more attention , especially if we see an uptick in taxation . The option for a customer to place some funds in a tax-advantaged wrapper to hedge this risk should be a part of any broad financial plan . In this low-interest rate environment , sub-account options tied to the markets can provide potentially better returns than fixed instruments . Furthermore , since we are currently at all-time market highs , investment options that provide upside potential along with downside protection will be important considerations . Obviously , indexed life insurance is built specifically for this type of strategy , but now many VUL products offer indexed sub-account options that achieve the same . Given these factors , and the risks posed by potentially higher taxation , this change to 7702 should fuel the sale of accumulation-based life insurance sales for the foreseeable future .
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