As seen on Moneygeek.com – Roth IRA vs. Life Insurance
Expert Advice on Life Insurance vs. Roth IRA for Retirement
Rick Valenzi, CFP
Founder and Certified Financial Planner at Financial ZenBACK TO ALL EXPERTS
Our research indicates some consumers are considering whether to fund a Roth IRA or permanent life insurance to plan for retirement. Why might they be making this comparison?
Honestly, it’s because the insurance industry wants people to think that. Very few professionals do not earn commission from selling life insurance policies, recommending them “as an investment.” Certified financial planner professionals can’t earn commissions on life insurance and I don’t personally know any who share the insurance sales people’s sentiment.
How do the contributions and contribution limits for a Roth IRA compare to premium payments for life insurance?
You can contribute up to $7000 in 2024 if you’re under the income limit ($146k for single filers and $230k for joint filers). That said, many 401(k)s now offer after-tax contributions that can be as high as $46k. Those after-tax contributions can then be rolled over into a Roth IRA. (The strategy is called a Mega Backdoor Roth.) You can design a life insurance policy however you’d like. The higher your premiums, the more cash value you’ll build. So there really are no limits, but you’ll still be spending 5% a year just on fees.
Recently some social media accounts have touted the value of insurance as a way to save for and fund retirement. Is this just marketing?
One hundred percent is just marketing. Only people who earn commissions recommend life insurance as a retirement savings strategy. You can’t believe everything you see on the internet.
For the typical consumer who’s not eligible for a Roth IRA, but isn’t ultra wealthy, how would you recommend they employ these products? Would you recommend one over the other or some usage of both?
They shouldn’t! Fully fund your 401(k), including a Mega Backdoor Roth if the 401(k) allows it, and save the rest in a brokerage account with low-cost index funds.
