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The Trouble with Roth IRAs

Roth IRAs were established by the Taxpayer Relief Act of 1997 and named for its chief legislative sponsor, Sen. William Roth of Delaware. That law allows individuals to make contributions to a special “Roth” individual retirement account (“IRA”).

While such contributions are not tax-deductible to the individual taxpayer, he or she can, after retirement, draw upon those contributions plus the growth thereon, tax-free. That’s the good news. Note: specific requirements apply to such accounts which are beyond the scope of this article.

The bad news:
1) Only individuals who earn less than $194,000 (married) or $132,000 (unmarried) per year may contribute to a Roth IRA;
2) The maximum annual contribution which may be made to such account is $5,500 (if below age 50) or $6,500 if age 50 or above.

A 55-year old person could contribute $6,500 per year for 15 years for a total of $97,500 of contributions. Those contributions would grow to $172,375 by age 70 assuming a tax-free growth rate of 6.84% per year.

The account could then be distributed over 30 years (31 payments) at the rate of $13,669 per year.
This represents a total distribution of $410,055, with $97,500 of principal and $312,555 of growth, a pretty good deal. However, this “good deal” is of limited value to an individual who can afford to fund more than $6,500 per year and who need more than $13,669 per year to retire on.

For those who have a greater need for retirement income, the perfect solution would provide:
1) The ability to make larger contributions;
2) Tax-free growth on investments, and
3) The ability to receive funds without having to pay taxes on principal or growth.

In other words, it would have the advantages of a Roth IRA without the limitations of such a plan.

In fact, such an ideal solution already exists, although it is available only to those who meet the requirements laid out below.
Let’s compare to the Roth IRA scenario above. Instead of contributing $97,500, the individual would contribute a total of $350,000 over the first few years. Beginning at age 70 he or she could receive an annual distribution payment of $858,310 per year for 30 years (31 payments).

That represents a total distribution of $26,607,610, with $350,000 of principal and $26,257,610 of growth. This is no longer a “good deal”, it is an amazing result! And it is available for those who cannot use a Roth IRA effectively.

Because this “ideal solution” uses the last safe tax shelter, life insurance, it is limited to:
1) Those who are insurable (or have an eligible family member who is insurable); and
2) Those who can be approved by a life insurance company for a large amount of life insurance by virtue of their net worth ($5 million or more), of their annual income ($500,000 per year and up) or both.

While investing $350,000 in a life insurance policy will generate a paid-up death benefit of almost $1 M at age 55, the result shown above is only possible through the using a premium financing arrangement where the lender’s interest is protected by the life insurance policy until death or until the loan is paid off.

For that whose income exceeds the Roth IRA threshold but is less than $500,000 per year, or whose net worth is greater than $1 M but less than $5 M, there are other programs which can provide excellent results as well. Contact the author for more information.

By Lance Wallach, CLU, CHFC
Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness
ABOUT THE AUTHOR: Lance Wallach CLU, CHFC, Ronald H. Snyder, JD, MAAA
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning. ” As an expert witness, Lance's side has never lost a case.

Copyright Lance Wallach, CLU, CHFC

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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