by AFrazz » Wed May 23, 2012 12:01 am
Hello everyone, my name is Alex and I'm 17 years old. My parents told me that saving money for retirement is very important, and I should start at a young age especially with how the economy is right now, and that social security is not guaranteed by the time I hit retirement. Is life insurance and retirement saving similar? What are the different options for retirement savings? Bare with me here, I'm young but I'm very eager to learn my options! Thank you for your time.
Posted: Sun May 27, 2012 09:31 pm Post Subject:
But, perhaps you didn't think about this, commingling pretax and after-tax dollars in the same account creates an accounting nightmare...
...While it's certainly possible to keep track of after tax contributions to an IRA, it makes more sense to simply use a second IRA account for that purpose. Keep the two accounts entirely separate from one another.
Why does it create an accounting nightmare? Why do keeping the accounts separate from each other make more sense?
If deductible and non-deductible IRAs were actually different IRAs, wouldn't one have no choice accept to keep them separate?
Ex. Max's Client has 2 IRAs:
IRA 1: Max's Client contributed $3,000 pre-tax. The account is now worth $5,000.
IRA 2: Max's Client contributed $4,000 post-tax. The account is now worth $4,000.
Ex. My Client has 1 IRA:
My Client contributed $3,000 pre-tax and $4,000 post tax. The account is worth $9,000.
Max's client wants $4,000. My client wants $4,000. Why does my client have a greater accounting nightmare? Is there anything that Max can do for his client that would make his tax situation different than it would be for my client?
Posted: Sun May 27, 2012 09:44 pm Post Subject:
How is he going to roll Roth funds into a "qualified" annuity, and why would he want to?
The "how" is easy. Because it is a roth IRA, if he rolls it into an annuity, it would be a qualified annuity because it would still be a Roth IRA.
The "why" would either because he wants to annuitize his money or because the specific annuity is offering some sort of guarantee that he can't get in mutual funds.
One should not annuitize if the idea is to leave the money to future generations.
Posted: Sun May 27, 2012 10:13 pm Post Subject:
But, since the Roth IRA has no RMD requirement like all other retirement plans, the annuity can simply be used as the conduit to make withdrawals. It could be annuitized or not, but when not annuitized any remaining balance can be rolled over to another beneficiary, who will continue to take tax-free withdrawals.
It depends upon the beneficiary. A spouse would not need to take withdrawals. Any other beneficiary would have an RMD based upon their age at the time of ownership transfer.
A subsequent beneficiary, however, must take withdrawals based on their life expectancy at the time of ownership transfer,
It would only be based upon their life expectancy if the previous beneficiary was the spouse. If the previous beneficiary was anybody other than the spouse, their withdrawals would be based upon the previous beneficiary’s age.
so if the money is left to a grandchild, the required distributions will be small and because they are based on life expectancy, regardless of age, are not subject to the 10% penalty tax (additional withdrawals could always be taken, and could be subject to the pre-age 59-1/2 tax on gains only),
Any amount above the required distribution can be taken at any time and there is never a penalty or a tax.
the account will continue to grow tax-deferred and provide (genuine) tax-free income (not that UL/IUL/VUL loan income) until the account is exhausted. With a great start, it could provide hundreds of millions of tax-free dollars to several generations of beneficiaries.
I don’t have a clue unless you want to use some insane example how it could possibly leave hundreds of millions of dollars. It also can’t give income for several generations because the required distributions can only last as long as the original life expectancy of the first non-spouse beneficiary.
Ex. Grandpa wants to leave as much money behind as possible. Therefore, he doesn’t touch is Roth IRA. He dies at age 82. He names his grandson as beneficiary. His grandson is 23. It can only give income for about 62 years….the life expectancy of his grandson. Even in this scenario, if Grandpa died with a $1,000,000 Roth IRA and it received an 8% return every year, the total payout would be around $28,000,000. That is a far cry from "hundreds of millions".
Google "Roth IRA annuities" and see what you come up with. Most life agents have no clue about this.
Unfortunately, it appears that you have a clue, but your clue isn’t very accurate.
Posted: Tue May 29, 2012 11:22 am Post Subject:
A) any and all employer-sponsored retirement plans, such as 401(k), 403(b), SIMPLE, SMART, Keogh, SEP
.B) individual retirement arrangements such as Roth IRA, Traditional IRA, nondeductible IRA
C) after fully funding all plans available to you under A and B above, if you still had money you wanted to commit to retirement savings, you could consider an annuity.
My recommendation: fully fund your Roth IRA ($5000 in 2012) first -- requires that you have "earned" income, then contribute to any employer-sponsored plan in which you are eligible to participate.
Life insurance provides money for those whom you leave behind at your death and were dependent upon your income for some or all of their living needs. Until you are married, you probably will have little or no need for life insurance, but you could consider a small policy ($25,000 - $50,000) now and name mom or dad as your beneficiary. It would pay for funeral expenses if, God forbid, you died anytime soon.
But don't let anyone talk you into using cash value life insurance as a way to save money for retirement. You'll could easily waste your money doing that by putting it into any kind of policy other than "whole life" -- and ending up with no money and no insurance.
I was just going through this post but couldn't understood the terms like some sections and clause discussed here and secondly Roth IRA, traditional IRA and non deductible IRA. I will be thankful if you could elaborate these terms.
Posted: Thu May 31, 2012 03:08 pm Post Subject:
Bump for Max
Posted: Thu Jun 14, 2012 04:58 pm Post Subject:
Max, care to correct your incorrect responses?
Posted: Tue Jun 19, 2012 07:22 am Post Subject:
Glad to see you start out so young, Alex. They are not the same things. Life insurance is typically meant to be understood as insurance that will pay out if and/or when a person dies. This money is meant to be income replacement, especially if the insured was the breadwinner in the house. It can also help cover other charges, like outstanding debts, payments or funeral costs. Retirement funds, on the other hand, are meant to pay for retirement years when you are still alive. A permanent life insurance policy, a policy that is bought for people who need permanent life insurance protection, will allow some cash value accumulation which can sometimes be withdrawn for retirement expenses. [Link deleted per TOU].
Pat Cassidy
Disclaimer: I work for [Link deleted per TOU] and this is my personal opinion.
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