Super Roth IRA: A Little Known Strategy For High Earners

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  • Super Roth IRA: A Little Known Strategy For High Earners
Author: Joseph Reinke, CFA

Are you a high earner looking for tax efficient ways to invest? There is a little-known strategy called the Super Roth IRA that might be just what you’re looking for.

It involves using life insurance policies to generate tax-free income in retirement.

This strategy enables high earners to increase their wealth and pass it on tax free to their heirs after they die.

In this article, we will explain how Super Roth IRAs work.

Click below to listen to the podcast version.

Reviewing the benefits of a Roth IRA

There are benefits of Roth IRAs that you need to know because we will be comparing them to the Super Roth IRA:

  1. Withdrawals are tax-free in retirement.
  2. They are not subject to required minimum distributions, so you can let the money compound for longer.
  3. There is no income requirement so high earners can participate too.
  4. Money in a Roth IRA can be turned over to heirs tax-free.

Disadvantages of a Roth IRA

Contributors above the income threshold of $198,000 cannot take advantage of the traditional Roth IRA’s benefits, as these individuals are subjected to IRS regulations.

Fortunately, those in this income bracket can still create a Roth IRA by taking an alternate route. This process involves making an after-tax contribution to a Traditional IRA and converting it into a Roth IRA.

At FitBUX we help make this process effortless so that problem is solved. However, there is still an annual contribution limit set by the IRS that limits how much you can contribute each year. Currently, the maximum amount for 2020 is set at $6,500 per person.

Enter Over Funded Life Insurance: AKA The Super Roth IRA

Enter Over Funded Life Insurance, also known as a Super Roth. While it is advisable to purchase as much life insurance coverage as possible to ensure greater protection of loved ones, the cost of insurance increases with the death benefit amount.

However, reducing the death benefit reduces the cost.

Therefore, when one opts for “over-funding” life insurance, they are essentially reducing their death benefit amount but they keep the same premium payments. This decrease in death benefits results in an increase in cash value accumulation within the policy.

With this increased cash value, individuals can have access to more money via policy loans or withdrawals.

The Benefits Of The Super Roth Exceed Traditional & Roth IRAs

The Super Roth IRA is an excellent retirement savings option for those who wish to have the benefits of a tax-deferred investment account, without having to be bound by income requirements. Contributions and investment growth in the Super Roth are not taxed when withdrawn as a loan, making it one of the most tax-efficient retirement savings plans available.

Additionally, the Super Roth provides life insurance benefits to the beneficiary upon death, with any payout being completely tax-free.

This makes it a great choice for those who want to provide financial security for their family members in case of their passing. The combination of these two features make the Super Roth IRA an attractive option for retirement planning.

Maximizing returns

Investing in a super Roth IRA can be a great way to secure your retirement savings and maximize returns. One of the best options for this type of investment is an indexed universal life insurance policy, which offers potential growth opportunities that other whole-life policies may not.

Indexed universal life insurance policies allow investors to take advantage of potential market growth while protecting their principal investment from losses. Through this vehicle, policyholders can enjoy the benefits of both traditional life insurance and stock market investments – providing a secure retirement savings option with potentially higher returns.

Cautions When Using The Super Roth

The Super Roth IRA is a powerful retirement savings tool, however, there are some risks to consider before investing. The most important risk is that of Modified Endowment Contracts (MEC).

A MEC happens when the premiums paid in any single year exceed the IRS-authorized maximums for non-MEC contracts. If a policy becomes a MEC, then all policy cash-value withdrawals are taxed as ordinary income and the 10% penalty for early withdrawal will apply.

Another risk to consider is that of too much money being withdrawn from the Super Roth IRA. Withdrawing large amounts of money from an insurance policy can cause premium payments to become due and if you cannot pay them, then the policy will lapse and you will no longer receive the benefits of life insurance or have access to your retirement savings.

Finally, as with any type of investment product, it’s important to do your research and understand all the terms and conditions associated with your Super Roth IRA policy. It pays to be informed before making a commitment.

Who Should Consider A Super Roth

If you make $200,000 or more per year, or if you make $150,000 and have little debt, then investing in a Super Roth IRA could be a great way to grow your wealth.

Summarizing The Super Roth

The Super Roth IRA is an excellent retirement savings option that combines the benefits of both life insurance and stock market investments.

It provides policyholders with tax-deferred growth opportunities, as well as a death benefit for their beneficiaries which can be passed on without taxation.

While there are some risks to consider before investing in this type of account, such as Modified Endowment Contracts or too much money being withdrawn at once, these potential issues should not deter you from taking advantage of the great benefits offered by the Super Roth IRA.

Ultimately, it pays to do your research and understand all terms and conditions associated with any investment product before making a commitment – but if done properly, investing in a Super Roth IRA could help secure your financial future while maximizing returns.

Joseph Reinke, CFA

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About the Author

Joseph Reinke is a Chartered Financial Analyst (CFA) Charter Holder and founder of FitBUX which has helped over 14,000 young professionals on their journey to financial freedom. Joseph has been personally investing since he was 12 years old.

In addition, he has experience in student loans, mortgages, wealth management, investment banking, valuation, stock trading, and option trading. He has been on 100s of podcast and has been invited to 100s of universities to discuss financial planning with their soon to be graduates.

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