What Are Roth IRAs, And How Are They Different From Traditional IRAs?

The way they are funded and the rules governing withdrawing funds, are the major differences between a Roth IRA and a traditional IRA.  

IRA Funding

Traditional IRAs are funded with your income dollars before taxes have been withdrawn whereas, Roth IRAs are funded with your income dollars after taxes have been withdrawn.

IRA Withdrawals

This means, you are  not taxed from any funds from a Roth IRA at any time, regardless of your age, and without incurring a penalty. With a traditional IRA, you’re taxed on withdrawals. Most experts will say that this is not a bad thing since your tax rate may be lower. Frankly, I have always had an issue with traditional financial planning strategies where they plan for you to be poorer after you retire. Unfortunately, the rest of the world does not get cheaper as you get older.

Another thing about a traditional IRA is, if you withdraw funds before you reach 59 1/2, you must pay a 10 percent penalty on the amount withdrawn. That’s on top of the tax consequences as a result of the withdrawal, and you must start withdrawals from a traditional IRA by age 70 1/2. Believe me, the government wants its money.

Over Funded Life Insurance Contracts

Another option you might want to look at is overfunding an insurance contract. To “overfund” an indexed universal life insurance policy means to maximize the policy’s cash value growth potential and minimize its net insurance costs over time. When the maximum premium is paid into the policy, cash values grow faster which leverages the net amount of life insurance at risk. The net amount of life insurance at risk is the difference between the actual face amount of the policy less the current cash value, see diagram below. With all universal life policies, insurance costs are calculated based on the amount of life insurance at risk at any given point in time. As the net amount of insurance at risk decreases, the costs of insurance decrease and a higher portion of the premium payment can be directed to the indexed account. By overfunding the policy, cash values can leverage the cost of insurance therefore maximizing the cash value growth potential.

Click Here To Check Out Our Post “Maximizing The Bank Of You Concept”

Leon C. Williams
Financial Strategist
LUCA Financial Services
http://leonsblog.leonwilliams.me
http://www.lucafinancial.com
leon@lucafinancial.com

Popularity: 9% [?]

Tagged with: equity indexed life insurance • financial planning • ira • ira penalty • ira withdeawal • overfunded life insurance • overfunded life insurance contracts • roth ira • tax consequences • tax penalty • traditional ira

Filed under: Finances • Financial Services • retirement • Savings • Stock Market

Like this post? Subscribe to my RSS feed and get loads more!