ROTH IRA Vs. Cash Life Insurance

This is the Truth Network. Welcome to Finishing Well, brought to you by CardinalGuide.com with certified financial planner Hans Scheil, best-selling author and financial planner, helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in finishing well, including discussions on managing Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes.

Now, let's get started with Finishing Well. Welcome to Finishing Well with certified financial planner Hans Scheil. And today's show is really cool. It's Roth IRA versus Cash Life Insurance, which that isn't really. Exactly, what's not verses?

They're both things, and we're just going to talk about what's the advantages and what situations work best for both. And so, if you've listened to Hans a lot, he likes to talk about buckets of money, which I just love that term: buckets of money. Who wouldn't want buckets of money? And so, here we've just got two different kinds of buckets of money, especially. Tax-free ones.

And so, as I was thinking about this, there's a scripture that Solomon in all his wisdom gave us in Ecclesiastes 11. And it starts out: it says, Ship your grain across the sea, and after many days, you may receive a return. Invest in seven ventures, yes, in eight. You do not know which disaster may come upon the land. And the idea of that is that there are different financial tools.

You know, if you keep all your grain local and something happens, you may need those. People across the sea, but by the same token. If you have all your money in one basket, so to speak, you know, you may not be getting the full advantage of what's available out there. And one of the neat things is with many counselors, plans succeed. And that's a beautiful thing when you've got somebody like Hans, who's a wonderful believer, that can help us to.

Get some idea of what all these tools are and where you can have an advantage of using them.

So today, We're taking on the Roth IRA and cash value life insurance haunts. Yeah, and I just too don't like. I made the title, and it's just one versus the other. It's almost like one's good and one's bad, or you know, we're going to have a debate about it. And these are just.

Two tools that we're going to use to essentially freeze the taxes on a given. amount of retirement funds and retirement savings.

So who this is for is generally people in their 60s and 70s. And I say 60s and 70s. Because You need to be 59 and a half or older to pull money out of your. IRA without facing a penalty.

So that doesn't mean that you can't learn something if you're in your 40s or 50s, because there's things you can do now to prepare. For the future, one of those is just start a Roth IRA and start putting some money in there now so you don't have this problem when you get into your 60s and 70s. And the problem is, is a person who is nearing retirement, maybe in retirement, and they have their income either from a job if they're nearing retirement or their post-retirement income, which might be coming from Social Security, might be coming from a pension, might be coming from part-time work, interest on their savings, whatever it is. Is they're getting along just fine without pulling money out of their traditional IRA or 401k. And those are the people that I really want to speak to today.

Is you have a large balance. in your IRA or 401k. And then you're getting along just fine, and you're not to minimum distributions. You're not to seventy three yet.

So you're just postponing taking anything out of your IRA because you don't want to pay taxes on it. And so that's the person we're speaking to. And I'd Just suggest to you that you might start looking at things in a different way. Because that accumulating Money inside of an IRA or a 401k is Um It's a tax debt as well as it is a savings account. And so a Roth IRA or a Roth conversion is something that we're going to do where we can lower.

Um lower your taxes over the whole of your retirement. And so we're comparing a Roth conversion, which we've talked about several times on this show, to using a cash value life insurance policy to make a similar payment into over a number of years like a Roth IRA.

So talk to me a little bit, Robbie. Oh, I think it's absolutely great that you mentioned that if you're in your fifties or forties or thirties or twenties and you can start with the Roth IRA there, you won't have to do these conversions when you get oh, it makes all kinds of sense to do that. I wish I'd known. But then on top of that, I The The one that really just shocked me, I I suppose, as the more I've talked with you, I I well, the Roth IRA was just beyond cool when I learned about it, but the different options with cash value life insurance have turned out just to be Huge in my world. You know, I actually took one out on Tammy when we were younger, and that has been one of the best financial moves I ever made.

But the different things you can do with that in retirement and the idea of, for those who are, you know, when you ask them what the IRA money is for, it's, you know, for my, you know, estate, it's for my inheritance, for my kids. You know, then that one really begins to make sense, right? But it still gives you access to the money. It's just, it's so cool, these financial tools, when you understand what they can do and just all the idea of buckets of money, you know?

Well, it is. And so if we just take this person who's 65 years old, maybe they're not retired yet, but they're coming into me and they're planning for retirement, and we're looking at this IRA and we got to live off of it for a number of years. And if we're going to be real dependent on it. We're going to start taking distributions anyhow.

Now. And then the challenge becomes... Are we going to take too much? And if we take too much, we're going to run out of money when we're 80 years old, or our spouse is 80 years old. There there's a big There's a lot of calculations that need to go on, and we've got to find out what people want.

But even those people that are drawing down their IRA or their 401k.

Some of them need to consider drawing it down more than they're doing because the opposite of that is just leaving it all in there, wait until you're 73, and then you're on the government's plan, and then you're going to come to me and say, how much is my minimum distribution? And then you only take the minimum. And then you earn it back on the investments over the year. And then the next year you take the minimum. And then you pass away at a ripe old age with a big, fat IRA, which sounds great.

It goes to your kids, and they've got a tax bomb on their hands. And they've got really a tax problem that we really want to begin preparing for now.

Okay, or preventing that. And so One simple solution is to do a Roth conversion.

So, and we've talked about that a lot. And, you know, if you... wanted to convert. $500,000 $401K. And maybe even between the two of you if you're a married couple.

and you're it's just sitting there. And we all of a sudden say, we want to convert about half of that. We'd like to get two hundred fifty thousand dollars Of the 500,000 converted into a Roth. which is a tax-free IRA then. And so If we want to get two half of it or $250,000 converted, we would do that at like $50,000 a year.

For five years. And the reason we do that is we wouldn't want to have one big tax year where you'd get pushed into the high brackets.

So what we would want to do is add $50,000 to your income every year and pay tax on. the 50,000 at those rates and spread it over five years. And maybe we would Lower it and do it over seven or eight or nine years, and then it'd be more like thirty, forty thousand dollars.

So there's a lot of strategy in this, but The whole idea is taking Some of your IRA or perhaps all of it in some cases. and getting it moved from taxable to tax freight. Does that make sense? Oh, yeah. And I, you know, the other thing that's beautiful about the Roth IRA is that the income inside the IRA is also tax-free.

Yeah. I mean, you're just not going to pay taxes on it. And so you let that accumulate. And, you know, if that doubles, you know, say this $250,000 that we convert over five years, in my example, it's probably going to be a little more than $250,000 by the end of the fifth year. But let's leave it at $250,000.

Let's just say that doubles by the time you die, and then you leave all of it to your kids. I mean, they're going to have a $500,000. tax-free inheritance. you know, and if you got two kids, they're going to get $250,000 each tax-free. And as opposed to $250,000 taxable, and it just really creates a lot of problems with inheritances, and even to the spouse.

it's a real benefit to have the availability of tax-free income.

So we pretty much covered that. And so now today we're talking about an alternative to that, or we have many clients that do a little bit of both. You know, maybe they wanted to convert $250,000, but once they understood this cash value life insurance, they might do... 125,000 of Roth conversion and 125,000 paid into a life insurance policy or a cash value life insurance policy over the five years, and then you sit down and you compare those two things, there's pluses and minuses. And that's what we're going to talk about today, and that's what the video that we had on YouTube does a really good job.

And I'd encourage you to take a look at those videos when you're listening to a show, especially if something interests you. There's show notes behind those and on the website where like the life insurance we're going to talk about in the second part of the show. There's actually an illustration of that life insurance in there back in the show notes.

So they're a lot more thorough, and we have visual. But we're on the radio today, and we're going to talk through this. In the second part of the show, I'm going to give you some of the meat behind this show. Yeah, and let me just say too that you know for me personally, as I look at it, even If the purpose of your 401k or your IRA is for your retirement, not for the estate, not for your kids, that the cash value life insurance, I think Hans will demonstrate that there's definitely reasons to go that way, even when you're not doing it for estate purposes.

So I think you'll be really fascinated by the use of these tools and the way that Hans goes into all that when we come back from the break. Of course, we've got to remind you right now that this show is brought to you by Cardinal Guide, CardinalGuide.com. And if you go to CardinalGuide.com, you're going to see that there is seven worries tabs. And in those seven worries tabs, of course, one of them is life insurance and the other one is on RRA.

So we kind of cover in two birds with one stone in this particular one. But I guess this show is probably under life insurance. It's under estate planning. It's under estate planning. Okay.

Okay.

Yeah. And so that's where you're going to find that one. And of course there you'll also find the complete Cardinal Guide to Planning for and Living in Retirement. That's Hans' amazing book. And of course the contact Hans and Tom page.

It's all there at cardinalguide.com. Again, the idea being sharpening our skills with all these financial tools as we continue to compare Rotha IRAs and cash value life insurance. We'll be right back. Investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM. a registered investment advisor.

BCM and Cardinal Advisors are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well with Certified Financial Planner Hans Scheil. And today's show is Roth IRA versus Cash Value Life Insurance.

It's actually more of just a comparison. Where would you use this tool versus where would you use that tool? And as I said in the last segment, it's amazing the different uses of these things coming up against these seven worries that, you know, one of those that you mentioned is people running out of money, Hans. Yeah, so what I I have an example of this cash value life insurance, and I tried to make it as realistic and applicable as possible to somebody that's right at retirement.

So I took a male age 65, and I did that because a female is going to be less.

So I wanted to illustrate this the most expensive it could be, and I put them at standard rates.

So this There are going to be some people that are going to qualify for select or preferred rates. And then of course there's going to be some people that are going to get rated because they have some health conditions. And they're going to have to pay a little bit more. But this is a good example.

So and with life insurance, you can't put a whole glob of money into a policy in the first year. There's a bunch of regulations that tax regulations that we're really not going to address today. But in this example, Uh this 65-year-old male puts in 23,000. $670 a year. And he does it for seven years.

And the total that's put in over the seven years is $165,692.

So around $165,000 is in there. And if you're going to put in $23,000 a year and you're going to get the money out of your IRA, you're pretty much going to need to withdraw about $30,000 or $32,000 if you're going to pay the taxes out of the IRA money. If you've got tax money sitting on the sidelines, you know, already been tax money sitting on the sidelines, then you could pay the taxes out of there. But in any case, we're comparing it to a Roth conversion.

So you'd probably have to draw out 30 to 32,000 to net this 23,670 each year. But at the end of seven years, you're going to have paid in $165,692. And I'm just showing on the board the illustration is at age 65. you're going to have $319,807 of cash value. and you're going to have a death benefit of $377,000.

So if you bought this thing and you died at age 85, your heirs, whoever you name of the beneficiary, is going to get $377,000 tax-free.

Now it starts out at $250,000 is the death benefit.

So if you died in the first year, the second year, your heirs are going to get $250,000 with just a small relative amount of premium paid. But we're not really buying this purely for the death benefit. We're sticking the money in there because this. can be tax-free and you can have access to your money. During your lifetime, if you wanted to access some of this money, you would simply take an interest-free loan.

From it. And you could even turn it into an income where you would draw out a certain amount per year. And the real emphasis is that the growth on this thing is tax-break. And if you just leave it there, like a lot of people do, until you die, I mean, a lot of people have intention of drawing the money out. And the 65-year-old guy might have that, but then it's just sitting there.

He only paid on it for seven years, and when he dies, $377,000 goes to to his spouse or his children or whoever he names as the beneficiary, and that's tax free. Yeah, and uh that's the idea versus the you know, the one we talked about earlier, if he had a traditional IRA and that two hundred fifty thousand dollars now is taxable instead of getting that heir getting two hundred fifty thousand, if they decide to try to take it all at once, Then What? Are they going to get 30% of it at least? There'll be time. you know, draw it all out at once at their tax rates, which you know their kids might be in their 40s or 50s.

When this is going on, or 60s, and they got a high tax rate. you know, this person dies at 85, there's going to be $377,000 that's all going to go tax-free.

Now. You know. You can get at this money and if you really just make a loan to yourself. I mean, that's essentially what you're doing, is you're borrowing from your life insurance policy, and the interest rate works out to be a net zero. It's too long on the show to, or too much limited time to really get into all the mechanics of how that works, but you can borrow what amounts to your own money at a 0% interest rate.

You know, with the Roth IRA, you could just draw it out, but the difference with life insurance. is you can put it back too. I mean I I've actually done that on my life insurance policies. Out of the cash value is I used a loan from them to finance opening my business. And then as later as my business did well, I put it back.

And now it's just sitting there for my retirement. And it'll I may never touch it. It's going to go to my kids or my wife when I pass away. Yeah, sweet, right? Yeah.

And, you know, again, the flexibility of being able to access that if you need it. And at the same time, it's growing inside of it. tax-free and Correct me if I'm wrong, let's say that you took out a tax-free loan. I mean, not a tax but you took out a loan and It obviously would be tax-free. And then you passed away.

you would still that your hair and your beneficiaries would still receive the full value of the life insurance just the cash value that you used wouldn't be in addition to it, right? No, it's it's actually a little different than that.

So if you have an outstanding loan which could have happened to me, you know, I borrowed all that money for the business and then I died still owing the money, y the death benefit of the policy would pay off the loan before it pays off to the heirs.

So, you know, in this guy's example, let's just say he borrowed $100,000. And then he really didn't have an intention of paying it off. And he did that later in life. And then he died at. 85 and there's a $377,000 death benefit, well, they would simply pay off the loan of $100,000 and then pay his heirs $277,000.

Does that make sense? Right.

So actually they get more. Than the original death benefit because of the other cash value that was already in the policy, right? Yeah. And so what I did is I went to my people at the whole life insurance company, and I just said I want to take a two hundred fifty thousand dollar policy on a sixty five year old male, and I want to stuff as much money as I can in there for seven years. Yeah, um You know, I just, that's what I want to do.

And I want to spread it out over seven years to meet the tax law. And so that's how he came up with all these numbers. But we could do the same thing. for you and we do this with in financial planning where You know, we say, okay, so we're going to have $20,000 a year. For like five years to work with.

So we want to stuff it into a life. How much life insurance do I need to buy to stuff 20,000 a year for five years in there? How much? And then he produces an illustration, and we're off to the races. It will be exactly.

So a lot of times we do these things in reverse. and trying to fit a person's particular situation. What I just wanted to emphasize is this is an excellent alternative to To a Roth IRA. And it's got a few extra benefits. One of those is that you can borrow from it, but then you can put it back.

And that can work out very well for people. It has long-term care benefits on it, so you can access that death benefit early if you need care in your lifetime. And then it is invested only in the life insurance. And with the life insurance company guaranteeing the interest rate. And so it's a good way to diversify where it's not subject to market.

ups and downs. And a lot of times Roth IRAs are invested in the market. They are for a lot of our clients. And by going with cash value life insurance, you can get some diversification there. Absolutely.

versus the Roth i in that type of situation where It seems almost similar, the the value of the two. If if I'm understanding.

Well, it is. And you could flip that around. You could say, well, with the Roth, you have the flexibility to leave it invested, and it could grow much larger than the life insurance is going to make it grow. But it could also lose money. And it could also and presumably, we don't ever convert people like all of their money to a Roth.

or stick all of their money in life insurance.

So there's going to be some money left in the taxable IRA. And that's probably going to be invested in the market and in stocks. And this is your balance money. The amount that you'd put into life insurance because there's guarantees built into all of this stuff, guaranteed by the life insurance company. Right, which makes another great point that the nice thing about the Roth when you compare the two is if your heirs inherit the Roth, they've got 10 years before they have to take it out.

It can continue to grow tax-free for 10 years inside the Roth, right? Where if they got the life insurance, they would be getting a check and they'd have to start their own Roth or whatever they want to do at that point, right? That's correct. I mean, so that would be viewed as a benefit of the Roth is you could leave it in there and have some more tax-free accumulation, but you'd have to have it emptied after 10 years. Boy, you've been studying this stuff.

This is good. And you know, the on the on the life insurance side, they could choose instead of taking a lump sum of $377,000 to have an income over their life or an income for 10 years, but then a little piece of that would be taxable because the interest component of the payoff w would be taxable.

So that would be a disadvantage to the life insurance as compared to the Roth. Right, so you can see that, wow, there's lots of uh different ideas on how to You know, best access money later on to what to do with your estate, all those things are available. You know, when you need help, it just makes sense to ask for it because you can open up your mind to some amazing opportunities. Which is why we want to remind you that this show is brought to you by Cardinal Guide, CardinalGuide.com. And if you go to CardinalGuide.com there, you're going to see the Seven Worries tab.

And during the break, we decided that this might in fact be under the Income Tax tab, or it may be under life insurance or estate planning. Uh, one of the two, but nonetheless, there you'll also find, besides the Seven Warriors tabs and the video with the show notes and all that goes along with this, you're going to find Hans's book, which is also a tremendous resource. The uh I can't believe my mind just went totally black. Complete cardinal guide to planning for and living in retirement. That's what it is.

The complete Cardinal Guide to Planning for and Living in Retirement. And of course, to contact Hans or Tom Page. It's all there at cardinalguide.com. And how fun to work with all this stuff, Hans. It's so wonderful.

It's great. And God bless all of you. Roth IRA vs. Cash Value Life Insurance approved with the addition of the following disclosure. Information provided is not intended as tax or legal advice and should not be relied on as such.

You are encouraged to seek legal You are encouraged to seek tax or legal advice from an independent professional. The opinions expressed by Hans Scheil and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such. Any statements or opinions are subject to change without notice. Investments involve risk and, unless otherwise stated, are not guaranteed.

Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you. Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation. Finishing Well is designed to provide accurate and authoritative information with regard to the subject covered.

Investment advisory services offered through Brookstrone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. We hope you enjoyed Finishing Well, brought to you by CardinalGuide.com.

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