When it comes to crafting a meaningful and tax-efficient legacy for your loved ones, Roth IRAs and life insurance policies are two powerful tools that share a similar goal: transferring wealth across generations. However, they operate under fundamentally different rules—and understanding how those differences affect your estate plan can make a significant impact.
Drawing on insights from estate planning authorities like Ed Slott and our own experience at RFG Wealth, here are three key distinctions to consider:
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Estate Inclusion and Tax Implications for Roth IRAs and Life Insurance
A Roth IRA, by its nature, remains in your estate—even today’s generous federal exemption ($13.99 million) can’t avoid taxes in states with lower thresholds. If your estate exceeds local limits, your heirs may face unexpected tax liabilities on Roth IRA proceeds. In contrast, life insurance can be structured to live outside your estate—often through an irrevocable trust—delivering tax-free death benefits directly to beneficiaries, unencumbered by estate taxes.
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Contribution Flexibility and Income Requirements
Roth IRAs come with tight IRS-imposed limits: for 2025, annual contributions max out at $7,000 (or $8,000 if you’re 50 or older). These contributions and must come from “earned income” that falls below threshold levels. High-income families may even be barred from contributing directly. In stark contrast, life insurance has no IRS limits. You may access as much coverage as insurers will underwrite—regardless of your income. Premiums are payable from any source, including investments or retirement distributions.
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Distributions and Timing of Benefit
Roth IRAs don’t require distributions during your lifetime. Upon your passing, non-spouse heirs must empty the account within 10 years. However, if they wait, a decade of potential tax-free growth awaits. A case in point: a beneficiary inheriting a $500,000 Roth that grows over 10 years could receive double that in tax-exempt income. Life insurance payouts are immediate and tax-free—but once invested, subsequent gains can be taxable.
Final Thoughts: There’s No One-Size-Fits-All
Neither option universally outshines the other. Life insurance may provide advantages when estate taxes are a concern or if Roth contributions become impractical. On the other hand, Roth IRAs offer extraordinary long-term growth. Plus, it doesn’t include the potential for taxes for families needing both legacy planning and flexibility.
Ed Slott—even known as the “Roth IRA’s biggest fan”—points out that using both tools, when appropriate, enhances planning flexibility. Plus, it empowers you to adapt based on your family’s circumstances.
Would you like to explore whether a Roth IRA, life insurance, or a tailored hybrid approach best fits your situation? Download our guide, “Leaving a Legacy: Life Insurance vs. Roth IRAs,” or book a free virtual consultation today.
Reach out to us at 940-464-4104, or schedule a time via RFGWealthAdvisory.com. As a fiduciary, fee-only firm, we’re committed to planning strategies that prioritize your legacy and your financial peace of mind.
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