Are you concerned about providing financial support and also wealth transfer for your loved ones when you pass away? Both life insurance policies and Roth IRAs are excellent tools for transferring wealth and ensuring your family’s financial security. However, with the recent changes by the SECURE Act and SECURE 2.0, understanding the differences between these options is more important than ever.
To help you make an informed decision, we’ve outlined the key differences between life insurance and Roth IRAs below. For a more comprehensive comparison, download our free guide, “Leaving a Legacy: Life Insurance vs. Roth IRAs.”
The Three Main Differences
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Estate Inclusion and Tax Benefits
Roth IRAs are always included in your estate. While most Americans won’t owe federal estate taxes due to the high exemption amount ($13.61 million), some states have lower exemption limits, which could result in estate taxes on your Roth IRA assets.
Life Insurance can be structured to be outside your estate, offering a truly tax-free benefit to your heirs. Using strategies like irrevocable trusts, life insurance proceeds can avoid both income and estate taxes.
2.Contribution Limits and Flexibility with Wealth Transfer
Roth IRAs have strict contribution limits. For 2024, you can contribute up to $7,000 ($8,000 if you are 50 or older) annually. Contributions can only be made with earned income, and high-income earners are restricted from contributing directly to a Roth IRA.
Life Insurance has no contribution limits dictated by the tax code. You can purchase as much life insurance as the carrier allows based on health, income, and net worth. Premiums can be paid with any income, including interest, dividends, and Social Security.
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Required Minimum Distributions (RMDs)
Roth IRAs do not require RMDs during the owner’s lifetime, but non-spouse beneficiaries must fully distribute the account within ten years of inheritance. While these distributions are tax-free, they must be taken.
Life Insurance proceeds are received tax-free by beneficiaries without any RMDs. However, any income generated from investing these proceeds may be taxable, unlike the tax-free growth within a Roth IRA.
The Bottom Line on Wealth Transfer
Whether life insurance or a Roth IRA is the best tool for your wealth transfer strategy depends on your unique situation. Health issues may preclude the option of life insurance, while the tax bracket of your beneficiaries may influence the choice of leaving them tax-deferred accounts versus Roth IRAs.
To discuss how these options fit into your overall financial plan and legacy goals, call one of our RFG Wealth advisors today at 940-464-4104. Or book a convenient appointment at RFGWealthAdvisory.com. At RFG Wealth, our fiduciary duty ensures your interests always come first, and we maintain a transparent fee structure for your peace of mind.
Don’t wait until it’s too late to secure your financial future. Let the RFG Wealth Advisory team guide you to financial success. Call us today!
P.S. Download our free guide, “Leaving a Legacy: Life Insurance vs. Roth IRAs,” to learn more about these critical wealth transfer tools.
