Use of IUL vs. Roth IRA during retirement years

[Allen Trent]

I've heard about using a "back-door" Roth IRA strategy to get around the annual Roth IRA contribution limit. I know it involves investing money into a traditional IRA, and then later moving it to a Roth IRA. There is apparently no limit to how much you can move from a traditional RA to a Roth IRA. Does anyone have experience using this strategy?

Scratch this off the idea list. He can't do both Roth IRA contributions & back door Roth as a way to put more annually into a Roth.

Back door Roth is for very high income clients that can't make Roth contributions. It works better in magazines than in reality as most consumers & most advisors dont understand how it works in real life.

The IRS has a pro rata rule of all IRA values to figure out how much can back door Roth from non deductible after tax traditional IRA. So, in your example of him having $430k Allianz IRA, if he were to put $7k in a non deductible Traditional & convert the $7k, it will actually create immediate tax bills, not a tax benefit.

The IRS would divide his 7k conversion by his total value of all IRA ($437k,). This would mean only 1.6% of the 7k back door Roth would be tax free & the other 98.4% would be a taxable conversion. Meaning he would owe taxes on $6900 of the conversion off the $7k he never actually deducted from his tax return for his 7k contribution. This would be added on top of his wages & SS income & likely cost him $1500-2000 in taxes.........and a crap load of work to temporarily open non deductible IRA to only convert it soon after & then all the accounting tracking of it

 

[scagnt83]

I still dont see the big tax issue here.
At a $90k retirement income, he has just a 6% effective federal rate if filing married joint.

IF he waits to take SS when needed, assuming just $6k, he is at $72k.
That leaves just an $18k gap for the Annuity to fill.

He gets taxed on $18k + 85% of $72k. Thats $79,200 taxable income.

After standard deduction, he pays $5,985 in federal taxes.
An effective rate of 6.65%

That is not a tax issue if he doesnt take more income than needed.

RMDs should be his main concern here. Now THAT would be a reason to look at life insurance. He only needs a very small portion of the annuity income. Use the RMDs to fund life premiums into WL. He keeps liquidity and he passes 50%-100% more to his loved ones.

But no reason to take more than necessary out of the Qualified Account at this point unless it has a greater purpose.

 

[LostDollar]

But no reason to take more than necessary out of the Qualified Account at this point unless it has a greater purpose.

After reading op's second post:

Debt service ?
(wants available money to pay off debt)

and

living expenses?
(he is self-employed. He also has a lot of business expenses (about 40 to 50%))
So 100K - 50K leaves only 50K to cover 90K in personal living costs?

There is also a new mention of a pension in that second post.

 

[scagnt83]

After reading op's second post:

Debt service ?
(wants available money to pay off debt)

and

living expenses?
(he is self-employed. He also has a lot of business expenses (about 40 to 50%))
So 100K - 50K leaves only 50K to cover 90K in personal living costs?

His income is $100k. That should be net of business expenses.

----

The debt servicing should be part of the $90k in expenses.

He pays an extra $8k yearly in taxes in order to pay off the debt early...

If the debt interest is more than $8k per year, maybe it makes sense.

But that is an $80k loss over the next decade just to pay off a debt early.

If he has to pay more than $80k in interest over the next 10 years... then it might make sense. If not, then its a 100% chance he is losing money in that situation to needless taxes.

Being out of debt is not always the smart move financially. Cash flow is what matters.

The primary focus of a retirement plan or financial plan should be optimizing cash flow.

This person does not have a tax issue or debt issue. The issue is they do not understand their cashflow and how to optimize it for their personal needs.

 

[scagnt83]

There is also a new mention of a pension in that second post.

Pension was a lump sum that funded the Allianz annuity. So pension no longer exists.... its now in an Annuity.

 

[LostDollar]

His income is $100k. That should be net of business expenses.

----

The debt servicing should be part of the $90k in expenses.

"Should Be" is a type of assumption that can get you killed in a different context.

You may very well be reading OP's mind correctly, but I think his second post does leave that open to some level of questionability.

 

[Allen Trent]

"Should Be" is a type of assumption that can get you killed in a different context.

You may very well be reading OP's mind correctly, but I think his second post does leave that open to some level of questionability.

it was stated he wants the SS to start now to pay off debt. In reality, he is saying he wants some added income right now so he can get rid of some debt. So, does it matter if it is $4k per month from SS or $4k per month from his Annuity IRA? If he is going to be taxed on 85% of his SS, I would say it does matter. In addition to forcing income on his tax return & owe income taxes on it to accelerate paying off debt, he is losing the 8% annual jump in SS.

I would suggest he stretch the debt acceleration over a longer period of time & if still choosing to do it, I might suggest the IRA money is better to use as it doesnt have a guarantee to grow 8% for him & his spouse for every year he postpones. The FIA IRA could post zeroes & likely wont exceed 8% guaranteed growth

 

[scagnt83]

"Should Be" is a type of assumption that can get you killed in a different context.

You may very well be reading OP's mind correctly, but I think his second post does leave that open to some level of questionability.

As financial professionals, I assume both the OP and I are using the correct terminology.

And its not mind reading. He currently takes no SS or Annuity income.... but he affords $90k in expenses. That means the $100k is net.

 

[scagnt83]

might suggest the IRA money is better to use as it doesnt have a guarantee to grow 8% for him & his spouse for every year he postpones. The FIA IRA could post zeroes & likely wont exceed 8% guaranteed growth

The FIA has an income rider. So it actually could have a guaranteed increase of 8% on the benefit base.

Also, why tap savings that could pass to loved ones if you dont have to? Cant pass SS down to the kids... but you can pass your IRA to them.

Plus, only 85% of the SS income will be taxed.... 100% of the IRA income will be taxed. So its less money for loved ones... and more taxes now.

Not saying that SS is definitely the best option. But comparing the IRA to turning on just 1 spouses SS would certainly be worth looking at.