What Can You Do if You Can’t Add to a Traditional or Roth IRA?

Traditional IRA and ROTH IRA plans are designed to allow investors to accumulate savings through contributions and earnings.

Traditional IRAs allow for deferred taxes until withdrawals are made, but tax liability is triggered when funds are distributed. On the other hand, there are no tax breaks for Roth IRAs when contributions are made, but eligible distributions are generally tax-free. This includes accumulated investment income.

So with Traditional IRAs, you avoid taxes when you put the money in. With Roth IRAs, you avoid taxes when you take it out in retirement.

Anyone with earned income can contribute to a Traditional IRA, as long as they are younger than 70½. Roth IRAs, however, have income-eligibility restrictions based on a person’s Modified Adjusted Gross Income (MAGI), depending on tax-filing status.

What happens if you are ineligible to participate in a Traditional IRA or ROTH IRA, because for example, you find yourself at the point of maxing out your contribution limits? The current contribution limits are $5,500, and $6,500 for those over age 50, so what might your options be?

If you find yourself ineligible to participate in a ROTH or Traditional IRA, now may be the time to look to old friends for help. The life insurance and annuity business still receive favorable tax treatment on earnings, with the only limitations on deposits being affordability or underwriting.

You just can’t put everything there, nor would it be wise to do so, but this may be a consideration depending on your individual circumstances.

Life insurance offers the following benefits (just in case you forgot!):

• Income tax-free death benefits to beneficiaries

• No defined annual IRS limitations on premiums

• No limit on gross income or modified gross income to affect your ability to contribute

• Missed premiums may be “made up” at a later time

• Tax-deferred accumulation

• Distributions using loans and withdrawals are income tax-free when structured properly

• No 10% penalty tax for accessing cash values prior to 59 ½ if structured properly

• Take distributions when needed, if at all

• No required distributions (RMDs) for owners

All signs point to changes in some aspects of IRS rules regarding IRAs, such as RMD on ROTH IRA and a ceiling on accumulation values in IRA accounts, sometime in the future.

Give us a call to schedule a discussion with a Szarka advisor about how this option, and others like it, may help your retirement planning diversification.