3 Reasons to Reconsider a Roth IRA

When people want to know how to retire early, they may consider investing in a Roth IRA. A Roth IRA is often touted as a good retirement strategy because the withdrawals are tax free; the money you contribute to it has already been taxed. It is also a viable tool for those interested in estate planning, because you can use it to leave money to your heirs.

However, there are also a few disadvantages to a Roth IRA for those who want to learn how to retire early. Let’s explore those here.

1. You may not qualify for a Roth IRA.

First and foremost, it’s important to note that not everyone can invest in a Roth IRA. The IRS has placed income limits on this retirement planning tool; if you exceed those limits, you will not qualify for a Roth IRA investment in the first place. What are those limits? As of Q2 2014, individuals who earn more than $129,000 per year are ineligible for a Roth IRA. Of course, those who don’t plan to make more than that amount per year don’t need to worry about the income cap. But if you are a high net worth individual or you have a goal to become one before you retire, then any investments that put a limit on the amount of money you can make are most likely a waste of your time.

2. You may not be able to contribute enough for a comfortable retirement.

Next, there is the matter of the maximum annual contribution. Depending on your current lifestyle and the lifestyle you want to have when you retire, the most you can contribute to a Roth IRA every year may not be enough for you to enjoy a comfortable retirement. For example, a hypothetical individual earning $70,000 per year is allowed to contribute just over 7 percent of his annual salary to his Roth IRA account. That’s only $4,900 per year. If the Roth IRA is his only retirement planning investment, he is going to have a difficult time living a comfortable retirement lifestyle. Of course, he can supplement his Roth IRA with other products – retirement assets like whole life insurance, for example. More on that in a moment.

3. Your Roth IRA contributions are not tax deductible.

Another downside to the Roth IRA is that the contributions you make to it are not tax deductible. For some people who are researching how to retire early, this comes as an unwanted surprise. After all, the Roth IRA has the reputation of being an investment with great tax advantages. But unfortunately, those advantages do not include tax deductions for your annual contributions. That should be a significant consideration if tax deductible retirement investments are important to you.

In fact, if you contribute to your Roth IRA more than the maximum contribution limit in a given year, you must withdraw the excess funds before you file your taxes for that year. And if you fail to withdraw these funds in time, you will be taxed at a rate of 6 percent on the excess funds. So in that case, a Roth IRA could actually impose more taxes on you than you paid before.

Supplementing Your Roth IRA with Other Assets

If you plan to stay under the IRS-imposed annual income limit for investors with a Roth IRA account, then a Roth IRA could be a good retirement planning option. However, it should definitely not be the only retirement investment you make. If you are earning $120,000 or less, the only way you can retire on a Roth IRA is by contributing $6,000 per year – and even then, it’s not going to be a comfortable retirement. The bottom line: You need to consider supplementing your Roth IRA with other retirement assets.

An Alternative that May Work for You 

Wouldn’t it be great if you could pay your taxes today, put your retirement investment money in almost unlimited amounts, have provisions to draw income in retirement tax free, and then pass the account on to your family when you die – also tax free? It would, right? There is a financial asset that allows you to do that, when properly designed by a knowledgeable financial advisor: a guaranteed, cash value whole life insurance account. If you really want to know how to retire early, this is one product that may be able to help. Contact a CERTIFIED FINANCIAL PLANNER™ professional to learn about supplementing or replacing a Roth IRA with this important retirement asset.

These concepts were derived under current laws and regulations. Changes in the law or regulations may affect the information provided. All numeric examples and any individuals shown are hypothetical and were used for explanatory purposes only. Actual results may vary.

Withdrawals and loans from a life insurance policy reduce the death benefit and cash value, may increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured. Life insurance should be purchased by individuals that have a need to provide a death benefit to protect others with insurable interests in their lives against financial loss. Life insurance is not a retirement plan, investment, or savings account.