Expert Advice on Life Insurance vs. Roth IRA for Retirement: Q&A with MoneyGeek

Our research indicates some consumers are considering whether to fund a Roth IRA or permanent life insurance to plan for retirement. Why might they be making this comparison?

If someone is considering funding permanent life insurance over a Roth IRA, it's probably because they're being sold on it. In my experience as a fee-only advisor (and someone who previously had an insurance license) without an incentive to sell a product, I rarely find that permanent insurance makes sense for the vast majority of people. Unless you have an estate tax liability (very few people do) or own an illiquid business, most would be much better served by term insurance and investing the difference using accounts like a Roth IRA. The fact that this is even a question is silly because if you are able to contribute to a Roth IRA directly, you're not a high enough earner to benefit from any tax deferral a complex permanent insurance policy may provide.

How do the contributions and contribution limits for a Roth IRA compare to premium payments for life insurance?

For 2024, phaseouts for direct Roth IRA contributions start at $146k MAGI (single filer) and $230k MAGI (married filing jointly). You can make up to a $7k direct Roth contribution if you're below those thresholds. However, there are still ways to make backdoor Roth IRA contributions even if you exceed the phaseout limits. Premium payments for permanent life insurance will depend on the specific product and coverage amount. Again, I would highly recommend maxing Roth IRA contributions (and many other things) before considering funding a permanent life insurance policy.

Recently some social media accounts have touted the value of insurance as a way to save for and fund retirement. Is this just marketing?

Yes, I'd say the people marketing these products have a substantial conflict of interest as they get paid via commission for selling these products. A true advice professional would examine the individual's situation and personal goals and would not have a one-size-fits-all solution for retirement planning. I highly recommend following Andy Panko on LinkedIn to understand the tactics of IUL salespeople in particular.

For the typical consumer who’s not eligible for a Roth IRA, but isn’t ultra wealthy, how would you recommend they employ these products? Would you recommend one over the other or some usage of both?

Keep in mind that anyone can contribute to a traditional IRA; it's just that their contribution may not be deductible if their income exceeds the phaseout amount. However, if they don't have any pre-tax money existing in their IRA, they can convert this money to a Roth IRA (this is known as a backdoor Roth IRA contribution). There are many different accounts to consider funding before permanent life insurance, such as a 401(k), a health savings account and even a taxable brokerage account. I would highly recommend keeping insurance and investments separate. Combining the two is a recipe for complexity and hidden fees.

Roth or Traditional Contributions: Which is Best for High-Income Earners?

Understanding Roth and Traditional Contributions

Today, we're diving into a topic that's often a point of confusion for many high-income earners: Roth versus traditional contributions. This decision can significantly impact your financial future, so it's crucial to understand the basics and the factors that should guide your choice. Let's start with the basics. Traditional contributions allow you to save on taxes in the current tax year. You put money into your retirement account pre-tax, which means you don't pay income tax on that money until you withdraw it in the future. On the flip side, Roth contributions are made after-tax. While you don't get an immediate tax break, the money grows tax-free for the rest of your life. When you withdraw from a Roth account, you won't owe income tax at that time.

The Impact of Income Tax Brackets

Your income tax bracket plays a significant role in this decision. If you're in a higher income tax bracket now and expect to be in a lower bracket in the future, traditional contributions may be more beneficial. However, if you anticipate being in a higher tax bracket in the future, Roth contributions could be a better choice.

The Unknown Factor: Future Income Tax Rates

It's also important to consider the potential increase in tax rates. While it's reasonable to speculate that tax rates may increase, it's best not to base your decision solely on this speculation.

The Mega Backdoor 401(k)

In a previous episode, we discussed the concept of the mega backdoor 401(k). This strategy allows you to maximize your contributions beyond the regular limits. If your tax brackets are the same now and in the future, it doesn't matter whether you choose Roth or traditional. The decision is an arbitrage question, based on whether you expect to be in a higher tax bracket now or in the future.

Wrapping Up

The decision between Roth and traditional contributions is a personal one, depending on your current and future income tax situation. I hope this episode has shed some light on the topic and will help guide your decision.

Understanding the Overlooked Risk of Long-Term Disability in Financial Planning

A Deep Dive into Long-Term Disability and Its Impact on Your Financial Future

Hello everyone, I'm TJ Van Gerven, your host for the podcast "Do More With Your Money". In one of our recent episodes, we delved into a topic that is often overlooked in financial planning - the risk of long-term disability, especially for those in the early stages of their careers. Today, I want to share some of the key insights from that discussion in a more detailed format.

What is Long-Term Disability?

Long-term disability is a condition that can prevent you from performing your regular work duties for an extended period. It's a risk that many of us tend to overlook, but it's crucial to understand its implications on our financial health.

The Importance of Having Coverage

Having long-term disability coverage is essential. It provides a safety net, ensuring that you have a source of income if you're unable to work due to a disability. However, it's not just about having coverage; it's about understanding the specifics of your coverage and considering whether it's adequate for your needs.

Employer-Sponsored Coverage: What You Need to Know

Many employers offer long-term disability coverage as part of their benefits package. While this is a great starting point, it's important to understand the details of your employer-sponsored plan. For instance, you should be aware of the waiting period before the benefits kick in and the percentage of your income that will be covered.

Own Occupation vs. Any Occupation Coverage

Another crucial aspect to consider is the difference between "own occupation" and "any occupation" coverage. Own occupation coverage pays benefits if you're unable to perform the duties of your specific job, while any occupation coverage only pays if you're unable to work in any job reasonably suited to your education and experience.

The Limitations of Employer Plans

While employer-sponsored plans are beneficial, they may have potential limitations. It's essential to understand your specific situation and expenses and consider whether supplemental coverage is necessary to ensure adequate protection.

The Role of a Financial Planner

A financial planner can provide objective advice on long-term disability coverage. They can help you understand your coverage, identify any gaps, and explore options for supplemental coverage.

Call to Action

I encourage you all to review your coverage, request your full policy from your employer, and explore portable coverage options. Understanding and managing the risk of long-term disability is a crucial aspect of financial planning.

In conclusion, long-term disability is an overlooked risk that can have significant implications on your financial health. It's not just about having coverage; it's about understanding your coverage and ensuring it's adequate for your needs. So, take the time to review your coverage, understand the specifics, and consider whether supplemental coverage is necessary. Your future self will thank you.

Are Target Date Funds The Best Option For Beginner Investors?

Making the Most of Your Money: A Deep Dive into Target Date Funds

Hello everyone, it's TJ Van Gerven here, your host of the podcast "Do More With Your Money." Today, I want to delve into a topic that's been on my mind lately - target date funds. As a financial planner, I believe it's crucial to understand the various investment options available to us, and target date funds are a particularly interesting one.

What are Target Date Funds?

A target date fund is a type of mutual fund designed with a specific future date in mind. This date is usually at least a decade away, making these funds a popular choice for retirement investing, such as in a 401(k) plan. The fund's asset allocation is adjusted over time to align with that target date.

Let's take an example. If the target date is 2050, the fund will initially adopt a more aggressive investment strategy, with a higher allocation to stocks to maximize growth potential. However, as the target date approaches, the fund gradually shifts towards a more conservative allocation, reducing overall risk.

The Convenience of Target Date Funds

One of the key selling points of target date funds is their convenience. They offer a one-stop solution for investors, eliminating the need to select individual mutual funds or ETFs. The underlying manager determines the asset mix, which typically includes a blend of stocks, bonds, and cash.

It's important to note that target date funds also provide exposure to international companies. This means your investment is diversified beyond just US stocks, giving you a broader range of opportunities and potentially reducing risk.

The Cost of Target Date Funds

Another advantage of target date funds is their relatively low expense ratios. This is particularly true when using providers like Vanguard or Fidelity. However, it's still important to review the expense ratios to ensure they are reasonable.

While some critics argue that target date funds can be slightly more expensive compared to basic index funds, the difference in expense ratios is generally negligible. This is especially true for investors who are just starting out and may not have a large amount of capital to invest.

Wrapping Up

In conclusion, target date funds can be a practical investment option, particularly for those who are just starting out. They offer a convenient, diversified investment solution with a risk level that adjusts over time. However, as with any investment, it's important to do your research and ensure it aligns with your financial goals and risk tolerance.

Remember, the goal is to do more with your money, and understanding the tools at your disposal is the first step. Stay tuned for more insights and discussions on how to make your money work harder for you.

Understanding Tax Withholding and Safe Harbor Rules: A Guide for High-Income Earners

Hello everyone, I'm TJ Van Gerven, your host of the podcast "Do More With Your Money". In one of our recent episodes, we delved into the complex world of tax withholding for high-income earners and the importance of understanding safe harbor rules. Today, I'd like to share some key insights from that discussion in a more detailed format.

The Difference Between Withholding and Actual Tax Rate

One of the first things we need to understand is that there's a significant difference between the withholding on your paycheck and your actual tax rate. It's not uncommon for employers to withhold at a higher rate on bonus income compared to regular payroll income. This is done under the assumption that high earners will be pushed into a higher tax bracket. However, this withholding rate may not always be accurate, which can lead to confusion and potential financial missteps.

The Importance of Safe Harbor Limit

To simplify the tax process, I recommend focusing on the safe harbor limit. This limit ensures that as long as you have a certain amount withheld on your taxes, you won't be penalized for under-withholding. It's important to note that you will still owe taxes come filing time. However, the advantage here is that you can keep the extra tax reserve in a high-yield savings account and earn interest on it. This can be particularly beneficial if you have a significant tax bill, as the interest earned can add up and provide a financial cushion.

Calculating Your Safe Harbor Number

So, how do you calculate your safe harbor number? It's simpler than you might think. Look at what you paid in federal taxes from your previous year's return and multiply it by 110%. This ensures that you have 110% of the previous year's federal income taxes withheld. The same concept applies to state income taxes if applicable.

What If Your Income Drops?

On the other hand, if your income drops below the safe harbor number, you may need to make estimated tax payments to avoid penalties. It's crucial to work with a tax professional or financial advisor to determine the appropriate withholding and estimated payments based on your income. They can provide personalized advice tailored to your financial situation, ensuring you stay on the right side of the tax laws.

Final Thoughts

In conclusion, understanding tax withholding and safe harbor rules is essential for high-income earners. It can help you avoid penalties, make the most of your income, and potentially earn extra through interest on your tax reserves. Remember, it's always advisable to consult with a tax professional or financial advisor to ensure you're making the best decisions for your financial health.

Stay tuned for more financial insights on the "Do More With Your Money" podcast. Until then, keep striving to make your money work harder for you.

Maximizing Your Retirement Savings with the Mega Backdoor Roth 401(k)

Unraveling the Mega Backdoor Roth 401(k) Strategy: A Guide for Savvy Investors

Hello, I'm TJ van Gerven, your host at the "Do More With Your Money" podcast. Today, I'm excited to delve into a topic that's been on my mind lately - the Mega Backdoor Roth 401(k). This strategy can be a game-changer for those with a strong cash flow and a long-term savings plan. But first, let's understand the basics.

Understanding 401(k) Contributions

The first step in leveraging the Mega Backdoor Roth 401(k) strategy is understanding the different types of contributions available in your 401(k) plan. The traditional contribution is the pre-tax contribution, which allows you to deduct up to $22,500 from your income for 2023. This can be a boon for those in high tax brackets or those seeking tax diversification in retirement.

The Power of Roth Contributions

However, if you're looking to create tax-free assets for the future, the Roth contribution option might pique your interest. With a Roth IRA or Roth 401(k), your contributions are made after-tax, but the growth and withdrawals are tax-free. This can provide flexibility and avoid potential tax complications in retirement.

The Mega Backdoor Roth 401(k) Strategy

The Mega Backdoor Roth 401(k) takes the Roth concept a step further. It allows you to make after-tax contributions above the $22,500 limit. If your plan offers this option, you can contribute up to a maximum of $66,000, including employer matches. These after-tax contributions can then be converted to a Roth 401(k), essentially allowing you to contribute five years' worth of Roth IRA contributions into your 401(k).

Who is it For?

This strategy is suitable for individuals with strong cash flow and a long-term savings plan. It's crucial to consider your overall financial situation before diving in.

The Concept of Fungibility

Understanding your finances and maximizing your resources is key. I often emphasize the concept of fungibility, where your income and assets can be used interchangeably to fund advantageous accounts. Even if your cash flow is limited, you can still utilize assets to contribute to these accounts. This flexibility is crucial in translating your income into wealth.

The Long-Term Benefits

Making strategic financial decisions early in your career can have long-term benefits. By contributing extra funds to a Roth account, you can take advantage of compounding growth over time. This can result in a significant lump sum of tax-free money that can supplement your other income sources or pretax distributions. Building this flexibility is essential for future financial security.

Seek Guidance

I always advise seeking the guidance of a financial advisor to ensure you are maximizing the tools available to you. Making informed decisions about your finances can have significant consequences over the years and decades. Don't overlook these opportunities and consider outside-the-box strategies.

Wrapping Up

To summarize, start by logging into your 401(k) account and confirming the types of contributions available to you. If you have the option for after-tax contributions separate from pretax and Roth, it indicates that you can facilitate a mega backdoor Roth contribution. Additionally, it's important to understand if your plan allows for in-plan Roth conversions.

I invite you to join me on this journey of financial discovery and empowerment. Let's do more with our money, together.

Understanding the Wash-Sale Rule and Its Impact on Equity Compensation

An In-depth Look at the Wash-Sale Rule

Hello everyone, I'm TJ Van Gerven, your host for the podcast "Do More With Your Money." In one of our recent episodes, we delved into the intricacies of the wash-sale rule and its implications on equity compensation. If you're not familiar with what a wash-sale is, it's when a security is sold at a loss and then repurchased within 30 days before or after the sale. This rule is particularly relevant to equity compensation, including vesting shares of restricted stock, stock purchase plans, and stock options.

The Consequences of Triggering a Wash-Sale

Triggering a wash-sale can have significant consequences. One of the primary outcomes is the disallowance of losses. This means that the loss from the sale cannot be used to offset capital gains, which can be a significant setback for many investors. Additionally, triggering a wash-sale can complicate the process of tracking cost basis and taxes.

The Importance of Being Mindful of the Wash-Sale Rule

As the host of "Do More With Your Money," I cannot stress enough the importance of being mindful of the wash sale rule. This is especially crucial during open trading windows when reducing concentration risk. While triggering a wash-sale does not result in a penalty, it can complicate future taxes and impact tax efficiency strategies.

Navigating the Complexities of Equity Compensation

Equity compensation can be a complex area to navigate, especially when it comes to understanding the implications of the wash-sale rule. However, with the right knowledge and understanding, you can make informed decisions that align with your financial goals.

If you have further questions on equity compensation or the wash sale rule, I encourage you to reach out to me directly. You can find me at modernwealthbuilders.com. I'm always here to help you understand these complex financial concepts and guide you toward making the most of your money.

In conclusion, understanding the wash-sale rule and its impact on equity compensation is crucial for anyone involved in investing. By being mindful of this rule, you can avoid unnecessary complications and ensure your financial strategies are tax-efficient. Remember, knowledge is power, and the more you understand these financial concepts, the better equipped you'll be to do more with your money.

How can you find the right financial advisor for your needs?

Understanding the Role of a Financial Advisor

On this recent episode of DO MORE WITH YOUR MONEY, I had the opportunity to share my experiences as a financial advisor. The conversation delved into the complexities of working with a financial advisor, and I found it enlightening to offer my insights. It is crucial to grasp the different types of advisors and their compensation structures.

In the past, many advisors primarily focused on sales, promoting insurance-based or financial products. However, this trend is gradually changing. Today, my role as a financial advisor has evolved to prioritize advice, taking a comprehensive approach to your financial situation.

A Comprehensive Approach to Financial Advisory

In my opinion, a competent financial advisor should consider your cash flow, insurance requirements, estate planning, and assist you in optimizing your resources. My aim is to understand your complete situation and help you develop a strategy to achieve your goals, rather than solely focusing on selling financial products or accumulating assets.

When searching for a financial advisor, it is advisable to seek someone who prioritizes advice. Reputable sources such as Fee-Only Network, XY Planning Network, or the National Association for Personal Financial Advisors can help you find suitable advisors.

The Importance of Specialization in Financial Advisory

I also want to emphasize the advantages of working with an advisor who specializes in a specific niche or group, such as retirees, millennials, or physicians. This specialization enables me to have a deeper understanding of the unique financial challenges and opportunities faced by these groups.

Understanding Compensation Structures in Financial Advisory

Regarding compensation, financial advisors can be remunerated through various methods, including investment fees, subscription fees, flat fees, or hourly fees. It is crucial to find a compensation structure that aligns with your needs and preferences.

Personally, I prefer a flat fee model, where clients pay a retainer fee for access to all my services and tools. This model ensures that my interests are aligned with those of my clients, guaranteeing that the advice I provide is genuinely in their best interest.

The Value of Independence in Financial Advisory

Lastly, I strongly recommend working with an independent advisor. Being independent means that I am not affiliated with any specific financial institution or product, allowing me to offer unbiased advice that truly serves the best interests of my clients.

In conclusion, finding the right financial advisor requires understanding the different types of advisors, their compensation structures, and their areas of specialization. It also entails selecting an advisor who is independent, advice-focused, and takes a comprehensive approach to your financial situation. With these insights from a seasoned financial advisor, I hope you feel better equipped to navigate the financial advisory landscape.

From Discounted Stock To Cash In Hand: Making The Most Of Employee Stock Purchase Plans (ESPPs)

Hello everyone, I'm TJ Van Gerven, your host for the podcast "Do More With Your Money". In one of our recent episodes, we delved into the world of Employee Stock Purchase Plans (ESPPs) and their potential as a valuable tool for equity-compensated professionals. Today, I'd like to take you through the key insights from that discussion.

The Power of ESPPs: A Unique Opportunity

ESPPs offer a unique opportunity for employees to purchase company stock at a discounted rate, typically around 15%. This discount can potentially lead to significant savings, especially when coupled with a lookback period. The lookback period allows you to buy the stock at the lower price between the start and end of the offering period, which can lead to even more savings.

But the benefits don't stop there. If you sell the stock immediately after the purchase period, ESPPs can essentially become a source of free money. However, it's crucial to be aware of the trade-offs involved.

The Trade-Offs: Holding Period Requirements and Concentration Risk

While the potential for profit is enticing, it's important to understand the holding period requirements and the concentration risk associated with ESPPs. Holding period requirements dictate how long you must hold onto the stock before selling it. On the other hand, concentration risk refers to the potential financial risk of having a significant portion of your wealth tied up in a single stock.

Maximizing Your ESPP Contributions: A Matter of Cash Flow

As with any financial decision, it's essential to assess your cash flow before deciding to maximize your ESPP contributions. If you can afford it, consider maximizing your contributions up to the IRS-defined limit of $25,000 per year. This strategy can help you make the most of the benefits offered by ESPPs.

Mitigating Risks: The Importance of Selling ESPP Proceeds

To avoid concentration risk, it's crucial to sell your ESPP proceeds. However, be aware of the tax implications of the discount you received on the stock. Selling your ESPP proceeds can help diversify your portfolio and reduce the risk of having too much of your wealth tied up in one place.

Planning Your Sale: The Role of Rule 10b5-1

When it comes to planning the sale of your company stock, Rule 10b5-1 can be a valuable tool. This rule allows company insiders to set up a predetermined plan to sell company stock, helping to avoid accusations of insider trading.

Wrapping Up: Review and Reap the Benefits

In conclusion, ESPPs offer a unique opportunity for equity-compensated professionals to potentially increase their wealth. However, it's crucial to understand the trade-offs and risks involved. I encourage you to review your ESPP plans and take full advantage of the benefits they offer. Remember, informed decisions are the best decisions.

Stay tuned for more insights on how to "Do More With Your Money".

Escaping The Real Estate Rat Race: Why Renting Might Be The Smarter Choice

The Societal Pressure of Homeownership

As the host of the podcast "Do More With Your Money," I've had the opportunity to delve into a variety of financial topics. In one of our recent episodes, we tackled the societal pressure to purchase real estate, particularly as a primary residence. This pressure is deeply ingrained in our society, largely due to the historical significance of real estate ownership for wealth accumulation. However, it's crucial to understand that the financial landscape has evolved, and so should our approach to wealth accumulation.

The Changing Cost of Ownership and Interest Rate Environment

The cost of owning a home has changed significantly over the years. The interest rate environment, in particular, has seen dramatic shifts. It's no longer just about buying a house and waiting for its value to appreciate. Today, it's about running the numbers and considering your personal and financial goals before making such a significant decision.

The Hidden Benefits of Renting and Diversified Investing

While owning a home can be a source of pride and stability, it's worth considering the potential benefits of renting and investing in other areas. For instance, the stock market and personal development can offer substantial returns. These alternatives can provide flexibility and free up capital for other investment opportunities.

The Financial Implications of Owning a Primary Residence

To illustrate the financial implications of owning a home, let's consider a couple looking at a $2.5 million property. The recurring expenses include mortgage interest, property taxes, insurance, and maintenance. A significant portion of mortgage payments initially goes towards interest, and it takes time to build equity.

If you're planning to buy a home, be prepared to stay in the property for at least ten years to make a dent in the principal and avoid transaction costs. Also, consider the value of time and effort involved in selling a property.

Tying Net Worth to a Non-Cash Flow Producing Asset

One of the key points we discussed in the podcast was the wisdom of tying a large portion of one's net worth to a non-cash flow producing asset. It's worth questioning whether this is the best strategy for wealth accumulation. Instead, focusing on investing in the stock market and personal growth could yield better returns.

Making Informed Financial Decisions

In conclusion, it's essential to resist the societal pressure to purchase real estate and make informed financial decisions based on your unique circumstances and goals. Remember, the path to wealth accumulation isn't a one-size-fits-all approach. It's about finding the right balance and making smart decisions that align with your financial goals and lifestyle preferences.