• David H. Kinder, ChFC

F.A.Q. #14 - "Roth IRA on Steroids??"

Updated: Dec 28, 2019

This is a strange topic at times, depending on who you're talking to.

Life insurance came out FIRST, way before Senator William Roth created an account after his namesake. https://en.wikipedia.org/wiki/William_Roth


What is it that William Roth created? What he created was an account classification that mirrored life insurance, but has several distinctions:

1 - You can't have one if you earn too much money.

For 2019, if you earn more than $137,000 as a single person, you can't contribute to a Roth. If you earn more than $203,000 with married filing jointly, then you can't contribute to a Roth for either you or your spouse.

- Life insurance doesn't have that kind of restriction!


2 - You are limited on the amount you can contribute. For 2019, the maximum you can put in... is $6,000. If you are over 50, you can add an additional $1,000 for a "catch-up" provision.

- Life insurance doesn't have that kind of limitation for YOUR plan!


3 - In the event of your disability, will funds continue to be contributed to your plan by the plan sponsor? Nope. Won't happen. But with a disability waiver of premium rider on cash value life insurance... it CAN happen! (See your contract for details.)


4 - You cannot borrow from or against your IRA or Roth IRA plan.

Why would we care about borrowing from or against an asset? Because it allows that asset to continue to grow uninterrupted while we can have TAX-FREE access to its benefits! (Loans have never been considered taxable income.) Now, if we look at IRS Publication 590-A, on page 33, it states the following:

PROHIBITED TRANSACTIONS: Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person. The following are some examples of prohibited transactions with a traditional IRA. • Borrowing money from it. • Selling property to it. • Using it as security for a loan. • Buying property for personal use (present or future) with IRA funds. Effect on an IRA account. Generally, if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year. Effect on you or your beneficiary.

If your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to you at their fair market values on the first day of the year. If the total of those values is more than your basis in the IRA, you will have a taxable gain that is includible in your income. For information on figuring your gain and reporting it in income, see Are Distributions Taxable in Pub. 590-B. The distribution may be subject to additional taxes or penalties Borrowing on an annuity contract. If you borrow money against your traditional IRA annuity contract, you must include in your gross income the fair market value of the annuity contract as of the first day of your tax year. You may have to pay the 10% additional tax on early distributions discussed in Pub. 590-B.


Pledging an account as security.

If you use a part of your traditional IRA account as security for a loan, that part is treated as a distribution and is included in your gross income. You may have to pay the 10% additional tax on early distributions discussed in Pub. 590-B. Loss of IRA status.

If the traditional IRA ceases to be an IRA because of a prohibited transaction by you or your beneficiary, you or your beneficiary aren’t liable for these excise taxes. However, you or your beneficiary may have to pay other taxes as discussed under Effect on you or your beneficiary, earlier. https://www.irs.gov/pub/irs-pdf/p590a.pdf


While "technically" those sections relate to the Traditional IRA, they equally apply to the Roth IRA. You cannot borrow against or from a Roth IRA and you run the risk of having the Roth IRA be 'cancelled' should you do a 'prohibited transaction'. Now, let's think about this. Why would the Government and the IRS be so adamant

about borrowing against or from an IRA contract? Because loan proceeds are NOT taxable as income!


So, if you WERE allowed to borrow against the asset... you could borrow against it tax-free, and the Government wouldn't be able to collect a DIME out of it! So, they regulated this account so that you couldn't do that, or you forfeit the entire account.


But with Cash Value Life Insurance... you can borrow against it ALL DAY LONG - as long as you had cash values to borrow against. So, then, what's the point of a Roth IRA? Wikipedia actually can help us understand why: "Roth was a sponsor of legislation creating the Roth IRA, an individual retirement plan that can be set up with a broker."


Whether intentional or not, this was about sharing the tax benefits of life insurance contracts with the brokerage and banking industries on a regulated level!

So, is Cash Value life insurance a "Roth IRA on steroids"? No.


I'll take the inverse approach to that statement.

"A Roth IRA is a stripped down, government regulated, benefit-reduced imitation of cash value life insurance to help banks and brokerages offer accounts with somewhat similar tax benefits."


As you can probably tell, I prefer the original, rather than the Government-inspired "imitation".


David H. Kinder | Lifetime Tax & Wealth Educator

Dynamic Advanced Insurance, Financial, and Retirement Strategies

0 views

3578 Atchison Circle
Riverside, CA  92503-5166 

Phone & Text: 

951.313.8208

Regulatory Disclosure:

David H. Kinder, ChFC® is regulated by the California Department of Insurance as a life, accident & health insurance agent (CA Insurance License #0E54187)​.  This communication is strictly intended for individuals residing in the state(s) of CA. No offers may be made or accepted from any resident outside the specific states referenced until proper state insurance licensing and company appointments are secured for that given state. David Kinder Insurance and Financial Solutions is the marketing name for David H. Kinder, ChFC® and is not affiliated with any other company.  Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Guarantees do not apply to the performance of any particular index option on fixed indexed insurance contracts, or on projected dividends on participating insurance contracts.  Not all recommendations necessarily require insurance product purchases. Not all products are appropriate or available for all situations. Results are not guaranteed and are subject to individual situations and circumstances. Listing company client access links under the "Client Access" menu does not constitute any endorsement, filing, or approval of this website or its content by such listed companies.  Client access links are provided for client convenience only.

Not Legal, Tax, or Securities Investment Advice:

The material discussed on this web site is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice, nor does it represent any specific company or specific products.  David H. Kinder, ChFC® is not registered nor licensed as a Registered Investment Advisory Firm (RIA), Investment Advisor Representative (IAR), nor as a Registered Representative (RR) with any broker/dealer firm, and is therefore not registered with, or supervised by, the U.S. Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), or any state securities regulatory office.  As such, David H. Kinder, ChFC® does not provide investment advice, specifically: buying, selling, holding, risk analysis, or any other analysis of securities, nor the asset allocation of securities portfolios. For specific investment advice on your securities investment portfolio, please contact a licensed and registered investment professional in your state.

He does offer general investment information for educational purposes and may propose alternative financial strategies that do not contain or include securities. He does also discuss the pros and cons of various kinds of accounts (such as IRS Regulated Retirement Plans) and is considered incidental advice surrounding various strategies and solutions, but does not necessarily constitute advice on the underlying securities.  

For tax or legal services and advice, please consult a licensed professional in your state.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary and the information should be relied upon only when coordinated with individual professional advice.

The ChFC® is the property of The American College of Financial Services, which reserves sole rights to its use, and is used by permission.  

© David Kinder Insurance and Financial Solutions; All Rights Reserved

Privacy Policy