Roth Conversion vs. Life Insurance
If an individal converts their IRA to a Roth, they will incur taxes and at the end of the day have a tax free pile of money.
If an individual takes a distribution from their IRA to buy life insurance, they will incur the same taxes and they will still have a tax free pile of money.
Which is a better use of the clients’ money and will provide the biggest pile of tax free money? Does anybody know of a program that can run this type of comparison?
Permalink Submitted by Bruce Steiner on Thu, 2009-04-23 22:41
They are independent issues.
The Roth conversion is generally beneficial, assuming you have nonretirement assets with which to pay the tax, the conversion doesn’t push you into too high an income tax bracket, and you weren’t going to leave your IRA to charity.
Life insurance hedges against dying substantially before life expectancy. If you keep the policy until death, the proceeds are free of income tax. If you invest the money in other assets, the other assets get a basis step-up at death, but the income will be taxable currently; and the other assets might produce a higher or lower return than the life insurance, depending mainly on how long you live, but also on investment performance.