Use of IUL vs. Roth IRA during retirement years

[RunnerDude]

I am working with a healthy 66 -year- old male (married) who has the following:
1. Social Security = $5,400 per month (joint)- starts this year (does not want to wait to age 70)
2. FIA with Allianz ABC (increasing income). $430,000 invested this year.
3. Still works making about $100,000 per year. No retirement date in sight.
4. Yearly expenses add up to about $90,000.
5. No long-term care or life insurance for either spouse. Wife is likely not insurable.

The problem is that all income is taxable. He has not yet started a ROTH IRA to mitigate tax liability. The question is: Where should he invest the extra cash he will not need. The most he and his wife can put into a Roth IRA is $15,000 per year. The only other vehicle available is the IUL (he does not want to invest in stock, land or crypto). The only other thing would be CD's or money market accounts. I know it would take 7 to 10 years for a IUL to begin seeing a profit, but it may make sense. Input in appreciated.

 

[scagnt83]

I am working with a healthy 66 -year- old male (married) who has the following:
1. Social Security = $5,400 per month (joint)- starts this year (does not want to wait to age 70)
2. FIA with Allianz ABC (increasing income). $430,000 invested this year.
3. Still works making about $100,000 per year. No retirement date in sight.
4. Yearly expenses add up to about $90,000.
5. No long-term care or life insurance for either spouse. Wife is likely not insurable.

The problem is that all income is taxable. He has not yet started a ROTH IRA to mitigate tax liability. The question is: Where should he invest the extra cash he will not need. The most he and his wife can put into a Roth IRA is $15,000 per year. The only other vehicle available is the IUL (he does not want to invest in stock, land or crypto). The only other thing would be CD's or money market accounts. I know it would take 7 to 10 years for a IUL to begin seeing a profit, but it may make sense. Input in appreciated.

He likely just needs a brokerage account. It doesnt have to be stocks, there are plenty of bond fund options out there that are low risk.

His age is a big hinderance to any life policy for accumulation purposes. Now if he needs the DB, then sure. But I would likely look at WL considering his age. You could 5 pay or 7 pay an IUL, but as you said, the break even takes a while. And that is the big issue. Most of his funds are locked up in the annuity... so he needs to stay liquid. IUL does provide liquidity, but he is in the red for 6 or 7 years in his liquid money at that point. His age makes any life insurance solution sticky, especially if the DB is not really needed.

Also, I think you are blowing taxes out of proportion. Someone with $100k income is only paying an effective rate of 8.4% federal after the standard deduction. And its only 4.6% added on from state taxes (effective rate). So 13% total is what they are paying on $100k.

He is stupid to take SS now while still working and not needing the money. He is giving up a guaranteed 8%-10% annual return on those funds.

And he is paying more in taxes on his wages than he has to because of the added income.

The extra $60k per year moves his effective tax rate up by apx 5%.

Thats an extra $5k he is paying on his wages.
And an extra $3k he is paying on SS income vs. what he could if he waited.

Thats an $8k loss per year by taking money that he doesnt need. Just handing it over to uncle sam for the hell of it.

Now maybe it will make sense for one of the to start SS and the other wait, just to fund a side account for extra savings. But taking the SS while he doesnt need it is actually reducing his overall net worth vs. what it could be if he waited.

 

[DHK]

He's going to pay back over $100,000 in taxes on his Social Security alone.



Assuming 85% taxation on his current benefits (that's just a bit less as I assumed a $3,000 PIA + $1,500 spousal benefit per month), he'll pay $5,508 per year. Over 20 years (not assuming COLA or inflation), that's $110,160 of taxes on his Social Security alone.

Does that bother him? It bothers me, but I'm not him.

Does $100,000 over 20 years matter to him?

Now, repositioning assets into something that can be collateralized for retirement cash flow... gets tricky when we're talking about annuities. Annuities guarantee income... taxable income very well.

As for what kind of life insurance, I'm partial to limited pay WL... but if he has an existing IUL, that may be best.

 

[Allen Trent]

He's going to pay back over $100,000 in taxes on his Social Security alone.

View attachment 8401

Assuming 85% taxation on his current benefits (that's just a bit less as I assumed a $3,000 PIA + $1,500 spousal benefit per month), he'll pay $5,508 per year. Over 20 years (not assuming COLA or inflation), that's $110,160 of taxes on his Social Security alone.

Does that bother him? It bothers me, but I'm not him.

Does $100,000 over 20 years matter to him?

Now, repositioning assets into something that can be collateralized for retirement cash flow... gets tricky when we're talking about annuities. Annuities guarantee income... taxable income very well.

As for what kind of life insurance, I'm partial to limited pay WL... but if he has an existing IUL, that may be best.

I think you have his annual tax (while working & collecting SS) actually too low annually.

Married couple with $100k income plus 65k SS will have a taxable income of around $125k(100k -30k std ded+ 55k SS taxable). So, SS alone will push taxable income from 70k to $125k. That will make total federal tax bill jump from 8k without SS to $18k after SS.

So the added SS alone will cause a $10k federal tax bill plus possibly state taxes. So, your annual estimate of 5500 tax is low........however i think your 20 year example is high as he only has this large of a problem for as long as he makes $100k per year. The tax bill will drop a ton when the wages go away.

This person is math nuts to collect SS now between the added $10k per year in taxes & the loss of guaranteed 8% annual growth if they wait to collect. If he works 3 years, he will be giving up 24% guaranteed growth in SS & the taxes paid on it. Plus, if he does collect now, he is locking his wife in at a lower SS check forever if she gets his higher check when he dies & gives up hers

The missing crucial piece of info missing from this post is whether the $430k is a Qualified account and if either of the clients have other qualified 401k type money they will be forced to take RMDs from in a few years.

Or, if those will be needed to live on. If this is true, now might be the time to stall SS from starting & convert some qualified to Roth while they are in low tax brackets the next couple years. WL or no lapse UL/IUL could be an added tool to use to provide death benefit if excess income is not needed & there is other assets to live on after $100k job is gone.

If 430k is all they have, really can't obligate them to a large life premium if 90k is needed to live on as 65k SS & 25k from 430k could barely cover the 90k annual income need

 

[DHK]

I just singled out the taxes only on his Social Security, not his full tax liability.

 

[Tahoe Ray]

Where did the 430k for the FIA come from?

 

[Allen Trent]

I just singled out the taxes only on his Social Security, not his full tax liability.

Yeah, but that is what I am saying that I believe is incorrect. there is no income tax specifically owed on Social Security. The Provisional calculation processes & puts 50% of a portion of your SS & 85% of a portion of SS & adds that to taxable income.

That is all going to the last highest marginal rate when you are choosing to collect SS that isnt already coming in. They net $55k of $65k of SS, owing $10k more in Federal tax & if South Carolina, no added tax due to SS income.

Taking SS in this case is putting a portion of it at 22% marginal rate & taking entire average rate on all income from 7.9% without SS to 11% of total income.

 

[DHK]

Yeah, but that is what I am saying that I believe is incorrect. there is no income tax specifically owed on Social Security. The Provisional calculation processes & puts 50% of a portion of your SS & 85% of a portion of SS & adds that to taxable income.

That's the exact definition of paying taxes on your Social Security.

Taxes on Social Security is incurred when there is taxable income at the thresholds discussed (and was already pointed out by the OP).

Even in your own software screen prints it shows a tax on Social Security at $6,200.

Because he is succeeding with his income, he will pay those taxes.

Now, once he wants to fully retire... he'll be penalized for the fact that he succeeded by doing what he was supposed to: save and grow his wealth.

That's not the only ripple effect in the tax code. If his income meets other thresholds, he'll pay an additional tax (I mean 'premium') for his Medicare via IRMAA. Those thresholds can be adjusted at any time in the tax code.

The question is... does it make sense to reposition assets where they currently are... to where he can use tax exempt cash flow instead and not have to incur those taxes?

The biggest question would be... does it make sense to liquidate the Allianz FIA and GIVE UP the contractual taxable income guarantees... and put the principal amount into something else? That takes more analysis to see if the client would be better off or not.

 

[Allen Trent]

That's the exact definition of paying taxes on your Social Security.

Taxes on Social Security is incurred when there is taxable income at the thresholds discussed (and was already pointed out by the OP).

Even in your own software screen prints it shows a tax on Social Security at $6,200.

Because he is succeeding with his income, he will pay those taxes.

Now, once he wants to fully retire... he'll be penalized for the fact that he succeeded by doing what he was supposed to: save and grow his wealth.

That's not the only ripple effect in the tax code. If his income meets other thresholds, he'll pay an additional tax (I mean 'premium') for his Medicare via IRMAA. Those thresholds can be adjusted at any time in the tax code.

The question is... does it make sense to reposition assets where they currently are... to where he can use tax exempt cash flow instead and not have to incur those taxes?

The biggest question would be... does it make sense to liquidate the Allianz FIA and GIVE UP the contractual taxable income guarantees... and put the principal amount into something else? That takes more analysis to see if the client would be better off or not.

Great points---I am just poorly saying there more taxed owed in total owed because of the overall impact, not just the specified calculation of how much gets added. Literally an added 10k bill on the 55k added of taxable income--that is just shy of 20% being lost to federal tax, not to mention some states that include SS in the taxable income & lastly impact to Medicare Part B premiums based on income. (not an issue in this example)

But, this entire thread supports the entire conversation of making sure you have more tax free buckets of income to draw from like Roth/Life, etc.

 

[RunnerDude]

Thanks for the input. I agree, this guy will be paying taxes on 85% of his social security. I believe he wants available money to pay off debt - which is why he has chosen to start social security now. The $430,000 is coming from his pension (qualified money). He recently used it to create a FIA with Allianz. Based the illustration, his FIA income is "increasing" and expected to be paying out $80,000 to $100,000 in about 10 years- and will continue to increase as he ages. His $100,000 income is commission-based - and he is self-employed. He also has a lot of business expenses (about 40 to 50%). Not sure how long he will continue at his current pace since it is a full-time job on the road. He doesn't want to risk investing in the stock market but does want to save it somewhere to beat inflation and save on "future" taxes (which he believes will increase over time). It's possible he may work a few years longer. Whole life, IUL, CD's and bonds are possible ideas after he maxes out his Roth IRA contributions. But, except for the IUL, none of these options will protect against increasing taxes or RMD's. I've heard about using a "back-door" Roth IRA strategy to get around the annual Roth IRA contribution limit. I know it involves investing money into a traditional IRA, and then later moving it to a Roth IRA. There is apparently no limit to how much you can move from a traditional RA to a Roth IRA. Does anyone have experience using this strategy?