FORBES: HOW A 'RICH PERSON ROTH' CAN HELP YOU MINIMIZE TAXES, FEES AND VOLATILITY

This article appeared in December at Forbes. Click here to view the original article.

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Your money needs a home, and it likely will need to multitask to accomplish all your financial goals. Taxes, fees and market volatility can have tremendous negative consequences on the growth of your savings. By minimizing losses, you can have a positive impact on the future of your money and wealth, rather than just chasing higher rates of return with a greater risk of loss.

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Taxes, Fees, Volatility: The Enemies Of Your Wealth

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Ed Slott, CPA and author, notes that “taxes are the single biggest factor that separates you from your retirement dreams.” As of the end of September, our national debt was at roughly $27 trillion. Eventually, that debt will have to be repaid. Do you think taxes will be higher or lower when you reach retirement age? Who will have to step up and pay the bill? 

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It’s a common misconception that taxes will be lower in retirement. This idea is based on several things: lower income, fewer necessary expenses (e.g., mortgage) and change of lifestyle. Most of the clients I work with don’t want less money in retirement, they want the freedom to spend their money as they choose, and they want to maintain or improve their lifestyle.

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Fees are another factor that can significantly impact your savings. The various fees on an account can be staggering. They include but are not limited to brokerage fees, commissions, mutual fund fees, expense ratios, sales loads, management or advisory fees, and 401(k) fees.

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Market volatility can also be detrimental to your wealth if you have to “ride out” the losses. Would it surprise you to know that you could have more money in an account with a “real rate of return” of 5% versus one with an “average rate of return” of 7%? It’s more important to avoid losses than it is to obtain the highest rate of return. Every investor should ask two questions: Does the order that I receive the returns matter? Should I have different strategies during the years of accumulation versus distribution? The answer to both questions is yes.

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Minimizing Losses With A ‘Rich Person Roth’

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While it’s important to remember that you can’t eliminate all possible issues, a properly structured “rich person Roth” (RPR) plan, also known as a “rich man’s Roth,” can significantly reduce or eliminate most of the risks discussed above. An RPR is a max-funded life insurance policy placed with a life insurance company. We use the word Roth to describe this type of vehicle because the money grows tax-free and is funded with after-tax dollars. Wealthy families have utilized this type of vehicle for decades, hence the name.

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A “properly structured” RPR takes into consideration financial qualifications, medical qualifications and analyzed needs (income versus growth). It is structured to eliminate unnecessary costs and has safeguards against market loss (linked to appropriate indices), and it utilizes life insurance as a vehicle. This differs from a typical life insurance policy because it offers significant cash benefits (more than traditional whole life) and functions much like a bank account. 

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For many RPR accounts, you will share in the market gains, as high as 90% to 95% of the “upside” and none of the losses. In such RPRs, you’ll never lose money because of market losses since there is a 0% floor.

Here is a partial list of the advantages of an RPR plan:

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• Your cash is liquid. You will not owe any income tax ever. Money invested in the RPR is after tax. Once in the plan, you will never pay tax on the gain or income derived from the RPR.

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• There are no age-based requirements to access your cash. You don’t have to begin spending your money at age 70 ½ years old, and you don’t have to wait until you are 59 ½ to gain access.

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• Because the RPR is built on a life insurance chassis, the death benefit provides a nice layer of security for your loved ones.

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• Your money will earn uninterrupted compounding interest as you pay no taxes and are often net positive on fees and experience no market loss.

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It’s important to keep in mind that this type of plan is built on a life insurance chassis and, therefore, does have health requirements. Not everyone is eligible for life insurance based on health issues. An RPR is also not a short-term vehicle, as it is front-loaded in costs and takes a while to get off the ground. However, once you are vested, it takes on its own unique capabilities. The RPR is a long-term strategy that works best when the plan is executed as designed. While it has flexibility in payments, payment frequency and benefits, if you deviate too much from design, there is the potential the RPR could implode. Having a skilled advisor is critical in maintaining the integrity of this kind of plan.

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While an RPR is a sophisticated investment tool that requires consistent funding, due to the uninterrupted compounding interest, it has the potential to create generational wealth that allows you to spend more, give more and leave more of your hard-earned dollars to future generations. 

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The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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