Maryland Bar Bulletin
Publications : Bar Bulletin : August 2008


Many Americans are looking for additional financial vehicles for their long-term savings. They understand their obligation to provide for themselves in retirement and often need more than their employer-sponsored 401(k) plans to help them to reach their financial goals. However, there are only four ways to meet your retirement goals if you are currently not on track to do so:

• Work longer. Those who decide to work longer seem to want to work because they choose to, not because they have to.
• Earn more on your investments. With increased earning potential often comes increased risk which may be inappropriate as retirement age approaches.
• Spend less in retirement. Who wants to take a pay cut in retirement? You should experience the same quality of life and lifestyle as you had in your income-earning years.
• Save more. Although it may currently seem like the most difficult option, saving more is usually the best option for most people.

Due to the ever-changing tax environment and the need to save more, consider such tax-efficient saving vehicles as Roth IRAs, non-deductible IRAs and whole life insurance. All three vehicles have the potential for tax efficiencies and can assist individuals to increase their long-terms savings and ultimately reach their retirement goals.

Roth IRA

The Roth IRA allows individuals to make up to a $5,000 non-deductible contribution in 2008 (or a $6,000 contribution for individuals age 50+). The earnings and withdrawals are tax-free provided you do not access the account before the age of 59-and-one-half. Another positive aspect of the Roth IRA is that you don’t have to start withdrawing from your Roth IRA account at the age of 70-and-one-half if you don’t want or need to. With a traditional IRA, you must take what is called a required minimum distribution (RMD) at the age of 70-and-one-half, otherwise, the IRS penalizes you on the required minimum distribution you were expected to take (at the rate of 50 percent) on top of the taxes that are owed on the minimum distribution. Not being required to take money out of your Roth IRA or waiting beyond the age of 70-and-one-half to take distributions from your Roth IRA account can play an important role in your income distribution strategy, in your estate planning with the transfer of assets to heirs and in your investment strategy – giving the assets more time to grow.

Although the Roth IRA is one of the few investment vehicles which provide a tremendous level of tax efficiency by way of tax-free growth and withdrawal, there is an income restriction, which disqualifies many from establishing one. If you are married, your adjusted gross income (AGI), with certain adjustments, has to be less than $158,999 to contribute the full $5,000 in 2008. You can make a partial contribution in 2008 if your income is between $159,000 and $168,999. If you are married and your AGI is above $169,000, you are not eligible to contribute to a Roth IRA.

For single filers, you are eligible to make a full $5,000 ($6,000 contribution if age 50+) Roth IRA contribution for 2008 if your income is under $100,999 and a partial Roth IRA contribution if your income is between $101,000 and $115,999. If your single filer AGI is above $116,000, you are not eligible to make a Roth IRA contribution.

Non-Deductible IRA

If your income exceeds the eligibility limits for contributing to a Roth IRA, you might then consider establishing a non-deductible IRA. Almost anyone with earned income can open a non-deductible IRA and, unlike the Roth IRA, there is no income cap to be eligible to contribute. There is no tax deduction for a contribution to a non-deductible IRA, so all you are really getting is tax-deferral on the investment gains. As with the Roth IRA, the government restricts the access to a non-deductible IRA account before the age of 59-and-one-half, and if you need access to the account before then you will incur a 10 percent penalty on the amount taken out. The tax-deferral could also be a benefit – or not – depending on your tax situation. The gains within the non-deductible IRA are taxed at ordinary income rates which can go as high as 35 percent as opposed to capital gains rates which max out at 15 percent. However, due to a recent tax law change, the non-deductible IRA can be more advantageous for investors than before. Recently, Congress passed legislation which eliminated a restriction barring anyone with modified adjusted gross income over $100,000 from converting a traditional IRA, whether deductible or non-deductible, to a Roth IRA.

Conversion to Roth IRA

This new provision does not go into effect until 2010. However, starting in 2010, anyone who has a traditional IRA, SEP IRA or non-deductible IRA will be able to convert it to a Roth IRA. An individual could consider funding a non-deductible IRA which also has a maximum contribution limit of $5,000 in the years 2008, 2009 and 2010 and then convert these assets to a Roth IRA in 2010. Individuals will also be able to pay the taxes due on the earnings portion of the conversion over a two-year period; half in 2011 and the remainder in 2012. This two- year conversion provision applies only for conversions in 2010. For all other conversions after 2010 the earnings portion of the conversion will be taxable in the year of the conversion.

Permanent Whole Life

Another recommendable financial vehicle for those who want to add to their long-term savings is permanent whole life insurance. Whole life insurance is a multi-faceted financial instrument and it has been relied on for centuries to protect families financially in the event of the loss of a love one and to provide financial security. It is a foundation piece to one’s financial plan and, in additional to paying a death benefit, whole life insurance is also a value savings builder. Not only does it provide life insurance coverage for your entire life, it also has a cash value component which enables the policy holder to build additional saving on a tax-deferred basis. Part of the premium the policy holder pays keeps the death benefit component in place and part goes to building cash value. The cash values that accumulate in the policy can be accessed during your lifetime to fund vital needs such as a child’s education, a new home or one’s own retirement.

Whole life insurance’s guaranteed cash value does not go up or down as a result of events in the financial markets. The cash value grows based on the performance of the insurance company’s separate account investments. Unlike IRAs, which limit access before the age of 59-and-one-half, a whole life insurance policy has no restriction on access to its cash values; however, withdrawals from the cash values will reduce the death benefit. A whole life policy can provide liquidity for financial needs during all stages of one’s lifetime with the use of policy loans and/or withdrawal of dividends left in the policy. As mentioned above, policy cash values accumulate tax-deferred and you have access to those policy cash values on a tax-favored basis as well, by withdrawing dividends up to their cost basis or through policy loans. As long as the premiums are paid, whole life insurance provides benefits at the time of death and throughout one’s life time. The premiums paid might be considered enforced saving which can provide long-term financial security and enhance net worth as well as a vehicle to pay estate taxes, when that time comes. Whole life insurance is recommendable both for its living benefits – its cash value accumulation – and for its death benefit; in most circumstances, this financial instrument should be a part of one’s financial plan.

Make sure you are saving enough for the long term; take advantage of one (or a combination) of the financial instruments above to enhance your overall financial well-being. These vehicles provide tax efficiencies, the ability to save on a regular interval basis and can help ensure that one meets their financial goals.

Todd E. Binder, MBA, CLTC, is with FranklinMorris, Coordinating Broker for the Bar Associations Insurance Agency, Inc. For more information on insurance benefits available to MSBA members, visit our website at:

Todd E. Binder, MBA, CLTC, is with FranklinMorris, Coordinating Broker for the Bar Associations Insurance Agency, Inc. For more information on insurance benefits available to MSBA members, visit our website at:

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Publications : Bar Bulletin:August 2008

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