Whole Life Vs. Roth IRA

Roth IRAs are always included in your taxable estate, but life insurance proceeds might not be.

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Planning for your retirement and what you want done with your assets after you pass away isn't always the most pleasant experience, but it can save you and your heirs substantial sums on your taxes. Whole life insurance and Roth individual retirement accounts both offer tax advantages, but which one is right for you depends on your personal situation.

Contribution Limits

Roth IRAs limit the amount you can contribute each year to just $5,500 if you're under 50 or $6,500 if you're over 50 as of 2013. Whole life insurance policies, on the other hand, don't have any government-imposed restrictions on how much you can contribute. If you can afford the premiums for a $5 million policy and an insurer is willing to underwrite it, you're all set. Of course you're free to choose a smaller death benefit as well.


Not only is a Roth IRA more restrictive as to how much you can contribute, but it also has more eligibility requirements. You must have compensation -- income from working or taxable alimony -- and your modified adjusted gross income can't exceed the annual limits. If you make too much, you're not allowed to contribute for the year. Whole life insurance policies, on the other hand, do not have income restrictions, and as long as you keep paying the premiums, your policy continues. Some policies don't even require a physical.

Investments and Taxes

Once your money is in a Roth IRA, you can invest is just about anything you want except collectibles. If you wait until you've had a Roth IRA for at least five years and you're either 59 1/2, permanently disabled, taking distributions as a beneficiary or taking out up to $10,000 for a first home, the distribution comes out completely tax-free. You're also allowed to withdraw your contributions at any time without being taxed. With a whole life insurance policy, the account builds up a cash value that you can tap tax-free as long as it doesn't exceed the premiums you've paid. You can also use the cash value to pay the premiums so the policy is eventually self-supporting.

Estate Taxes

When you die, whatever is left in your Roth IRA passes to the named beneficiary of the account. The money doesn't go through probate -- the court-supervised process of distributing your estate -- but it still counts toward your taxable estate, which could leave heirs on the hook for estate taxes. On the bright side, your heirs will likely avoid paying any income taxes on distributions from the inherited Roth IRA. If you set up your whole life insurance as an irrevocable life insurance trust, the proceeds won't be taxed as income, nor will the proceeds be included in your taxable estate.