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A Roadmap to Retirement Whatever your age, it is never too soon to look ahead and begin giving thought to your retirement. When the time finally comes, if you've done the proper planning, the transition will be smooth and you will feel comfortable and secure about it. Today, more than ever, as the society we live in becomes more demanding, planning for retirement is a necessity. You must plan ahead by setting goals and deciding how they will be met. Retirement planning also means getting ready for a lifestyle change as well as a changing financial picture. You may be faced with some hard choices. If it has been difficult to accumulate the essential funds necessary to enjoy a truly "worry-free" retirement, you may find yourself choosing between dining out more frequently or preparing more meals at home. You may find yourself having to choose whether to put your spouse, the man or woman with whom you've spent the last 50 years, into a no-frills nursing home or a nursing home with big bay windows, a view of the ocean and a private sitter. Many retirees find themselves balancing between having a sufficient life style and lacking some of the comforts that make life easier. In addition, you may find yourself considering just how much or how little you want to leave to your children. These difficult decisions can be made easier, with proper planning, savings, and investing done ahead of time. Investing for a future lifestyle Although pre-retirement and post-retirement investment portfolios should each have both income and accumulation aspects, your pre-retirement portfolio should be more heavily weighted toward accumulation for later use. A post-retirement portfolio should show a greater allocation of investment resources toward income-producing vehicles, with a portion allocated for accumulation, in order to be able to create a greater income in the future; inflation will erode some of the purchasing power of current income-producing investments. You can use different investment management techniques as you create your own portfolio and consider the different investment alternatives available to you. Tailor make your investment portfolio Diversification, or spreading your investible assets among a group of different investments, is insurance against a severe crisis every few years and avoidance of the old "feast or famine" characteristic of investment markets. Diversification is used to create a margin of safety in the portfolio by spreading you investible assets among various groups, including mutual funds, variable annuities, life insurance and fixed-return savings accounts, such as money market funds. Today the majority of all retirement assets are contributed to tax-deferred retirement plans through employers or through individual retirement accounts. The fact that Uncle Sam allows contributions to be made on a tax-deductible basis, as well as allowing tax-free accumulation, is the ideal stimulus for increasing the amounts which go into the above retirement choices. At the top of most lists are mutual funds. Choosing a family of funds is the wisest approach. Under this arrangement you will be able to take the amount allocated for mutual funds and break it down further by positioning a specific percentage to either income funds, growth funds, or a mixture of both. In addition, these same families of funds can provide municipal bond funds, which distribute tax-free income when you want it most -- at retirement. While mutual funds represent the largest source of retirement funds, in order to maintain a diversified portfolio, you must include annuities, fixed or variable, as well as life insurance. The latter will also establish a basis for a sound estate plan. If you are financially independent at retirement, it can become a time of new opportunities, a time to try a second career, to develop a new lifestyle or to pursue new dreams and goals. Instead of a period of boredom and disenchantment, retirement can be your most stimulating, fulfilling time ever -- your true golden years. You can retire rich What is the idyllic way to spend your retirement years? Travel to all the exotic places you never had time to before? A beach home where the sun always shines? A cozy mountain retreat? However you picture it for yourself, it's going to be a lot harder to achieve than it was for your parents' generation. With Social Security cuts and rising health care costs clouding the future, most Americans are worried about funding their retirement. But sticking to a few simple strategies, you should be able to retire comfortably, or with a little luck, lavishly. Your company's retirement plans may be more than enough to feather your nest, especially if your firm offers a 401(k) plan. These plans allow you to deduct up to nearly $9,000 annually from your pre-tax income and place it in a managed investment fund. Often, matching funds are pitched in by your employer. Put away the maximum amount, and you could find yourself with $500,000 in savings after 25 years. If you're successfully self-employed, you can set aside an even higher percentage of your income as savings. Keogh plans and SEPs (simplified employee pensions) allow you to save up to 13 percent of your income tax-free, and you can salt away up to 20 percent of your income in a Keogh (to a maximum of $30,000) if you agree to put away the same percentage of your income each year. Most such plans offer productive interest yields. A growing number of two-income families are tightening their belts for the future by undertaking to save or invest one spouse's entire earnings. Doing so may require you to forego some luxuries in the present, but prudent investment of the "extra" income in savings plans, mutual funds, and insurance can pay off big in your golden years. The road to retirement comfort can also be paved with real-estate investment. Some families have put their savings into the purchase of one or two multi- family rental units. Once your units are paid for, you can turn profit on them through rental revenues and tax breaks for homeowners. You can then plow the profits back into savings and investment, giving yourself more padding for a plush future. IRAs are still one of the best wealth-builders around Nobody likes to pay taxes, and nearly everybody is concerned about retirement. Yet many investors neglect or underutilize one of the best ways to escape the taxman's clutches -- the individual retirement account. IRAs have declined in popularity since Congress disallowed tax deductions on IRA contributions for most individuals with employer-sponsored pension plans. But the biggest advantage of an IRA, the ability to shield investment earnings from income taxes, remains intact. To utilize IRAs fully, you must know both how to exploit their tax advantages and what investments to put in an IRA. In many respects these objectives are interrelated. IRAs should be viewed as part of your overall portfolio. If income stocks, bonds, or income funds have a place in your portfolio, place those securities in an IRA. That way, dividends and interest payments, normally taxed each year, can compound tax free. All else equal, your lowest-yielding stocks should be held outside an IRA. Taxes on capital gains are deferred until a stock is sold, so an IRA's tax shield is not as valuable. In fact, by putting a capital- gains vehicle in an IRA, you forever lose the ability to pay lower capital gains taxes on the gains. All gains are taxed at ordinary rates upon withdrawal from an IRA. If you plan to sell a stock after a couple of years, however, holding it in an IRA may be worthwhile. But losses on assets held within an IRA are not tax deductible, so highly speculative investments should be kept outside your IRA. Whatever you do, don't put variable annuities, municipal bonds, or other tax- advantaged vehicles in an IRA. Municipal bonds pay lower yields because the interest they pay is tax- exempt, but that interest will be taxable when withdrawn from an IRA. Seeking the Ideal Retirement Investment There are many possible investments available today which can be accumulated for one's "retirement nest egg." Some examples include: Certificates of Deposit Mutual Funds Stocks and Bonds Municipal Bonds Deferred Annuities Real Estate . . . plus many others, including Qualified Retirement Plans. However, the complexity of today's tax laws and government regulations which pertain to Qualified Retirement Plans has prompted many people to seek alternative ways to provide for their retirement years. DESIRABLE FEATURES IN A RETIREMENT INVESTMENT 1. No legal, accounting, or actuarial costs. 2. No annual administration costs. 3. No complex rules regarding discrimination. 4. A provision for automatic withdrawal of money from one's checking account or paycheck. 5. A conservative investment policy. 6. A death benefit which is income tax free. 7. Contribution of pre-taxed dollars. 8. Tax-free accumulation of funds. 9. Withdrawal of funds without penalties or taxation. The Accumulation Process There are three basic phases to accumulating one's "retirement nest egg." Those phases are: 1. The Contribution Period 2. The Accumulation Period, and 3. The Withdrawal Period PERIODIC CONTRIBUTIONS │ │ │ │ $ │ │ $ ╔════════════╗ │ │$ │ ╔══╝ ╚══╗ $ $ │ v ╔══╝ ┌────────────┐ ╚══╗ │ │ $ ╔══╝ │ YOUR │ ╚══╗ │ v ╔══╝ │ RETIREMENT │ ╚══╗ │ $ ╔══╝ │ NEST EGG │ ╚══╗ v ╔══╝ $ └────────────┘ $ ╚══╗ ╔══╝ $ $ ╚══╗ ╔══╝ $ $ ╚══╗ ║ ║ ╔══╝ ACCUMULATION YEARS ╚══╗ ╚═══════════════════════════╦════╦════╦═══════╦═══╦═══╦═══╦════════╝ TODAY ║ ║ ║ ║$ ║ ║ ║ DEATH │ $ │ $ │ │ $ │ │ │ │ $ │ $ │ │ │$ │ │ v v v │ │ $ │ │ CHILDREN'S NEEDS │ │ │$ │ - College │ │ │ $ │ - Weddings v v v v etc. RETIREMENT WITHDRAWALS WILL THERE BE ENOUGH IN YOUR RETIREMENT NEST EGG? Taxation While Accumulating The Nest Egg In comparing various types of investments, one must consider the question of income taxes. Most investments are taxed during one or more of the three phases of building the retirement nest egg. ╔════════════════════════════════╗ ║ 1. TAXATION DURING THE ║ ║ CONTRIBUTION PERIOD ║ ╟────────────────────────────────╢ ║ Are Contributions made with: ║ ║ ║ ║ 1. Pre-tax dollars, or ║ ║ ║ ║ 2. After-tax dollars ║ ╚════════════════════════════════╝ ╔════════════════════════════════╗ ║ 2. TAXATION DURING THE ║ ║ ACCUMULATION PERIOD ║ ╟────────────────────────────────╢ ║ Are Earnings Taxed: ║ ║ ║ ║ 1. As Income is Earned, ║ ║ ║ ║ 2. As Assets are Sold, or ║ ║ ║ ║ 3. Not Taxed During ║ ║ Accumulation Period ║ ╚════════════════════════════════╝ ╔═══════════════════════════════╗ ║ 3. TAXATION DURING THE ║ ║ WITHDRAWAL PERIOD ║ ╟───────────────────────────────╢ ║ When Withdrawn, Are Funds: ║ ║ ║ ║ 1. Fully Taxable, ║ ║ ║ ║ 2. Partially Taxable, or ║ ║ ║ ║ 3. Not Taxable ║ ╚═══════════════════════════════╝ Proper tax deferral or avoidance will result in a larger retirement benefit. Potential Problems When Comparing Investments There are four basic methods of taxing an investment as illustrated in the following chart: ╔══════╦═══════════════════╦═══════════╤═════════════╤════════════╗ ║ ║ EXAMPLE OF THIS ║ PRE-TAX or│ TAXABLE │ TAXABLE AT ║ ║ TAX ║ METHOD OF ║ AFTER TAX │ DURING │ DISTRI- ║ ║METHOD║ TAXATION ║ DEPOSITS │ ACCUMULATION│ BUTION ║ ╟──────╫───────────────────╫───────────┼─────────────┼────────────╢ ║ 1 ║ CERT. OF DEPOSIT ║ AFTER TAX │ YES │ PARTIALLY ║ ╟──────╫───────────────────╫───────────┼─────────────┼────────────╢ ║ 2 ║ QUALIFIED PLAN ║ PRE-TAX │ NO │ FULLY ║ ╟──────╫───────────────────╫───────────┼─────────────┼────────────╢ ║ 3 ║ MUNICIPAL BONDS ║ AFTER TAX │ NO │ NO ║ ╟──────╫───────────────────╫───────────┼─────────────┼────────────╢ ║ 4 ║ DEFERRED ANNUITY ║ AFTER TAX │ NO │ PARTIALLY ║ ╚══════╩═══════════════════╩═══════════╧═════════════╧════════════╝ It is somewhat difficult to compare investments when each of them is taxed by a different method. For example, additional pre-tax dollars would be available for investment in a qualified retirement plan over an after-tax investment like personally owned stocks, bonds, mutual funds, etc. On the other hand, the qualified retirement plan generally has a much higher annual maintenance fee to cover accounting and actuarial fees, the cost of including other employees and potential tax penalties upon distribution. Even the thought of further government involvement has its own "emotional costs" for many people. Also, more and more people today are considering the value of life insurance as a supplemental retirement plan. These plans generally take the form of a cash value life insurance policy, where the balance of the premium (after certain charges and expenses) is credited to the account and interest is allowed to accumulate. (For details, refer to the complete insurance company illustration.) Comparing only the cash value account to the other investments does not take into consideration that a portion of each deposit pays for the death benefit as well, an advantage which is not found in the other planning vehicles. These factors should all be taken into account in reviewing this comparison. The Value of Tax-free Compound Interest Much of the discussion of the growing value of a retirement fund or annuity investment depends upon the tax free compounding of the earnings. Everyone knows about the "miracle of compound interest." It is such a cliche that almost everyone ignores the powerful, fundamental truth underlying the concept. And few people understand how to make compound interest work for them. Compounding is a two-way street. Debts compound, too. That is why so many "wealthy" people are going bankrupt, for example. Back in the 1970s and 1980s, the fashion of the time was to buy real estate leveraged with debt, and roll over the debt, counting on an increase in the value of the property to pay off the debt and make a profit. And in much of the United States, real estate values did increase at a rate that enabled a lot of people to make a lot of money purely on debt financing. They would buy a property. And they would pay for it with borrowed money, sometimes 90% or more of the total value. (The banks played along with this game. They made money too as long as prices were rising.) Instead of paying off the loan, they would allow the principal and interest to build. At 10% interest...after a year the principal on a $100,000 loan would grow to $110,000. In five years it would be a monstrous $161,000, and so on. The trouble is, real estate values don't go in one direction only. They also go down, as is they are now in many parts of the world. All that built-up, compounded debt eventually has to be paid. And very often, real estate investors do not have the means to actually pay off the debt they contracted. They never expected to have to do so. The secret of compound interest is to be on the right side of it. Debts compound and so do costs. Being on the right side of compounding means positioning investments so that time works for them, rather than against them. When investments are positioned properly, each passing day adds to their value, free from taxes and inflation. More than 2,000 years ago the philosopher Aristotle explained that the secret of success in anything was habit. Aristotle used the word "ethos." To him it was the crucial ingredient of all genius. And it was nothing more than a recognition of the concept of compound interest applied to life itself. Aristotle recognized that people do not simply wake up one day with the idea for a great invention...or jump to the command of a great army...or write down a marvelous essay...or get rich. All progress is made by small increments compounding over time. A great thinker thinks hard for a long time and, over time, comes up with great thoughts. A great builder lays one brick at a time and, over time, builds great monuments. A great artist works day after day and, over time, produces great works of art. So too, a man builds his wealth a little each day...and over time...becomes very rich. The idea of building wealth over time has a kind of tedious ring to it, but it leaves out the entire power of compounding. With compounding, time adds to value. Instead of being tedious, the passage of time in the investment plan becomes an important ingredient that turns the capital into more. Thus the "miracle of compound interest." It is based upon a powerful, fundamental truth, although too few people understand how to make compound interest work for them. The results are incredible. As we showed earlier, a 20% annual free of tax compounds to a sum 1200% larger over a lifetime than the same sum with tax. It is the difference between $8 million and $100 million over 40 years. And the same magic applies when you start with smaller amounts. But we do want to stress that just because money is offshore does not automatically mean it is tax-free. It is important that a proper and legal structure be used to keep the money tax-free, either through annuities, trusts, or other structures that you choose only after proper accounting and legal advice. $2,000 a year into a tax-free account investing in stocks that pay 10% dividends, means $35,062.31 after 10 years -- not including any capital gains. YEAR TAX-FREE INCLUDING TOTAL DIVIDENDS 1 starting capital $2,000.00 $2,200.00 2 add US$2,000 $4,200.00 $4,620.00 3 each year $6,620.00 $7,282.00 4 $9,282.00 $10,210.20 5 $12,210.20 $13,431.22 6 $15,431.22 $16,974.34 7 $18,974.34 $20,871.77 8 $22,871.77 $25,158.94 9 $27,158.94 $29,874.83 10 $31,874.83 $35,062.31 After 25 years, he'd have $216,363.29 -- just by putting $2,000 a year into his IRA, with its $2,000 contribution limit. An annuity has no such limit. 11 $37,062.31 $40,768.54 12 $42,768.54 $47,045.39 13 $49,045.39 $53,949.92 14 $55,949.92 $61,544.91 15 $63,544.91 $69,899.40 16 $71,899.40 $79,089.34 17 $81,089.34 $89,198.27 18 $91,198.27 $100,318.09 19 $102,318.09 $112,549.89 20 $114,549.89 $126,004.87 21 $128,004.87 $140,805.35 22 $142,805.35 $157,085.88 23 $159,085.88 $174,994.46 24 $176,994.46 $194,693.90 25 $196,693.90 $216,363.29 Compounding this kind of income from investments, in a tax-free annuity, is a guaranteed way to build wealth. There weren't any extra risks, or any extra effort. Once the wealth-building strategy was in place, it was just a matter of time. Most investors are looking for extraordinary capital gains -- and most fail to realize how hard it is to achieve that. Wealth-building investors should seek investments offering decent dividends or interest, and let that yield compound. Think of it another way: Amounts at Compound Interest Multiply the Principal by the Factor in the Table Years 1% 2% 3% 4% 5% 6% 7% 1 1.0100 1.0200 1.0300 1.0400 1.0500 1.0600 1.0700 2 1.0201 1.0404 1.0609 1.0816 1.1025 1.1236 1.1449 3 1.0303 1.0612 1.0927 1.1249 1.1576 1.1910 1.2250 4 1.0406 1.0824 1.1255 1.1699 1.2155 1.2625 1.3108 5 1.0510 1.1041 1.1593 1.2167 1.2763 1.3382 1.4026 6 1.0615 1.1262 1.1941 1.2653 1.3401 1.4185 1.5007 7 1.0721 1.1487 1.2299 1.3159 1.4071 1.5036 1.6058 8 1.0829 1.1717 1.2668 1.3686 1.4775 1.5938 1.7182 9 1.0937 1.1951 1.3048 1.4233 1.5513 1.6895 1.8385 10 1.1046 1.2190 1.3439 1.4802 1.6289 1.7908 1.9672 11 1.1157 1 2434 1.3842 1.5395 1.7103 1.8983 2.1049 12 1.1268 1 2682 1.4258 1.6010 1.7959 2.0122 2.2522 13 1.1381 1.2936 1.4685 1.6651 1.8856 2.1329 2.4098 14 1.1495 1.3195 1.5126 1.7317 1.9799 2.2609 2.5785 15 1.1610 1.3459 1.5580 1.8009 2.0789 2.3966 2.7590 16 1.1726 1.3728 1.6047 1.8730 2.1829 2.5404 2.9522 17 1.1843 1.4002 1.6528 1.9479 2.2920 2.6928 3.1588 19 1.2081 1.4568 1.7535 2.1068 2.5270 3.0256 3.6165 20 1.2202 1.4859 1.8061 2.1911 2.6533 3.2071 3.8697 21 1.2324 1.5157 1.8603 2.2788 2.7860 3.3996 4.1406 22 1.2447 1.5460 1.9161 2.3699 2.9253 3.6035 4.4304 23 1.2572 1.5769 1.9736 2.4647 3.0715 3.8197 4.7405 24 1.2697 1.6084 2.0328 2.5633 3.2251 4.0489 5.0724 25 1.2824 1.6406 2.0938 2.6658 3.3864 4.2919 5.4274 26 1.2953 1.6734 2.1566 2.7725 3.5557 4.5494 5.8074 27 1.3082 1.7069 2.2213 2.8834 3.7335 4.8223 6.2139 28 1.3213 1.7410 2.2213 2.9987 3.9201 5.1117 6.6488 29 1.3345 1.7758 2.3566 3.1187 4.1161 5.4184 7.1143 30 1.3476 1.8114 2.4773 3.7434 4.3219 5.7435 7.6123 Years 8% 9% 10% 11% 12% 13% 1 1.0800 1.0900 1.1000 1.1100 1.1200 1.1300 2 1.1664 1.1881 1.2100 1.2321 1.2544 1.2769 3 1.2597 1.2950 1.3310 1.3676 1.4049 1.4429 4 1.3605 1.4116 1.4641 1.5181 1.5735 1.6305 5 1.4693 1.5386 1.6105 1.6851 1.7623 1.8424 6 1.5869 1.6771 1.7716 1.8704 1.9738 2.0820 7 1.7138 1.8280 1.9487 2.0762 2.2107 2.3526 8 1.8509 1.9926 2.1436 2.3045 2.4760 2.6584 9 1.9990 2.1719 2.3579 2.5580 2.7731 3.0040 10 2.1589 2.3674 2.5937 2.8394 3.1058 3.3946 11 2.3316 2.5804 2.8531 3.1518 3.4785 3.8359 12 2.5182 2.8127 3.1384 3.4985 3.8960 4.3345 13 2.7196 3.0658 3.4523 3.8833 4.3635 4.8980 14 2.9372 3.3417 3.7975 4.3104 4.8871 5.5348 15 3.1722 3.6425 4.1772 4.7846 5.4736 6.2543 16 3.4259 3.9703 4.5950 5.3109 6.1304 7.0673 17 3.7000 4.3276 5.0545 5.8951 6.8660 7.9861 18 3.9960 4.7171 5.5599 6.5436 7.6900 9.0243 19 4.3157 5.1417 6.1159 7.2633 8.6128 10.0197 20 4.6610 5.6044 6.7275 8.0623 9.6463 11.5231 21 5.0338 6.1088 7.4002 8.9492 10.8038 13.0211 22 5.4365 6.6586 8.1403 9.9336 12.1003 14.7138 23 5.8715 7.2579 8.9543 11.0263 13.5523 16.6266 24 6.3412 7.9111 9.8497 12.2392 15.1786 18.7881 25 6.8485 8.6231 10.8347 13.5855 17.0001 21.2305 26 7.3964 9.3992 11.9182 15.0797 19.0401 23.9905 27 7.9881 10.2451 13.1100 16.7386 21.3249 27.1093 28 8.6271 11.1671 14.4210 18.5799 23.8839 30.6335 29 9.3173 12.1722 15.8631 20.6237 26.7499 34.6158 30 10.0627 13.2677 17.4494 22.8923 29.9599 39.1159 Does It Matter When You Contribute to an IRA? When contributions to an IRA are consistently made at the beginning of the year rather than at the end, the funds have an extra 12 months in which to grow. Over a period of years there is a substantial difference in the amount accumulated. $2,000 PER YEAR ACCUMULATED AT VARIOUS RATES OF RETURN* ╔════════════╦═══════════════════════════════════════════╗ ║ NUMBER OF ║ 5% RETURN ║ ║ YEARS FROM ╟──────────────┬──────────────┬─────────────╢ ║ BEGINNING ║ │ CONTRIBUTION │ INCREASE ║ ║ OF THE ║ MADE │ MADE │ IN AMOUNT ║ ║ FIRST YEAR ║ JAN. 1 │ DEC. 31 │ ACCUMULATED ║ ╠════════════╬══════════════╪══════════════╪═════════════╣ ║ 5 ║ $ 11,604 │ $ 11,051 │ $ 553 ║ ║ 10 ║ 26,414 │ 25,156 │ 1,258 ║ ║ 15 ║ 45,315 │ 43,157 │ 2,158 ║ ║ 20 ║ 69,439 │ 66,132 │ 3,307 ║ ║ 25 ║ 100,227 │ 95,454 │ 4,773 ║ ║ 30 ║ 139,522 │ 132,878 │ 6,644 ║ ║ 35 ║ 189,673 │ 180,641 │ 9,032 ║ ║ 40 ║ 253,680 │ 241,600 │ 12,080 ║ ╚════════════╩══════════════╧══════════════╧═════════════╝ ╔════════════╦═══════════════════════════════════════════╗ ║ NUMBER OF ║ 10% RETURN ║ ║ YEARS FROM ╟──────────────┬──────────────┬─────────────╢ ║ BEGINNING ║ CONTRIBUTION │ CONTRIBUTION │ INCREASE ║ ║ OF THE ║ MADE │ MADE │ IN AMOUNT ║ ║ FIRST YEAR ║ JAN. 1 │ DEC. 31 │ ACCUMULATED ║ ╠════════════╬══════════════╪══════════════╪═════════════╣ ║ 5 ║ $ 13,431 │ $ 12,210 │ $ 1,221 ║ ║ 10 ║ 35,062 │ 31,874 │ 3,188 ║ ║ 15 ║ 69,899 │ 63,544 │ 6,355 ║ ║ 20 ║ 126,004 │ 114,549 │ 11,455 ║ ║ 25 ║ 216,363 │ 196,694 │ 19,669 ║ ║ 30 ║ 361,886 │ 328,988 │ 32,898 ║ ║ 35 ║ 596,253 │ 542,048 │ 54,205 ║ ║ 40 ║ 973,702 │ 885,186 │ 88,516 ║ ╚════════════╩══════════════╧══════════════╧═════════════╝ * Assumes compounding annually - amounts would be higher if compounded quarterly, monthly, daily, etc. The overall effect is that you have one full extra year of growth when you make the contribution at the beginning of the tax year. IRAs vs. Life Insurance Life insurance in a IRA may sound like a great way to plan for one's retirement. However, the law does not allow IRAs to purchase life insurance contracts. After comparing cash value life insurance to the benefits of an IRA, many people are choosing the life insurance method as a better alternative. The following chart compares the two methods: OVERVIEW COMPARISON ╔════════════════════════════════════════════╤═══════════╤═══════════╗ ║ │ │ LIFE ║ ║ DESIRED FEATURE │ IRA │ INSURANCE ║ ║ │ METHOD │ METHOD ║ ╟────────────────────────────────────────────┼───────────┼───────────╢ ║ 1. Can you contribute as much as you want? │ NO │ YES ║ ║ │ │ ║ ║ 2. Is the contribution deductible? │ SOMETIMES │ NO ║ ║ │ │ ║ ║ 3. Is the accumulation tax-deferred? │ YES │ YES ║ ║ │ │ ║ ║ 4. Can participants borrow funds? │ NO │ YES ║ ║ │ │ ║ ║ 5. Are withdrawals before 59 1/2 free │ MAYBE │ YES ║ ║ of the 10% penalty tax? │ │ ║ ║ │ │ ║ ║ 6. Can forced withdrawals at age 70 1/2 │ NO │ YES ║ ║ be avoided? │ │ ║ ║ │ │ ║ ║ 7. Does the death benefit exceed the │ NO │ YES ║ ║ accumulated cash? │ │ ║ ║ │ │ ║ ║ 8. Do heirs of a participant receive the │ NO │ YES ║ ║ funds income tax-free? │ │ ║ ║ │ │ ║ ║ 9. Can provisions be made to continue │ SOMETIMES │ YES ║ ║ contributions if disability occurs? │ │ ║ ║ │ │ ║ ║10. Can death benefits be estate tax free? │ NO │ YES ║ ╚════════════════════════════════════════════╧═══════════╧═══════════╝ 1. IRA contributions are limited to $2,000 per year (or $2,250 if non-employed spouse). Contributions to an insurance policy are limited only by financial means and health of participant. 2. Life insurance premiums are not deducible. Contributions to IRAs are deductible unless participant is also covered by an employer's qualified plan, in which case, the contributions are not deductible for married couples earning over $50,000 (or single taxpayers earning over $35,000); and they are only partially deductible if salaries are between $40,000 and $50,000 (or $25,000 and $35,000 for single taxpayers). 3. Accumulation of funds in both methods is tax-deferred. 4. Funds may not be borrowed from an IRA nor can they be used as collateral for a loan. Life insurance cash values are readily available at rates below market. 5. There is a tax penalty on IRA withdrawals made prior to age 59 1/2 unless the participant dies, is disabled or elects to begin distribution of equal payments over his or her life expectancy. 6. Persons with IRAs must begin taking withdrawals (and begin paying the income tax due) after they reach age 70 1/2 years. There is no such rule for life insurance. 7. Whatever has been accumulated in an IRA will be paid at the death of the participant to his or her named beneficiaries. Life insurance generally has a death benefit which greatly exceeds the accumulated cash values. 8. Heirs who receive a death benefit from an IRA must pay income tax on the amount received. If the amount in all Qualified Plans and IRAs exceed certain limits, there will also be a 15% penalty tax. Heirs who receive the death benefit of life insurance policies are not required to pay any income tax. 9. Life insurance contracts often provide for a disability waiver rider which guarantees the premium will continue to be paid even if the insured becomes disabled. Disabled IRA participants would not be able to contribute to an IRA unless they received earned income for the year. 10. Life insurance owned by an irrevocable trust can be free of estate taxes.