-Would you expect one-year term insurance that is renewable and convertible to r

Question

-Would you expect one-year term insurance that is renewable and convertible to require a higher premium than one-year term insurance without these features? Explain.

-Compare term life to universal life and to variable life insurance in terms of (a) death benefits, (b) cash value, (c) premium, and (d) policy loans.

-Compare the traditional IRA with the Roth IRA

-Why might an individual purchase a single premium annuity if he or she can just invest the money and live off the proceeds?

-Compare variable annuities with index annuities.

Explanation / Answer

b.The limitations for making a Roth IRA contribution are as follows:

Single taxpayers can not make a Roth IRA contribution if their modified adjusted gross income (MAGI) is $122,000 or more for 2011

Married taxpayers can not make a Roth IRA contribution if their MAGI is $179,000 or more

Solution:

Make a non-deductible IRA Contribution

Then convert to a Roth IRA which has no income limits

Or convert some portion of your IRA to a Roth IRA

Although you will not take a tax deduction for the non-deductible IRA, you probably will have some income to recognize on the conversion of the non-deductible IRA to a Roth IRA.

Why, if you have other IRA accounts when you convert the non-deductible IRA, you’ll owe tax on the ratio of pretax money in all of your traditional IRAs including the non-deductible IRAs (but not 401(k)s).

Illustration:

You have $94,000 in a traditional IRA

You make a $6,000 non-deductible IRA and then convert to a Roth IRA

Now you have $100,000 in your IRA

The ratio of your pretax money in your IRA is 94% ($94,000 of the total of $100,000)

The income on the conversion would be $5,640 ($6,000 times 94%)

Let's say you're eligible for both a Roth and a traditional IRA. Generally, you're better off in a traditional if you expect to be in a lower tax bracket when you retire. By deducting your contributions now, you lower your current tax bill. When you retire and start withdrawing money, you'll be in a lower tax bracket, thereby giving less money overall to the tax man. If you expect to be in the same or higher tax bracket when you retire, you may instead want to consider contributing to a Roth IRA, which allows you to get your tax bill settled now rather than later.

But it can be difficult, if not impossible, to guess what tax bracket you will be in later in life, particularly if you've got a long way to go until you retire. So if you're not sure, another rule of thumb is to keep your retirement savings tax diversified, meaning you have accounts that will be both taxable and tax-free when you cash out in retirement. For example, if you already have a tax-deferred 401(k) plan through your employer, you might want to invest in a Roth IRA if you are eligible.

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