IUL vs Roth IRA for Retirement

An IUL and a Roth IRA can both be used toward retirement. However, they function very differently and are entirely different vehicles, so should be considered independently.

What is a Roth IRA

A Roth IRA is an investment vehicle. It enables you to make post-tax contributions into an account that can then be invested in various resources such as stocks, bonds and mutual funds. A Roth IRA is not taxed when you retire and withdraw money, but offers no tax benefit at the time of investment. In 2024, you can invest up to $7,000 (or $8,000 if you are 50 or older). A Roth can be opened with a bank in-person or through a brokerage account online. In-person banks, however, offer additional options than online brokerages such as the ability to invest in certificates of deposits.

What is an IUL

An IUL; eg Indexed Universal Life, is actually not an investment product at all but a life insurance policy with a cash component. When you purchase a policy, a portion of each payment premium is put into a cash value account (the rest goes to pay for the policy and toward the death benefit). That cash value account is then invested in a fund that tracks the stock market, such as the S&P 500. As the policy matures and the value of the account grows, you can take low-interest loans against the principal for any life needs you may have. Loans do not have a specific time frame in which they are due; any outstanding loans at the time of the policy holders death are taken from the death benefit.

How Does an IUL compare to a Roth IRA for retirement?

Both a Roth IRA and an IUL can help you toward retirement. But each have a unique benefits. A Roth IRA enables you to invest in accounts that reinvest dividends and allows you to select and invest in individual stocks. The growth a Roth IRA can experience has no cap, making it an excellent way to experience aggressive growth through your lifetime. However, if you need to access the cash in a Roth, or want to retire early, you will typically incur penalties on earnings if you withdraw prior to 59.5.

Conversely, an IUL typically has less aggressive growth than a Roth IRA because even though it tracks a market index, most policies have market caps on the returns. However, an IUL also has a floor of zero, so while the earnings on a Roth IRA can fluctuate wildly based on market forces, they will be reasonably stable in an IUL. You can also borrow against your IUL cash value at any point, and the interest on the value will continue to grow against the original value- as if the loan had never been taken. As mentioned earlier, loans on IULs also do not require repayment; but any unpaid loans are taken out of the death benefit when the policyholder passes. This means an IUL can provide tax-free income in retirement.

In Summary:

An IUL is a life insurance policy that:

  • Applies a portion of your premium to a cash account
  • Invests the money in that account against a market index that has both a cap and a floor
  • Allows for low-interest loans for any reason that have no repayment date
  • Provides for a tax-free retirement option

An IUL is a life insurance policy that:

  • Enables you to invest in accounts that reinvest dividends
  • Allows you to select and invest individual stocks
  • Has no cap on its growth, but also no floor
  • Allows you to withdraw money tax-free and without penalty once you turn 59.5

No retirement strategies are mutually exclusive, so you can of course leverage both, and a blend of the two offers great stability in retirement. If you’d like to learn more, please call 512-922-1273 or schedule a time to speak.

The investing information provided on this page is for educational purposes only. Gallant Life Insurance does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.