No direct experience with the Roth IRA strategy except what I’ve read. From what I can remember, as long as the IRA doesn’t have controlling interest, and the IRA owner can’t do things like set his own pay level, it is kosher.
I remember reading about various Silicon Valley titans who are doing this, and have piled up ridiculous amounts in Roth IRAs (like $100 million). Probably from this article:
@SOSConcern, just curious. What is the rationale for buying life insurance for a young person with no dependents? Getting them inexpensive life insurance that you can gift to them when they do have dependents?
@iglooo, this is from a Fidelity website: “However, once a 529 plan account reaches a certain value—typically more than $300,000 (varies by state)—further contributions are not permitted.” However, you could, if you wished put more into other states plans, but I wouldn’t put in more than I thought would take care of future education for my currently hypothetical grandchildren.
@notrichenough, I actually spoke to a leading lawyer in the area on that. He says the stuff described in the article is pretty dodgy – in some cases, he’s not sure how they have gotten things approved (if they have). In other cases, he may have been the lawyer putting things together. But generally, IRAs can invest in private companies. However, the IRA cannot generally make transactions with a Disqualified Person, which includes the IRA fiduciary, IRA holder, lineal descendants of either, or entities controlled by either (or other Disqualified Persons). This could work if my IRA invested in a company that was not controlled by my son. And that, I think, is the way that Thiel, Levin et al. argued for their Roth IRA investment. But I have also been advised that no Disqualified Person can be an employee of an entity while an IRA has an equity investment in it. If that is correct, I am not sure how Thiel, Levin et al. got around that.
@shawbridge I looked into this a long time ago. My understanding was that the 529 contribution and any other “gifts” all combined are capped at the annual gift limit. We couldn’t open a 529 if we were gifting max to our kid unless we go into life time gift allowance.
Would your son have controlling interest in the company?
This whole area seems dodgy and open to abuse, but it is a hazy shade of gray, and smarter people than me are doing it. I haven’t seen any rulings from the IRS on this that have been made public that would clarify it. What’s the worst that can happen - the IRS disallows the IRA and forces the assets out? That doesn’t seem that bad.
Do trusts have rules about this kind of self-dealing?
The older you get the more likely it is that health issues will crop up (either the kids or parents!) that make insurance for the kids significantly more expensive or even make them uninsurable. So it’s not a bad proactive approach. For a young kid I’d look at 40 year level premium, 30 years isn’t long enough.
@Iglooo, ah. The gifting limit as opposed to the limit on 529s. We should be OK on that as we have structured things away from gifting by putting a lot in the trust.
@notrichenough, he wouldn’t have a controlling interest in Venture 2 as he has one partner, maybe two. [Having 50% of a company is completely different from 50.1% for a variety of things tax-related].
I think the IRS can unwind things in ways that are quite costly. From IRS:
A disqualified person who takes part in a prohibited transaction must correct the transaction and must pay an excise tax based on the amount involved in the transaction. The initial tax on a prohibited transaction is 15% of the amount involved for each year (or part of a year) in the taxable period. If the transaction is not corrected within the taxable period, an additional tax of 100% of the amount involved is imposed. Both taxes are payable by any disqualified person who participated in the transaction (other than a fiduciary acting only as such).
The trust has very different rules regarding self-dealing. The trustee is not one of us. So, the trust could buy a property that we rent from the trust at market rates. It can invest in companies started by one of us, etc.
With respect to insurance, does one gift the insurance policy to the kid? Or do you just set the beneficiary to the kids family (when spouse and kids come into existence)?
@shawbridge you may expect the young person to stay healthy and always be eligible for obtaining term life insurance, then something happens. I like the security of insurance. To us, their lives are worth the insurance level. Young people have a higher incidence of accidental deaths too. They can always get more later (if they are insurable) when their dependent situation changes and they want a higher level of coverage.
I just learned of a young guy that has had Lyme disease undetected - and believe it or not, health insurance is trying to not pay for medical claims (another gal I know has had Lyme disease for probably 14 years - it is in her cerebral spinal fluid and they can never get it totally out of her body) - the insurance will pay for the 28 day course of antibiotics and want to ‘ignore’ if the disease was not caught. Tri-care Military Ins (which usually is more problematic for paying claims) is paying some while Blue Cross keeps trying not to cover. This young man wasn’t able to move one morning, and mom had to call ambulance, had ER charges, hospitalization - Blue Cross doesn’t want to cover. From what I have gleaned, they have to handle a lot like an auto-immune disease.
When H and I were in our 20’s we had no direction on insurance and didn’t have the right stuff for quite a long time. Low amount of money for peace of mind for the kids. Insurance sometimes has goofy windows of opportunity and no opportunity too - H and I got long term health care policies fortunately before the insurance industry shifted on it (many companies who were heavily ‘invested’ in LTC insurance abandoned the field - some of the great policies) - our ins policies’ cost/year has come up for three years after the 10 year policy ‘lock in’ rate went by, and they were able to prove to state insurance commission that the policy increases were justified. Our policies are still a bargain, and give us peace of mind. Have no payment cap, with 5% increasing inflation rider. If we need LTC, we can get top of the line care w/o draining our estate. I am 59 now; my cancer at age 52 would have made me in-eligible for a policy if I didn’t have one in hand.
I don’t like the marginal tax rates of trusts. The grantors are ok. Beneficiaries can be subject to high marginal tax rates at much lower income levels than individuals. Then there are the potential trustee fees.
Roth iras are included in estates when figuring out estate taxes.
“7. Buy hybrid LTC insurance. $100K upfront premium. LTC benefits when needed start at $444K and go up each year by 3%. If I die without drawing down, beneficiaries get $136K. If I just change my mind and want to withdraw, I get $80K.”
That sounds like one of those mega fee deals where the advisor gets a big bonus, and you get a bad deal. I have always heard that if you have a high asset level (over a couple of million), then it is not worth it to pay for a LTC policy. Do you really need an expensive policy to cover potential monthly costs, that you could easily afford anyways?
Others were mentioning life insurance policies for children. That always creeped me out, especially when we’d get these pictures of the Gerber baby, selling life insurance. If something happens to one of my kids, I really don’t want any money. I can’t imagine they would be having a family for at least another 5-10 years, so it seems wasteful to pay for a policy that long, just in case they couldn’t get one. When people are in their thirties, I think there are plenty of level term policies that they can get, with no medical questions, particularly through places of employment.
Insurance through your employer is not portable though. Once you leave the company the coverage ends. And IME the premiums are set in 5 year bands, and as you get older it gets significantly more expensive than if you had gotten a 30 year level premium policy on your own when you are young. I looked at the table for my company, at age 50 the premium is 7x the premium at age 30.
I’m not aware that you can get your own individual policy without medical underwriting, ever.
I don’t think the intent of getting policies for your kids is to pocket a pile of money if something happens. It’s to provide them some coverage in case in the future they become uninsurable. You can $0.5mil of term life with a 30 year level premium for around $350/year when you are in your early twenties. In ten years when they are married and starting a family they can replace that for another 30 year level premium policy for around $450/year if they are still insurable, which would carry them through the college years and near retirement, after which insurance needs should diminish. It’s really not very expensive.
I’m certain that you can get many level term policies with no underwriting. You may have to get underwriting over a specific amount of coverage, though. I have seen many policies advertised with no medical exam needed, and have gotten a few over the years. Sign up, pay the policy, done deal. And why get a 30 year level premium policy that they are going to replace in ten years? Why not just have them continue on with the 30 year policy, isn’t that the point, to get it while they are cheap (and insurable)?
I got a 40 year term policy at age 30 after S1 was born. Doubled it when pregnant with S2 at age 31. It had an automatic increase rider on it which almost doubled the policy again over the next seven years. Became uninsurable at age 41, and doubly so at age 51. Am darned glad I still have coverage – had things gone south, it was enough to have paid for college for both of them. Premiums are still reasonable (much cheaper proportionally than DH’s policy). At this point, I will hang on to the policy and leave a share to my kids. DH is keeping his policy as well, which I would need to cover medical premiums and my very expensive meds if something were to happen to him before we get to Medicare age. We do not have policies on our kids, as we have no financial risk where they are concerned (have not taken out PLUS loans, co-signed car notes, etc.). S1 has insurance through work.
I always relied on employer provided life insurance when I was employed (2x and 3x salary). It probably wasn’t enough, but that’s what I had. When I became unemployed in 1997 I bought a term life policy with fixed premiums for 10 years. As I recall the insurance company sent someone to my house to take my blood. I kept that policy even after I found a job that provided life insurance. But when that job ended in 2007, both kids were out of the house and their college paid for, I skipped that last premium (I won that bet) and now have no life insurance.
It depends on how long you need the insurance for. If you get the 30 year policy when you are 22, at 52 the premiums will switch to year by year and will cost many times (10x or more) what you were paying before. If you need insurance until you are 65, it gets ridiculously expensive.
If you redo the policy in your 30’s, you can get a 30 year level premium that is very affordable, that will take you up to 65 or so.
As tenured faculty I have excellent job security, so term life insurance through my employer at multiples of salary is all I’ve ever needed. A good thing, too, because I’ve got some medical issues that would make individual coverage prohibitively expensive. It’s been a comfort knowing that if anything happened to me, DW would at least have enough to get the kids through college. We’re now about 18 months from passing that milestone. After that, I don’t really see that I need life insurance. I’ll keep it as long as I keep working because my employer pays the premium for the “base” level of insurance (= 115% of salary) and everything beyond that is available at an affordable group life rate, making it too good a bargain to pass up. I’ll lose it when I retire, but that shouldn’t really matter. If things continue to proceed according to plan, DW & I should have enough in our retirement accounts, coupled with after-tax assets, plus Social Security, that DW should be able to live comfortably for a good long while after I’m gone.
Other things equal, I suppose DW would be best off financially if I dropped dead just before retiring. Then she’d get the insurance proceeds on top of all our retirement assets (which will then likely be as big as they’ll ever get) and after-tax assets, plus my Social Security benefit which will be larger than hers—all with one less mouth to feed and one less set of medical bills to pay. But I have no intention of letting that happen. DW assures me it’s not in her plans, either. Which is reassuring.
I’m dubious about the single premium LTC coverage, but we’ve got a great policy from back in the day when unlimited policies were available. Somewhere years ago I saw an article that suggested if your net worth was under $.5 MM, LTC coverage might not be especially important/good financial deal, and that it might be unnecessary if your assets were >$3MM, since you could easily fund any expenses at that level. I don’t know whether the thinking on that has changed. We have excellent LTC policies acquired about a dozen years ago, so not really an issue for us.
H and I are in the boat that @arabrab is in where we have great LTC coverage at affordable rates. Incredible peace of mind.
The Gerber policies are a rip off. Blanket statement, insurance sold on TV isn’t getting oversight by state regulators and is a rip off as to what you are getting to what you are paying in.
Unless insurance is through an employer or a professional association, any policy that is ‘no medical evaluation’ is going to be a rip off/over standard cost.
All the term and other life insurance products we have had since we have purchased since mid-90’s has required lab work/BP check/Wt. - person comes to work place or home for face to face.
Insurance is always getting creative with products that have value to some policy holders while also making them money.
Some people will have small term insurance policy through work for their family, in part because they don’t have any savings/emergency fund, so if there is a funeral expense, it is covered. Pay like a few dollars a month.
Maybe 90, 95% of kids have no health issues into their 30’s and take out term insurance later. That’s fine. The insurance to me is peace of mind. And I have had enough bad happen to me that it helps me sleep better (the hot/cold from Tamoxifen interrupts my sleep enough). If I get this job (hope to hear something tomorrow - they may be interviewing the last candidate today) that will be a very positive change for me too. I never intended to stop out of my career, and we have been a one income household for 10 years before my stage III cancer in.
Someone has a significant negative event and it changes the whole ball of wax.
Almost everyone with a lot of insurance want their spouse to survive with them through healthy retirement years. I know a fortune 500 widow who would give up her mega-million if her H was still alive.
Amazing that people don’t choose to die when it is economically optimal. What would John Stuart Mill say? [WWJSMS]
When I looked at LTC policies about 5 years ago, it seemed like the caps they now put on total expenditures and/or total annual expenditures and maybe some subcategories meant that it was better to self-insure if you could.
The single premium hybrid LTC seems to sacrifice return if I don’t have LTC expenses for significant coverage if I do. The longer I live without having reimbursable expenses, the bigger the loss of return. So, they are betting on me not needing LTC. I don’t see a ton of fees. I need to ask about commissions.
I did learn that while Canada covers medical expenditures, Canadian health insurance does not cover LTC expenses.
If I didn’t have the LTC policies I have for H and me, I would probably not do a hybrid policy unless I was truly fearful of having dementia or a condition that would require nursing home care for a prolonged time. For activities of daily living (ADLs), one can pay to have home care come in, or could fund assisted living if wanting higher level of care. Having funds invested with returns to cash flow needs.
You know the saying, if I would have known I was going to live this long, I would have taken better care of myself.
One of the best things people can do is to maintain reasonable body weight and exercise/fitness. Cutting fats and even modest exercise like regular walking.
The term insurance on my kids is inexpensive. Having the insurance is not wishing bad or going to change whatever happens in life/death timing.