Q. I have the choice of a traditional or Roth 401(k). Would a whole life insurance policy be a better investment? Are the fees higher for insurance?
— Looking for a deal
A. You’re really talking apples and oranges. Or even bananas.
The characteristics of a 401(k) plan and a whole life insurance policy are very different.
“The major benefit to putting your investments into a traditional or Roth 401(k) is that it allows you to invest in assets that grow tax-deferred — tax-free for a Roth — until retirement,” said Nicholas Scheibner, a certified financial planner with Baron Financial Group in Fair Lawn. “You can then use those assets to supplement living expenses in retirement and pass any remaining assets to your estate.”
Scheibner said a whole life policy, on the other hand, is an insurance product that carries a cash value and pays out its value at death.
“We have found that it is usually best for investment accounts to be used for investing, and insurance products to be used for insurance,” he said. “When you start to mix the two, things can get complicated.”
When comparing your investments, fees are only one thing to consider, Scheibner said. You need understand the role of each of your investments in your portfolio and what each investment can add to an overall portfolio’s expected return and expected risk.
When you’re trying to decide between a traditional or Roth 401(k), Scheibner said, you need to ask yourself an important question: Do I want to pay my taxes now while I am working? Or later while I am retired?
If you believe your taxes are lower now, such as for someone who is just starting a career, you will want to consider a Roth, he said. Your tax bracket may be lower now than in the future when Social Security, pensions and retirement account distributions come in.
“If you believe your income is high now — you are in your prime earning years — you will want to defer taxes in a traditional 401(k) and pay your taxes later,” he said. “Finally, you may consider contributing to both plans. This might allow you to diversify your tax-base in your retirement years.”
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