Doing Roth Conversions for Your Clients? Consider an IUL Alternative.

Many advisors and clients utilize Roth conversions, especially those who want to take advantage of today’s historically-low tax rates and mitigate future taxes. Here are some considerations, and an IUL alternative strategy you might want to consider.

 

Roth Conversions

A Roth conversion is the process of moving assets from a traditional IRA, 401(k), 403(b) or other taxable retirement account to a tax-free Roth IRA. This is done to take advantage of the future tax benefits of a Roth IRA, such as tax-free withdrawals, no required minimum distributions, and no taxes due from account beneficiaries who inherit the Roth. Here are some things to consider about Roth conversions:

 

• Taxes: The amount converted is included as ordinary income and taxed at your income tax rate for the year of the conversion. The growth inside of the Roth IRA grows tax-free like the traditional IRA.
• Time: There is a five-year rule that applies to each conversion. This means that you cannot access or withdraw those funds converted to a Roth IRA without penalty during the first five years. The five-year period starts on the first day of the calendar year of the conversion.
• Account types: You can convert traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s and similar accounts to Roth IRAs.
• Investments: Future appreciation depends on the investments made in the Roth IRA. For example, stocks, bonds, money markets, etc.—just like traditional IRA investments—are subject to market risk and volatility.
• Conversion methods: You can convert your IRA by rollover, trustee-to-trustee transfer, or same-trustee transfer.
• Best strategy: The right strategy depends on your goals, objectives, and risk tolerance. Most clients will do multiple conversions over many years to minimize taxes in any given year. Remember, Roth conversions cannot be undone.

 

Indexed Universal Life (IUL) Insurance Policies

Indexed universal life (IUL) insurance is a type of permanent life insurance that provides a cash value component along with a leveraged death benefit. The money in a policyholder’s cash value account can earn interest by tracking a stock market index selected by the insurer, such as the Nasdaq-100 or the S&P 500, or even a money market. You can choose how much you want to track against each index to diversify your IUL policy, although your money is not actually invested in the market or subject to market risk.

 

• Taxes: The amount converted is included as ordinary income and taxed at your income tax rate for the year of the conversion, just like a Roth conversion. The growth inside of the IUL grows tax-free like the Roth IRA.
• Time: There is no waiting period that applies to each conversion unlike the five-year rule for the Roth. This means that you can access or withdraw funds converted to an IUL at any time, in the form of a tax-free loan from the cash value.
• Account types: You can use withdrawals or distributions from traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s and similar accounts to purchase an IUL policy.
• Investments: Future appreciation depends on the crediting of the IUL policy based on its contract terms and the financial strength and claims-paying ability of the issuing insurance company. For example, a client might receive a fixed rate or a participation rate based on tracked stock market indices like the S&P 500. Unlike a Roth IRA which can lose money during stock market downturns, an IUL contract has no risk to its principal because it’s not actually invested in the market. If the selected index or indices go down, the client is never credited less than zero.
• Conversion methods: You can convert your IRA by taking a distribution and sending those monies to the insurance company that issues the indexed universal life policy.
• Leverage: The IUL will automatically leverage the contributions for an enhanced death benefit for the client’s beneficiaries. The Roth IRA does not provide leverage and depends 100% on the growth of the monies converted.
• Best strategy: The right strategy depends on your goals, objectives and risk tolerance and the health of the client for underwriting at the insurance company.

 

Indexed Universal Life (IUL) Insurance Funding Strategy

Because an IUL will have multiple years of premium payments, a popular funding vehicle inside a client’s traditional IRA is the utilization of a fixed indexed annuity (FIA), providing the money to pay the IUL conversion premiums.

 

• FIAs are linked to an index like the S&P 500, and earnings are based on the index’s performance. When the index rises, the FIA is credited based on contract terms. If the index falls, principal is protected based on insurance company strength. This is important because the FIA owner will know exactly how much they have to cover the IUL annual premiums and do not have to worry about a market correction or bear market when funding their IUL policy.

• FIAs have a free partial withdraw feature that is utilized to fund the IUL.

• Many FIAs also offer immediate cash bonuses, increasing their value.

 

Case Study Comparisons

Mr. Jones, age 60.

 

• Has a $1,000,000 traditional IRA.
• Does not need income from his traditional IRA and would like tax-free income at age 75.
• Mr. Jones wants to convert $100,000 per year for the next 10 years into a Roth IRA, and in his tax bracket, will owe approximately 30% ($30,000) in taxes to the IRS each year out of the IRA distribution.
• Risk level: Mr. Jones is moderate to conservative and thinks he can generate a 7% rate of return in the Roth IRA over the next 15 years.

 

Year One valuations if Mr. Jones dies within the next year and assuming zero returns:

Year 10 Roth and IUL valuations:

Consider an IUL Alternative

Instead of taking distributions from a traditional IRA and converting the money into a Roth IRA, advisors and clients should consider leveraging those distributions and buying an indexed universal life (IUL) insurance policy, especially if they seek contract guarantees based on the financial strength and claims-paying ability of an insurance company, protection of principal from market risk, and a higher tax-free death benefit for heirs and beneficiaries.

 

Call the Advanced Planning Team at Quantum to discuss your case: 800.440.1088.

 

Based on an IUL illustration / case design run mid-October, 2025, for a healthy 60-year-old male non-smoker.  \Ask us a for a copy, or let us provide an illustration / case design for your client.

This case study is provided for informational purposes only, and is not intended to provide any financial, legal or tax advice. Before making any financial decisions, it is strongly advised to consult with proper legal or tax professionals to determine any tax or other potential consequences that might be encountered related to the specific situation.