Are you considering different options for saving for retirement? Two popular choices are Maximum Premium Indexing (MPI) accounts and Roth Individual Retirement Accounts (IRAs). While both offer tax advantages and potential for long-term growth, they have distinct differences that make them suitable for different types of investors. In this comprehensive guide, we'll explore the key features, benefits, and drawbacks of MPI and Roth IRA to help you make an informed decision about which one aligns best with your financial planning goals.

At a Glance: MPI vs. Roth IRA

Before we dive into the intricacies, let’s briefly overview the commonalities and distinctions between Maximum Premium Indexing (MPI) and Roth Individual Retirement Account (Roth IRA).

Similarities:

Differences:

  • MPI accounts come with a 0% floor guarantee, ensuring that your principal investment does not decrease even if the market does. On the other hand, Roth IRA investments may fluctuate with market conditions, potentially incurring losses.
  • With MPI, your investment choices are managed by the account provider, limiting personal control over investment decisions. Conversely, self-directed IRAs offer a broad spectrum of investment options, including stocks, bonds, mutual funds, and more, or the choice to have a financial advisor manage your portfolio.
  • Traditional IRAs, including Roth IRAs, typically impose a 10% early withdrawal penalty if funds are accessed before age 59.59. MPI accounts, however, do not penalize early withdrawals, which can be advantageous for those considering early retirement.
  • Contribution and income limits are imposed on Roth IRAs, which may restrict the amount high-income earners can invest. In 2024, the annual contribution limit is $7,000 for individuals under 50, or $8,000 for those 50 or older. MPI accounts do not have these restrictions, offering more flexibility for individuals with higher incomes.

What is MPI?

A Maximum Premium Indexing (MPI) account is a specialized type of indexed universal life insurance policy, distinctively trademarked and offered by Suncor Financial. The company is helmed by Curtis Ray, who has gained recognition predominantly through his personal finance advocacy on various social media platforms.

Diving Deeper: IULs

MPI accounts are a subset of indexed universal life (IUL) insurance policies, and understanding their fundamental components is essential:

  • Life Insurance Policy: An IUL operates as a life insurance contract requiring premium payments. The objective is for the policy’s cash value to grow sufficiently to cover these premiums, a process that may span several years. Obtaining coverage typically necessitates a physical examination, with premium rates being contingent upon the insured’s health and age.
  • Cash Value: This term refers to the sum that is accessible for withdrawal if the policy is surrendered. It represents the funds within the policy’s account that can be accessed tax-free, either through loans or direct withdrawals.
  • Account Value: The account value reflects the accumulated worth within the policy, augmented by dividend credits tied to the performance of a stock market index such as the S&P 500. This value is also utilized to offset the costs associated with the policy, including fees and premiums.
  • Surrender Fees: Early termination of the policy results in surrender fees. These fees typically decrease over time, starting at a higher percentage in the initial year and reducing annually until they are eliminated, usually by the tenth year. For MPI accounts, surrender charges are generally in effect until the 14th year.
  • Dividend Credit: Annually, a specified credit is added to the policy’s account, reflecting the performance of the chosen index, such as the S&P 500. The terms of the contract, including the participation rate, cap, and floor, play a crucial role in determining this credit. It’s important to note that this credit is not a direct return from the stock market but rather a calculated figure set by the insurance company based on the policy’s terms.

What is a Roth IRA?

A Roth IRA (individual retirement account) offers a tax-advantaged approach to retirement savings, allowing contributions with after-tax dollars. Unlike traditional IRAs, contributions to a Roth IRA are not tax-deductible. The principal advantage of a Roth IRA lies in its tax-free withdrawals during retirement, encompassing both the contributions and the accrued investment gains.

The popularity of Roth IRAs has surged in recent years. By the end of 2021, Roth IRAs accounted for approximately $1.3 trillion of the $13.9 trillion total held in IRAs across the United States. This growth reflects the increasing preference for the tax benefits that Roth IRAs provide.

Benefits: MPI vs Roth IRA

Both MPI and Roth IRA offer unique advantages that cater to different investor needs and preferences. Let's explore the key benefits of each option.

Advantages of MPI

  • Stock Index-Linked Returns: MPI earnings are correlated with the performance of a stock index like the S&P 500, offering the potential for market-like gains without the downside risk. This makes MPI a lower-risk investment option compared to directly investing in the stock market.
  • Loss Protection: With a return potential of up to 10% and no risk of loss during market downturns (due to the 0% floor), MPI may provide a balanced approach between growth potential and downside protection. This can be especially appealing for risk-averse investors or those nearing retirement.
  • Tax-Free Borrowing: The retirement equity line of credit (RELOC) feature enables tax-free borrowing from the account as it's classified as a loan rather than a taxable income distribution. This can be particularly advantageous during retirement when you want to minimize your tax liability.
  • No Contribution Limit: Unlike conventional retirement plans like 401(k)s and IRAs, MPI does not impose any annual contribution limits. This makes it an attractive option for high-income earners who want to save more for retirement.
  • No Early Withdrawal Penalty: MPI allows for early withdrawals without incurring penalties, providing flexibility for those who may need to access their funds before traditional retirement age. This can be beneficial for early retirement planning or unexpected financial needs.
  • Tax-Free Benefits for Beneficiaries: In the event of the policyholder's death, beneficiaries receive both the life insurance amount and the remaining cash balance tax-free. This can be a significant advantage for leaving a tax-efficient legacy to loved ones.

Advantages of a Roth IRA

  • Contribution Age Flexibility: There are no age restrictions for contributions to a Roth IRA; you can contribute at any age as long as you have qualifying earned income. This makes it an excellent option for both young savers and those nearing retirement.
  • Tax-Free Growth: Both contributions and potential investment gains in a Roth IRA accumulate tax-free. This allows your money to grow without the burden of annual tax bills, maximizing your long-term returns.
  • Qualified Tax-Free Withdrawals: Withdrawals from a Roth IRA can be taken tax-free and penalty-free if you're age 59.5 or older and have met the minimum account holding period, currently set at five years. This provides a source of tax-free income in retirement.
  • Tax-Free Retirement Income: As one of the most well-known tax-free retirement plans, a Roth IRA allows you to withdraw your money tax-free in retirement, provided you meet certain conditions. This can help you stretch your retirement savings further and reduce your overall tax burden.
  • No Mandatory Withdrawals: Unlike a Traditional IRA, there are no required minimum distributions (RMDs) with a Roth IRA. This means you can let your money continue to grow tax-free for as long as you want, even past age 72.
  • Tax-Free Inheritance: Inherited Roth IRAs allow tax-free withdrawals of contributions for heirs. Earnings from an inherited Roth IRA are generally tax-free as well, although they may be subject to income tax if the account is less than five years old at the time of the original owner's passing.

Downsides: MPI vs Roth IRA

While MPI and Roth IRA offer significant benefits, it's essential to understand their potential drawbacks as well. Let's examine the disadvantages of each option.

Disadvantages of MPI

  • Infinite Cost Increases: The insurance policy's costs rise annually, necessitating higher returns each year to maintain its value. This can make it challenging to keep up with the policy's increasing costs over time.
  • Ongoing Fees: Even during periods of poor market performance, fees and insurance premiums continue to be charged, potentially leading to losses, especially when compounded with loan interest. This can erode the account value over time.
  • Health Dependency: Accessing RELOC requires proving insurability every two years. Declining health, which is common as people age, may result in higher insurance costs or policy cancellation at the worst possible time, leaving you without access to your funds.
  • Tax-Free Cap: There is a limit on tax-free transfers out of an MPI, limiting its effectiveness for creating generational wealth. Once you reach this cap, additional transfers may be subject to taxes.
  • Lapse Risk: A policy lapses when its cash value reaches $0. To prevent this, one must either contribute personal funds to the policy or ensure it is self-sustaining, which can be financially demanding, especially in the initial years.

Disadvantages of Roth IRA

  • Poorer Tax Structure for High Earners: Roth IRAs may not be as advantageous for high earners, as contributions are made post-tax, potentially leading to higher taxes during the contribution period compared to retirement years when income may be lower.
  • Income Caps: Roth IRAs have income limits, meaning high earners may not qualify to contribute directly. In 2023, the income phase-out range for Roth IRA contributions is $138,000 to $153,000 for single filers and $218,000 to $228,000 for married couples filing jointly.
  • Contribution Limits: The yearly contribution cap for Roth IRAs is significantly lower than that for 401(k) plans. In 2023, the Roth IRA contribution limit is $6,500 (with an additional $1,000 catch-up contribution for those age 50 and older).
  • Early Withdrawal Penalties: While contributions can be withdrawn tax- and penalty-free at any time, early withdrawals of earnings may trigger income taxes and a 10% penalty if you're younger than 59.5 or the account is less than five years old.
  • No Upfront Tax Benefits: Unlike traditional IRA contributions, which can be tax-deductible, contributions to a Roth IRA do not provide any immediate tax benefits. This can be a drawback for those seeking to reduce their current year's taxable income.

Should I Choose an MPI or Roth IRA?

Choosing between an MPI and a Roth IRA ultimately depends on your unique financial situation, retirement timeline, and long-term goals. Let's break down the key considerations for each option.

Verdict on MPI

MPI is a life insurance plan that has the potential to grow in value over time, providing a source of retirement income. However, to fully benefit from its tax advantages, you need to fund it consistently and keep the policy in force for the long haul.

In our opinion (we are not your financial or legal advisor), MPI is best suited for individuals who:

  • Have a longer time horizon before retirement
  • Can commit to consistently funding the policy
  • Are in the high-net-worth individual (HNWI) or high earner, not rich yet (HENRY) category
  • Expect to have a lower income in retirement

Verdict on Roth IRA

The prevailing advice for retirement saving is to prioritize employer-sponsored plans, especially if there's a matching contribution available. After maxing out these plans, consider adding a Roth IRA to further boost your retirement savings.

Roth IRAs can be particularly advantageous if you expect to be in a higher tax bracket during retirement compared to your current bracket. This is often the case for younger workers who have yet to reach their peak earning years.

However, it's important to note that Roth IRAs have income limits that may disqualify high earners from making direct contributions. Additionally, the annual contribution limits for Roth IRAs are lower than those for 401(k)s and other employer-sponsored plans.

Considering these factors, Roth IRAs are generally better suited for people with traditional career paths, where income and contributions are expected to gradually increase over time. Regardless of your current financial situation, it's best to start contributing to a Roth IRA as early as possible to maximize tax-free growth and combat the erosion of purchasing power due to inflation.

The Bottom Line

Ultimately, the choice between an MPI and a Roth IRA (or a combination of both) depends on your individual circumstances. Factors to consider include your age, income level, retirement timeline, and overall financial goals. Consult with a qualified financial advisor to develop a personalized retirement strategy that aligns with your unique needs and objectives.

Use Kubera to Help Prepare for Retirement

Planning for retirement starts with understanding your unique financial circumstances and goals. This requires having a clear picture of all your assets, liabilities, and investments.

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That's where Kubera comes in. Our personal balance sheet software seamlessly integrates with thousands of assets, providing a comprehensive view of your entire portfolio. With Kubera, you can:

  • Get a big-picture view of your entire portfolio, including your MPI, Roth IRA, and other retirement accounts, as well as your other assets and liabilities, such as bank accounts, cryptocurrency accounts, brokerage accounts, real estate, loans, etc.
  • Rebalance your portfolio according to your retirement goals and timeline, using the built-in features that help you monitor and adjust your target asset allocation, performance, and returns.
  • Model real-life situations to see how they affect your net worth in the future. Traditional retirement calculators use fixed withdrawal rates, inflation rates, and social security benefits, which are too simplistic for today's complex financial landscape. You need an adaptable yet simple tool for the fluctuating market conditions and personal circumstances. Kubera lets you simulate different financial scenarios, such as changing your income, expenses, savings, investments, taxes, inflation, interest rates, etc., and see how they impact your future wealth.
  • Track your finances in your preferred currency, view your net worth and asset ROI in real-time, and organize your financial documents all in one place with Kubera.
  • Access your dashboard from any device, anywhere, anytime, with secure and encrypted data storage and backup.
  • Enjoy a simple and intuitive user interface that makes wealth management easy and fun.
Retirement and Glide Path Planning with Kubera

Whether you choose an MPI, Roth IRA, or a combination of retirement accounts, Kubera empowers you to take control of your financial future. Sign up today and start building a solid foundation for your retirement.

Remember, this article is for informational purposes only and should not be considered financial, legal, or tax advice. Always consult with a qualified professional before making any investment or retirement planning decisions.

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