by John Darer ® CLU ChFC MSSC CeFT RSP CLTC
Structured Settlement vs. Roth IRA, which is better?
The answer: Depends
People eligible for structured settlements may be eligible for IRA. People eligible for an IRAs however, may not necessarily be eligible for structured settlements.
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which went into effect on January 1, 2002, included major changes to the laws governing Individual Retirement Accounts (IRAs), providing for increases in IRA contribution limits.
The contribution limit for Roth IRAs is $7,000 for those under 50, and $8,000 for those 50 and older. In order to qualify for the 50 and older catch up provision, an individual must have reached the age of 50 in the year in which they make the "catch up" contribution. Your personal Roth IRA contribution limit, or eligibility to contribute at all, is dictated by your income level.
The contribution limit will be annually indexed in $500 increments, adjusted for the cost-of-living (COLA).
Structured settlements have no such limitation
No matter what your age or income you can agree to up to 100% of your share of the present value of your settlement in the form of a structured settlement. With a structured settlement there is no pre-59 1/2 penalty for receiving scheduled payments prior to 59 1/2.
IRA Contribution Limits for 2024 vs. 2023 (aarp.org)
An advantage of the Roth IRA is that you will never pay taxes on your earnings or withdrawals ever again (as long as you have reached the age of 59 ½ and your account has been open for at least five years).
Structured settlement payments are income tax free if the periodic payments represent damages that are excludable under IRC 104(a)(1) Workers compensaton, IRC 104(2)(2) Personal physical inmjjury or physical sickness or wrogful death, or IRC 139F wrongful incarceration. If you qualify for Roth and have a structured settlement you could allocate part of your structured settlement payments, when received, to satisfy your Roth contribution. Then hold on for 5 years!
Very small settlements with short deferrals and plaintiffs with greater risk tolerance may be better off with a Roth, up to the Roth limits
Last updated February 16, 2024
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