Zero Taxes in Retirement

The Holy Grail for Investment – Zero Taxes in Retirement

When you think about retirement, you naturally consider 401k, 403b, IRA and other tax-deferred accounts because that’s what Wall Street and your employer has deceived you into believing. But, tax-deferred plans are actually promoted to maximize financial firm management fees while reducing employers’ need to provide expensive pensions. These dangerous plans are building a TAX-TIME-BOMB for your retirement that these same entities like to downplay. As tax rates are likely to rise, retirees are discovering too late that too much invested in tax-deferred plans is a very “taxing” thing. These plans may expose you to the volatility of the stock market as well!

Let’s reject what Wall Street wants us to believe is a good investment and judge for ourselves what is best. Here is a list of optimal investment goals:

• ZERO taxes during the growth period and ZERO taxes in retirement
• Early access to cash with ZERO taxes at ANY age without penalties
• Stock market type investment returns without stocks market risks
• Guaranteed ZERO losses even during the worst stock market declines
• No limits on investment amounts, no income limits, no conflict with other plans
• Tax-free inheritance (unlike IRA, 401k and Annuities)

When I first heard that all of these goals were obtainable, I completely rejected them as too good to be true and not worth further investigation. After all, I had been trained by Wall Street propaganda. My closed mind could not accept these goals as possible.

I had mistakenly limited my thinking to using typical retail investor tools like stocks, bonds, mutual funds, and annuities. But institutions, with their larger size and longer investment horizons of 50 to 100 years, have better investment options, unavailable to the retail investor.

It occurred to me that if individuals could invest alongside these huge institutions, they could achieve better returns. I also realized I was missing out on huge tax advantages, so I opened my mind to a previously rejected asset class: life insurance. One must understand that I viewed life insurance as loathsome and incredibly expensive, but often a necessity of life. My view of life insurance salespeople was even lower. But life insurance can have awesome benefits before you die!!!

Swallowing my distaste for life insurance, I opened my mind to investing alongside a huge insurance-related institution and taking advantage of both institutional investments and insurance tax benefits. Now the seemingly unattainable goals I list above become practical, and available to you, the retail investor!

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The Basics of Life Insurance As an Investment

Most people view life insurance as a necessary expense, they naturally want to get the maximum amount of death benefit possible for the lowest premium paid. Insurance sales people love this because they get paid based on the higher size of the death benefit. However, if we do exactly the opposite, life insurance can become a great investment vehicle.

By minimizing the death benefit, we also minimize the cost of insurance and commission paid. Now we can maximize our premiums which are mostly going into a high earning investment account which will grow and compound without taxes.

With older whole life policies, your policy received interest credits of only 3 to 5 percent per year. Not a great return! But, with the newer Index Universal Life (IUL) this growth rate has averaged 7 to 10 percent return over the last 20 years. Due to insurance tax law, this cash value account is growing and compounding at these high rates, without taxes!!

You don’t have to die to access the money!!! At any age you can borrow from this increased cash value. Why is borrowing better than withdrawing? Because loan proceeds are TAX-FREE and because most IUL’s have net ZERO INTEREST loan provisions. This allows monthly policy loans for retirement cash flow and borrowing lump sums for any other purpose.

In addition to not paying interest on these loans, you never need to pay them back. That is because when you die, the tax-free death benefit pays off all these loans before any remaining death benefit goes to your heirs.

High Investment Gains Without Stock Market Exposure

How can an IUL provide you with high interest credits while often guaranteeing NO market losses? The key is that the insurance companies do not invest your money in stocks, they use much less volatile long-term investments. Then they credit you interest based on the performance of various financial markets of your choice according to your risk tolerance. You can conservatively limit your losses to ZERO in bad years, or aggressively accept the risk of a small loss to make even greater gains in good years.

Some crediting methods limit your losses but also cap the maximum you can earn. Other crediting methods provide for uncapped index gains while still guaranteed NO market losses.

The insurance companies invest in bonds, upscale office towers, huge apartment complexes, specialty loan portfolios, venture capital and many other advanced instruments that the average investor can’t access. Profits from these conservative investments allow an insurance company to purchase leveraged financial instruments that provide for paying higher interest credits when the indexes outperform.

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The Devil Is In the Details

Let’s talk about some practical limits of an IUL. First understand you are putting after tax money into life insurance. You can roll previous life insurance plans into an IUL. Life insurance is not available within a tax-deferred plan. Moving IRA money into life insurance will likely cause taxes and penalties to be due, but these would normally be spread over 7 or more years, limiting the pain.

You can take loans for any reason, including retirement cash flow, buying a car, starting a business or any other purpose. Also, you can do this at any age … there are no early or pre-age 59.5 penalties. You can choose whether or not to pay these loans back. But you need to let your policy grow some before starting loans. Typically, you should let your policy cook for 7 to 15 years before you start taking loans. There are no required minimum distributions like in an IRA. You decide when and how much to borrow.

Unlike an IRA or 401k, there are no limits regarding how much you can put into a life insurance plan. However, the investment may not be in a lump sum, it must be spread over at least 7 years for favorable tax treatment. Alternatively, a lump sum can be placed into a special account which automatically distributes premium payments to the insurance policy over 7 years. Further there is a minimum amount of life insurance that must be purchased based upon your premium amount, which is determined by IRS rule 7702.

The cost of the death benefit is a small drag on your policy earnings. IULs work incredibly well as a retirement investment starting in your thirties, and great in your forties. However, as you enter your later fifties the benefits start to be less pronounced.

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Other Benefits of Owning Life Insurance

The most prominent is the TAX-FREE death benefit that could benefit your heirs should you die unexpectedly. Unlike inheritance from an IRA or 401k which is a fully taxable burden to your heirs. The other is a built-in no cost benefit similar to long term care. Life insurance cash values may have some shelter from lawsuits, bankruptcy, and are generally not counted when your children apply for college financial aid.

Life insurance is often inaccurately portrayed as high cost. Life insurance is front-end loaded where other fee-based investments have ever larger and larger fees as the account grows over time. Life insurance costs decrease over time as the cash value grows. Thus, over the long run life insurance is lower cost than a typical fee-based growth account or mutual fund.

Normally, once money is taken out of an investment, no further growth occurs on the money removed. However, this is not true with IUL life insurance policies with index or arbitrage loans provisions. This is another outstanding feature that makes IULs favorable for retirement assets.

The previous are excerpted from the book The Wealth Conspiracy, by Curtis Hill

Go to the Calendly.com calendar link below to schedule an appointment with an expert, Curtis Hill. Discover how you can achieve zero taxes during the growth of your investment plus flexible access to your funds with zero taxes now and during retirement all with lower risks than being in the stock market. Learn how “Not the same old advice” can benefit you.