What is Tax-Advantaged Retirement?
A Tax-Advantaged Retirement is the accumulation of cash value for use during your retirement years, that was “accumulated tax-deferred,” can be “used tax-free,” and be “transferred tax-free” to your family upon your death.
The most effective tax retirement strategies will provide the maximum reduction in “retirement-tax-risk” during your retirement years.
Taking into consideration that the U.S. National Debt is in the trillions of dollars ($13+ trillion as of 04/02/2023), is it possible that the Federal income tax rates may be increased? The possibility that your tax rate may increase during your retirement years, creates the risk that you could lose a portion of your difficult to replace retirement savings; this is the “retirement-tax risk.”
You may be familiar with retirement savings vehicles such as 401(k)s and IRAs that allow you the ability to accumulate a savings for retirement that is tax-deferred, meaning income/earnings taxes have not been paid on this cash value. The theory is that you avoid paying taxes right now at your current tax rate, possibly lower your tax-rate by lowering your reported annual income, and pay taxes on that cash value during retirement when you “might” be in a lower tax bracket.” However, often times when people retire, they don’t change their lifestyle and/or required annual income leaving them in the same tax rate they were in during their working years.
Within the Internal Revenue Code (IRC) (IRC 77, 7702, and 101), there are provisions through which you can “accumulate-tax-deferred” cash value, leverage that cash value for “use-tax-free,” and ultimately “transferred-tax-free” to your family upon your death.
- Tax-Deferred-Accumulation: Retirement savings vehicles such as 401(k)s and IRAs typically are funded with pre-tax dollars, meaning the deposited funds have not paid income/earnings taxes. Therefore, both the deposited funds and all accumulated interest/earnings are fully taxable at your tax rate when the funds are “withdrawn.” A Life Insurance Retirement Plan (LIRP) will also allow you to “accumulate-tax-deferred” cash value, however, only the “accumulated” interest/earnings is taxable because the funds deposited are after tax dollars, meaning they have already been taxed.
- Tax-Free-Use: With a LIRP you can avoid the taxation (i.e., tax bracket of 24%) by never accessing the cash value via a “withdrawal” (which is taxable), but accessing it through a collateral “loan” which is not taxable or reported as income. Depending upon the policy, a loan can be issued with interest rates typically ranging from 2-8% with options such as “wash” or “zero-interest-net” loan rates. Example (wash/zero-interest-net); if you had a cash value of $1,000,000, and use $50,000 as collateral to borrow $50,000, the insurance company would charge 2% on that $50,000, and pay you 2% on that $50,000, which results in a wash/zero-interest-net loan costing zero dollars. There may be other options in which you could earn a higher interest rate than what you are paying. Contact us for additional information.
- Transfer-Tax-Free: Upon your death, the value of your LIRP is transferred to your family (properly designated beneficiary) as a tax-free death benefit.
