THE 0% TAX RETIREMENT Is It Possible to Pay No Income Tax on Your Retirement Income? IndexedUniversal.Life [email protected] 2021IULEB-ZeroPerc
TABLE OF CONTENTS 04 08 11 13 20 23 How Much Money Will You Have Available to Spend in Retirement? Less Income Does Not Mean Less Tax The Tax Train Wreck is Coming How to Generate More Spendable Retirement Income in Any Income Tax Rate Environment Putting All of Your Retirement Savings Ducks in a Row Are You Prepared for the Fast-Moving Tax Storm That’s on the Way? IUL20220%Tax [email protected] • www.indexeduniversal.life 2
What if you learned that the bulk of what you’ve saved for retirement would end up going to Uncle Sam rather than towards funding your future expenses? You might generate a healthy amount of retirement income from several different sources, such as Social Security, interest and dividends from personal investments, and possibly even an employer-sponsored pension. The real test is how much of that income you can keep. Most people are aware of the long list of potential risks to their savings during their “accumulation” years, including stock market volatility and low-interest rates. But what many don’t realize is that they could lose nearly every dollar of growth in traditional retirement accounts to taxes when you begin using the money for living expenses. Millions of workers regularly “max out” their annual contributions to traditional retirement savings plans like IRAs and 401(k)s, unaware that there is a ticking tax time bomb awaiting them, and it’s ready to detonate as soon as withdrawals are made. In addition, the actual amount of tax that you’ll be required to hand over to the government is currently unknown. But the U.S. Federal tax rate has been as high as 94% before. If we got there again, how might that impact your retirement dreams? There is good news, though. While no one can control future tax rates, there are ways to plan – and possibly even get yourself into a 0% tax bracket in the future. But these savings and retirement income-generating strategies must be implemented using the right tools and the proper techniques. Otherwise, they could backfire, taking all of their tax-related benefits away. IUL20220%Tax [email protected] • www.indexeduniversal.life 3
How Much Money Will You Have Available to Spend in Retirement? If you’ve been setting aside money for retirement, you may have a good start on securing your financial future. But did you also know that if you’ve been a good saver and investor throughout your working years, you could end up being “penalized?” When you leave the working world, you may be able to do away with your alarm clock. But unfortunately, some things will remain – and one of them is taxes. Taxes can have a significant impact on how much money you have available to spend. In addition, while you may have been told that your income taxes will go down when you retire, this is not necessarily the case. Depending on how much retirement income you generate – and where these dollars come from – and of course, how high future tax rates become, you could even end up being in a higher tax bracket in retirement. As you are likely aware, the government collects taxes on income and financial gains generated from various sources - such as wages from your employer, interest, and profits on investments – throughout your entire lifetime. Depending on how much you earn, your income can be taxed at several rates, with the highest federal income tax rate currently (as of 2021) at 37%. While that rate may seem a bit high, it is sitting at one of the lowest levels in over a century – and there is no guarantee that it won’t go up again. IUL20220%Tax [email protected] • www.indexeduniversal.life 4
Rate Single Individuals, Taxable Income Over: Married Filing Jointly, Taxable Income Over: Head of Household, Taxable Income Over: 10% $0 to $9,950 $0 to $19,900 $0 to $14,200 12% $9,951 to $40,525 $19,901 to $81,050 $14,201 to $54,200 22% $40,526 to $86,375 $81,051 to $172,750 $54,201 to $86,350 24% $86,376 to $164,925 $172,751 to $329,850 $86,351 to $164,900 32% $164,926 to $209,425 $329,851 to $418,850 $164,901 to $209,400 35% $209,426 to $523,600 $418,851 to $628,300 $209,401 to 523,600 37% $523,601 or more $628,301 or more $523,601 or more Income Tax Brackets and Rates (in 2021) Source: Internal Revenue Service Following the Tax Cuts and Jobs Act, signed into law in late 2017 – a law considered the most extensive overhaul of the U.S. tax code in more than 30 years – individual income tax rates fell from their previous levels. The top federal income tax rate fell from 39.6% to 37%, with rates in the other six brackets also following suit (aside from the 35% remaining the same, and the lowest bracket, which remained at 10%). This legislation made millions of United States taxpayers happy. But cutting taxes may have made things worse in the long run – especially if the government is going to cut its source of revenue. It must also reduce its spending, but it hasn’t. If anything, the U.S. government has increased its spending since the Tax Cuts and Jobs Act passed by Congress. So, it is almost like having dessert before eating your vegetables, knowing full well that you’re not going back for the latter. In other words, the government is essentially just “kicking the can” further down the road and effectively postponing the inevitable increase in tax rates. So, the happiness of the American taxpayers will also be short-lived because these changes are only temporary, and they are set to expire on December 31, 2025. At that point, given the tremendous national debt and other government responsibilities, it is probable that tax rates will go up – possibly way up! When that happens, countless retirees will be forced to drastically change their lifestyle, given the massive drop in their net spendable cash flow. Unfortunately, history often repeats itself. Ever since 1913, when the United States reinstated the income tax, the top federal rate has fluctuated between a low of just 7% to a high of 94%. And in forty-nine of the last 108 years (through 2021), this rate has been at or above 70%. If tax rates go back up to these astronomical levels – which they are likely to do – how would that impact your spending, lifestyle…and overall future? IUL20220%Tax [email protected] • www.indexeduniversal.life 5
Year Rate Year Rate 2018-2021 37% 1950 84.36% 2013-2017 39.6% 1948-1949 82.13% 2003-2012 35% 1946-1947 86.45% 2002 38.6% 1944-1945 94% 2001 39.1% 1942-1943 88% 1993-2000 39.6% 1941 81% 1991-1992 31% 1940 81.1% 1988-1990 28% 1936-1939 79% 1987 38.5% 1932-1935 63% 1982-1986 50% 1930-1931 25% 1981 69.125% 1929 24% 1971-1980 70% 1925-1928 25% 1970 71.75% 1924 46% 1969 77% 1923 43.5% 1968 75.25% 1922 58% 1965-1967 70% 1919-1921 73% 1964 77% 1918 77% 1954-1963 91% 1917 67% 1952-1953 92% 1916 15% 1951 91% 1913-1915 7% Top Federal Income Tax Rates 1913 – 2021 Source: IRS.gov IUL20220%Tax [email protected] • www.indexeduniversal.life 6
Many pre-retirees today have a false sense of security and believe that income tax rates will remain at or near the present figures, with the top federal income tax rate standing at just 37%. But believing this can be dangerous to your retirement lifestyle. Given that the national debt continues to rise, coupled with additional “unfunded liabilities,” like Social Security and Medicare, there is a tremendous amount of money “owed” – and it is the American taxpayers who will be responsible for paying it back. Raising taxes is the method that the government has for doing that. To make matters worse, as more of the Baby Boomers retire (to the tune of approximately 10,000 turning age 65 every day), they aren’t putting money into the system – but instead, they are pulling it out through Social Security and Medicare. Currently (mid-2021), the U.S. national debt is approaching 29 trillion dollars – and it continues to grow every second of every day. That’s trillion, with a “T,” meaning $28 with twelve zeros added to it. (And by the way, this number doesn’t even include the Social Security and Medicare figures). To give you an idea of how much money this is, just counting to $1 trillion would take you almost 32,000 years! Multiply that by 28, and it could take quite a while! $28,000,000,000,000 vs. $3,500,000,000,000 Compare this to the present U.S. federal tax revenue of approximately $3.5 trillion (mid-2021), and it becomes clear that there is a significant “gap” between the country’s income and outgo. And as long as the U.S. continues adding to its “credit card balance,” this gap will become more expansive, and the burden will be more significant for the taxpayers required to repay the national debt. IUL20220%Tax [email protected] • www.indexeduniversal.life 7
Less Income Does Not Mean Less Tax Did you know that even if you generate less annual income in retirement (or even the same amount) than you did during your working years, you could end up paying MORE in taxes? The most common reasons for this include: Lost/fewer tax deductions Taxation of Social Security benefits Lost / Fewer Tax Deductions Upon retiring, many people experience “vanishing” income tax deductions. For instance, if you do not have a mortgage balance, deduct no mortgage interest. If you are no longer working – even from home – then the home office deduction is also lost when you retire. Likewise, you may no longer be eligible for the child and dependent care tax credit. One of the few remaining income tax deductions that retirees can take advantage of is the standard deduction. If you do not itemize your deductions, you may get a higher standard deduction amount if you or your spouse are 65 years old or older. If you’re still employed or running a business, you may now have access to numerous income tax deductions. But some of these could end up hurting you down the road. For instance, if you participate in an employer-sponsored traditional 401(k) or have a personal IRA account, you may be allowed to make pre-tax contributions. The gains in these accounts are also tax-deferred. But in return for these more minor tax breaks in the present time – when you still have access to other types of tax deductions, you will likely end up paying much more in future taxes at a time when you have far fewer options to offset them. Unfortunately, though, your tax preparer isn’t likely to inform you about how and why you should hold off on tax benefits now – even if it means saving you from astronomical taxes to pay as a retiree. Accountants and CPAs tend to offer their clients ways to save money in the present time but not necessarily in the future. For instance, receiving a larger tax refund or paying less in tax NOW is more appealing than waiting for delayed gratification. After all, who wants to pay tax before the IRS requires it? But going this route can be detrimental to your financial future. Taxation of Social Security Benefits You could also owe income tax on your Social Security retirement benefits, reducing the net income you have available to spend. The amount of your Social Security benefit that could be subject to taxation will depend on a couple of factors; 1) whether you have other income sources (including wages, self-employment income, dividends, interest, or 2) if you have other taxable income that is required to be reported on your annual tax return. IUL20220%Tax [email protected] • www.indexeduniversal.life 8
The tax on this income will also be dependent on how you file your tax return (such as a single individual or as a married person who is either filing jointly or separately). So, depending on whether you file as a single or a married taxpayer and how much you generate from other retirement income sources, you could have up to 85% of your Social Security benefit taxed. For instance, you will have to pay tax on a percentage of your Social Security benefits (in 2021) if you meet any of the following criteria: • You file a federal tax return as an individual, and your combined income is: o Between $25,000 and $34,000 (up to 50% of your benefits may be taxable) o More than $34,000 (up to 85% of your benefits may be taxable) • You file a joint tax return, and you and your spouse have a combined income that is: o Between $32,000 and $44,000 (up to 50% of your benefits may be taxable) o More than $44,000 (up to 85% of your benefits may be taxable) • You are married, and you file a separate tax return. *Note that your combined income equals your adjusted gross income plus any non-taxable interest earned, plus one-half of your Social Security benefits. One way to reduce or eliminate tax on your Social Security income is to minimize the amount of other taxable income if you claim Social Security before you have reached your full retirement age (FRA). Based on the year you were born, your Social Security full retirement age will fall somewhere between 65 and 67. The Best Results Come From Expert Advice. Locate Your IUL Expert At IndexedUniversal.Life Or Call 800-743-9221 IUL20220%Tax [email protected] • www.indexeduniversal.life 9
Year of Birth Minimum Retirement Age for Full Benefits 1937 or before 65 1938 65 + 2 months 1939 65 + 4 months 1940 65 + 6 months 1941 65 + 8 months 1942 65 + 10 months 1943 to 1954 66 1955 66 + 2 months 1956 66 + 4 months 1957 66 + 6 months 1958 66 + 8 months 1959 66 + 10 months 1960 or later 67 Social Security Full Retirement Age Source: Social Security Administration IUL20220%Tax [email protected] • www.indexeduniversal.life 10
The Tax Train Wreck is Coming Many experts agree a tax “train wreck” is coming that could cause the retirement of many millions of Americans to be much different than imagined, and not in a good way. Experts say this will happen primarily through a dramatic rise in tax rates in the next decade. What exactly is powering this train? The U.S. national debt is setting the stage for massive tax increases within the next ten years, and it will impact a retiring generation of Baby Boomers. On average, people are living longer than ever before – and regardless of how long you save, you are likely to either outlive your money or watch it be “taxed into oblivion.” Millions of Baby Boomers have been funding traditional retirement plans in hopes that they will have enough income to get them through an unknown amount of time. With the ups and downs of the stock market, low interest rates, inflation, and rising healthcare costs, this income will likely be halved (or worse) by high-income taxes. The enormous national debt and programs like Medicare and Social Security that may or may not be solvent at that time nearly require it. For example, Social Security is considered a “pay as you go” program. So, the taxes that are being paid into the system today will fund the current benefit recipients. In the early days of Social Security, this method worked well. But unfortunately, the Baby Boomer generation had fewer children than their parents did – roughly 30 million fewer. So, the number of workers that pay into the Social Security program has also gone down. In contrast, the number of benefit recipients continues to rise – primarily due to the massive number of Baby Boomers entering retirement. It is estimated that roughly 10,000 people in the U.S. turn age 65 every day – and this massive influx of benefit recipients is putting pressure on both the Social Security and Medicare programs. IUL20220%Tax [email protected] • www.indexeduniversal.life 11
Year Covered Workers (In thousands) Beneficiaries (In thousands) Ratio 1940 35,390 222 159.4 1950 48,280 2,930 16.5 1960 72,530 14,262 5.1 1970 93,090 25,186 3.7 1980 113,656 35,118 3.2 1990 133,672 39,470 3.4 2000 155,295 45,166 3.4 2010 156,725 53,398 2.9 2019 178,000 65,000 2.7 The Ratio of Social Security Covered Workers to Benefit Recipients Source: Social Security Administration, Fact Sheet Social Security and Board of Trustees (2006, Table IV.B2) With longer life expectancy today, benefits are being paid for much longer (on average) than they were a few decades ago when retirees did not live as long. This, too, is placing an enormous strain on the program. Because of that, Social Security in its current state will not likely be able to continue. The good news is that by making just a few simple changes, you can “reroute” your retirement savings so that you can reduce or even eliminate this tax time bomb – as long as you’re ok with forgoing some of the small tax breaks you’re getting today. The purpose of traditional retirement accounts is not to save on taxes now but rather to maximize your spendable income in the future – at a time when you can least afford to pay taxes. Even if you have to give up a tax-related benefit now, future income maximization should be the key focus of your retirement savings as you move closer to that time in your life. What do you believe will happen with taxes in the future? IUL20220%Tax [email protected] • www.indexeduniversal.life 12
How to Generate More Spendable Retirement Income in Any Income Tax Rate Environment With the likelihood that tax rates will go up in the future, any type of taxable retirement income that you generate could be at risk. But because no one knows exactly how much taxes will increase, the dollar amount of this risk is unknown. One way to reduce this risk – or eliminate it – is to generate more tax-free income in retirement. This can be accomplished in a couple of different ways. One is through a Roth IRA. Additionally, there are some other little-known strategies like the life insurance retirement plan or LIRP. Roth IRA Roth IRAs allow investors to set aside money on an after-tax basis in return for tax-free growth and tax-free withdrawals, regardless of what your income tax rate is at that time. A Roth IRA can allow you to net more spendable income towards your spending needs and not the government. There are some items to consider when opening and funding a Roth IRA, though. These include: Roth IRA income limits Motivation of your financial advisor The IRS imposes income limits for Roth IRAs. So, it is possible that you could earn “too much” income to qualify for this type of account or to make the total maximum annual contribution to a Roth. The way you file your income tax return can also factor in. Income Tax Filing Status Modified Adjusted Gross Income (MAGI) in 2021 Roth IRA Contribution Limit Married filing jointly (or qualifying widow or widower) - Less than $198,000 - $198,000 to $207,999 - $208,000 or more - $6,000 (or $7,000 if age 50 or older) - Begin to phase out - Ineligible for making direct Roth IRA contributions Married filing separately (and you lived with your spouse at any time during the year) - Less than $10,000 - $10,000 or more - Begin to phase out - Ineligible for direct Roth IRA contributions Single, head of household, or married filing separately (and you didn’t live with your spouse at any time during the last year) - Less than $125,000 - $125,000 to $139,999 - $140,000 or more - $6,000 (or $7,000 if age 50 or older) - Begin to phase out - Ineligible for making a direct Roth IRA contribution) Roth IRA Income and Contribution Limits (in 2021) Source: IRS.gov: Contribution Limits IUL20220%Tax [email protected] • www.indexeduniversal.life 13
To determine the amount of modified adjusted gross income you have earned, you can use IRS Publication 590-A or go online and visit: https://irs.gov/pub/irs-pdf/p590a.pdf. Only earned income is allowed to be contributed to a Roth IRA account. There are two ways to make money that is considered eligible “earned” income by the IRS. These are: Working for a company or entity that pays you via a salary, bonus(es), commissions, or tips, as well as through fringe benefits Income generated through your own business or farm There are a few other alternatives that might also qualify as receiving earned income too. These may include the generation of alimony (that is taxable) or receiving military differential pay or untaxed combat pay. Investment income generated from rental property (residential or commercial), securities (like stock dividends), or other assets is considered “unearned” by the IRS, so they do not qualify for contribution into a Roth IRA account. The same is also true regarding child support payments, the receipt of unemployment benefits, Social Security retirement income, non-taxable alimony payments, and wages earned as a prison inmate. It is also important to note that both traditional and Roth IRAs also impose maximum annual contribution limits. In 2021, this amount is $6,000 if you are aged 49 or younger and $7,000 if you are aged 50 or over. These annual contribution maximums apply to the total amount that may be added to an IRA (in 2021). Therefore, if you have more than one IRA account, you must stick to these dollar limits in total (versus contributing these amounts to each IRA account that you have). The good news is that there are ways around the Roth IRA income limits, so if you are a high-income earner, you could still be able to take advantage of these accounts, along with the tax-free income they can provide. 2021IULEB-ZeroPerc 14 [email protected] • www.indexeduniversal.life
For example, you may be able to convert money over into a Roth IRA account. So, if you have money in a traditional 401(k) or other kinds of employer-sponsored retirement plans, you may be able to convert those funds into a Roth IRA. If you opt to do this, it is considered a taxable transaction, so you will be taxed in the year that the transfer (or conversion) was made. However, it can still make sense for you to do so – especially in today’s low tax rate environment. By paying taxes now at a lower rate you are able to withdraw funds from the Roth account in the future, tax-free. (This can be particularly beneficial if – or better yet, when - income tax rates go up). If you have a considerable amount of money to convert into a Roth account, you don’t have to take the full brunt of the tax hit in one single year. For instance, if income tax rates don’t go up until 2026, you could convert just a portion of your traditional IRA or other retirement plan balance over each year and “stretch out” the tax liability over time. In addition, because there are no required minimum distributions necessary with Roth IRAs (like there are with traditional accounts, starting at age 72), you can leave your money in the account and, in turn, allow it to continue generating tax-free earnings. If your current financial advisor hasn’t brought up a Roth IRA conversion topic, there may be a good reason for this. That is because financial advisors don’t typically benefit when doing these types of transactions. The primary reason for this is that moving money from traditional to Roth accounts triggers taxation (on both the untaxed contributions and the gains), leading to fewer assets under management for the advisor. For instance, if an investor converts $1 million from a traditional to a Roth IRA, they could owe approximately $300,000 in tax, reducing the advisor’s assets under management (in this case, by 30%). Therefore, Roth IRA conversions represent a pay cut for financial professionals compensated on a percentage of the assets they manage. The Best Results Come From Expert Advice. Learn How You Can Benefit From An IUL Expert At IdexedUniversal.Life Or Call 800-743-9221 IUL20220%Tax [email protected] • www.indexeduniversal.life 15
Life Insurance Retirement Plan (LIRP) Another option for generating tax-free income in retirement is to set up a particular type of life insurance policy that offers tax-deferred growth of the cash value and a way to access funds on a tax-advantaged basis. This option is referred to as a life insurance retirement plan or LIRP. Unlike traditional IRAs and employer-sponsored retirement accounts, Roth IRAs have no maximum annual contribution limit when funding a LIRP. There are also no income limits, so even if you generate a healthy wage, you can move forward with opening and funding a life insurance retirement plan. Although a life insurance policy isn’t nearly as “exciting” as purchasing shares of stock or mutual funds, the long list of benefits can be enticing, especially about taxes and retirement income. For instance, a properly structured life insurance plan can allow you to build up cash on a tax-deferred basis. Similarly, your loved ones will receive an income-tax-free death benefit, replacing lost income. It is important to note, though, that a life insurance retirement plan that is appropriately structured will ideally have the smallest death benefit possible, along with a cash value that is “over-funded.” By deferring tax on the gains in the cash value until the time of withdrawal, the account value can snowball exponentially – especially over time – compared to the growth in a taxable account, with all other factors being equal. In addition, depending on the type of permanent life insurance policy you choose, you could reap some added benefits. For example, an indexed universal life insurance policy has a cash value component that earns its return primarily based on the returns of an underlying market index (such as the S&P 500). This allows you to obtain market-linked returns – usually up to a specified cap. However, this makes the indexed universal life insurance policy even more advantageous – if the underlying market index has a down year, your funds don’t lose value. Typically, the worst you can do is 0%. The protection of principal and previous gains in an indexed universal life insurance policy can be extremely powerful, particularly in a volatile market environment like we’ve seen over the past decade or so. There are no dips in the account value to “make up for” following a negative return. So, the funds can keep growing without interruption. Take, for instance, a taxable account where the average return is 0%, but you still end up with a loss of principal. How is that possible? The reason is that any time there are negative numbers in the overall mix, the average return will not be the same as the actual return on your money. As an example, if an investment of $1,000 bounced up and down over a decade, where every other year the return was 10%, but for all of the years in between, it generated a negative 10%, the result would be just shy of $951 – an actual loss of nearly 5%. IUL20220%Tax [email protected] • www.indexeduniversal.life 16
End of Year Gain or Loss Value of Account 1 10% $1,000.00 2 (-10%) $990.00 3 10% $1,089.00 4 (-10%) $980.10 5 10% $1,078.11 6 (-10%) $970.30 7 10% $1,067.33 8 (-10%) $960.60 9 10% $1,056.66 10 (-10%) $950.99 This is why it can be so dangerous to make investment decisions based on “average” returns. In addition, the lower the return in a given year, the more it will take to get the value back to even. The Best Results Come From Expert Advice. Locate Your IUL Expert At IndexedUniversal.Life Or Call 800-743-9221 IUL20220%Tax [email protected] • www.indexeduniversal.life 17
Percent Loss Incurred Percent Gain Needed to Recoup the Loss 10% 11.11% 20% 25% 30% 42.85% 40% 66.66% 50% 100% 60% 150% 70% 233% 80% 400% 90% 900% 100% Broke Percent Return Needed to Recoup a Loss Now compare that to the cash value performance in an indexed universal life insurance policy, where no losses are incurred in contract years when the underlying index incurred a negative return. IUL20220%Tax [email protected] • www.indexeduniversal.life 18
End of Year Gain or Loss Value of Account 1 10% $1,000.00 2 0% $1,100.00 3 10% $1,210.00 4 0% $1,210.00 5 10% $1,331.00 6 0% $1,331.00 7 10% $1,464.10 8 0% $1,464.10 9 10% $1,610.51 10 0% $1,610.51 One reason why investors shy away from any type of life insurance is that they are led to believe that these financial vehicles have excessive fees. But in reality, you could lose far less in charges or fees with a LIRP when compared to an employer-sponsored retirement plan. Plus, the 401(k) won’t guarantee that your principal and your previous gains will be protected in any type of market environment. For example, if your traditional retirement account is being managed by a broker or a firm that charges a percentage of the asset value each year, then as your account value grows, so will the amount of the fees taken out. On the other hand, when an indexed universal life insurance policy is purchased as part of a LIRP – and its focus is to maximize the cash value within the account – the fees will typically remain reasonably level. This is done by buying as little life insurance as the IRS requires while at the same time putting as much money into the cash value as the IRS allows. Therefore, when the indexed universal life insurance policy has low fees, the bulk of your contributions will remain inside of your tax-advantaged growth account and can continue to grow and compound over time. Such low expenses over the life of the policy can make life insurance retirement plans very efficient retirement planning tools. IUL20220%Tax [email protected] • www.indexeduniversal.life 19
Retirement Account Account Value $10,000 $100,000 $1,000,000 Fee as % of account balance 1.50% 1.50% 1.50% Fee as $ amount $150 $1,500 $15,000 IUL Policy / LIRP Cash Value $10,000 $100,000 $1,000,000 Fee as % of account balance 15% 1.50% 0.15% Fee as $ amount $1,500 $1,500 $1,500 Retirement Account Fees vs. IUL / LIRP Fees Another enticing feature of life insurance retirement plans is that these financial tools could benefit if tax rates go up. As tax rates rise, interest rates will often follow suit – which could increase the cap and/or other potential upward return limits. While withdrawals taken from a life insurance retirement plan can be taxable, there is another strategy that allows you to access funds on a tax-free basis. This is by way of a policy loan. In this case, even though the loan balance will accrue interest, it does not necessarily have to be repaid before the insured’s death. Any remaining balance to be paid can instead be paid off using the death benefit proceeds, with the remainder of these funds being paid to the policy’s beneficiary(ies). Some extra bonuses can come with a life insurance retirement plan. One is that they may include penalty-free waivers for accessing cash if you have a long-term care need and/or you’ve been diagnosed with certain health conditions. Another is that the policy loan that you access tax-free is technically borrowed from the insurance company and not directly from the policy. Therefore, you can still generate interest as if the entire amount of the cash were still there. IUL20220%Tax [email protected] • www.indexeduniversal.life 20
Putting All of Your Retirement Savings Ducks in a Row Getting to the 0% tax bracket in retirement can take some planning – and not all of your money may fit into a 0% strategy. So, it is essential to have a good understanding of the three basic types of investment accounts – as it pertains to taxation – along with where each of these could fit into your overall retirement strategy. Account Type #1 – Taxable Taxable accounts do not allow a tax deduction on the contribution. So, this money goes into the account after it has been taxed. The growth in these accounts is taxed each year, which, unfortunately, tends to erode the value over time. In years of a taxable gain, you will use IRS Form 1099 to report the income on your annual tax return. Some examples of taxable financial vehicles and accounts include: Savings and checking accounts Personal brokerage account Interest Dividends Because of their taxable nature, the IRS places no upper limit on the amount of money contributed. As far as the IRS is concerned, the more, the merrier – especially if it produces taxable growth. Due to their taxable nature, these types of accounts are the least efficient. However, they are also the easiest to access if the money is needed quickly. Therefore, they could be an excellent option to use for an emergency fund. The Best Results Come From Expert Advice. Discover How You Can Benefit From An IUL Expert Visit IndexedUniversal.Life Or Call 800-743-9221 IUL20220%Tax [email protected] • www.indexeduniversal.life 21
Account Type #2 – Tax-Deferred With a tax-deferred account, you may make pre-tax contributions, and, in turn, the amount of earned income you owe taxes on is reduced in the year(s) that you make deposits. Given the tax-deferred nature, any of the gains are not taxed in the year received, but instead not until the funds are withdrawn. Common types of tax-deferred accounts include: Traditional IRA Traditional 401(k) SEP IRA SIMPLE IRA Annuity There are a couple of items to be mindful of when you have tax-deferred accounts. One is the future taxation you will likely incur. In this case, if neither the contributions nor the gains have yet been taxed, then 100% of the income and withdrawals you access will be. And given that income tax rates could double (or go even higher) in the future, it can harm your spendable cash flow in retirement. The other potential issue here is that the taxable income that you receive from these accounts can go towards your provisional income – and this means it could deem up to 85% of your Social Security retirement benefits to be taxable. (This, of course, can reduce the amount of income you have available to spend). Account Type #3 – Tax-Free Tax-free accounts do not allow pre-tax contributions. So, the money that you place in these accounts has already been subject to taxation – and will not have to be taxed again upon withdrawal. Likewise, the growth that takes place in these accounts, as well as the funds you withdraw in the future, will also be tax-free. This is the case, regardless of what the then-current income tax rates are. Some of the most common tax-free accounts include the following: Roth IRAs Roth 401(k)s; Roth 403(b)s; Roth 457 plans Life Insurance Retirement Plans (LIRPs) Many different types of investment accounts qualify either as tax-deferred or tax-free - and you must know how your money is being treated concerning the taxes in each, both before and after you retire. IUL20220%Tax [email protected] • www.indexeduniversal.life 22
Tax-Deferred Tax-Free Traditional IRA Roth IRA SEP IRA Roth 401(k) SIMPLE IRA Roth 403(b) 401(k) Roth 457 Profit-Sharing 529 Plan 403(b) Coverdell Education Savings Account 457 Plan Health Savings Account (HSA) Qualified Annuity Life Insurance Retirement Plan (LIRP) Non-Qualified Annuity Life Insurance Policy Loans With that in mind, if your primary goal is to generate income in retirement – and to ensure that you have as much as you can have available for your income and expense needs – then the tax-free account area is where you should ideally place the bulk of your funds and your focus. IUL20220%Tax [email protected] • www.indexeduniversal.life 23
Are You Prepared for the Fast-Moving Tax Storm That’s on the Way? While many people save and invest for the future, the only number that matters in retirement – at least from a financial standpoint – is how much you will have to spend on essentials like housing and food, as well as additional “nonessentials,” such as travel, entertainment, and fun. So, how much money will you have available to spend in retirement? Will it be enough to fund the lifestyle that you’d hoped for without worrying about the stock market “correcting” or significant tax rate hikes in the future? Right now, there is a window of opportunity that is open until the end of 2025 for implementing strategies that could be life-changing for you in retirement. Everyone’s situation is different, though, so what may be a viable tax-reduction strategy for you might not work for someone else. With that in mind, it is essential to discuss your financial and retirement income goals with an advisor who specializes in this area. That way, you can better ensure that you’re covering all of the bases and not just some areas, making you much more vulnerable to high taxes in retirement and, in turn, a lower amount of net spendable income for funding your lifestyle. Are you taking unnecessary risks with your retirement savings? If you would like to set up a no-cost, no-obligation consultation with a retirement income specialist – either in-person, over the phone, or online – please feel free to contact us at 1-800-743-9221 or send any questions that you have to [email protected] We look forward to helping you prepare and protect yourself from the upcoming tax storm. Disclosure: Content is not personalized financial advice and should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed. Tax and legal information provided is general in nature and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. Indexed universal life insurance may not be suitable for you depending upon your investment objectives, risk tolerance, financial situation, and liquidity needs. Accessing policy cash value through loans and surrenders may lead to a permanent reduction of the policy’s cash value and death benefit, which may lead to a potential lapse of the policy. There may be tax penalties for distributions prior to age 59 ½. Insurance product guarantees are subject to the claims-paying ability of the issuing companies success. Working with a highly-rated adviser also does not ensure that you will experience a higher level of performance. Please contact the adviser for more information regarding the criteria for any awards or rankings noted. Ratings can be based on client evaluations, professional activity and promotional fees paid by the professional. IUL20220%Tax [email protected] • www.indexeduniversal.life 24
IUL20220%Tax [email protected] • www.indexeduniversal.life 25 Indexed Universal Life [email protected] indexeduniversal.life
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