You may be concerned about having enough income during retirement to help you preserve your pre-retirement lifestyle. A major factor in solving this concern is generating income that is tax-free. For example, if you have a $10,000 per month income, but pay a 25% tax rate, you really only have $7,500 to spend once you pay Uncle Sam.
We think you should focus on finding tax-free income sources in an effort to raise your retirement income and eliminate the unknowns about taxes. So how do you do this?
Most people immediately turn to municipal bonds, a vehicle that does offer tax-free income. We have some concerns, though, about the current rates of return on municipal bonds and the heightened risk municipal bond buyers could be taking on.
Instead, we think you should consider life insurance.
Why Life Insurance?
Similar to other types of retirement savings vehicles, the early stages of funding life insurance act as your accumulation phase. Decades later, once your policy has had many years to grow and accumulate value, the distribution phase can begin. Many of today’s state of the art policies can be fabulous vehicles for accumulation and future tax free income.
Life insurance can be a more efficient vehicle than IRA accounts or annuities because of how the distributions are structured. For example, you can withdraw your basis first, which is a tax-free event. You can then structure your withdrawals as policy loans — also tax-free events — which get paid back from the tax-free death benefit when you eventually pass away. Withdrawals from IRA accounts are always subject to income taxes, and annuity distributions require that the gains come out first and are taxed as ordinary income.
That is not quite as efficient as tax free. Of course, in some instances in which you’re dealing with qualified funds, an annuity can be an excellent option because you can’t put qualified monies into a life insurance policy. An annuity, however, can accommodate IRA and 401(k) rollovers and transfers.
The size of the income you can draw from life insurance will vary depending on the type of policy you choose and how it performs. Traditional policies will offer annual credits based on dividends and interest rates. We also offer indexed universal life plans that can perform based on an underlying market index with no risk of market loss.
If you have a much higher tolerance for risk, you can buy a policy that invests either directly in stocks or bonds through a variable life policy. However, we do not offer that to our clients because there is the risk of loss and a securities license is required. Regardless of your risk tolerance and how you structure the policy, the ability to take tax-free distributions later on will apply as a result of the life insurance vehicle, provided the proper IRS guidelines are followed.
Clients can ask us to structure a proposal that targets a specific amount of future annual, tax-free income between, for example, the ages of 65 to 90. We can solve for how much money needs to be contributed into the policy assuming a potential conservative return and policy expenses. The results can be very impressive. Of course, like any life insurance policy, you must be insurable.
If you want to generate more tax-free income for your retirement and do it with no market risk and more efficiency than other financial vehicles, speak with us. Our life insurance advisors have decades of experience advising on retirement income and estate planning. Let us create a custom solution for you. Call us today at 800-DIE-RICH.