Many people ask, what kind of vehicles can they invest for retirement beyond just putting money into their IRA or 401K Plan. We look at that question with the premise that you have a strong foundation of liquid savings.
I am also going to provide some answers from the context of a post Covid-19 world. America has seen its national debt rise to new levels prior to the Covid-19. Post Covid-19 will see debt rise well beyond what anyone could have ever imagined. When President Trump took office in 2017 the national debt stood at $20 trillion. According to a recent CNBC report March 2020 the national debt post Covid-19 could grow to $25 trillion or higher.
What does this national debt have to do with your retirement? 401k and IRAs are not taxed as they grow, and you receive a tax deduction for contribution you make to these plans, but – when you take the money out, you are taxed. Today you probably are going to be in the lowest tax bracket you will ever be in during your lifetime. The average maximum tax rate in the US has been 59.4% through 2013. From 1938-1981 we were well over 70% on average. That means someone in the highest tax bracket only was able to keep $30 on each $100 earned. Ask yourself a question, what happens to your retirement if taxes rise? Also ask yourself, how will the $25 plus trillion in debt be reduced?
Well the only way the government makes money is by taxing the citizens. So, if you are planning to retire on $100,000 a year and your taxes today are at 25%, you take home $75,000. But if that tax gets increased to 50% you now only have $50,000 to take home. Your IRA/401k despite how popular to accumulate money for retirement, does have a “catch”. That “catch” is that you have no idea what the tax rate is going to be when you start taking income from it. In my practice I strongly urge my clients to incorporate tax diversification into their retirement planning. Let me explain.
As you plan for retirement, you need to look at the different “buckets” of money you will have available at retirement to provide you income and ask how they will be taxed. Retirement income from 401k and IRAs are taxed as ordinary income, investments outside these retirement accounts are taxed at more favorable taxable gains rates and qualified dividend rates. That provides some relief and you should have a bucket of money to draw from in retirement from these types of accounts, they can come in the form of stocks, bonds, mutual funds, and ETFs. Insulation from these accounts though provide no guarantee from high taxes as the capital gain rate is also subject to tax increases.
A third bucket of money can be established that in effect provides money on non-taxable basis. All would agree, no tax is better then tax, especially when you might believe taxes will be higher in the future.
This third bucket is something financial planners use with their clients and is rarely known or written about. It is a special life insurance policy that confirms with a little-known IRS code 7202. Under the code, you purchase a minimum amount of life insurance, there is a cost of insurance premium associated with this, the IRS though sets a limit as to how much you can pay over and above this amount, the limit you can pay up to is known as the 7202 limit. When you contribute up to the IRS limit, all your contributions grow tax-deferred, and come out through policy loans non-taxable. Thus, in effect providing you tax-free income in retirement. The loan you have accrued is paid back to the insurance company upon your death through the death benefit. I should point out the cash value portions come in different varieties, you can have it invested in a fixed account, in index funds, mutual funds, the point is you can receive equity type returns if you select that type of account. These types of contracts can be custom designed by an advisor to meet your needs and are based on what you can contribute. They are though, especially in today’s times an excellent way to provide for retirement.
If you want to diversify your retirement income, control taxes in retirement or are looking for what to do with funds you have to contribute for your retirement over and above what your doing with your IRA or 401K, I strongly recommend you contact an advisor today to see how this idea can work for you. If you would like more information, please feel free to contact I welcome your inquiry.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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