Death and Taxes
Benjamin Franklin famously said, “In this world, nothing can be said to be certain except death and taxes.”
While there’s no way out of the first one, there’s something that each of us can do to alleviate the second one. That’s not to say that we should avoid paying our fair share of taxes.
After all, our taxes do help provide education, roads, libraries, safety and security. However, there is no need to pay excess tax.
In fact, paying more than necessary can put us at risk of outliving our money at a time when we’ll need it the most. During retirement, most Americans experience what’s called “deduction reduction” which puts them into a tax bracket that’s often as high or higher than where they were during their earning years.
It’s not hard to understand why this is so. By this point of our lives, most of us will have paid off our mortgages. This means we’re losing out on those tax deductions.
Typically, at retirement, we have no more dependents at home and we can no longer claim them as deductions.
Our business expenses tend to retire when our career does so we lose those deductions as well.
Combining the loss of those deductions with the prospect of continued tax increases in the future, we can find ourselves paying much higher taxes than we had anticipated.
This is why every sound financial strategy for retirement should include the vehicles that provide the best tax advantages possible, including after-tax dollars.
Ideally, we want to build our retirement nest egg with dollars that have already been taxed, at today’s rates–not tomorrow’s.
With tax rates going up in the future to unknown amounts, getting taxes over and done with will likely be incredibly important and financially significant.
This is sometimes referred to as paying taxes on the seed rather than on the harvest.
Ideally, when we take money out, it should be income tax free. If done properly, it won’t be regarded as taxable income. There are very few instruments that can do this.
The tax-free vehicles that can accomplish this have been grandfathered into the IRS Code for decades.
Tax-free gains are the next necessary component.
Money should be able to increase in value due to competitive interest, without being subject to taxes due on the gains when you take the money out.
So many investments, including IRAs and 401(k)s require us to pay taxes down the road on the harvest.
Tax-free transfer is the final element required. When we reach the end of our lives and pass away, the money should transfer to our loved ones free of income tax.
Getting Aboard the Right Vehicle
In Doug’s four decades as a financial strategist and tax minimization specialist, he’s only seen one money accumulation vehicle that accumulates money totally tax-free and later allows you to access your money tax-free as well.
It also has the advantage of increasing in value when you pass away by blossoming into a benefit that then transfers to your heirs totally tax-free.
That vehicle is a max-funded tax-advantaged insurance contract or MFTA insurance contract.
This doesn’t mean that every retirement dollar you set aside should be in an MFTA contract. However, it can be an important part of your overall approach, especially when compared to traditional accounts like 401(k)s or IRAs.
To illustrate, let’s say that you wish to realize $100,000 a year during retirement. Between all the taxes you pay including federal, state, FICA, and Medicare, you’ll likely end up paying around a third of your money to Uncle Sam in the form of taxes.
That’s because the money that most Americans have in their IRA or 401(k) is merely tax-deferred and still subject to those taxes mentioned above.
If your retirement money is in a 401(k), in order to net $100,000 yearly, you’ll have to pull out $150,000 because those taxes will take one third of your money.
This means that you’ll also be going through your retirement nest egg more quickly than you might have expected. That raises the very unpleasant possibility of outliving your retirement savings.
On the other hand, if your money were in a properly structured max-funded tax-advantaged insurance contract, you could instead take a zero-cost loan of $100,000 each year and you’d net $100,000.
How much longer would your nest egg last if zero dollars were going to taxes?
The fact is that a better way to save for retirement exists and if the value of tax-advantaged or tax-free savings over tax-deferred savings makes sense to you, there’s much to learn.
Start by visiting with a wealth architect today.