Save Retirement Taxes with Indexed Universal Life Insurance

WORKING AND SAVING HARD

They had just turned age 60 when they started to seriously analyze their retirement plans. The Garners had spent their careers working hard, earning a moderate income.

They anticipated they would have enough for retirement between their pensions and other traditional accounts (including 401[k]s, 403[b]s, and TSAs—with a total value of $250,000).

They had just rolled these supplemental accounts over into an IRA, and were wondering whether they should begin withdrawing money from the IRA during their 60s, or wait until later. At the advice of an accountant, they were leaning toward waiting until their 70s, thus deferring and delaying the inevitable tax.

AFTER MEETING WITH US

They met with us to look more closely at overall, long-term tax-minimization strategies and immediately saw the fallacy in continued tax-deferral.

If they waited until age 70½ to start taking RMDs, they could end up sending as much as $250,000 in taxes to Uncle Sam over the course of their retirement years (because they would be “stretching the IRA out” to their life expectancy). This was shocking, as they only had $250,000 total in their IRA at the time. They couldn’t afford to give Uncle Sam that much—and they wanted a better quality of life for themselves.

They ended up deciding to do a strategic rollout. Over the next five years, they moved their money from their IRAs, got their taxes over with, and transferred their money into an indexed universal life insurance policy (we call it the LASER Fund).

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TAX REDUCTION

By doing so, they ended up paying about $60,000 in total taxes on that $250,000—which is over four times less than they would have if they had kept their money in the IRAs.

Now their money continues to grow in their LASER Fund (IUL policy), where it is safe from downturns in the market and can provide tax-free retirement income from this point forward.

One of the best ways to make the most out of retirement income is make sure you get the most out of your retirement income, rather than Uncle Sam. That’s why tax reduction tends to be one of the primary reasons people choose properly structured indexed universal life insurance.

THE TAX BENEFITS OF INDEXED UNIVERAL LIFE INSURANCE

If you’re putting money into an IUL policy that has already been taxed (such as from regular income, a money market, savings account, the sale of a property, etc.), once inside an indexed universal life insurance policy, your money can grow tax-deferred, and you can access it tax-free and transfer it income-tax-free to your heirs upon your passing.

If you’re looking to put money into your indexed universal life insurance contract from tax-deferred accounts, you will likely want to do a strategic rollout. This way you can minimize the impact of taxes—and adhere to TAMRA—while you transition your money into your insurance policy.

TAX DIVERSIFICATION

Now keep in mind, it’s not imperative to move every cent you have in tax-deferred accounts to your IUL policy. It is just as important to diversify your “tax portfolio” as it is to diversify your financial portfolio. Depending on age, tax brackets, health, and other factors, there may be compelling reasons to keep part or all of your money in tax-deferred accounts. If so, there may be options for how to manage the money within those accounts that can give you better liquidity, safety, predictable rates of return, and tax advantages.

To see five additional case studies on saving retirement taxes, see our article Case Studies on Retirement Tax Reduction.

It’s important to work with an experienced financial professional to weigh all of your options and choose solutions that are best for you.

What are the five key objectives to financial abundance? How can you evaluate various financial vehicles using the LASER test? Click Here to gain immediate access to the Three Tools for a Strategic and Predictable Retirement.

 

*Life insurance policies are not investments and, accordingly, should not be purchased as an investment.

Names have been changed and a few identifying details have altered to preserve privacy.

This article is not intended to provide comprehensive information regarding Indexed Universal Life insurance policies. This is general information only. Each insurance product will have specific features, benefits, and limitations.

Tax laws are subject to change, and you should consult a tax professional. Seek professional tax advice for your specific situation.