Tax Free Income Strategies

When you retire how would you like to receive your income, Taxable or Tax Free? Are you planning your retirement or Uncle Sam's? Are you concerned about volatility of the stock market or the U.S. National debt? When you retire do you think tax rates will be lower or higher than todays historically low rates, see graph below?

Pension Plan using Cash Value Life Insurance          

Cash Value Life Insurance

The primary reason to purchase life insurance is the death benefit it provides to beneficiaries; however, certain policies can also accumulate cash value. Under current tax law, if premium payments and certain policy transactions stay within IRS guidelines, permanent life insurance is the only financial product that enjoys all these key tax advantages for as long as the policy remains in effect. These key tax advantages include:

  • Tax deferral of any policy cash value accumulation.
  • Tax-free withdrawals until basis (cumulative premiums) is recovered, if not a Modified Endowment Contract (MEC).
  • Tax-deferred loans of policy cash value for non-MEC policies even if total policy loans exceed basis.
  • Tax-free stream of retirement income using withdrawals up to basis, and then switching to loans. This assumes the policy is not a MEC and it remains in effect until the Insured death, with any loan balance being repaid from the policy death proceeds. If a policy lapses, is surrendered or terminates, any outstanding loan will be treated as a distribution and may be taxable.
  • No set IRS limit on premiums (unlike qualified plan retirement savings vehicles) or cash value limits as long as minimum death benefit amounts are met in order to satisfy IRS-prescribed ratio of premiums to death benefit.
  • Video Why You Should Consider Tax Free Income Strategies 

Sample 1       Sample 2     Sample 3 


Roth IRA

First introduced in 1998, the Roth IRA offers owners a powerful advantage: tax-free distributions. Contribution limits are the same as the previous two types of IRAs, and the earned-income and catch-up provisions both apply. Qualified withdrawals of both contributions and earnings are free from federal income tax. Since contributions are made with after-tax dollars, they can be withdrawn tax-free at any time. As with traditional and non-deductible IRAs, early withdrawals may be subject to federal income tax plus a 10% federal penalty. Also, eligibility to contribute to a Roth IRA begins phasing out for individuals and households with a modified AGI of $107,000 and $169,000, respectively, and those with modified AGIs exceeding $122,000 (individuals) and $179,000 (households) cannot open or contribute to a Roth IRA.

 Retirement Plan Comparisons                 Roth IRA Annuity Rates and Benefits                  Income Calculator at 8%

Which is Right for You?
The answer to that question depends on a number of factors, including your age, household AGI, current and projected tax rates, whether or not you are eligible to participate in an employer-sponsored retirement plan, your marital status, and your retirement goals. As the figure below shows, tax rates are historically low, and with the deficit growing at unprecedented levels, it would be nonsensical for advisors and clients to ignore the prospect of rising taxes. We'd be happy to discuss your options and help you make the right choice based on your individual needs.

Highest and Lowest Marginal Tax Rates by Year, 1913-2008

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