Tax Free Retirement Cash Flow

Overfunding is a strategy that focuses on accumulating cash in the policy rather than paying for the death benefit which is the payout to your loved one’s when you pass away. This approach leverages the highest policy premium that is allowed with the lowest life insurance death benefit so that your cash accumulation exceeds your policy net insurance costs over at least 10 years. There are fundamentally 4 steps to determining the combination of maximum premiums and minimum death benefits necessary to selecting the most leveraged indexed universal life policy:

4. Finally, you must pay close attention to the maximum premiums allowable under the  Internal Revenue Code which is referred to as the seven-pay premium limitation.[1] As long as the total premiums for any seven-year period are equal to or less than the maximum allowable premiums for the seven-pay test,[2] you’ll be able to access the cash values in the policy at any time, tax-free and relatively liquid.

In essence, a life insurance contract that fails to meet the seven-pay test will be classified as a modified endowment contract (MEC). The seven-pay test is not met if the accumulated amount paid at any time during the first seven years is more than the total of the net level premiums that would normally have been paid on or before such time if the contract provided for paid-up future benefits after payment of seven level annual premiums

Want to see if this is a fit for you? If you’re healthy it may very well be a great tool in your arsenal to slay the bailout dragon for your retirement.

Tax Free Income for Life

I’ve been working on my new program which is going to be essential as Congress is likely to shift the entire marginal tax rate making your deferred plan (IRA or 401(k)) obsolete. You’ll want to take a look at our two vehicle system to build up tax-free.

One of the vehicles is the Solo-401(k) ROTH self-directed plan. This vehicles does not have income limitations on the $165,000 for a couple filing jointly the way the ROTH IRA does. It is designed for solo-practitioners, those without employees or contractors or part-time people.

Since it is ROTH you pay your taxes up front but never pay again on the build-up or when you take monies out in the future. Traditional deferred plans allow you to defer taxes but get hammered when you retire if you are in a higher tax bracket and without tax deductions to offset which is uniformly the case for a retiree.

You can contribute up to 25% of compensation and additional catch-up is available for those 50 or older. A $41,000 annual limit applies and is indexed in the future up to 2010 unless the new regime changes things when they are sworn in as President and one could be higher than the other. A cap of $205,000 on compensation  was in force as of 2004 and is indexed up to 2010. The benefit is that you can set aside more tax-free money in the solo-401(k) ROTH than other plan choices and if it is self-directed, you do have to remain victim to what the market provides as you can have numerous choices for guranteed returns that are not connected to the market at all.

Remember this is just one half of a dynamic duo that provides for tax-free income for life. You’ll want to examine the seld-directed arena so that you’re not held to just mutual funds and other market connected investments that are roller coaster driven because they are up and down according to whimsical financial and political events.

If you have questions or are looking to set one up or need information on the “Dynamic Duo” you can find our e-book “Tax Free Income for Life” available on the website.

Untaxingly,

James Burns

“How Much is Retirement Costing You?”

No matter who becomes our new President it is almost assured that the entire marginal tax rate will have to shift and that means a deferred retirement plan will get hammered when you retire. Typically you put away money without tax for a number of years and then when you retire your taxed at ordinary income rates which if the tax rate shifts, means whether your successful or not successful you’re going to pay more tax on those saved dollars. The key is to reduce fees and taxes so that what you put away gets further.

When you invest in the typical mutual fund (assuming outside of a qualified retirement plan), you face costs that erode your benefit. Chances are you’re not aware of them, they’re not in your prospectus and your broker isn’t going to sit down and tell you about them. The five costs of mutual fund investing are:

1. Tax costs – excessive capital gains from active trading.

2. Transaction costs – the cost of the trades themselves.

3. Opportunity costs – dollars taken out of portfolios for a fund’s safekeeping.

4. Sales charges – both seen and hidden.

5. Expense ratio, or “management fees” – no end to increases in site. This is a calculation based on the operating costs of the fund divided by the average amount of assets under management.

How radically do fund expenses affect you? Well, with the expense ratio, which averages 1.6% per year, sales charges of 0.5%, turnover generated portfolio transactions costs of 0.7% and opportunity costs of 0.3%—when funds hold cash rather than remain fully invested in stocks— the average mutual fund investor loses 3.1% of their investment returns every year just on fees. While this might not seem like much on the surface, costs and fees alone could consume 31% of a 10% market return. Think about that. You could be losing almost a third of your return before it’s even taxed. You’re losing a third of your return just for the cost of maintaining your investment. Add in the 1.5% capital gains tax bill that the average fund investor pays each year and that figure shoots up to 46% of your return being lost to fees and expenses, nearly half of a potential 10% return.

In my new book “The 3 Secret Pillars of Wealth” we discuss tax-free strategies that reduce fees and allow you to save more that will go much further. We’ve identified two vehicles that allow for tax-free build-up and one of those is the proper use of savings grade life insurance that is described in the book. Also, I have an e-book on tax-free income for life that lays out the strategy to help you be successful.

Untaxingly,

James Burns, Esq.