Is “Tax-Free Retirement” Too Good to Be True?

Tax-free retirement—living a comfortable life in retirement without the obligation to pay income tax—comes as the result of planning and arranging your finances (following IRS guidelines every step of the way) so that when you retire, none of the money you receive is taxable—perhaps not even your Social Security income.

Tax-free retirement is good, and this article reveals how to make it happen.

Is Avoiding Taxes on Your Retirement Income Legal?

Reducing or avoiding taxes is perfectly legal. People take steps to reduce or avoid taxes all the time. They may donate to charity to avoid paying as much tax. They deduct their mortgage payments. They take legitimate business deductions. They may shift medical expenses, hoping to bunch expenses into one year and exceed the threshold for deductions that year. These are just a few of the legal tax-avoiding measures Americans take every day.

Many people even believe they have an IRA or a 401(k) to avoid paying taxes. But that’s a trap, because traditional IRAs, 401(k)s, and most other government-controlled retirement plans do not allow you to avoid paying taxes. They merely postpone tax day. We’ll talk more about that in a few minutes.

Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands.” — Supreme Court Justice Learned Hand

So while avoiding taxes is legal, evading taxes is not. Maybe you don’t report your income. Maybe you take deductions you’re not allowed. Or maybe you just tell the IRS to take a hike. That’s tax evasion.

But make no mistake: A tax-free retirement can be achieved legally, using IRS-approved methods.

Ways to Avoid Income Tax in Retirement

There are steps you can take before retirement to avoid paying income taxes in retirement.

Will traditional retirement plans allow you to avoid taxes in retirement?

What about 401(k) plans, IRAs, 403(b) plans, and other government-controlled retirement plans? Are they tax-exempt?

No, with the exception of Roth IRAs.

Advisors who promote tax-deferred plans as ways to avoid paying taxes are perpetrating one of the greatest hoaxes in America.

Countless individuals have discovered—too late—that their taxes weren’t avoided. They were merely delayed (“deferred”) until retirement—often when they could least afford to be hit with a big tax burden.

The Society of Actuaries explains the true value of tax deferral:

The point is that a fully deductible tax-deferred account produces the same effect as a Roth that is taxed at the beginning and no longer is taxed. In both cases, a certain fraction of your money is left to you after taxes, and if those tax rates are identical, it’s the same fraction of your money that is left to you. It doesn’t make any difference whether it’s taken away from you at the beginning or at the end.”

But isn’t it smart to defer taxes until you’re in a lower tax bracket? More and more experts are saying “No!” to that question, as well.

Ann C. Logue writes about saving for retirement in Forbes:

The benefits of tax deferral assume that future tax rates will be significantly lower than today’s. Given the deficits faced by the federal government and by most states, however, it’s difficult to say that that will be the case. If the marginal tax rate you’ll pay in retirement is higher than the one you face today, you’re better off paying the taxes now, according to recent research published in the Financial Analysts Journal.”

If you want to begin thinking about tax-free retirement, stop thinking your tax-deferred retirement plans will help.

The only government-controlled retirement plan that is tax-exempt is a Roth IRA. But the government restricts the amount you can contribute to a Roth, so you probably won’t be able to build up enough cash for a comfortable tax-free retirement. We’ll show you how to supplement your Roth in a minute.

What about money in the government-controlled plans you already have?

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You are going to have to pay taxes on that money. Virtually every dollar you contributed to your government-controlled retirement plan was income on which you paid no income tax at the time. (Roth contributions are the exception.)

What will the tax rates be after you’ve retired? Many observers believe tax rates must go up due to government deficits and because of the increasing numbers of aging baby boomers receiving government benefits.

And there’s no guarantee your personal tax bracket will be lower in retirement. Many retirees we talk to say they’re finding themselves in a higher tax bracket.

Uncle Sam wants his pound of tax flesh. But you can pay your tax on the money one time, and never owe taxes on it again, if you move it into the proper financial instrument. We’ll tell you more in a moment.

Caveat: Money you withdraw from any tax-deferred plan increases your taxable income for that year. Don’t withdraw all your funds in one tax year, or you’ll blast your tax bracket for that year into the stratosphere. Work with a professional who can help you structure your departure from “tax-deferred” to “taxed-nevermore” so you pay the minimum tax necessary. That’s simply smart tax avoidance!

Other methods of reducing taxable retirement income

So the government isn’t much help when it comes to reducing your tax obligations, is it? Why should it be? The government wants every tax dollar it can legally get.

Where can you find good advice from someone who’s in your corner? It’s time to talk to a qualified life insurance professional.

A high cash value dividend-paying whole life insurance Policy may be the best way to accumulate wealth on a tax-deferred basis. You put in dollars on which you have already paid income tax. Then, as with a Roth IRA, you can access your principal and growth with no taxes due as long as your policy remains in force, under current tax law. This is accomplished through a combination of dividend withdrawals and loans against your cash value.

Life insurance offers other incredible tax advantages, which you can read about here.

High cash value dividend-paying whole life insurance policies are used by many, many knowledgeable individuals to fund tax-free retirement income streams.

What about your Social Security income? Will it be taxed?

Many people we’ve surveyed are shocked to learn that when they begin drawing Social Security, they’ll have to pay income tax on a major portion of it if they have other taxable income. And it doesn’t have to be much other income at all! Even taking the Required Minimum Distributions from their tax-deferred retirement plans can easily trigger taxes on Social Security income.

In the article, “Are My Social Security Benefits Taxable?” AARP explains: If you and your spouse file a joint return with a combined income between $32,000 and $44,000, up to 50 percent of benefits may be taxable. And if your combined retirement income is more than $44,000 annually, up to 85 percent of your Social Security income will be taxed as income.

But guess what? If you follow the rules, the money you take from your Bank On Yourself-type life insurance policy isn’t considered to be income.

First, dividends you withdraw (up to the amount of premium you’ve paid in) are generously characterized by the IRS as “return of premium paid” (in other words, not taxable). So to take money from your Bank On Yourself-type life insurance policy, it’s best to withdraw those dividends first. Then you borrow against your cash value.

And second, policy loans against cash value aren’t income. They’re just loans.

If your only income during retirement is from Social Security, plus life insurance dividend withdrawals and policy loans, plus less than $32,000 from other sources, your Social Security probably will not be taxed, under current tax law. (We have to say “probably” because there are exceptions to everything. So consult your tax advisor for specific advice based on your situation.)

Caution: Not All Permanent Life Insurance Policies Can Give You Worry-Free Tax-Free Retirement Income

Beware of books that promote the use of life insurance to create a tax-free retirement—if they recommend any form of life insurance other than dividend-paying whole life!

For example, in his book Tax-Free Retirement, Patrick Kelly advocates using universal life insurance. Others recommend indexed universal life insurance.

But whole life insurance gives you more guarantees than any other type of permanent life insurance. This article compares universal life with whole life, so you can decide for yourself.

Indexed universal life insurance has no place in a worry-free retirement plan. This article reveals 7 Reasons to Be Wary of Indexed Universal Life Insurance.

What Are You Waiting For?

The key to tax-free retirement income is planning. The time to start planning was probably yesterday, but today is the second-best time.

Request a FREE, no-obligation Analysis and find out how much tax-free money you could have in retirement. You’ll receive a referral to an Authorized Advisor (a life insurance agent with advanced training on this concept) who will prepare your Analysis and Solution. There is no cost for this service, and no obligation on your part.

The Truth About Whole Life Insurance and Why It’s More Than a “Rich Man’s Roth”

I came across an online article by an anonymous blogger who claimed that the only good purpose for whole life insurance was as a rich man’s Roth. He was certain whole life insurance was only for individuals whose high incomes made them ineligible for the tax-saving advantages of a Roth IRA.

That’s actually pretty funny. Why restrict the incredible advantages of whole life insurance—including the tax advantages—only to the wealthy?

Let’s look at how a Roth IRA works and then compare it to a Bank On Yourself-type whole life insurance policy.

How Does a Roth IRA Work?

A Roth Individual Retirement Arrangement (Roth IRA) is an IRS-approved strategy that allows you to invest money you have earned by making contributions to a Roth IRA plan you have set up. You are not allowed to take a tax deduction for your contribution as you are with a traditional IRA. However, none of the money you take from your plan in the future is taxable. As far as the money in your Roth IRA is concerned, you will not be affected by future changes in the tax rate.

How a Roth IRA differs from a traditional IRA

Roth IRAs are quite different from traditional IRAs.

Chart Comparing Key Differences Between Traditional And Roth IRAsWith a traditional IRA, your contributions are tax-deductible. However, when you withdraw money from your traditional IRA—and you must withdraw specific percentages annually, beginning soon after your seventieth birthday—you must pay taxes on everything you withdraw—at whatever the tax rate happens to be at the time.

See the table for a summary of the key differences between a Traditional IRA and a Roth IRA. [Read more…]

Bill Williams’ AHA Moment: How Bank On Yourself Freed Him from 401(k) Loans and Mutual Funds

Bill Williams is an enthusiastic believer in the Bank On Yourself concept because of how it has helped his family financially. He wrote to me several years ago, and I included his letter on page 228 of my 2014 New York Times best-selling book, The Bank On Yourself Revolution:

Thanks for all the good things you are doing, Pamela. I am working with my Bank On Yourself Advisor to set up my third policy, and I am so appreciative of her guidance and expertise. She has been tremendously supportive.

The real “snake oil” is all of the purported advice about savings and investing we have been fed by the “experts” in the past. I get so upset by the advice to invest with before-tax dollars into 401(k)s or 403(b)s.

I’m over sixty years old and know when I turn 70½, I’m going to have to take required withdrawals from my plans and have the added burden of paying taxes on them. After all, the IRS wants to get its hands on the taxes they let me avoid paying all those years.

I wish not only that I had learned about Bank On Yourself earlier, but that the concept could be taught to the masses when they are young enough to get the maximum benefit from it.

Here’s why I say that: I think of all of the purchases I’ve made through the years where Bank On Yourself would have been a much better means to fund them. As an example, my son’s college expenses, which I paid every cent by selling stock and mutual funds and taking a loan from a 401(k).

Needless to say, my son received a great education (to his credit), but dear old dad has nothing to show for it. I had to put money into the stocks, 401(k), and mutual fund, so I had the resources—which could have been so much more powerful in a Bank On Yourself policy! It’s as simple as that. If I had done that, I would now still have the policies, which would have even more value.

I am depleting an IRA to fund my third policy and to help fund my first two Bank On Yourself-type policies. I just hope I live long enough to enjoy all the benefits.

Bill Williams writes again, about Bank On Yourself, tax-free retirement, and dividend-paying whole life insurance

[Read more…]

The Ticking Tax Time-Bomb of Conventional Retirement Plans

One of the biggest selling points of 401(k) and IRA retirement plans is that the money you put into them isn’t taxed right away. Bring out the bubbly to celebrate, right?!

Not so fast.

First of all, some people – hopefully not you! – mistakenly believe money placed into these retirement plans is “tax free.” It isn’t. It is “tax deferred,” meaning that you will pay tax on that money when you withdraw from your retirement plan down the line.

Deferred taxes might sound good, but deferring your taxes is like putting off a visit to the dentist. The problem compounds and will only get worse.

Deferring taxes creates a dangerous potential tax time bomb because you don’t have the answers to two critical questions…

First, what will the tax rates be when you retire? And what will they be 20 or 30 years later?

[Read more…]

The good, bad and the ugly of the new myRA

You’ve probably been hearing about the new “myRA,” a new government-run retirement account that President Obama unveiled at his State of the Union address and plans to create with a stroke of his pen.
Obama State of the Union Address
Its primary purpose is to offer a savings option to the 50% or so of U.S. workers who have no access to employer-sponsored retirement plans and have little saved for retirement.

The appeal is that it “guarantees a decent return with no risk of losing what you put in,” according to Obama.

Sounds okay so far, right?

I did some digging into the details to understand more about how this program will actually work… and to help you sort through the pros and cons of programs like this.

Below I’ve listed the good, the bad, and the ugly about this new program. But really, most of the bad and the ugly points apply to all government-run retirement accounts, including 401(k)’s, 403(b)’s, IRA’s, etc. So if you have one of these plans, I urge you to read this today.

The good…

[Read more…]

Are you putting your retirement savings in prison?

Ted Benna, "Father of the 401(k)"

Ted Benna is known as the “Father of the 401(k).” In the late ‘70’s, he worked as a consultant to business owners whose main agenda was “How can I get the biggest tax break, and give the least to my employees, legally?”

Tax nerd that he was, Benna discovered an obscure part of the tax code – section 401(k). Voila! By 2012, nearly 75% of all company pension plans had disappeared!

What does Mr. Benna say about his beautiful 401(k) baby today?

If I were starting over from scratch today with what we know, I’d blow up the existing structure and start over!” 1

Uh oh.

Per the US Senate Committee on Health, Education, Labor, & Pensions: “After a lifetime of hard work, many seniors will find themselves forced to choose between putting food on the table and buying their medication.” The U.S. Census Bureau says the average value of 401(k) accounts of pre-retirees between 55 and 64 is only $170,645; the average value of their IRAs is only $147,345. And half of all those close to retirement age have less than $50,000 in these plans.

Something went horribly wrong. Actually, several things went horribly wrong, not only with 401(k)’s but also their kissing cousins: IRA’s, Roth Plans, 403(b)’s, SEP-IRA’s and so on.

And the problems with these government-controlled plans are in these five key areas:
[Read more…]

How will these 3 financial surprises affect you?

There have been three recent surprising revelations I urge you to pay close attention to, if you have any money invested in the stock market and/or you have an IRA, 401(k) or other government qualified retirement plan…

1. The ugly truth about the stock market’s new record highs

Take a look at the chart below which reveals how, when measured in real purchasing-power terms, the S&P 500 Index is nowhere near its March 2000 high. In fact, the index would have to increase by another 32% today, just to get you even (in real dollars) with where you were more than 13 years ago:

Your Retirement Plan Powered by Wall Street-Fast Graph

Even if you look at the total return of the S&P 500 (including reinvested dividends), the real (inflation-adjusted) purchasing power of your investment remains negative after 13 years. And this assumes you have no fees, commissions or taxes, which, of course, will take another big bite out of your savings.

2. Long-term investors received only HALF the return of the S&P 500 [Read more…]

Stock market hits 5 year high – what they’re not telling you

As the bull market that began in March, 2009 picks up steam, the Wall Street stock jocks are urging individual investors to jump back into the market with both feet. They boast that the S&P 500 has hit a 5-year high and is closing in on a new all-time high. But – somehow – they all forget to mention one pretty important fact: It also ended the year 3% lower than where it was 13 years ago at the end of 1999.

This chart tells the rest of the story you’re not hearing…

 

Your Retirement Plan Powered by Wall Street-Fast Graph
You’ll notice inflation was 36% over the past 13 years, which took an enormous bite out of the purchasing power of your savings.

Some readers may be wondering why I didn’t include the value of the dividends earned by the S&P 500 companies in the chart. So let’s do that now. The total return of the S&P 500 (including dividends) for the past 13 years was 22%, which is an average return of about 1.7% per year – and still lags inflation.

Don’t forget the fees and taxes…

[Read more…]

Bank On Yourself: The Ultimate Wealth-Building Strategy Video

Do you know what your retirement account will be worth on the day you plan to tap into it? If you’re like most people, you don’t have a clue. Well, here’s a reality check – that’s not a plan; it’s gambling.

Because people have blindly followed the conventional wisdom about investing and retirement planning advice, most baby boomers have been forced to postpone retirement an average of five years…and nearly half aren’t expected to have enough money in retirement to cover even basic living expenses, like food and medical care.1

At Bank On Yourself, we believe the decision of whether and when to retire – or not – should be a matter of choice, not necessity. If that makes sense to you, we urge you to watch this fast-paced video revealing seven reasons to consider using the Bank On Yourself method as a safe and proven alternative to traditional retirement plans.

Click the play button in the video below and see how many of these
seven advantages you’d like to have in your financial plan…

Bank On Yourself gives you guarantees, predictability, control, tax advantages and peace of mind missing from traditional financial planning

Want to find out how much money you could have – guaranteed – in 10 years, 30 years, and at any point along the way if you added Bank On Yourself to your financial plan?
Request Your Analysis Button
It’s easy to find out! Just request your FREE, no-obligation Analysis that will show you how a custom-tailored plan can help you reach your short-term and long-term goals and dreams in the shortest time possible.

1. Center for Retirement Research at Boston College, March 2012 Report