What do you think your tax rate will be in Retirement?
Your tax rate will almost certainly be higher because typically, retirees have fewer deductions than working people and tax rates are likely to increase.
So, which makes more sense. Tax deductible deposits before retirement or tax free income during retirement? Let's analyze the typical, traditional IRA account.
How does it work?
Let's analyze the typical, traditional IRA account.
Husband & Wife setting aside $6,000 per year into IRA accounts.
Tax savings - 33 1/3% tax bracket = $2,000
Savings plan - 20 years Total Taxes saved = $40,000
Accumulation at 20 years = $1,000,000 (hypothetical)
Withdrawals to equal interest earned so as to not deplete principal @7.5% =
$75,000 withdrawal per year
-25,000 Taxes Due
$50,000 Net available dollars
After only 2 years of withdrawals the government will be paid $50,000 in taxes which eliminates the deduction allowed during accumulation over 20 years. If you grasp this, you have to ask yourself at this point, "Whose retirement am I saving for, mine or the government's?"
In order to net $75,000 after taxes a withdrawal of $112,000 would be necessary, which would dip into principal and deplete the 1 million dollars.
How can you withdraw your money from your retirement account tax free?
The government wants to encourage us to become financially independent, without dependence on Social Security. So, the government provides us with various provisions or incentives within the tax code to help us.
One such provision is contained in IRC section 7702.
This section of the tax code allows insurance companies to structure "qualified" insurance policies with unique tax advantages. These policies can credit interest earnings on your deposits without taxation and allow you to "borrow" the money out of your account without tax and you can pay off these tax free "loans" with the tax free proceeds from the policies' death benefit, without ever paying taxes on any of the money.
The U.S. Treasury Department lists "Life Insurance Cash Values" as one of the top ten tax subsidies currently available to us.
Does it make sense to accumulate money in an insurance policy? I hate insurance!
Don't focus on what it is, focus on what it does.
And it gets even better, because now you can link your interest earnings on the cash inside your insurance policy account to an "index." Without taxation, without actually buying or selling any stocks, without risk of losing your money in the market, by using an "Indexed Insurance Policy."
With an Indexed Policy, there is no direct participation in the equities market. The policy simply credits your account with an interest rate that tracks a specific market index, such as the S&P 500, DJIA or NASDAQ. When the index is positive, your account is credited with a percentage of the gain. When the index is negative, none of those losses are ever deducted from your account. It just stays the same.
The interest rate credited to your account only tracks the positive gains - it doesn't track the losses. Once interest is credited, you cannot lose it.
What is the result? What do I wind up with?
- Tax Free, Compound Interest Earnings
- Interest crediting linked to an Equities Market Index
- Tax Free Income Withdrawals during Retirement.
Everyone should take advantage of IRC section 7702. So, if you or your clients have recently inherited some money, received some type of cash settlement, plan to exercise some stock options, expect to receive a bonus, have significantly increased income, consider using a section 7702 plan for your retirement savings, especially if you have already maxed out on your IRA or 401(k).
These plans are complicated to structure properly so that they are fully compliant with section 7702. Before you put your money into a section 7702 plan, you should seek the advice of a knowledgeable consultant.
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