How To Retire Tax- Free.

It was Benjamin Franklin who said that nothing is certain in this world except for death and taxes. Americans are tax in four different ways when you make money, they tax you, you spend money, they tax you, you save money, they tax you, and when you die, they tax you. From sales tax to income tax to property tax to estate tax and every other tax, anywhere you turn, the IRS is waiting for your hard-earned money.

If there were strategies where you can legally reduce or avoid paying taxes during your retirement years. Is that something you would like to know more about, and if possible try to implement them in your retirement planning?

A Growing Tax Problem In The United States.

Taxes take a big chunk of your money as an active worker and also during your retirement if you don’t understand or use tax-free retirement strategies. Any saving and investment strategy must consider the tax impact on it. What is your current tax rate? What will the tax rate be in the future? Will taxes rise and fall during your retirement years?

We now know that with the COVID-19 and the recent economic crisis, millions of Americans are in danger of not having enough money to maintain their standard of living in retirement years. The consequences of these growing economic and savings crises could be severe for both American families and the national economy. Let’s look at the challenges ahead.

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1. The Shrinking Tax Base – Between 1945 and 1965, when Social Security began, the decline in worker-to-beneficiary ratios went from 41 to 4 workers per beneficiary. And the number continues to decline due to the aging demographics in the United States.

The Social Security program matured in the 1960s, when Americans were consistently having fewer children, living longer, and earning wages at a slower rate than the rate of growth in the number of retirees. As these trends have continued, today there are just 2.9 workers per retiree, and this amount is expected to drop to two workers per retiree by 2030.

The program was stable when there were more than 3 workers per beneficiary. However, future projections indicate that the ratio will continue to fall from two workers to one, at which point the program in its current structure becomes financially unsustainable.

2. Mounting Debt Crises – As of August 31, 2020, federal debt held by the public was $20.83 trillion and intergovernmental holdings were $5.88 trillion, for a total national debt of $26.70 trillion. Guess who is going to pay for this debt? Our future generations. The government borrows most of it through public debt, which it owes to individuals, businesses, and foreign governments who bought Treasury bills, notes, and bonds. Foreign investors hold the largest share of the U.S. national debt. China and Japan top the list, holding more than $1 trillion each in IOUs.

As the tax base for workers per retiree is shrinking, the costs to provide retirement benefits, Medicare, defense, and infrastructure continue to rise. The government will have to choose between cutting down the budget or raising taxes. Many people believe taxes may have to go up in the future. What do you think? That’s why many Americans are looking for strategies to reduce or avoid taxes during their retirement years.

Tax Free Or Tax Advantage Retirement Vehicles.

These are legal tax-free or tax advantage retirement income financial vehicles;

1. Health Savings Account ( HSA) – This is a savings account used in conjunction with a high-deductible health insurance policy that allows users to save money tax-free against medical expenses.

2. Roth IRA – It’s an individual retirement account allowing a person to set aside after-tax income up to a specific amount each year. Both earnings on the account and withdrawals after age 591/2 are tax-free.

3. Roth 401(k)- It’s a type of retirement savings plan. It was authorized by the United States Congress under the Internal Revenue Code, section 402A, and represents a unique combination of features of the Roth IRA and a traditional 401(k) plan.

4. Roth 403(b)- It’s essentially a hybrid combining some features of a traditional 403(b) plan with some features of a Roth IRA. Roth IRA plans are self-established without any employer involvement.

5. Cash Value Life Insurance- It’s a form of permanent life insurance that features a cash value savings component. The policyholder can use the cash value for many purposes, such as a source of loans or cash or to pay policy premiums.

Indexed Universal Life Insurance (IUL 7702A).

It is important that all individuals understand that, by definition, a life insurance policy is a tax-deferred vehicle. It is not a tax-free vehicle. In other words, the cash value within a Universal Life Policy grows without being taxed, but if this money is simply withdrawn, then all the gains realized within the policy (the amount above the total premiums paid) will be taxed and taxed as income, not capital gains.

Let’s look at how Indexed Universal Life Insurance can help us retire tax advantage or tax-free. Let’s say you are going to borrow money to buy a new house or car. Is the loan you receive from the bank being taxed? No. The house or car may be taxed ( due to state sales tax), but the loan is not taxed. Right?

Loans are not taxed; items are not taxed. So Life insurance companies, in their brilliant ingenuity, created a contractual policy feature that allows the policy owner to have access to tax-free money by using their life insurance cash value as collateral. This feature enables the owner to avoid any tax on the money received because it is just a loan from a financial institution, not a withdrawal.

A policy owner can always take a tax-free withdrawal up to the total premiums paid into the policy, subject to surrender charges because the first money allowed coming out of a life insurance policy is simply a return of the owner’s total premium payments, which have already been taxed prior to being put into the policy.

However, if an individual wants to withdraw money above the total amount of premiums paid ( again, always subject to any surrender charges) then a withdrawal of this gain would be taxed. It would be taxed as income because the policy owner would now be withdrawing money that has not yet been taxed.

How To Access Tax-Free Money During Retirement.

For you to benefit from Indexed Universal Life Insurance as a tax-free retirement financial vehicle, the policy must stay in force until the insured’s death. The reason that policy must stay in force is that if the lapse or cancels for any reason, then all of the gains that have been taken as a tax-free loan will suddenly become taxable. You should sit down with your financial adviser should you want to include any of these products in your tax-free retirement planning.

Why Isn’t Everyone Using This Tax-Free Retirement Vehicle?

Many Americans aren’t using this Indexed Universal Life Insurance strategy for tax-free retirement income because they don’t know about it. And secondly because though this financial product is open to everybody who can qualify for and needs life insurance, it is often best suited for those who earn a relatively large income or for individuals who want to save more each year than what Roth IRA will allow.

During our retirement years, most retirees don’t have the monthly income to take of their living expenses and they would like to reduce or avoid paying too many taxes. If you would like to pay fewer taxes during your retirement years and have much money to spend on other living expenses and medical expenses, then please talk to your financial adviser to take a look at Indexed Universal Life Insurance as a tax-free or tax advantage financial vehicle.

“If you have any feedback about how to retire tax-free that you have tried out or any questions about the ones that I have recommended, please leave your comments below!”


NB: The purpose of this website is to provide a general understanding of personal finance, basic financial concepts, and information. It’s not intended to advise on tax, insurance, investment, or any product and service. Since each of us has our own unique situation, you should have all the appropriate information to understand and make the right decision to fit with your needs and your financial goals. I hope that you will succeed in building your financial future.