If I can show you a way to help you avoid taxes would you give me 30 minutes of your time?

If I can show you a way to help you avoid taxes would you give me 30 minutes of your time?

March 14, 2021
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If you have money in a tax-deferred retirement account such as a 401(k), IRA or 403(b), you're sitting on a tax time bomb.

I'm going to explain the tax traps you face and show you how to move toward a 0% tax bracket in retirement (legally!) – but not by doing it the way most people do it, which is by being broke!

Conventional wisdom says, "Maximize your contributions to tax-deferred plans. Your money compounds without being reduced by taxes, and you'll end up with more money during retirement."

But like much conventional wisdom about personal finance, it’s baloney.

The Society of Actuaries says if the tax rates are the same, "It doesn't make any difference whether [the taxes] are taken away from you at the beginning (tax-exempt) or at the end (tax-deferred). It's the same fraction of your money that is left to you."

But most people look at their savings and think it's all theirs. You may have forgotten you'll owe the Internal Revenue Service the taxes they let you defer all those years – on every penny you've put in and every penny of growth.

And according to Boston College's Center for Retirement director, Alicia Munnell, "It's a very big deal when people realize they only have two-thirds or three-quarters of what they thought they had." (And that statement was made before the pandemic lit a fire under government spending.)

If the tax rates are actually lower during your retirement, you might come out ahead by deferring your taxes. But where do you think tax rates are headed long term? You must consider what tax rates might be during a retirement that could last 30+ years.

Most people we talk to realize taxes ultimately must go UP due to the aging demographics of our country and our unsustainable national debt, not to mention the massive cost of Coronavirus-related stimulus and bailouts. (The nation's debt is now over $28 trillion... and climbing – see for yourself here.) And when the tax rates go up, if you're successful in growing your nest-egg, you'll simply end up paying higher taxes on a bigger number.

Former comptroller general of the federal government David Walker has predicted that tax rates would have to double to pay for unfunded obligations such as Social Security, Medicare and Medicaid.  So, we see a disconnect between what the experts - and most people with money in tax-postponed accounts - believe, and where people are keeping their money. 

But, we know taxes will go up in 2026, even if Congress does nothing, as the TCJA sunsets by law.

You've probably been told you should expect to retire in a lower tax bracket, but many retirees complain that they're actually in a higher tax bracket. That's happening for two reasons:

#1: Required Minimum Distributions (RMDs)

Those pesky RMDs retirees have to start taking from tax-deferred accounts at age 72 – whether they want to or not – are pushing them into a higher tax bracket.

#2: The "Social Security Tax Torpedo"

Many people are surprised to discover their income from various sources causes 50 to 85 cents of every Social Security dollar they receive to be taxed.

RMDs can trigger a "tax torpedo" that taxes up to 85% of your Social Security benefits. Financial planners and CPAs are seeing retirees' tax rates double or more because of this!

Best-Kept Secret for Moving Toward a 0% Tax Bracket

There's a terrific option available to you that you're probably not hearing much about. It comes with numerous tax advantages too.

I’m talking about the kind of high cash value, low commission, indexed universal life insurance policies we call Private Reserve Accounts (PRAs). 

The advantages of a properly structured PRA include:

  • No Required Minimum Distributions to push you into a higher tax bracket
  • You put in after-tax money, which grows tax deferred and can be accessed tax free under current tax law – if you're concerned tax rates will go higher long term, isn't it better to pay them today to eliminate unpleasant surprises?
  • The income you take from the policy is not included when the IRS determines how much tax you'll pay on your Social Security income
  • The income you take doesn't increase your Medicare premiums, unlike IRA distributions and tax-exempt bond income (income from conventional retirement plan withdrawals can increase your Medicare premiums by as much as 350%!)
  • In addition to the cash value that builds up in your policy, there is a death benefit – an amount that is paid to the beneficiary when you die. The death benefit – which may be many times larger than your cash value – passes to your loved ones and favorite charities income tax-free.

 

Unexpected Advantages of a PRA Include...