CASE STUDY #1: FROM HIGH TAX BRACKETS TO LOW
In our first case study on retirement tax reduction, Steve and Leslie Franks had been in the highest tax bracket for years. Now in their 60s, they were looking ahead, and the last thing they wanted to do was split their future retirement income with Uncle Sam any more than they had to.
Having suffered the ravages of the Great Recession, they were also eager to enjoy better predictability without market risk—and they wanted to ensure their money would pass on income-tax-free to their children through a death benefit.
They made a plan for a strategic rollout, taking into account their unique tax implications. At the time, they were living in a state that did not have state income tax—but they were planning on eventually moving to a state that would have exorbitant state income taxes.
THEIR STRATEGIC ROLLOUT
Furthermore, federal tax brackets were set to increase soon. The resulting strategic rollout was aggressive, moving as much as nearly $2 million from traditional accounts and paying over $600,000 in taxes in a single year. While that may sound high, this strategy provided for considerable tax savings as compared to if they had waited to pay taxes.
In the end, they transitioned their money into four LASER Fund policies (indexed universal life insurance)—two for Steve and two for Leslie—putting a total of $4 million into the policies. To further diversify their portfolios, they worked with two different insurance companies and chose different indexing strategies for each policy.
Fast forward ten years, and their money in their policies has grown to over $7 million. Because their taxes are over and done with, as they start to take retirement income now (just under $200,000 a year), they are doing so tax-free. With their tax-free income, their mortgage and other deductions, they are effectively in a 0% tax bracket now.
Going from paying the most in taxes to the least, the Franks are grateful to be looking forward to an abundant retirement, one where taxes can no longer impact their income, and where their heirs will receive an inheritance income-tax-free, through the death benefit on their policies.
CASE STUDY #2: THAT’S ENOUGH, UNCLE SAM
With just a few years left before retirement, Jim Woodrow had a diverse retirement portfolio awaiting him. But there was something nagging at him—one of his retirement accounts was an IRA, with $100,000. While he would not necessarily need that IRA for primary retirement income, he also did not want to pay more in taxes than necessary.
He decided to do a strategic rollout over the next five years, getting the taxes over with, and maximum funding a LASER Fund.
He has since finished the rollout, and his policy has been earning nearly 8% interest per year. He has just started taking out a nominal amount, tax-free, to supplement his retirement income—about $10,000 a year. He is relieved to have the taxes over with, and glad to add that $100,000 going to work in a tax-deferred environment, providing tax-free supplemental income, with the opportunity to pass along a death benefit to his heirs.
CASE STUDY #3: A CPA – CONVINCED OF A BETTER PATH
As a CPA, Sydney Weston is meticulous about her finances. When she heard about The LASER Fund through a professional networking group, she, like many people learning about these strategies for the first time, was impressed … but hesitant. She wondered if it could really provide benefits that IRAs and 401(k)s could not.
She examined details like IRS codes 7702 and 72(e). She explored the safety of entrusting her money to 100-year-plus insurance institutions and a 0% floor during market downturns. She weighed the living benefits, such as tax-free retirement income.
Her thorough analysis did not stop there. She enlisted the keen eyes of colleagues, including a chartered financial professional and tax attorney.
These professionals confirmed that the IRS codes were employed to create exactly the tax-free retirement income that had been suggested; that the IRS codes 7702 and 72(e) would in fact give her tax-free benefits for life; and that the structured format of the LASER Fund could provide the safe, cost-effective, and tax-advantaged solution she was looking for.
She opened a LASER Fund, and now enjoys the confidence of tax-free income—even to age 100 and beyond—and an income-tax-free death benefit for her heirs when she passes on.
CASE STUDY #4: THE ARTISTRY OF PRUDENT PLANNING
With a successful career as self-employed entrepreneurs in the arts, the Carters realized they needed to get serious about setting money aside for retirement. They veered away from IRAs and chose a LASER Fund, because they understood the value of paying taxes on the seed rather than the harvest.
After putting about $3,000 a month into their policy to maximum fund their policy, but they wanted to do more. They sold their large home and downsized to a beautiful retirement community, then used the $300,000 from the sale of their home (which was capital-gains-tax-free) to create a second LASER Fund.
Over the past ten years, their LASER Funds have given them greater financial flexibility to pursue their other passions, including serving religious and humanitarian missions and traveling to visit their children and grandchildren. They pay taxes only on their earned income from their art business, and the rest—about $30,000 a year—is tax-free income from their LASER Funds.
Like many of our clients, they are enjoying a lifestyle that is more than double what is reflected in earned income on their tax returns—which is in perfect compliance with tax codes.
Not only are they enjoying a more abundant life now, but they have the reassurance of knowing they will pass along that abundance to their children upon their passing, through the income-tax-free death benefit on their policies.
CASE STUDY #5: WHAT CAN GO WRONG
The Smiths had $450,000 in taxed-as-earned accounts, and they were tired of getting hammered on taxes. As soon as they learned about The LASER Fund’s tax-deferred growth, tax-free access to money, and income-tax-free death benefit, they were ready for a brighter tax future.
They repositioned their money and were enjoying the tax-deferred growth for several years when they met with a financial advisor who was not well-versed in LASER Funds. He insisted they would do better by pulling their money out and allowing him to put it to work in the market.
We cautioned them—canceling the policy would trigger a tax event on the money their policy had gained over the years. Their policy had been averaging about a 9% annual rate of return, and its cash value was now over $900,000.
They were determined, however, and followed through with their plan. They were shocked when April 15 rolled around and they had to pay taxes on the growth—totaling about $150,000 in taxes.
If they had left their money in the policy, it could have continued to grow tax-deferred, provided tax-free access to money, and income-tax-free transfer of wealth to their children through the death benefit. Instead of a tax reduction, they experienced tax devastation.
MAXIMIZING YOUR FUTURE
While paying taxes is an important responsibility for all of us as Americans, by utilizing proven strategies, it is possible to get necessary taxes over and done with, and avoid paying unnecessary taxes. With The LASER Fund’s tax advantages, you can give yourself the ultimate advantage during retirement—tax-free retirement income and income-taxfree wealth transfer to your heirs.
You can also enjoy greater liquidity, safety, and predictable rates of returns that can empower you to bring opportunities to your children and grandchildren, to give more to charity, and to pursue personal pastimes.
In all, whether your goals include accessing working capital, managing risk in business planning, protecting yourself with emergency funds, or reducing your taxes, The LASER Fund’s versatility can help you maximize your future in multiple ways.
In addition, The LASER Fund’s income-tax-free death benefit provides a way to transfer your wealth to future generations.
As you combine these strategies for the Financial Dimension with tactics for your Intellectual and Foundational Dimensions, you can leave a lasting legacy for Authentic Wealth to future generations. We wish you all the best as you move forward, toward a brighter, more abundant future.
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*Life insurance policies are not investments and, accordingly, should not be purchased as an investment.
Names have been changed and a few identifying details have altered to preserve privacy.
The LASER Fund is an indexed universal life insurance policy. This article is not intended to provide comprehensive information regarding Indexed Universal Life insurance policies. This is general information only. Each insurance product will have specific features, benefits, and limitations.
Tax laws are subject to change, and you should consult a tax professional. Seek professional tax advice for your specific situation.