What are the top tax planning strategies to protect the wealthy from unnecessary taxes?
If you find yourself in the top tax brackets, my guess is you have the same question that thousands of my affluent clients, audience members, radio listeners, and YouTube followers have had over the years: What are the top tax saving strategies for high income earners?
In my five decades as a financial strategist, I’ve had the pleasure of working with countless affluent individuals and families. Many of them have asked what tax saving strategies for high income earners they should consider.
Yes to Fair Taxes, No to Unnecessary Taxes
Now don’t get me wrong. They don’t feel like taxes are bad altogether. In fact, many of them feel like I do–that taxes are actually an asset. Every time we as fortunate Americans drive down a highway; take off from an airport; take our children to the library; watch our young ones graduate from public high school; send them off to fine state universities; call on police and firefighters; and benefit from the service and protection of our men and women in the armed services—all of these are made possible by the taxes we pay.
It is a privilege to enjoy these advantages in a blessed country like America, and for that, we believe we, as Americans, should pay our fair share of taxes. However, I also believe there are positive, productive ways to contribute to society other than paying unnecessary taxes.
By escaping the tax trap and saving on taxes where legally prudent and possible, it frees that money to be put to use for charitable efforts to benefit those in need. It empowers Americans to put their resources in business and capital investments that can go on to create jobs, and to create self-sufficiency in healthcare and retirement living.
And since there’s hardly a soul alive who believes taxes will do anything but go up–with out-of-control government spending and a possible recession rumbling on the horizon–I agree it’s in everyone’s best interest to reduce the amount of unnecessary taxes we pay.
Common Tax Saving Strategies for High Income Earners
So what are some of the top tax saving strategies for high income earners, those who are in the top three tax brackets (which is currently more than $170,050 for single filers, and more than $340,050 for married filing joint tax payers)?
Most financial advisors would rattle off the most common tax saving strategies tactics:
Go all in on your 401(k)
This account is one of the most popular retirement vehicles in America, particularly because of the employer contributions that help accelerate the money you put into the account each year. Here’s why people tout 401(k)s: The money you contribute can reduce your taxable income for the year, your money can grow tax-deferred in the account, and you won’t pay taxes on your money until you take withdrawals. (It’s wise to wait until after age 59 ½, otherwise you’ll be hit with a 10% early withdrawal penalty, in addition to your taxes.)
Invest in tax-free bonds
A tax-free bond fund is a fund comprised of several different municipal bonds. It offers typically conservative fixed rates of return and is exempt from federal income tax. The interest on municipal bonds is also often exempt from state tax if purchased in the state where you live.
Convert your traditional, SEP, or SIMPLE IRA to a Roth IRA
Inside a Roth, your money will be able to grow tax-free, and distributions from Roths also qualify as tax-free income. (Remember to wait until age 59 ½ to withdraw money from your account, or you’ll likely pay a 10% fee.)
A Better Tax Saving Strategy
There is merit to each of these strategies, and they can play a positive role in your financial portfolio. But in my opinion, there’s something even better–one of the tax saving strategies for high income earners that knocks the socks off these other vehicles.
It’s a properly structured, maximum-funded Indexed Universal Life policy. These policies have been around since 1997, and they offer several advantages, particularly liquidity, safety, predictable rates of return, and tax advantage.
The peace of mind of liquidity
Let’s say you have a business opportunity, a real estate deal, or an emergency arise, and you need to access cash fast. If you were to turn to your 401(k) or traditional IRA, you’d pay taxes (and a 10% fee if you’re under age 59 ½). With IUL, you can access your money within a few days via a policy loan. You’d pay zero taxes on the money you borrowed from your policy, and you wouldn’t pay any early-withdrawal penalties for being under age 59 ½.
Safety from market downturns
Your 401(k) and even Roth IRA are exposed to fluctuations in the market. When the market goes up, your account earns interest. But when the market tanks, your account values drop. With an IUL, your money accumulates tax-free when the market goes up, and your money is protected from market downturns by a guaranteed 0% floor, so you don’t lose a dime due to market volatility.
To draw on a real-life scenario, from March 2019 to March 2020, the S&P 500 dropped 15.04% (largely due to the onset of the pandemic and sudden market volatility), which impacted millions of Americans’ traditional retirement accounts. With the guaranteed 0% floor, our IUL clients didn’t lose anything due to market volatility. With the annual reset, our clients with specific indexing strategies in place were in a position to benefit from what happened during the next period. As we look at the point-to-point change a year later (March 2020 to March 2021), the S&P 500 gained 66.33%. The threshold/spread (in other words, the fee) on their indexed account was 5% at the time, so our clients with this indexed account received a 61.33% return over that one-year period (which is the 66.33% return minus the 5% threshold).
Predictable rates of return
As I’ve talked about on my YouTube channel, some people LOVE the thrill of playing the market. They get a rise when their stock-based investments soar 22%. They don’t mind when the market plummets and they lose 40% in one year, like millions of Americans did in 2008. But for the rest of us, our goal is to earn a competitive rate of return that historically has beaten inflation. The average annual return that most people with IUL policies have achieved during the last 30 years is 5% to 10%. And as mentioned above, when the market experiences a downturn, you don’t have to worry about losing cash value due to market volatility–the money in your policy is protected by a 0% floor.
Multiple tax advantages
With IUL, you put after-tax money into an IUL. Why is this a good thing, especially when other financial advisors tout the pre-tax contributions of IRAs and 401(k)s. They often repeat the myth that it’s better to save taxes during your earning years then during retirement, when they say you’ll be in a lower tax bracket. But the affluent often find the opposite. During their retirement years, they find they’re in a tax bracket that’s as high or higher than their earning years. Why? They’ve lost deductions they enjoyed during their younger years, like dependents, mortgage interest, and business expenses.
Other tax advantages of IUL? Your money accumulates tax-free. Now other vehicles offer similar tax-deferred growth, but where the tax advantages really count is in the distributions phase. If you want to access money from your IUL for living benefits like college funds, business ventures, or retirement income, you can do so absolutely tax-free. That’s not so for IRAs and 401(k)s, where you’ll pay taxes on your withdrawals. And when you pass away, your wealth transfers to your heirs income-tax-free in the form of a death benefit, which has often blossomed in value far beyond your original premiums.
So when it comes to tax planning strategies for high income earners, you have options, but among the best in my opinion is a properly structured, maximum-funded Indexed Universal Life policy, or what I call an IUL LASER Fund. Take time to explore your opportunities in-depth, and consider making an IUL LASER Fund part of your balanced portfolio.
Want to Learn More?
Watch the Video
Watch the related YouTube video to see me explain “Where the Wealthy Put Their Money to Pay Less Taxes” (and while you’re there, be sure to subscribe to my YouTube channel so you don’t miss a thing!).
Elevate Your Financial Dimension
Find out how you can improve your Financial Dimension journey and seize the liquidity, safety, predictable rates of return, and tax advantages of an IUL LASER Fund. Explore the in-depth financial strategies and learn from real-life client experiences by claiming your free copy of “The LASER Fund” book at LASERFund.com. Just pay for shipping and handling, and we will send it to you, absolutely free.
Join a Webinar
Want to find out if an IUL LASER Fund (a maximum-funded, properly structured indexed universal life insurance policy) is right for you? Join us for an upcoming webinar where you can explore these strategies.