Little-Known Tax Shelter Could Provide Relief for Average Americans

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With the fear of tax increases on the horizon, the average American who has most of their money in tax-deferred accounts faces a potential tax time bomb that could derail their retirement plans. Families should consider the tax shelter aspects of cash value life insurance policies, a strategy which is underutilized and often misunderstood, according to the financial firm Wealth Preservation Strategies of NJ.

How Much of Your Retirement Income Will Uncle Sam Keep?

The average American faces a potential tax time bomb that could derail their retirement plans.

In Part I of this three-part series, several facts important to the welfare of average Americans were explained:

  •     Taxes are relatively low now compared to the average tax rates of the past 100 years. and could increase significantly in the near future.
  •     Many Americans have the majority of their retirement money in tax-deferred accounts. Any withdrawals from these accounts are taxable.
  •     A minority of Americans have money in tax-free accounts, and even for those who do it’s often a small percentage of their money.
  •     There are limited tax-free investments available to Americans: municipal bonds, Roth accounts, and the lesser-known cash value life insurance policies (if properly structured).
  •     Municipal bonds are usually only a good fit for those in higher tax brackets, and Roth accounts have income and contribution restrictions, and early withdrawal rules to follow.

Cash value life policies, on the other hand, have no such restrictions. When properly structured, which means following the guidelines established by the IRS (IRC 7702) and three Acts of Congress (TEFRA-1982, DEFRA-1984, and TAMRA-1988), cash value life policies can provide a significant tax shelter with the following flexibility:

  •     No income restrictions-anyone of any income level can participate.
  •     Virtually no restrictions on the amount one can pay into the policy, as long as one spreads out the payments over a minimum of seven years. Ultra wealthy individuals might have some limits on how much they can contribute, depending on the insurance company, but the IRS has not capped out the amount like they have for IRAs, 401(k)s, and other plans.
  •     No early withdrawal penalties before age 59 ½. At any age, for any reason, one can either withdraw or take a loan against the cash value of the policy, usually up to about 90% of the value. The IRS will not penalize you if you are under 59 ½, like they do for qualified plans.

There are many applications for using cash value policies, such as for college planning, a future business loan, or a down payment on a home. When it comes to retirement planning, it is a more flexible instrument than Roth IRAs while still maintaining a similar tax-free treatment, if one follows the guidelines above. Of course, these policies always have a tax-free death benefit attached to them, which can be a huge benefit to beneficiaries in the event of premature death or for legacy planning purposes. With so many benefits and so much flexibility it’s no wonder these policies are sometimes called a “Roth on Steroids."

These policies are not the perfect solution for every individual, and anyone considering this strategy should meet with a qualified insurance professional to discuss the pros and cons for their unique situation. It’s not as familiar to most Americans as their 401(k) plan, and lack of education has kept many from considering it as a tax shelter that, if properly structured, could potentially provide years of tax-free income for retirees.

Part three of this 3-part series will explain how an average working family might use this strategy to build themselves a tax-minimized retirement.

Brian Solik, CRPC is President and Founder of Wealth Preservations Strategies of NJ. He is a former Wall Street broker who now focuses on educating investors on how to maximize their financial security and minimize taxes. If you would like to receive the remainder of this article contact Brian at 732-415-7717, bsolik(at)brokersifs(dot)com or visit his website

Securities and investment advisory services offered through Brokers International Financial Services, LLC, Panora, Iowa. Member FINRA/SIPC. Brokers International Financial Services, LLC and Wealth Preservation Strategies of NJ are not affiliated companies. The opinions expressed are those of Brian Solik and not necessarily those of Brokers International Financial Services, LLC.

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