What if I could show you how to buy dollars with pennies, would you be interested? If you or someone you know is 65 or older, this financial secret is something you certainly want to know about. There are people who are saving their individual retirement account (IRA) for a rainy day or an emergency. Believe it or not, these IRA accounts often are never spent by their owner. People who own these like the idea of having a nest egg to pass to their loved ones if they never need it during their lives.

The After 70 ½ Rule for Your Ira

One major financial setback of an Ira is that sometimes these accounts are taxed upwards of 50 percent when they pass it to their heirs. As people age, Uncle Sam gets greedier. For example, John is 71. He has a pension from his job and social security that covers all of the monthly expenses. He also has $75,000 sitting in an IRA. There is currently a tax code in place that makes it mandatory for John to take money out of his IRA account even if he has no need or desire to spend that money. This is true for anyone who is 70 ½ or older. Worse yet, John has to deduct money out of that account each and every year.

Uncle Sam Needs Your Money Even After You Retire

In case you are wondering why John is forced to take money out of his personal account, the government wants him and everyone else his age to take a distribution each year because individuals pay taxes on the money they withdraw. The reason why this occurs is because taxes are the fuel that runs the government engine. If there are millions of retirees withdrawing money, there are billions in tax revenue generated for the government. As you continue to read, there is a way to turn this “have to” money into “want to” money. In other words, you are going to learn how to look forward to putting a required minimum distribution to work for you.

How to Make Uncle Sam Work in Your Favor

You will most likely be shocked to find out that cash value life insurance is the answer. One reason why people shy away from life insurance is because the annual premiums are so high. This becomes the perfect scenario for a retirement account that has a required minimum distribution (RMD). Instead of John spending money from his (RMD) on unnecessary purchases, he can take that money and purchase a policy that will last for the rest of his life. Perhaps the best advantage is that the money passes to the beneficiary tax free.

Since the distribution is tax free, John has great flexibility with his IRA as long as he knows that he intends to save it for an emergency and pass it to his loved ones. If we compare John’s options side-by-side, it will be easy to conclude the decision that would be in John’s best benefit. If John keeps his money in his Ira, he will have to withdraw money from his account yearly. If the amount taken out is more than the interest earned the value of his Ira is going to decrease. When John dies, the entire amount left over will be taxed before his heirs receive the money. If John places his money in an insurance policy, he may end up spending all of his money down in his Ira as he transfers that money to his insurance policy on an annual basis. However, the difference is that if he purchases a $75,000 policy, the entire $75,000 plus any earned interest will pass to his heirs. If done properly, this strategy will always allow anyone to pass more money to their loved ones without any out-of-pocket expenses.

Obviously, every situation is unique. If you live in the greater Los Angeles area or the Inland Empire, please feel free to ask one of our experts if you need help to maximize the amount you pass to your loved ones, church, or even your favorite charity.

If you are a teacher or any member of the educational community, there is a high likelihood that you are supplementing your retirement plan with a 403(b) or tax-sheltered annuity. If that is the case, pat yourself on the back because you are taking steps to secure your ideal retirement. That stated, you also probably have a 403(b) because it was the only option presented to you. By the time you are done reading this, I hope that you will explore other options and implore your friends and colleagues to do the same.

How a 403(b) works

The purpose of a 403(b) is to set aside a portion of your income now so you will have more income during your retirement.  There are three stages of retirement when you use a 403(b) as your savings vehicle. In this hypothetical example, we will use 30 years as the time-frame to prepare for retirement.

Stage 1 – Contribution

If you decided to place $500 a month toward your retirement, you would have contributed $6,000 ($500×12) that year towards retirement, and $180,000 ($6,000×30) that you have invested. The contribution simply is the amount of money you take out of your pocket to invest.

Stage 2 – Accumulation

Accumulation is the amount of interest that the contributed money yields over time because of compounding interest. For example, if you contribute $180,000 over 30 yrs, that interest earning 10% ( I know it may not seem realistic these days, but it’s just an example to illustrate the concept) would yield $1,139,663.

Stage 3 – Distribution

After you have contributed your $500 each month to watch it accumulate over the years, retirement is the reward. The money you live on during retirement is the distribution. Typical rule of thumb is to live on not more than 5 percent of your total nest egg to ensure that you don’t outlive our money. There are some definite benefits and drawbacks that people should consider when you invest in a 403(b).

Advantages of a 403(b)

• pre-tax contribution
• Deferred taxes

Disadvantages

• taxes paid upon distribution
• you don’t know the rate that your money will be taxed upon distribution
• the money you take out in retirement may be taxed at a higher rate than the amount you saved on the money you put in years earlier

As teachers started to realize that their nest eggs were going to be depleted by taxes, they decided to explore other options that gave them more favorable tax treatment. With tax sheltered annuities, you simply delays taxes. Therefore, a more fitting name would be tax delayed annuities.

My objective was to simply open your eyes to explore other options that have:

• No loss of principle in the stock market
• More favorable tax treatment
• No taxes upon withdrawal – if structured properly
• No contribution limits

When you are able to find retirement investments that offer these benefits, you should take advantage of them because any investment that is missing any of the benefits above has the potential to diminish your long-term wealth building capacity.

Most of us believe that insurance is only for our loved ones when we die, but some types of life insurance fulfills a variety of personal needs and wants while we are still living. The following points can help you decide how to choose between term insurance, permanent insurance, or a combination of both.

Term Insurance

Advantages

• Cost of insurance is lower. If you are healthy, you can buy dollars for pennies
• Ideal for young families who have a limited budget but have a need for lots of insurance
• Coverage lasts between 5 and 30 years. For example, if a person has 24 years left on a $250,000 mortgage, they can get $250,000 of coverage for 24 years.

Disadvantages

• Once the contract ends, it is expensive to renew
• If the policy lapses, it is very difficult to reinstate
• Term policies do not accumulate cash value
• Coverage ends

Permanent Life Insurance

Advantages

• Offers coverage for the insured’s entire life as long as the premiums are paid
• Premiums can be flexible or fixed depending on different financial needs
• Significant tax advantages
• College savings inside of cash value do not increase the parent’s expected financial contribution for college
• No probate. If a spouse passes away, the proceeds from insurance can’t be used to pay outstanding debt in the insured’s estate
• The policy accumulates cash value, which the insured can access during his or her lifetime and, if structured properly, can provide income during retirement

Disadvantages

• Initially larger premiums are required to properly fund this type of policy
• Some plans provide few or no guarantees, and while increased benefits may occur, poor investment performance can cause a reduction in the cash value account, the death benefit, or both. Be sure to get the product that best meets your needs and risk tolerance

Combination of Term and Permanent Life Insurance

To determine if you need both types of life insurance, consider using the DIME method:

D = Debt – If you pass away prematurely, you want to make sure you consumer debt like outstanding car payments or student loans for your children.

I = Income – It is recommended that you get between 7 to 10 times your income in coverage. This amount is meant to replace your income for 7 to 10 years.

M = Mortgage – How much does is your mortgage?

E = Education – When your children do go to college, how much will it cost for them to attend college four or five years?

When you add up these four figures, you will know how much insurance you need. Your debt, mortgage and education are temporary, so term is appropriate to cover those amounts. Your income will hopefully increase over your lifetime, so permanent insurance is appropriate for this amount. However, this example is over-simplified to provide a basic understanding. Every individual and family has a different set of circumstances, and therefore, you should see an insurance expert to discuss your specific needs.

This blog post is a continuation of a 7 part series on life insurance. You can find the first post here: http://www.your-insurance-experts.com/why-get-life-insurance-part-1/

Using Life Insurance for Favorable Tax Treatment

If you had a dollar that doubled every year (100 percent gain) for twenty years, you would have $1,048,576, which would be fantastic. However, if that money was taxed each year at 30% you would have a meager $40,642. I am in agreement that we should all pay our fair share of taxes, but I also believe that we should make ourselves aware of ways to redirect our hard-earned money that favors us. Permanent cash value life insurance is a way to place large sums of cash, and if structured properly, receive the growth of that cash free of income taxes (based on current tax laws as of the time of this writing).

Perhaps you are wondering why you did not know about this, and how is it possible to have an increase of cash value without having to pay taxes. Firstly, it is important to understand that many insurance professionals only know insurance and many financial professionals only know finance. Utilizing cash value as an investment strategy within a life insurance policy combines two different professional industries in one product. As time passes, more professionals are starting to see the value of understanding both industries, but this process is still in the infancy stages.

The money you place in cash value life insurance has already been taxed by the time it enters your bank account. Because the money is a part of a life insurance policy, there is no tax liability on the growth as long as you stay within the funding limitations from the government. For example, Justin needs $500,000 of coverage. Depending upon policy variations from one insurance company to another, he could put around $1,400/mo. into his policy. At age 70, he could have around $2,000,000 even after the fees and cost of insurance. Additionally, he still has $500,000 to pass to his heirs. The best part of the $2,000,000 is that he has access to that money tax free!

You may have noticed the many disclaimers about having a properly structured cash value life insurance policy. To illustrate this point, a dragster racing car requires a special type of fuel and a properly structured racing course to get the maximum use out of that type of high performing vehicle. A specific combination of methanol and alcohol are used as fuel to help these cars to reach speeds in excess of 300 mph in less than 5 seconds. If I decided to fuel a dragster with unleaded 87 fuel, and drive it around the neighborhood, could I possibly get the maximum use from this vehicle? Absolutely not. Similarly, cash is the fuel and time is the course for this type of funding vehicle. Along these lines, someone with a cash value life insurance policy should put as much cash as the policy will allow for at least 20 years to accomplish the absolute best benefit. I would imagine that there is no exhilaration like going from 0 to 100 mph in less than a second. Likewise, having access to over a million tax-free dollars is a thrill like no other.

In the next blog post I will discuss how the Real Power in Cash Value Life Insurance comes during Distribution…