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We have all heard the saying, “the only things that is certain are death and taxes”. Well that might not be entirely true. In today’s sophisticated financial market place, there are a few products that are specially designed to avoid federal income tax in retirement. When retirees strategically combine them together, it is possible to have an effective tax rate of 0%, even at a
Knowledge of tax codes combined with multi account planning levels will allow future retirees to efficiently save for their
golden years, while stretching their retirement savings by saving 15% – 25% by avoiding payment to the IRS. Here is a quick summary of what an effective plan needs…
Roth IRA: This is the best gift congress has ever given to the American middle class. Utilize it to its full potential. Start making maximum yearly contributions for both husband and wife. The contribution limit was just increased for those who do not have access to an employee plan. Some employee plans even offer Roth 401k plans with much higher limits even for high income earners.
Roth Conversions: The most recent tax cuts are not yet permanent, so while taxes are 20% lower, it may make good financial sense to convert part of your IRA each year for the next 5 years. Your CPA should be able to let you know what your threshold is to keep you out of the next highest tax bracket. Paying extra tax now while you are working for a few years is a good trade off to avoid higher taxes in retirement, with a possibility of avoiding them all together!
Maximize Social Security: Social Security was designed to be a tax-free benefit. It only becomes taxable when your other “taxable income” (i.e. Pensions, IRA RMDs, etc.) exceeds a certain household threshold. Have a conversation with your CPA with your projected Social Security Benefit amount to set up your maximum tax-free income target.
Overfund an IUL: For decades, the IRS has allowed for certain distributions from life insurance products to be tax free (IRS code 7702). Thousands of policies are sold each year to savvy consumers wishing to take advantage of this provision while protecting their family from the untimely death of family members. Life insurance also provides tax free death benefit for income replacement. Many Life policies also protect your financial future by offering accelerated death benefits which can pay out a portion of the larger death benefit for chronic care (Alzheimer’s), critical care (Heart attack or Stroke), or terminal care (Cancer) so that your retirement is not devastated by an unforeseen health crisis.
By utilizing all these strategies together in your retirement income planning, there is an excellent chance that you could drastically lower your tax liability in retirement, if not avoid