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Do You Know Your Retirement Tax Bill?

Fact Checked by Jason Herring & Barry Brooksby
Licensed Agents & Life Insurance Experts.
As a licensed insurance agency, Insurance and Estates is committed to integrity in our editorial standards and transparency in how we receive compensation from our insurance partners.
tax bill in retirement

The following is the full transcript of the webinar titled Do You Know Your Retirement Tax Bill? We have added additional links where we felt it would be helpful. If you have any questions pertaining to this topic, please feel free to leave a comment below.

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Steven Gibbs:                    I’m excited today. This is going to be a groundbreaking webinar with my pal, Jason Herring. Excited to start focusing on some of these concepts around IULs, index, universal life. And Jason is our resident expert on IULs. He spent many years in the industry at various levels with various companies doing a lot consulting with other agents. Well versed in these advanced concepts having to do with permanent life and in particular index universal life.

For those of you joining us for the first time, I’m Steven Gibbs. My background is as an estate planning attorney who became fascinated in permanent life insurance strategies. Called together a team and started up our Insurance and Estates platform. And Jason, I’ll let you jump in and just offer-

Jason Herring:                    Sure.

Steven Gibbs:                    … a little background on you.

Jason Herring:                    Going back in history. I’ve got my life in health license back in 2010, and at the same time was able to secure my Series 6 and 63. So I am registered with FINRA. From a planning aspect like that, with my Series 6 and 63 being registered and housed with the Leaders group. So I spent the first part of my career, really, as a wholesaler. I was calling on financial advisors, teaching them how to do more advanced life insurance concepts with their clients, because all financial advisors are really good at doing stocks, bonds, mutual funds, growing assets. But what we saw, and what some of these larger firms, some of the big broker dealer houses, warehouses out there saw, was that their advisors self admittedly are not very good at protecting assets.

So we were asked to come in and work with these warehouses, these larger firms, to really teach them not only how to protect the assets, but how to look at some advanced life insurance concepts as well. So I did that for a long time. Really enjoyed it. And really back, 2017 or so, ’18, found you here at Insurance and Estates and have really just kind of thrived in helping people. Our backgrounds mirror so well, because you enjoy the planning side of it. I enjoy the planning side of it. We are not product pushers. We’re an independent organization. We don’t care which companies, which products we use. We just take the best products out there and fit them with each customer, with each client’s goals.

Steven Gibbs:                    And you mentioned something really interesting. I had an uncle that was in the life insurance business that kind of mentored me a little bit growing up, and he would always say, “All offense, no defense.”

Jason Herring:                    Right.

Steven Gibbs:                    That’s a big problem. And obviously we’re going to talk some defense today. And the beautiful thing about what we’re doing here together as a team, is that we’re sort of marrying offense and defense to a certain extent because we’re going to be talking about growth.

Jason Herring:                    Right.

Steven Gibbs:                    But we’re also talking about sort of defending against some-

Jason Herring:                    Sure.

Steven Gibbs:                    … of these risks and specifically per the title of our webinar today, Rising Tax Risk, keeping offense and defense in mind. Jason, let’s jump in. I know we’re going to talk about a lot of interesting things that people are waiting to hear here.

Jason Herring:                    Well, no, I appreciate it, Steven. And one of the concepts that we focus on here at Insurance and Estates is really using tax advantage strategies to help grow and have potential tax free income. So we do specialize in income and retirement planning. We specialize in maximizing cash value planning. But when you’re looking at income and retirement, it seems like everybody out there, all the financial advisors, anybody you talk to, is always going to be focused on growth. How do we grow these assets? How do we maximize the assets so that we have as much retirement income as possible?

So growth is obviously a very, very important part when you’re looking at income and retirement. But too often, what we’re seeing is that people are not paying attention to the taxation side as well. And one of the great lines I’ve heard for years is that when you retire one day, you cannot spend percentages, Steve. All you can spend is cash. And you need these two areas. You need growth and you need some taxation risk mitigation to make sure that you’re able to maximize the amount of income that you have in retirement.

So both of these are important, but they’re both very important equally. And we have some data that really kind of backs this up for you. Because when you’re looking at saving for retirement income there’s two ways that you can handle taxes, you can either pay taxes today. And there’s some vehicles that allow you to do that. But what we’re seeing is, and what society has taught us over the past three or four, five decades, is that the most advantageous tool to use for retirement income savings are tax deferred qualified money accounts, things like 401ks and IRAs, because-

Steven Gibbs:                    Right. Very familiar to everybody listening. And guys, this is not a new thing that we’re touching on here with Jason. We do talk a little bit about sort of the traditional mindset. Some of the, maybe thinking a little contrarian here with some of this planning, or at least for a portion of the assets as a planner.

Jason Herring:                    Absolutely. And obviously Steve, you and I are not CPAs. So we don’t tend to, or we don’t claim to be given a lot of taxation advice. And we’re also not zealots from a standpoint that we don’t think that you shouldn’t take advantage of any types of qualified money. And what I mean by that is we don’t counsel our clients to walk away from free money from your employer. But what we see a lot of times is we see people getting that match with their employer and maybe they’re continuing to max fund a qualified tax deferred bucket of money. And really all they’re doing is, we’ll see from today, is they’re just kind of creating this tax bomb that’s going to have to explode one day down the road. So everything we’re working with here is how do we kind of mitigate that rising tax risk? Okay. And this is-

Steven Gibbs:                    So Jason, I’ll jump in on that.

Jason Herring:                    Sure.

Steven Gibbs:                    I mean, I have experienced that as a planner. Sometimes people, their biggest problem as an older person is actually having to take the required minimum distribution on a retirement account-

Jason Herring:                    Yep.

Steven Gibbs:                    … and having that drive them into a higher tax bracket.

Jason Herring:                    Absolutely. So what we’re trying to talk about today is really being diversified, and having a good mix of qualified money, and a good mix of non-qualified money, so that you have more control over your taxation when you do get into retirement one day. Because you can see when you’re looking at some of the risks there involved in retirement income, and we’ve touched on the two so far being growth risk and taxation risk. This is a great example to kind of walk through what can happen when things go a little south on both of those two sides of the equation.

So we have a 64 year old male here who has built up a million dollars in a qualified IRA and he’s getting ready to retire. And he wants to ensure that he has income from his IRA till age 100. So he’s getting ready to retire, so the portfolio has been switched to where he’s got 50% in equities that are earning 8%, and he’s moved the other 50% into fixed income earning at about 2.5%. And he’s an effective tax rate of 20%. So we do the calculations, we do the math and we see that he can project a $50,000 after tax income and his money will last him until he gets to age 100. So this gentleman is excited. He’s found a way to secure a $50,000 annual income out of his million dollar IRA from ages 65 through age 100.

But once again, Steve, his equity’s earning an 8% growth rate.

Steven Gibbs:                    Right.

Jason Herring:                    So what happens if he doesn’t get that? And let’s just say that we drop his equities down to a 5% earning rate. Well-

Steven Gibbs:                    You got to be a little careful. There’s a lot of liberties out there when it comes to illustrating your average market returns over, especially when you’re just looking at, say an average 8%. Right, Jas? So you’re saying, that’s assuming that could be a fairly-

Jason Herring:                    That’s assuming an 8% average over the remainder of age 64 through 100. Yes.

Steven Gibbs:                    Right. There you go.

Jason Herring:                    Right. So what happens when the equities only earn 5% instead of 8%, is that the client now has to take an $8,000 pay cut every year. So growth risk, once you get to retirement, is certainly a real risk. But unfortunately, what we see is a lot of people focus on the left side here, and they’re only looking at growth risk with their money. We’re not even looking from a tax risk standpoint as well.

Steven Gibbs:                    Ah.

Jason Herring:                    So what would happen if he went from a 20% tax bracket and Congress comes in and now he is in a 30% tax bracket?

Steven Gibbs:                    Right. Which I think a lot of folks are thinking is probably at least a possibility at this point.

Jason Herring:                    Definitely a possibility for sure. And we’ll definitely get into that here in a second. But you notice that he also has to take a pay cut. So with everything being focused on the growth of the assets, what we try to do here at Insurance and Estates is really get you to think about the right side of this equation as well. It’s not just about what happens with growth, it’s what happens with how much money do you actually get to keep. So every person that is saving for retirement or every person that is in retirement is always asking the question, “Where are tax rates heading?” We want to know where taxes are going.

Well, there’s really three ways or three things that can happen to taxes. Taxes can either be lowered, which we did get to experience back in 2017. And we’ll touch on that as well. Tax rates can stay the same, or we could see an increase in taxation here down the road. A lot of our tax situations, and what we’ve been taught is that our tax rates are going to be very situational based. And it’s going to be depended on how much income we want in retirement. So we’re going to be able to dictate what our tax rates could be based off of the amount of income we need plus based off of how we actually file our taxes through a joint or a single. So those types of situations with situational taxation, in our minds we think that should help us to lower our tax bracket. And this is what we use.

Steven Gibbs:                    Right. So that’s a huge point, Jason. So this whole idea of required minimum distributions and having rules around that. What you’re saying is that you need to have a portion of your assets so that you have some discretion around that.

Jason Herring:                    You do. You want to have a balanced portfolio to where you are not at the mercy of somebody depending on how much money you get to keep.

Steven Gibbs:                    Yep.

Jason Herring:                    And we’re going to get into the legislative risk of that. But this is the strategy right here that we’ve been taught our entire lives, is that during your working years, you’re making more income so therefore you have a higher tax bracket. And the thought process is there that this is the best time to defer those taxes, because you want to be able to, while you’re working each year, keep as much money as you can and let those taxes defer. So the thought process with that is that once you do reach retirement age one day, you’re going to have your house paid off. You’re going to have all your bills taken care of, and you’re not going to need as much income.

So therefore, you should be able to shift to a lower tax bracket and pay all of that growth on these tax deferred accounts, to be able to pay those in a lower tax bracket. And there’s a generation out there that has done that. If you look, and when we start comparing generations, the Greatest Generation has learned that when they retire, they have reduced their lifestyle. And by reducing their lifestyle, they need less income in retirement, which in essence has reduced their tax liability to where they throw them down into a lower tax bracket. So the Greatest Generation has done a good job with that. But you and I see this every day, just in our practice at Insurance and Estates. The Baby Boomers and beyond, they don’t want to make lifestyle changes in retirement.

Steven Gibbs:                    Yeah. I’m thinking about my grandfather and how he did pay off his house. He was in the same house for pretty much his whole life. They ended up with a place in Arizona. I’m from Minnesota, originally. And it was a completely, this idea of scaling down your lifestyle was completely a given. The other thing is a lot of people in that generation had pensions. We’ve seen that kind of go away.

Jason Herring:                    Yep.

Steven Gibbs:                    Pensions offer a lot of times guaranteed income. Yeah, so the Boomers are different.

Jason Herring:                    The Boomers are definitely different. And we hear it every day. When we’re designing plans for tax-free retirement income, nobody’s telling us that they want to take pay cuts. They’re trying to maximize, because they don’t want to change their lifestyle. So when that happens, you’re probably looking at staying in the same tax brackets, because you’re going to be looking at the same amount of income. Well, once we introduce Congress and the legislative branch to this entire equation, typically over the years, what we see is we see a higher tax rate with that.

And there’s several reasons that point to that. First of all, I know we all talk about this every day. Federal deficit now is $30 plus trillion. It’s now larger than the US economy. And it’s just growing and growing and growing every day. All of us have set here and watched Congress debate trillions upon trillions of more dollars in tax and spending bills. So we know that Congress doesn’t really have an appetite right now to reduce spending. Everything is about spending more money that we don’t have, that is just growing to the depths.

And we all remember back during the elections. We remember the famous comment of, “Nobody making under $400,000 per year will have their taxes raised period.” Well, I think all of us are wise enough to know that that just is not going to happen, based off of a $30 trillion deficit, trillions of dollars more in spending. They’re going to have to make up some shortfall somewhere. And so when you get the legislative branch involved, we start looking at what are some future ways that taxes could potentially be higher? Well, the first thing we look to are brackets.

So we are currently sitting in some very low tax brackets that are set to expire at the end of 2025. Because in 2017, Congress passed and President Trump signed the tax break incentives that we have.

Steven Gibbs:                    Yeah.

Jason Herring:                    But they were set to expire at 2025. So unless Congress gets involved, we’re going to revert back to the old tax bracket rates that we had back before 2017. So very good chance that we could see some rising income tax brackets here in the future. Deductions is a huge way that we could see an increase in taxations. Steve, if you make $100,000 a year and they’re giving you $20,000 of deductions, you have an $80,000 taxable income. But if Congress decides to allow now only $10,000 of deductions, it doesn’t change your bracket, but you pay more tax.

Steven Gibbs:                    Right. And so if you’re above a certain threshold, then you’re going to pay a higher percentage as well. So for those of you that are sort of students of the whole tax game-

Jason Herring:                    Yep.

Steven Gibbs:                    … that’s a reality

Jason Herring:                    And we never know what new taxes could come along either. I think back to the Obamacare taxes that we saw, the penalties that you had to pay, if you didn’t have credible health insurance. Right now, Social Security income is taxed at 85%. That’s another way they could tax that at 100%. It’s not going to kick you into a higher bracket, but you do not get to keep as much of your money. So all of these things add up to the legislative risk. And when Congress gets involved and they start looking at your retirement accounts, I’ve heard this said, and I think it’s a great strategy, that you have to remember the tax code for your retirement accounts is written in pencil. And it’s up for election every two years, because we never know what’s going to happen with this.

Steven Gibbs:                    Yeah. Yep. We saw that a couple years ago with the Secure Act-

Jason Herring:                    Sure.

Steven Gibbs:                    .. and changing beneficiary retirement accounts dramatically.

Jason Herring:                    And that leads us to thinking about taxation. And what we see with all of these qualified tax deferred accounts, is that people tend to think about taxation from a micro level. They look at it from a standpoint of, “How do taxes affect me this year? How do I get to save as much as possible this year in taxes?” Instead of looking at taxation from a macro level, which really kind of explores, how do we reduce our taxes over our lifetime. Instead of having that immediate gratification of this year, how do we reduce our taxes over our lifetime? And we have some great analysis here that kind of helps you with this macro level thinking.

So in this scenario here, we have a 64 year old female. She has a 25% tax liability and she currently has a half a million dollar IRA that is we’re planning for about a 5% growth rate in retirement. So she has saved up and she has money in other places. When she starts having to take her required minimum distribution at age 72 and a half, she is not going to need all of that money for retirement purposes. And this is something, this is real world. We see this a lot, where people do not need all that money. They wish they did not have to take that requirement minimum distribution, but you have to.

Steven Gibbs:                    Yep.

Jason Herring:                    If you do not take that money, the penalty is 50% of what the distribution should be in taxes.

Steven Gibbs:                    Right. I threw out a little teaser about that earlier.

Jason Herring:                    Yep.

Steven Gibbs:                    That’s a big-

Jason Herring:                    You sure did.

Steven Gibbs:                    … problem. Yeah.

Jason Herring:                    They sure do.

Steven Gibbs:                    They have to take it and it might be pushing them into a higher bracket and so on and so forth.

Jason Herring:                    Could easily push them to a higher bracket. So what we’re seeing when we look through, these are all the different taxes that could come about from tax deferred accounts. So we have her living to age 90 and then she passes away. But what she’s going to do is she’s going to use the money not needed from her required minimum distribution. And she’s just going to simply reinvest that. And we do see that a lot. People that take the RMD, pay the taxes on it and then turn around and reinvest it.

Once again, it’s just creating a larger tax issue as you walk through these numbers. So the total taxes paid on her RMDs are going to be $204,000. The growth of the reinvested RMDs that she does not need is almost another $100,000 at 96. And then when she passes away, when this money drops to the next generation and they cash out the IRA, there’s another $156,000 in taxes that have to be paid.

Steven Gibbs:                    Right.

Jason Herring:                    So when you look at a total tax bill over her lifetime here, $456,000 from looking at this from a micro level, putting this money away and how does it save her each year? Instead of looking at it from a macro level.

Steven Gibbs:                    Well, Jason, I like that you talked about the taxes upon death. And I mentioned the Secure Act, it did change that. For inherited IRAs, they have to distribute within 10 years. So they can’t even stretch it like they used to be able to.

Jason Herring:                    They can’t. And it used to be a lot of generational wealth was created by some very smart and very disciplined people that would stretch the IRAs that they received from their grandparents even, and just take their required minimum distribution and turn these in to basically kind of an artificial pension. Really nobody our age is probably are going to have… We might be the last generation that has a pension. But with the Secure Act, that money has to be distributed by the 10th year of the death of the second spouse. So this tax bill that used to be somewhat of a maybe, is now a reality, because the money has to come out. You’re for sure. Yeah. That’s a great point, Steve.

Steven Gibbs:                    So that tax bill is multifaceted.

Jason Herring:                    Yep.

Steven Gibbs:                    It’s not just in retirement. Though, that’s the big one people probably are mostly concerned about it. It also kind of transcends that.

Jason Herring:                    Right.

Steven Gibbs:                    All right.

Jason Herring:                    So when you think about taxes from a macro level, there’s got to be a better solution to help you mitigate some of this taxation. So there’s a vehicle out there obviously called a Roth IRA. And a Roth IRA is a individual retirement account that can be contributed with after-tax money. So money that you’ve already paid taxes on you contribute to the Roth IRA. The money, the growth is tax deferred, and you can take the income one day income tax free. So in this scenario here, at age 64, with a 25% tax liability, she simply decides to go ahead and take the hit today, when tax rates are at their lowest, when tax brackets are at the lowest, and do a Roth conversion so that everything after this can be received income tax free.

So when she does this strategy, she’s going to have $125,000 upfront that she needs to pay. But the growth on the IRA is going to be tax free. And the taxes paid to the next generation at her death are also going to be tax free. So her total tax is paid in this scenario is $125,000. So just a better, not just a better, but just a different way of thinking about from a macro level, how do we reduce taxations over our lifetime?

Steven Gibbs:                    It’s a good example. Jason, you’re so conservative and hesitant to say better, but the numbers look pretty dramatically different, correct?

Jason Herring:                    Yeah, they do. And what’s nice about these numbers is that we have these numbers now available for our clients, Steve. So for anybody that visits our website at insuranceandestates.com and visits our webpage that we have there for the Retirement Tax Bill

Get My Retirement Tax Bill Now!

Steven Gibbs:                    Yep.

Jason Herring:                    … you can enter all of your own personal information and we will generate the potential tax impact report for you. It’s about a four page report, that will be emailed to you. And just really gives you a really nice idea of your choices that you have.

Steven Gibbs:                    So important that we created that special resource under our resources tab that Retirement Tax Bill page. It’s got some guidance that the link to go and get your retirement tax bill calculated, is right there and click on that. And then yes, Jason’s calendar is there as well. So when you’ve done that, you can then get his feedback one to one in terms of the numbers and understanding on how they look and how you might reallocate or make a change there in order to prevent some of that exposure.

Jason Herring:                    Yeah, so total potential taxes paid in our last scenario, we’re looking at $450,000 possibly with tax deferred accounts versus what we know would be more of a reality of $125,000 with a non-qualified account. So that whole scenario, Steve, was built on what happens if taxes just stay the same. And I think we’re being very generous when we look at taxes, when we talk about taxes, staying the same. What happens if taxes were to increase? Well, when you look at the middle quintile of America. This is middle America. This is your middle class. Everything on the left pays lower taxes. Everything on the right pays more taxes. But this is the middle Heartland of America. When you’re looking at the middle quintile of taxes.

Steven Gibbs:                    Quintile’s a cool word. I’m not sure I even-

Jason Herring:                    That is a cool word.

Steven Gibbs:                    You might have actually come up with that. I don’t know.

Jason Herring:                    Did I say that correctly? Quintile.

Steven Gibbs:                    I think you did.

Jason Herring:                    So, there you go.

Steven Gibbs:                    No, you did. It’s just an interesting word. Quintile.

Jason Herring:                    So what are some historical numbers with this middle quintile when we’re looking at tax brackets? Well, in 1998, not too long ago, we think taxation, but we look, hey, 20 years ago, 1998, the middle quintile was in a 28% tax bracket. And thanks to the lowering of the taxes back in 2017, we’re currently in a 22% tax bracket. But while that doesn’t look like huge numbers, it actually represents that back in 1998, the tax bracket rates for 30% higher than they were in 2018. So just going from 22 to 28% there. So how does that translate to the example that we had? And I don’t think it’s farfetched. I mean, if Congress is sitting around and they’re trying to figure out how much can we raise taxes. Would it be easy for them to simply just say, do you think the public could accept going back to 1998 levels?

Steven Gibbs:                    Logically, you could see that.

Jason Herring:                    Logically you could see that.

Steven Gibbs:                    You can see those government wheels turning, I suppose.

Jason Herring:                    Yeah, exactly. So if we take our 64 year old female and we keep everything the same, but now starting in five years, she moves from a 25% tax bracket to now a 32.5% tax bracket. And we keep everything the same. All of her taxes go up in which her total taxes paid are now $578,000. Which, if she keeps everything from a macro level and goes ahead and takes the hit today and pays the taxes, then everything would still remain the same. So over time with no changes to tax brackets whatsoever, you’re looking at a difference of $450,000 in taxes versus $125,000. If we simply just go back to 1998 taxation tax brackets, you’re looking at an increase of $130,000 in taxes. And the scary thing really, Steve, is we don’t know what would happen if we had even more. Right. I mean, to look at some additional taxation that’s out there.

Steven Gibbs:                    Correct. There’s some big bills to pay there.

Jason Herring:                    Yep. For sure. So a couple ways that we help you at Insurance and Estates, we’ve already touched on this, but we really do approach everything from a holistic type of planning. Our process is very simple. You book an appointment on my calendar, 30, 45 minute appointment. I just learned during that call a lot about you and your goals, and what you want to accomplish. From there, we can do some very detailed analysis with some of the software that we have and show you what your potential tax impacts would look like. And then we can show you also some alternative strategies that people are using outside of the Roth IRA to contribute money for potential tax free income one day down the road.

Steven Gibbs:                    And if you guys, wherever you’re watching this webinar, there should be a link underneath to access that page. And then once you’re on the page, then you can either you can run the Retirement Tax Bill initial numbers or connect with Jason directly.

Jason Herring:                    I think Judge Hand here really wraps this up pretty well when he said at one time, “That there are two systems of taxation in our country. One for the informed and one for the uninformed.” And that’s really our goal at Insurance and Estates is to inform you as much as possible about some alternative strategies that are available, strategies that have been in play for years and years. And they’re also strategies that all of our politicians on Capitol Hill take advantage of. And they use these strategies. And a lot of people don’t realize that the general public has these strategies available to them as well. So that’s what we do a lot here is we work on, number one, education. And I think you’ll see with Insurance and Estates, it’s one of the top ranked websites out there. Any information that you want on advanced planning, advanced life insurance concepts are available there.

Steven Gibbs:                    Absolutely well said, Jason. And to some extent, guys, for you listening, I mean, there’s a battle for dollars out there. A lot of times you’re getting all kinds of financial advice, but maybe the thing that you might consider is if there’s a conflict of interest going on with some of that, again, we started this and come at it from a planning perspective. Certainly just to have balance, suggesting that there’s not necessarily a one thing that somebody should do and ignore all the rest. So we want to at least encourage people to understand this predictable side of wealth building, this tax savings component of any plan. And we’re passionate about it. So definitely do the homework.

Jason Herring:                    So when we’re looking at alternative strategies and we’re looking at strategies that have been around for years and years and years, and you’re looking at strategies that companies like Walt Disney, McDonald’s, Mary Kay, all of these companies were founded from very successful, very bold, ambitious entrepreneurs, simply using the cash value in a life insurance policy to start their business.

Steven Gibbs:                    Yep.

Jason Herring:                    So we talked about the Roth IRA, Steve, and that’s a great option that’s available to you. And it’s an option that really was born a little bit from cash value in a life insurance.

Steven Gibbs:                    If you look at any major bank, corporation, they have huge portfolios of life insurance. There’s a reason there’s tax advantages attached to it, Jason.

Jason Herring:                    Well, and you’re right, Steve. I mean, one of the greatest gifts that the IRS has ever given us is Section 7702 of the tax code. Because so many people, when you think about 401(k) 403(b), these are all qualified accounts that are just simply tax code numbers. So you flip open the book, the tax code, and you see the Section 401(k). You flip two pages over and you see 7702 and we spend our entire lives, society talks about 401(k). But not enough people talk about 7702. And all that is, is just a favorable way that the IRS has given us to be able to take cash value out of a life insurance policy, income tax free.

So when you’re dealing with 401(k)s and you’re dealing with Roth IRAs, so we talked about in our scenario today, the client basically doing a Roth IRA conversion, paying the taxes up front to have tax free income after that. If you’re 35 years old and you’re saving for retirement, you can have a Roth IRA, as long as you and your spouse don’t make over roughly about $200,000 of income. But there’s limits to how much you can make and there’s limits to what you could put into it. So if you wanted to open up an individual Roth IRA account, 2022, you really can’t put more than $6,000 into it.

So you don’t have a lot of large buckets of money. I guess you don’t have a lot of options to where you could put larger buckets of money, I guess is a good way to say it. So what’s attractive about the 7702 with life insurance, and as long as you’re working with people like us who have for the past 12 to 13 years have been designing these contracts every day with the ultimate goal of not death benefit protection, even though it’s still a nice goal to have, but the ultimate goal in this scenario here is more built around maximizing cash value growth for potential tax free income one day.

Steven Gibbs:                    Yep.

Jason Herring:                    And the nice thing about this, there’s no limits to how much you can make, and there’s no limits to how much you can put into it. So in this scenario here, what we did was we took a 35 year old female who was very healthy and she’s currently contributing about $12,000 per year into her 401(k) at work. And this is above what the company is matching. So she’s getting her free money. Let’s just say up to 6% and then she’s put in another $12,000 per year. So if she continued to do that into her tax deferred bucket, she could potentially run into all the problems that we’ve discussed today about the tax bomb that’s going to happen as she gets later on in life.

So if we’re looking at a different strategy for her to take advantage of, we could simply just reallocate those dollars going to the 401(k). This is not new money. This is just relocating dollars from the 401(k) into this strategy. And we’re going to purchase the least amount of death benefit that we have to purchase. And in this scenario, the computer tells us it’s about $282,000. So by keeping your death benefit extremely low, instead of maximizing a death benefit like you would with a term policy or some other type of insurance policy, we’re actually keeping the death benefit low. And that allows her cash value to grow very quickly. So what we did here is we mimicked what she’s doing in her 401(k), Steve. We just put in $12,000 a year, and we just said that she’s going to continue to pay that until she retires one day at age 65.

Steven Gibbs:                    Yep. For you guys, so this is a first. It’s basically an illustration example of how these policies are demonstrated over time.

Jason Herring:                    But this is an illustration. We’re averaging. If you remember in the strategies we were showing with the equities account, we were showing an 8% rate of return. We’re just trying to average a 5.74% rate of return over the life of the policy here.

Steven Gibbs:                    Which is typical, by the way. Life insurance is illustrated much more-

Jason Herring:                    Much more conservatively.

Steven Gibbs:                    … conservatively than other kinds of accounts.

Jason Herring:                    Exactly. So by minimizing the death benefit, we’re allowing the majority of your premiums here to go to the cash value accounts, not going to pay cost of insurance. So one day when you turn 65, you’re going to retire. There’s no more premium that’s needed. And what you’re going to decide to do from ages 66 through age 90, right here, you’re going to decide to call up the insurance company and say, “I want to start taking a loan against my cash value.” And the way 7702 works is that when you take a loan, as long as the policy is still considered to be valid in the eyes of the IRS, it’s something that we call a Modified Endowment Contract. We won’t get into detail. We have several articles. But we build these policies. Our number one goal is to make sure we build a policy that would never become a Modified Endowment Contract.

So what this says here is that we saw for how much money could you take per year, potentially from a tax free basis, and not outlive the policy. So we want to make sure that the policy stays enforce well after, obviously, until you pass away. So when you take a loan, as you can see, we’re able to generate, this is an average of about $92,123 of tax free income between the ages of 66 through 90. Now, when you take-

Steven Gibbs:                    That’s an important point. So if someone were to do the math, this is tax free versus taxable.

Jason Herring:                    Yep.

Steven Gibbs:                    Remember, when you’re doing any comparison, you always have to compare apples to apples.

Jason Herring:                    So as you take a loan from a life insurance policy, the IRS tells us that, “Look, we still have to do something about this loan.” So there’s only two ways to get rid of a loan when you have a loan on a life insurance policy. Number one, you can pay it back. Or number two, you can pass away. So when you pass away, whatever loan amount that is on the policy comes off of the death benefit and your beneficiaries receive the net amount. So this is a self completing contract. So as you’re taking this income, you can see, we can take $92,000 per year. If you pass away at age 90, based on a 5.74% rate of return, we still have a net death benefit amount of $438,000 tax free going to your family.

Steven Gibbs:                    Yeah. And we have a lot on the site, too, guys about policy loans, the power of policy loans.

Jason Herring:                    So another report that we can provide to you is this qualified account analysis. And I ran this today for our webinar. And this report talks a little bit about qualified accounts, the Roth IRA, some of the things that we’ve pointed out here for you today. But this scenario here is showing us what happens if you decide not to use the overfunded life insurance strategy, and you just kept your money in the 401(k). So since the client is in, if you remember, we were paying a $12,000 annual premium into the life insurance policy. Right, Steve?

Steven Gibbs:                    Yeah.

Jason Herring:                    We were doing that because we were taking the hit and paying the 25% taxes on it today. So we had actually less money going into the IRA, into the life insurance strategy than we did going into the 401(k) at work.

Steven Gibbs:                    That way.

Jason Herring:                    Exactly. So the annual contribution that you’re actually able to make to your 401(k) is $16,000 instead of $12, because this is pre-tax money. So you’re able to put that additional 25% in there. So I’m showing that income begins at age 65, just like we show with the life insurance policy. I’m being very generous and I’m keeping your tax bracket at 25% while you’re saving. And I’m keeping you in the exact same tax bracket when you retire one day. So I even did a 90/10 split. So I’m trying to get aggressive with your growth here. And we’ve got 90% of your earnings are going to come from equities, that are averaging 7%. And we have 10% of your money only in fixed income at 3.5%.

When you retire, I actually moved you to a 65/35 split, but I kept the equities earning at 7%, 3.5%, and I kept your account expenses in the 401(k) at around 1.5%. And I have you passing away at age 90.

Steven Gibbs:                    So you’re being pretty fair here, is what you’re saying.

Jason Herring:                    I’m being fair. I’m being aggressive towards growth and I’m being aggressive towards getting a good rate of return with equities.

Steven Gibbs:                    Gotcha.

Jason Herring:                    So when you look at the potential taxes of leaving this money in the 401(k), because if you remember this strategy here, this individual here, this 35 year old female, she’s simply just reallocating this money here to this strategy with life insurance. So here we leave it in. You’re saving in a qualified account. You retire age 65, you live to age 90, and you can take $72,507 in distributions from the account annually. So your potential taxes that you deferred while you were saving were $120,000.

So from that micro level, you were saving yourself over those times each year, combined $120,000. But by deferring all of those taxes on the growth, you now are going to be responsible for about $453,000 in taxes.

Steven Gibbs:                    Okay.

Jason Herring:                    So what does that mean? The potential distribution amount pre-tax is $72,507, which translates to $54,380 of after tax income. That’s what you would be able to take based off of the gross scenario to get to age 90 without running out of money. Does that make sense, Steve?

Steven Gibbs:                    It does. So this is using a traditional retirement account. So $120 was-

Jason Herring:                    Right.

Steven Gibbs:                    Right.

Jason Herring:                    So here with the life insurance component, this was just over funding the life insurance policy-

Steven Gibbs:                    Gotcha.

Jason Herring:                    … with after tax money and utilizing the 7702 tax code-

Steven Gibbs:                    Yeah.

Jason Herring:                    … to take tax free distributions in retirement. Here, what we’re doing is we’re not using life insurance and we’re keeping that $16,000 per year or $12,000 net that was going to the life insurance. And we’re just keeping this in the 401(k) at work.

Steven Gibbs:                    Right. So you’re basically offering the life insurance versus the traditional-

Jason Herring:                    Right.

Steven Gibbs:                    … deferred for 401(k) or whatever it is.

Jason Herring:                    Absolutely. So after tax income, based off of the growth strategies about $54,000 a year. But look what happens when you want to try to match the $92,123 after tax income that the overfunded life insurance strategy is producing for you. So what happens when you try to match that strategy, you now have to take out $122,831 per year, pre-tax, to equal the same amount of after tax distribution that the life insurance policy is providing for you. And what happens when you take that large of a distribution, this client actually runs out of money at age 76. So it just shows you the impact of taxation and the impact of tax deferred money versus taking the hit now, paying your taxes now.

Steven Gibbs:                    Can you put it in a nutshell, Jason? What do you think in your experience, the reason for this difference is? Do you think that the deferral simply results in such a much bigger, I guess, tax hit?

Jason Herring:                    Well, a lot of it is built around, and in this scenario, keep in mind, we kept the tax bracket the same, both in savings and retirement. I mean, we’re not even accounting for-

Steven Gibbs:                    Yeah.

Jason Herring:                    … for instance, if Congress doesn’t make any changes by 2025 and we revert back to the-

Steven Gibbs:                    Right

Jason Herring:                    … old brackets. We’re not even taking that into an account here.

Steven Gibbs:                    Right.

Jason Herring:                    It’s more just the mentality, Steve, of what we’ve been taught for decades now to take advantage of qualified accounts with our employers. It just really is. And as companies try to get away from pensions and get that responsibility off their books and move from a defined benefit plan to a defined contribution plan that you’re contributing to. And all they have to do is contribute their match as well. People have just looked at this as a more favorable way and as a more focused on today, scenario of how do we save taxes today.

Steven Gibbs:                    And then that question always arises. Do you want to pay on the seed or the harvest?

Jason Herring:                    Exactly. You ask any farmer.

Steven Gibbs:                    And your example, you’re paying a pretty good amount on the harvest-

Jason Herring:                    Yeah.

Steven Gibbs:                    … versus just the initial seed.

Jason Herring:                    Well, if you think about it and you went to the bank and you wanted to buy a new car, and you walked in and you told them what you want to buy. And they said, “We’re going to give you a loan and it’s going to be no questions asked. But we’re not going to tell you what the interest rates going to be. And we’re not going to tell you what your payments have to be.” Right. I mean, would you sign up for that loan? You wouldn’t. In essence, the government is doing the same thing here. Congress is basically, with qualified money, none of us know what the interest rate, none of us know what the tax bill is going to be one day, because our tax code with retirement accounts is written in pencil. As opposed to contracts, contracts between you and insurance companies that are typically more favorable from a grandfathering standpoint. I’m sure you can talk about that a little bit.

Steven Gibbs:                    Okay. So now you get another one of our sort of core principles here, which is really trading an account for a contract.

Jason Herring:                    So there’s a lot of things that you can use for this. We haven’t even talked about sequence of returns, risk, and how, when you have to start taking money out of your tax deferred accounts the year after a down year, how much stress that it puts on those accounts and how quickly those accounts can dwindle. So having buckets of after tax money, sitting on the sidelines like this, it just gives you so much more flexibility. Maybe you want to retire before age 59 and a half, and you don’t want to start touching your qualified money because you don’t want that extra 10% penalty. So maybe you have this bucket sitting on the sideline to tap into. Maybe you want to just use this bucket of money to get you all the way to age 72 and a half, so you don’t have to start taking distributions early in retirement.

So some of the alternative strategies and we help clients with this every day, is just looking at what’s available to you to diversify. As we said earlier, we’re not zealots. We’re not telling you to sell everything you own and move it into life insurance and move into the van down by the river. But what we are wanting you to do is to look at a diversification strategy and instead of continuing to create tax bombs with the advice that we’ve been getting for decades, we have it on paper here now of your tax liability. We just don’t know what the final numbers are going to be. But we know just keeping everything the same, how potentially devastating this can be for your retirement income.

So that’s where we really feel like if you would just reach out to us, schedule some time with me, let me walk through your scenario and we can show you some very detailed, personal designs that we think you’ll find very attractive.

Steven Gibbs:                    You need to see the numbers. You need to think about your bill. We all have one. I feel peace of mind working with Jason. As I know you will just because he doesn’t play games and he does this in the way that it is correct. And you have to have a seasoned expert, guys, when you’re designing high cash value policies. It’s a bit of a different animal than your standard policy. So we talk about that a lot And our other experts in these other areas that they operate.

Jason Herring:                    The biggest problem that you could have with any of these policies is the policy becoming that Modified Endowment Contract. And you just have to design them. And you also have to make sure you’re working with people that are going to design the policy to benefit you and not the agent. After being this in this arena for as long as I have, it’s amazing, Steve, how many people come to us and they’ll send me illustrations that, “Hey, can you review this? I got this from person on TikTok.” I mean, I hear this. That’s what I hear all the time now.

Steven Gibbs:                    Yeah.

Jason Herring:                    And I look at it and I’m like, they’re buying three to four times more death benefit than they need simply just to increase the commissions for the agent. If these things are done correctly, they’re done with very low death benefits so that the majority of the premium goes to your cash value. We’re simply just using life insurance as a vehicle to take advantage of the 7702 tax code.

Steven Gibbs:                    Yeah.

Jason Herring:                    And when people can get that through their mind, Steve, that this is, I mean, we’re just using the life insurance vehicle to do that and truly understand the gift that we’ve been given with 7702. I mean, the proof is in the numbers, it’s here.

Steven Gibbs:                    Yeah. It really led to this whole movement and this whole platform. And most of you guys, if you’ve been around-

Jason Herring:                    Yeah.

Steven Gibbs:                    … in some of our webinars, you know that. There’s a lot of different names, 7702, there’s LIRP, there’s IBC. There’s a lot of ways that a person can go about learning about this, but the concept is somewhat consistent. Just maximizing the cash and choosing the direction you want to go. So, Jason, this has been a wealth of information. Wherever you’re watching, there’ll be a link to our retirement tax bill page. That will be where you want to click. And then you can access if you need to take the first step and have your retirement tax bill run. Fantastic.

If you want to access Jason’s calendar to get started learning some specifics for your situation, see the numbers, make the comparisons. Guys, I encourage you to get educated. There’s a whole slew of benefits that we weren’t even able to talk about today.

Jason Herring:                    Sure. Living benefits, everything. Yep.

Steven Gibbs:                    Which are going to be probably featured in some of our other upcoming webinars. Jason, thanks again. Awesome. Get that retirement tax bill figured out.

Jason Herring:                    Absolutely. Thanks, Steve.

Steven Gibbs:                    All right.

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