How often have you heard or read somebody declare that when you retire, your tax rate will go down? The third rail, at least when I’ve written about it, is the 401k — which might be the best designed transfer of private wealth to government coffers ever. One might gently ask the question, “How’s that been workin’ for ya lately?” But I digress — if you love your 401k far be it from me to dissuade you.
If however, you’ve been wondering if there’s another option out there, here’s some food for thought. I sincerely hope this helps.
Just the highlights though, so we can get to our tax free basket of retirement income.
- The average 59 year old has less, far less, than $100K in their 401k — in fact it’s less than $60,000 — FAIL
- Even those with a million bucks or more in their 401 when they quit working will pay more taxes in the first 3-9 years they draw income from it, than taxes saved in the 30 previous years — really.
- The gov’t will force you at times, to withdraw more than you choose.
- They will also at times force you to bite into your principal when you don’t need it — when that happens, you’re a financially dead retiree walking.
- When you die, your heirs might as well divide their inheritance from your 401k in half. It’s (pun intended) taxed to death.
- So I ask you — why do folks put themselves in this position on purpose?
Not gonna deal with the whole 401k topic though, as that’s another post altogether, and frankly its track record speaks for itself. I made the points above merely to set the stage for your alternative — a tax free basket of income to supplement your hard earned real estate investment cash flow.
What the heck is an EIUL? An Equity Indexed Universal Life insurance policy, that’s what. It’s most often tied to the S & P. It can be grown through years of monthly payments, or just a few big ones, depending upon each investor’s Purposeful Plan. Let’s talk about how they’re different than 401k’s.
First of all, you can’t lose money in an EIUL by definition of the contract. Yeah, I know, Grandma’s spinning in her grave listening to that one. This is the exception proving the rule she most lovingly taught us about things seeming too good to be true. In fact, the wealthy have been employing EIULs for decades now for both asset protection and tax free income.
Principle: EIULs aren’t used to create wealth — wealth is used to fund EIULs in order to create tax free income and shield said wealth from our favorite greedy Uncle.
Principle: Though they won’t create wealth, they can and certainly do create impressively large tax free annual incomes for those who contribute regularly for long time periods.
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OK, Here’s the Strategy For Real Estate Investors
If you’ll recall, my last post talked about the double positive Catch 22 of increasing your annual depreciation AND being able to pull tax free money from appreciated real estate while selling and/or exchanging. If done with knowledge, skill, and forethought that approach often finds the investor nearing retirement with enough capital gain ‘offset’ to fund a pretty impressive EIUL. I’m not implying, and please don’t infer this to mean you should convert all your hard earned investment property equities to insurance policies. Far from it.
It’s merely another income basket you should consider developing.
Since they’re heavily front loaded with fees, a minimum of 10 years is required to generate income. In a recent example, I had an analysis run by my EIUL expert. It was for a 35 year old guy who paid $500/month into his EIUL for 30 years. Aside from his real estate income, Social Security (wink, wink) and any other income, he’ll be gettin’ just over $50,000 a year tax free — year in and year out.
If he decides he can forego the income another decade, the tax free income will skyrocket.
Those who opt for this strategy, investing one large chunk, or a very few large chunks of cash just before, during, or after retirement, will almost always end up generating far more tax free income than that. Far more. (Note: Sometimes the IRC requires large policies be funded over a period of four years.)
Here are some points to ponder
- These must be set up correctly by a slam dunk expert — in other words, don’t have your cousin Larry the insurance guy do it for you. As it turns out, I know one.
- Unlike most annuities, IRA’s, and 401k’s, this income is tax free — period.
- You can borrow from them without having to pay it back. Really.
- YOU decide when you wanna start taking income from it, not Uncle Sam.
- You aren’t compelled to take an arbitrary minimum amount. In fact, you can distribute when, how much, etc., as you see fit, within the parameters of your particular sized contract.
- When you die, your heirs get 100% of the death benefits — EIULs are not part of your estate. How cool is that?
- If you so choose, you may take out a lump sum — tax free — at retirement and do with it what you will. Try that with a 401k.
- Because you can’t ever have a losing year, you will never experience multiple ‘treadmill’ years of playing catch-up just to get back to where you were.
Warren Buffet once said, (badly paraphrased) “Rule #1 when investing is, ‘Don’t lose money’. Rule #2 is, ‘Never forget rule #1’.”
If you’re a real estate investor, and 30-55 years old, this strategy could produce some pretty significant ‘supplemental income’. Supplemental my Aunt Fannie. When done on purpose with enough time to work, many have reaped tax free incomes of $100,000 yearly and more — much more. Don’t forget, you’ll also have a splendid cash flow from your real estate portfolio — 50-100% tax sheltered.
This is where I mention what you should be doing with your Social Security check. Investors in this enviable position generally use it for pocket change.