Tax Diversifying Your Retirement Income


Retirement used to be more predictable.  You could retire comfortably on Social Security benefits, a company pension (in many cases) and a modest amount of personal savings.  There were higher tax rates and more tax brackets, making tax-deferral an effective retirement planning strategy.


Your Retirement Has Changed.  Given the new retirement landscape, you may need to rethink your approach to retirement planning. 


Tax Diversification Can Protect You.   Tax diversification simply means that you have a source of tax advantaged income supplementing your taxable income, if structured properly, to help reduce your overall tax burden.


Why Tax Diversification Is So Important.  It used to be that if your annual income was $100,000, and you took qualified deductions to lower your taxable income to $80,000, you would most likely fall into a lower tax bracket.  So, you put money into tax deferred vehicles, delaying taxation until you fell into a lower tax bracket in retirement.  That may no longer be the case because we are currently in one of the lowest tax rate environments in history, and there are fewer tax brackets.  Today, a reduction in your taxable income may not result in a lower tax rate.  However, if you tax diversify your retirement income, you can potentially put yourself into a lower marginal tax rate, without lowering your standard of living.


All Assets Have Unique Tax Consequences. 

401(k)'s and Traditional IRA's:  Pre-tax money is contributed to 401(k)'s and traditional IRA's; it has the opportunity to grow tax deferred, but is taxable when you use the money; if it is passed on to heirs, it is taxed at the beneficiaries' tax rate.


Roth IRA's, Tax-Free Municipal Bonds and Cash Value Life Insurance:  After-tax money is paid into a combination of Roth IRA's (if you qualify), tax-free municipal bonds and cash value life insurance; it grows tax deferred, and is generally income tax free when you use the money*; the death benefit from cash value life insurance is passed on to heirs, generally income tax free.


Tax Diversification with Life Insurance.  While life insurance is primarily purchased for death benefit protection and is subject to underwriting, it can be an important part of your retirement and legacy plan.  Let's take a look at how life insurance can be used in retirement.  Bob, age 67, is retired and plans to access $90,000 of his retirement savings this year.  He is married and filing jointly and assumes no additional income this year.  Whether or not he tax diversifies in advance of his retirement will have a significant impact on how much money Bob will have to spend.


Without Tax Diversification:  Bob accesses $90,000 from his 401(k); the full $90,000 is taxable at a marginal tax rate of 25%** or $22,500, leaving Bob $67,500 to spend in retirement.


With Tax Diversification:  Bob accesses $45,000 from his 401(k) and $45,000 from his cash value life insurance policy, if structured properly; only $45,000 from his 401(k) is taxable, and it is taxed at the lower marginal tax rate of $15%** or $6,750, leaving Bob $83,250 to spend in retirement.


Grow the Tax-Free Element of Your Retirement Income.  There are several options for growing the tax-advantaged component of your retirement income, but only cash value life insurance enables you to pass on a legacy to your heirs, generally income tax free, and provides a source of tax-free supplemental retirement income.


Permanent life insurance accumulates cash value tax deferred and can be accessed tax free, making it a vital element of a tax-diversification strategy.  If structured properly,*** the policy's cash value can be accessed at any time, even prior to age 59-1/2, without IRS penalty, through loans and partial surrenders.  So, the money can be used to supplement your existing retirement income, support a surviving spouse after a pension-earning spouse passes away or for unexpected expenses.


Security and Flexibility.  Permanent life insurance can be viewed as part of a holistic approach to retirement funding.****  If you live a long life, you can draw on the cash value to help supplement your other sources of retirement income.  With optional customizable riders, such as the Disability Waiver of Premium rider, if you become disabled, you can ensure your policy will be kept in force.  And, you can pass on an income-tax free death benefit to loved ones, which they can use as a foundation for their retirement.


The Right Approach for Today's Environment.  Given the instability of Social Security, dwindling company-sponsored pension plans, uncertainty of tax rates and increasing longevity, it's clear that those planning for retirement need to tax diversify and can do so by making permanent life insurance a part of their retirement.



Simcox Financial Group, LLC does not offer tax advice.  Please see your tax avisor before making any decisions.

*Municipal bonds may be subject to the Alternative Minimum Tax.

**Marginal federal income tax bracket filing status, when filing status is married and filing jointly, or for a qualifying widow or widower under current rates.

***Provided the policy stays within the tax law definition of a life insurance contract, and the policy is not a modifie d endowment contract (MEC).

****The cash value in a life insurance policy is accessed through policy loans, which accrue interest at the current rate, and cash withdrawals. Loans and withdrawals will decrease the total death benefit and total cash value. Policy values are based on non-guaranteed factors, such as dividends and interest rates, which are subject to change. Therefore, the supplemental retirement income is not guaranteed. 





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