This blog is going to focus on taxation. We will talk about how taxation affects retirement plans, your earned income, and life insurance. You should realize that where you put your money now will determine the amount of taxes you will pay in the future.
To start off, here are some interesting facts about taxation.
Contrary to what many think, the income tax hasn’t been around forever. The “modern income tax” was introduced in 1913 with passing of the 16th Amendment. This amendment allowed the government to tax people who earned over $3,000/year a 1% income tax. Today, to be considered in the top 5% of income earners in America you need to earn $167,000. To qualify in the top 10%, you need to make around $110,000.
As you may know, not everyone that lives in America pays taxes. Of those that do, 30% of the top earning taxpayers pay 90% of taxes in the U.S., while the top 10% of earners pay a staggering 70% of total taxes in the U.S.
To wrap up these not so fun facts, the highest income tax rate in U.S. history was a stunning 94% in 1944!
What type of taxation are we dealing with.
Today we have all sorts of taxes that we are required to pay. Income tax, sales tax, property tax, social security tax and medicare tax just to name a few. Robert Kiyosaki says that most employees and self-employed people pay at least 40% of their income to taxes.
Here in the U.S. we have what is called a progressive income tax. This means, the more you make the more they take! Currently (2020) there are seven tax brackets in the federal income tax code. The seven rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. There are certain thresholds for each category, and once your earned income passes a threshold, you move up to the next rate. For example, let’s say you made $50,000 in 2019 and you are single. Earning $50,000 would put you in the 22% tax bracket, but you do not pay a straight 22% income tax on the $50,000. For the first $9,700 you pay 10%, the next $29,775 you pay 12%, and on the final $10,525 you pay 22% income tax. This doesn’t include your state taxes either!
Roth qualified plans.
Before we relate this back to the Infinite Banking Concept and life insurance, I’m going to discuss the relationship between different qualified plans and taxation.
First off, Roth IRAs or Roth 401ks are funded with after tax dollars. This means that you have already paid income tax on the money you put in these Roth plans and have not received a tax deduction for your contribution to the plan. The principal and growth can be accessed tax and penalty free after age 59 ½ under current tax law, as long as it has existed for 5 years.
Traditional qualified plans.
Traditional 401ks and IRAs are a different story.
You are told that these plans are great because you don’t have to pay income taxes on the money you put in, but is that really a good deal for you?
If you paid in $100,000 into your 401k and now it is currently worth $200,000, would you rather pay taxes on the $100,000 or the $200,000?
I’m sure all of you would rather pay tax on the $100,000! For those managing the money though, there is potential for more money in these traditional plans (it's less of a percentage of your income than with ROTH plans). This means more money for them to earn a fee on!
With these types of QRPs (qualified retirement plan) you get a tax deduction for your initial contribution, but pay taxes on the initial contribution plus the growth when you pull out the money. This money is also taxed as ordinary income, instead of potentially getting more favorable capital gains tax if you invested outside of a qualified plan.
Most people who are in favor of 401ks often say that you will be in a lower tax bracket in your later years so paying the taxes on the full value won’t matter. This may be true for some people, but the majority of people do not want to have less money or less income coming to them in the future than what they have now.
A longer look at the idea of being in a lower tax bracket in your later years of life.
I cannot predict the future, but I will give you a few reasons why I do not think most people will be in lower tax brackets in the future than they are now. First off, the U.S. is currently $23 trillion in debt and running yearly deficits of $1 trillion (2020 was much higher with Coronavirus relief, a staggering 3.1 trillion).
Secondly, American future unfunded liabilities (things like social security and medicare) are growing at a ridiculously high rate with all the entitlement programs the U.S. currently provides. These debts and unfunded liabilities will need to be serviced at some point.
Now after reading these large debt numbers where do you think tax rates are going to have to go to cover this?
The government has kicked the debt can down the road and no one can be sure how long the can kicking can continue, but when it stops it may get ugly. Lastly, later in life you will most likely not have all the tax deductions you once had like mortgage interest and dependent deductions.
After reading this, do you think it is likely you’ll be in a lower tax bracket in your retirement age?
Whole life insurance does have favorable tax treatments.
Cash value grows on a tax deferred basis. This does not make whole life a tax gimmick though, because whole life insurance has been around a lot longer than the IRS! Also, life insurance is viewed like any other insurance, it is there to protect against loss. Whole life policies are funded with after tax dollars and all gains can be accessed tax free if implemented and used properly. This is because the cash value is treated on a first in first out basis, FIFO, and policy loans are used to access the gains.
If you get a loan from a bank is it considered income?
No, and when you receive a loan against the cash value of a life insurance policy from the life insurance company’s general account, it isn’t income. If you would pass away with the loan outstanding, your death benefit would be used to satisfy the loan and the amount of death benefit over the loan value would then pass on to the beneficiary.
At Cash Value Solutions we properly design a whole life policy for you to use as a financing tool. We also teach you how to use this tool in a tax-free manner.
When implementing whole life to perform the Infinite Banking Concept, you are giving yourself a more certain tax future under the current laws. If you would like to learn more on how to do this Book Your IBC Discovery Call today.