Planning and investing for retirement is all about choosing the best plans that will facilitate wealth accumulation that will be minimally impacted by income taxes when the time comes to withdraw your money.
There are traditional investment products that many of us have access to through our employer and there are non-traditional products that we can access on our own. Although having a portion of your paycheck diverted to an investment account is considered a good thing (out of sight, out of mind), your means to an end may not be the most productive.
In this article, we will discuss how a LIRP can outperform most traditional investments, how it can be safer for the investor, and most importantly, how the funds in the LIRP can be withdrawn with no tax consequences.
What is a LIRP?
LIRP is an acronym for Life Insurance Retirement Plan. When an investor chooses a cash-building life insurance policy as a part of their financial planning package, their ability to accumulate wealth is greatly enhanced while their income tax liability (at the time of withdrawing) is greatly reduced.
A LIRP can be implemented using any type of cash-value life insurance but our recommendation is to use Indexed Universal Life insurance (IUL) because it can provide a guaranteed death benefit and deliver significant earnings at the same time.
Additionally, a LIRP isnot subject to the constraints that traditional investment products are subject to. Although tax-hungry legislators are continually looking for ways to get more tax money from their constituents, the fed has pretty much left Indexed Universal Life insurance alone. Going forward, we want to focus on the constraints on traditional investments like the 401(k) or IRA, and compare them with IUL.
Currently, the IRS has limits on how much of your hard-earned money can be tucked away for retirement if you choose to participate in your employer’s 401(k) or SIMPLE 401(k). The maximum amount that you can contribute to your employer-sponsored retirement plan is $19,000 which means many employees can hit their maximum well before the end of the year.
Your contributions (paid premiums) to a LIRP have no limits which allow the investor to invest in such a manner that the asset can grow quicker and bigger. Many of our prospective clients complain about the investment limits that have been placed on their retirement programs and are looking for an alternative product to invest in. A LIRP will do just that and provide a guaranteed death benefit for surviving loved ones.
No Limits on Income
It’s confusing to most investors when legislators strongly recommend that workers heavily invest in a retirement plan and constantly remind us that Social Security is considered an entitlement and should not be relied upon, yet they limit not only our annual contributions amount but also set an income threshold on traditional investment products.
For example, the maximum income threshold for a Roth IRA for a married couple in 2019 is $203,000. If the couple earns more than this amount, they are no longer qualified to take advantage of a Roth IRA.
Not with a LIRP. Your LIRP, built on Indexed Universal Life Insurance has no income limits that can prevent you from investing your hard-earned money.
No Risk of Government Control
With the national debt surpassing $22 trillion, government bloodhounds continually search for money to feed their debt addiction.
Even though Americans across the U.S. have hundreds of millions of dollars earning interest in their cash-value life insurance policies, legislators appear to be reluctant to tax this money while it’s earning interest and when it’s withdrawn via policy loans.
Although there have been some forced product changes from time to time, none of these have had an impact on the value of policies currently in force and it appears the IRS is not considering any changes in the near future.
How does a LIRP Work?
When you use Indexed Universal Life Insurance as the basis for your LIRP, your premium dollars are first used to pay for the life insurance costs and any fees while the remaining portion of your premium is placed into a cash account that is linked to the performance of the various indices that you have chosen to invest in.
It’s important to note, however, when you invest in to a market index like the S&P 500 or the NASDAQ, your money is not actually invested but rather your account is linked to the performance of the index which allows you to invest in the market without actually being in the market.Here’s how your investment account grows in your IUL:
Your IUL will contain two very important components that will impact how much you can earn or lose in your IUL. The first component is a CAP which represents the maximum amount of interest your cash account can be credited at the end of each reporting period.
For example, if the CAP in your policy is 12% and your indices earned 14%, your account would be credited 12% which is your CAP.
The second component is a FLOOR which represents the minimum amount your cash account can be credited at the end of a reporting period.
For example, if your FLOOR is 0% (most common) and the linked indices perform badly and the interest is a negative number, your account will not lose money because the minimum amount of interest you can earn is 0%. Simply put, if the market loses money, you don’t.
Why are Withdrawals not Taxed like other Investment Products?
First of all, it’s important to point out that unlike a 401(k) or IRA, your contributions to your LIRP are made with after-tax dollars and the interest you earn is on a tax-deferred basis.
When you decide to withdraw funds from your LIRP’s cash account (at any age), you will do so by taking loans from the policy that you may or may not repay. Since the cash you are taking is considered a loan rather than income, there is no tax liability on those funds.
It’s also important to note that the IRS does not control when you can take withdrawals (loans) from your LIRP like they do with traditional retirement plans. There are no penalties for taking a loan before age 59 ½ and there is no required minimum distribution (RMD) at age 70 ½.
Simply put, the money that accumulates in your Indexed Universal Life Insurance policy is yours and you can do whatever you please whenever you please with that money. The only requirement is that your account must maintain a balance sufficient to pay your insurance costs and other fees so that your policy remains in force.
Lastly, when you die, all loan amounts will be deducted from the death benefit that is due to your beneficiary. The death benefit paid to your beneficiary is also done on a tax-free basis. For an in-depth explanation about how your LIRP is a tax-free investment plan, we recommend that you read David McKnight’s The Power of Zero.