Retirement Plans and Taxes

Taxes will place a burden on wealth as you try to grow your assets. So investing in tax favored strategies is a way to increase your wealth. For example, invest in a qualified plan that gives you a tax deduction and a period of tax deferral. The deferral is like a loan until you make withdrawals from your retirement account. But wait, if you initially took the tax savings and used them to acquire a permanent life insurance policy, you could take out a policy loans in later years to pay income taxes on your retirement distributions from your qualified plan. Then use the death benefit to pay of the policy loan balance. This is using the leverage of a death benefit which provides cheaper dollars than the dollars from your estate for purposes of paying taxes on retirement distributions. Insurance is also being used as a living benefit. However it is important to review this strategy with your insurance agent, because insurance may be limited by insurance companies. Also you must be insurable.

Another way to use permanent life insurance is it inside a non qualified plan, to protect your retirement portfolio against downturns in the market. Here is  how. When you take withdrawals from your retirement account, be careful when you take them. If your portfolio balance is down as a result of a market correction, don’t take retirement withdrawals from your qualified plan. Take them from the nonqualified plan. Depending upon the amount your portfolio is affected, the market effect on your retirement account causes a significant draw down on your account. An unrealize derpreciation becomes real when funds are actually withdrawn from an account.  Of course if you are using liability driven investing this may not be a problem, because your portfolio has a different asset line up that is not effected by market movements