In this month’s “Mark’s Corner”, I posted an article about the interaction of taxes and retirement savings. I pointed out the benefits of saving in either a tax deferred or tax free environment. I also pointed out that the government places all kinds of limits on the amount one can contribute.
It seems like strange public policy to incent citizens to save by providing tax favored accounts, and then turn around and limit the amount of contributions to IRA’s and 401k type plans. I understand that our public policy doesn’t want the super wealthy to avoid too many taxes, but I would argue the current limits hurt many working Americans who are not likely saving enough for their retirement.
But leaving public policy aside, once we agree that these tax deferred and tax free treatments are favorable ways to accumulate savings, many of us want to contribute more than what the limits allow.
If we own a small business, we can increase the contributions to a deferred environment with profit sharing, and defined benefit plans, but are not allowed a tax free choice for the contributions above the personal limits.
If we work for someone else, we are limited to the 401k type limits. Or worse, if we have no company plan and make a “Bay Area” type salary, we may be completely phased out of any contributions to any qualified plan.
To gain contribution capacity to a semi-tax deferred environment, we need to find capital gain type investments, or purchase annuities. Both of these typically are long term investments with little or no access to our savings until retirement.
To gain contribution capacity to a tax free environment, we need to buy muni bonds (being careful of the effects of AMT), or purchase cash value life insurance.
One of the many reasons I choose to purchase cash value life insurance for my retirement plan is that it allows contribution capacity to a tax free environment as long as I keep the policies in force (which I plan on doing). I purchase polices designed to have the maximum cash value build up so I can benefit from as much of the insurance company’s investment portfolio as possible. With this strategy, I travel into retirement with a substantial amount of tax free savings, and death benefit.
In addition, my life insurance policies have contractual terms that allow me to borrow up to my cash value for any reason I want. The terms are an interest only loan at current bond market rates, without any scheduled principal payments. It’s a little bit like having a HELOC on your retirement account.
So, not only do I get the tax treatment I want, I also have access to my savings if I need it for an emergency or an opportunity.
Written by Mark Guthrie
Principal – Westface Financial and Insurance Services
Mark Guthrie is a Registered Representative offering Securities through The O.N. Equity Sales Company, Member FINRA/SIPC , One Financial Way, Cincinnati, Ohio 45242 (513) 794-6794.
Investment advisory services offered by Mark Guthrie through O.N. Investment Management Company.
Tax and/or legal advice is not offered by Mark Guthrie. Please consult with your tax professional for additional guidance regarding tax-related matters.