Business owners are a great group of people and I love working with them. What I hear more than anything is “I need tax relief!” We have been brainwashed to pay the least amount of tax NOW so we can pay MORE later. It’s sad but true. Every dollar you put inside a tax-deferred account has a blank check attached to it payable to the IRS and signed by you. You are authorizing the IRS to charge whatever amount they want on that dollar when you go to take it out later in retirement. There was more than $25 TRILLION in tax deferred accounts as of 2015. This is a huge IOU that the govern-ment has their eyes on. Don’t think for one minute they won’t manipulate income tax rates to their benefit. Oh and you should also know there is a blank check attached to every dollar your dollar earns inside of a tax-deferred account signed by you and payable to the IRS. Please know I am not a pessimist. I am a realist. I hope I have peaked your interest.
Traditional retirement options such as SEP, Simple, Solo 401(k), Keogh, Traditional and Roth IRAs are plagued with high expenses/fees, liquidity restrictions, risks and taxes. The one thing business owners need is flexibility. Putting you money into an account that you have no access to for possibly decades (until age 59 1/2) can be disastrous. Life happens. The number one challenge for a business is consistent cash flow especially in the early years. I often see traditional retirement accounts liquidated for business needs. After penalties and taxes, they walk away with 50-55 cents on the dollar sometimes. This is madness and needs to stop!
In addition to liquidity restrictions, the all-in fees and expenses are ridiculous. There is an entire industry built around capitalizing on the retirement market. Yes we all have bills to pay but layers of excessive, hidden fees is completely unnecessary. Clients often lose 50% of their return to fees and expenses (6% return with 3% in fees). What’s worse is when the market is flat these fees invade the clients’ principal. For what?! The account didn’t perform. What are you paying for?! Every day I show business owners how to take $1 and do 5 different things with it (including save for a tax-free retirement) often for much less than 1% annually. Keep reading.
If all of that is not enough the market risk inside all of these traditional retirement options is not suitable for most. Again we have been brainwashed to believe our money cannot grow at an acceptable rate without being invested in the stock market. WRONG! In fact, after a little research I discovered that Market Returns are NOT Investor Returns and the retirement projection your advisor prepared is probably not worth the paper it was written on (https://media.wix.com/ugd/10cf77_8c9724ddda774f46a97b566477e1e1d5.pdf). The strategies we use at JondaKnows have OUTPERFORMED the S&P500 for over 20 years. You do NOT have to be in the stock market to make a good return on your money but that’s what “they” want you to think.
Pros of traditional retirement options………..I got nothin’. People will scream, “what about the tax deduction?” What about it? We know what the income tax rates are today. I would much rather use the system to my benefit now, pay what I owe, invest my money in an opportunity where I will never owe tax on it again. Blank checks are dangerous. Control what you can!
God forbid the word get out about Life Insurance Retirement Plans (LIRPs). For the record, you would not go to a foot doctor for open heart surgery. Please do not go to just any life insurance agent and ask about LIRPs. These are specialty products that must be properly designed in order to produce results. These things can blowup just like picking the wrong stock if they are not properly designed, overfunded and regularly monitored.
LIRPs are gaining attention as they should. Coach Harbaugh is a great example. Cash-Value Life Insurance is a big part of his multi-million dollar contract at U-Michigan. (http://www.thinkadvisor.com/2016/11/16/cash-value-life-insurance-makes-harbaugh-college-f) LIRPs are POWERFUL financial tools that have no income limits, no contributions limits, no market risk, no liquidity restrictions and NO INCOME TAX. Best funded with Indexed Universal Life, a cash accumulation policy, the client can experience market like returns without ever being invested in the stock market. Interest credits are based upon the movement of an index up to a cap with a ZERO floor (current caps are anywhere from 12-14%). Any gains in the policy are locked in at the end of the term (often annually) and we start over. If the index loses money you get a zero. Zero is your hero! The naysayers, including financial celebrities, claim the expenses are outrageous on these contracts and to NEVER use life insurance as an investment. I say they have never looked at an Expense Report. First and foremost, life insurance is a tool that the IRS gives us to create tax-free income. So, if you are in the 25% tax bracket and the expenses were 10% (THEY AREN’T) would life insurance be worth considering as an investment alternative? The point I try to make here is that we gag at a nat and swallow a dang camel! THINK PEOPLE. We have got to get our minds open and start thinking for ourselves.
When LIRPs are properly designed, they are based on a minimum death benefit. The IRS says look, if you are going to receive all the benefits afforded to you from life insurance, the policy has to look, act and smell like a life insurance policy. As a result, the death benefit is driven by the amount of money you wish to contribute. Minimum death benefits also help keep expenses low which aids in cash accumulation. For business owners who wish to "front load” their accounts with significant contributions over 5 or 10 years (substantially increasing the death benefit) we have the ability to re-evaluate the policy after the last contribution and significantly lower the death benefit again allowing us to control how much we are spending on insurance costs.
So what are the 5 things I can do with $1 when I use Indexed Universal Life inside a LIRP? 1) The death benefit is not just a requirement it is a wonderful safety net that “completes” the funding of your retirement account should you pass prematurely. Tell me what traditional retirement option is going to throw in all of your missed contributions when you die? Umm, exactly none of them! 2) They provide Accelerated Benefits. All of the LIRPs we manage at JondaKnows come with this free rider which advances a portion of your death benefit while you are living if you suffer a chronic, critical or terminal illness. That advance is income tax free and is not a reimbursement program. This is your money to buy the best medical care, pay ordinary living expenses or take a trip around the world. You decide. 3) I can create a savings account or “rainy day” fund as LIRPs allow you to borrow funds from your policy for ANY reason. With the exception of a Solo 401(k), this flexibility does not exist in traditional retirement options. Although you can withdraw contributions from a Roth IRA penalty and income tax free you can never redeposit them. 4) LIRPs can also double as College Funds for your children. 529 Plans have a plethora of restrictions while cash accumulation life insurance provides so much flexibility with zero market risk and considerably lower fees. I couldn’t agree more with Bankrate.com in this article (http://www.bankrate.com/finance/college-finance/life-insurance-or-529-for-college-savings-1.aspx). 5) Tax-Free Retirement! Now that’s value!
In summary, traditional retirement options haven’t changed much over the years. The contribution limits have increased a little and they have thrown us a bone with a Roth IRA. Please tell me who can retire by saving $6500/year until they retire? AND, most business owners make too much money to fund a Roth IRA (that’s by design) so that’s a mute point. How I wish people would see things for what they are. ALL traditional retirement options are LAWS. Go ahead, check me out. Laws can and do change EVERY day. You can’t win the game when they are constantly changing the rules. LIRPs are contracts. Contracts are binding and protected by our U.S. Constitution. And for all of the naysayers out there who say this “loophole” is going to be closed, please tell me how they are going to pass a law that says we have to pay income tax on loan proceeds?! That’s never going to happen. I’m here to tell you LIRPs are the most cost-effective, flexible retirement plans on the planet!
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