Unique Tax Mitigation Strategies your Father didn’t tell you about

Today I will focus on three ways to grow your money tax-deferred and distribute your money tax-free. Tax-deferred growth and tax-free distributions are my favorite ways to build wealth over the long term, as tax rates will inevitably go up in the future. Too many CPAs and financial advisors are still using mantras from 30 years ago, recommending their clients sock money into tax-deductible retirement plans to lower today’s taxes when they will inevitably end up paying more taxes when they withdraw their money and will be taxed on their gains as well.

  1. The 529 Plan: This college savings plan is pretty well known, although most people are surprised at its enormous flexibility. 529s don’t have income limits, age limits, or in many cases, contribution limits.  And now under the 2017 Tax cuts, 529s can be used for Private Elementary and High School as well. Another little-known benefit is that the 529 has no requirement to withdraw/liquidate money from the account at a certain age, allowing a single plan to provide educational funds for more than one generation. You can change the plan’s beneficiary to a different family member tax-free.
  2. Back-door Roth IRA: Many high-income earners are ineligible to contribute money towards a Roth IRA, but they can alternatively use the back-door method to ultimately fund a Roth IRA. Roth\’s doesn’t have required minimum distributions. You can use this back door method every year if you’re unable to contribute to your Roth IRA in a regular way. The Back-door Roth only works if you have no other IRAs or you are able to transfer your other IRAs into another retirement plan through your employer. As always, please check with your tax advisor before making any tax decisions.
  3. IULs/LIRPs: Indexed Universal Life (IUL) can be used as a Life Insurance Retirement Plan (LIRP) and are extremely effective in generating tax-free income. There are virtually no contribution limits to these plans, the funds grow tax-deferred and can be withdrawn or borrowed as tax-free distributions in the future. This type of plan is often referred to as a Rich Man’s Roth, a Private Pension Plan, a Retire Life Plan and I hear advertisements all the time on the radio for “Bank on Yourself” or “Infinite Banking”, which use this concept. This is not your Grandfather’s Life insurance policy! In addition, LIRPs don’t have an income limit, provide liquidity at all ages, have stock market-like returns with no downside stock market risk, and can even be used for long-term care needs. On Balance, a fully optimized IUL could end up being the most valuable part of one’s overall portfolio.

As always call me if you have any questions or would like to review your tax, retirement, or estate plan. 310-417-9040.

-Jeff Gurman

The information above is not to be construed as tax, legal or investment advice. That advice can only be provided by independent tax, legal or investment advisors. CA Insurance License #0815028

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