Getting to the zero-tax bracket is one of the things that people planning for their retirement yawn for. It is something you should look for if you do not want to see your retirement nest egg get vaporized by the taxes.
According to David McKnight in the Look Before You LIRP Book, you need to find the right LIRP to help you get into the zero-tax brackets. The trouble is that having the right features when looking for the LIRP is always a challenge. Here is what David Mcknight says needs to be done to get the right type of LIRP.
He starts by saying that the only product to think of when looking for a LIRP is the Indexed Universal Policy. McKnight has reasons that make him believe IUL is a better life insurance retirement plan for you. Thus he systematically lists the steps to be undertaken to get one in the zero tax brackets in retirement.
The book is simple but packed with all the information you need to make the right decision. It is loaded with facts that will give insight into many retirement opportunities. They include investing in the stock market and many more.
What Mcknight Thinks About IRS?
Keeping all the assets in the 0% tax bracket is a good idea. But, he opines that IRS will not allow you to do this unless you have a strategy. According to him, the best tool to use to get the retirement assets into the tax-free bracket is through a life insurance retirement plan.
In the book, Mcknight outlines the benefits of putting your savings in insurance assets. Also, he talks about diversification with a focus on having most of your money in LIRP.
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Feature To Look For In LIRPs
As mentioned, there are many types of life insurance plans that come with varying features. It gives you a wide range of options to choose from. So, you need to look at the attributes of each type before you decide the best option for you. Here are some of the features you may need to consider.
- Manageable fees
- Long Term care rider cost
- Safe and productive growth
- Tax-free
Let’s now explain each of these features:
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Safety and Productive Growth
Your LIRP should be safe. It is your lifeline, and so it must be able to endowment your retirement. Saving accounts are secure, but they are horrible. They cannot guarantee against market forces like inflation. But, LIRP will protect you against market loss. It will deliver growth that will ensure your retirement money serves you until you die.
For this reason, David recommends that you consider IUL. It guarantees that your money will grow and is safe. You can never lose your money because of market crashes.
Thus, according to David McKnight, IUL policies guarantee the safety of LIRP. Whole life insurance offers the same guarantee. But LIRPs beats it in other aspects, including return on investment. That is why it is considered fruitful for retirement.
Thus, good LIRP should give you more than 7.5% growth. If it grows at just 5%, you may quickly run out of money and so leaving your savings in the tax-deferred IRA is better. But, IULs have a return of more than 7.7% per year, which is right for you.
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Low Fees
Any payment made to an insurer has an opportunity cost. The cost refers to the earning the fees you pay would have made if it had been invested elsewhere. LIRP charges the least fees compared to other products. So, according to McKnight, the LIRP you choose must have charges that are less than the tax-deferred.
Thus, since IRAs are averaged at 1.5% every year, the LIRP must be equivalent or less than 1.5%. Even though this may not be the case when beginning, so pay attention to the associated fees.
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Cost and Tax- Free Distribution
It is another vital consideration when selecting LIRP. Of course, you will pay heftily to get your money out of some LIRP. It may cost extra than the tax savings you are making. To operate efficiently, ensure that your LIRP guarantees both cost and tax-free distributions.
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Long Term Care-Rider
In a few cases, one may need some form of long term care. Such care is expensive, and so it should be the last thing you may wish to have. But, there is a 70 percent chance that either of the spouses may need long term care insurance. Also, there is a 30 percent chance that neither of the spouses will need the care. So it is something that is not certain.
Unfortunately, most of us do not like paying for something that may not happen. So naturally, you will want to avoid long-term care insurance. But, McKnight says choosing the right product (LIRP) will give you the long term care you need.
Given that there is a chance that any of the spouses may need the care, the right LIRP could be the best option for you. The care may cost anything between $6,000 and $10,000 every month.
How Long-Time Care Rider Works
Long-Term Care Riders come in two versions. There is the type you will pay for and the one you will not pay for. Here is the difference.
The rider you pay for
When you sign up for this rider, the cost of coverage goes up. So each month, you will be expected to pay more premiums.
How It Works
For instance, if you have a $500,000 death benefit, it will help you. If you become incapable of performing any of the daily living activities, you must find a medic to put this in writing.
If the doctor does it, you will receive two percent of the death benefits every month for at least four years. This is good for those who will eventually need long-term care. But if you fall in the 30% category, the extra amount you pay on your premiums could be too expensive for no good reason.
Let’s now look at the type of long term care rider you will not need to pay for.
Assuming that you have U.S. dollars 500, 000 cash death benefit, but you want to spend it on your long-term care, this is how it works. Your insurer calculates 2 % of the death benefits but discounts the amount before a check is sent to you. The discounting formula is simple- they will convert your age into a percentage. So, if you are 80 years old then you will get 80% of 10,000.
Thus, companies won’t charge you for the rider because they have a catch. They are aware that the cost will be offset in the discounting process.
According to David Mcknight, you will not get anything for free, so choosing either method will cost you about 1.5%. But In IUL, you will enjoy tax and charge-free distribution as well as productivity growth.
In his final remarks, McKnight outlines a checklist for anyone considering IUL. He also demystifies a myth associated with the products.
Here are the things you will need to check.
- Does it guarantee 0% of loans
- Do the arrears attract interest?
- Is there a cap on the interest charged?
- The index Cap rate stable
- Is the company financially stable?
- Does it feature a protection rider on over-loans?
Benefits of Investing in LIPR
- Investing your money in LIRP is better than having it in IRAs and 401(k)s. You will be able to access the money even before you reach 59 ½ years without risking the 10% penalties and fines.
- The cash invested in LIRPs is not taxed. So, it is a better option compared to investing your money in CDs and Mutual funds.
- Taking your money from LIRP using the First in first out withdrawal method or policy loan is the best. It will not show up on IRS’s radar, so it will not be taxed.
- Compared to Roth IRA, LIRP has no contribution limits. It means that you can contribute as much as you want. What IRS requires is that you tie your contribution to death benefits. It allows you to provide as much as you can manage.
- Your income will not limit you as it is in the case of the Roth IRA. You cannot contribute to Roth IRA if your income is more than $194,000. Such rules do not apply to LIRP.
- If you already have the policy, changes in legislation that affects LIRP will not apply to you. You will retain whatever benefits you were entitled to before the law changed.
Cons of LIPR
- The rate at which the investment grows is lower than when the funds are invested inequities.
- It may need ongoing contributions.
- The early years come with a surrender charge.
- You cannot deduct the contributions from your income for taxation purposes.
Final Thought
David Mcknight’s approach in the book Look Before You LIRP is a well thought out. It is appropriately structured and simplified for easy understanding. It is even suitable for people who have a phobia for financial calculations.
Mcknight explains why a life insurance policy is the best tool for retirement savings. He takes his time to demonstrate what IUL product is and why it is better than other LIRPs products. His objective is to help people secure the best financial retirement asset.
