This is Darren Kuhn with the Masculine Journey Podcast, where we search the ancient paths to find ways that God brings light into a dark world and helps set men free from the struggles that we all face on a day-to-day basis. Your chosen Truth Network Podcast is starting in just a few seconds. Enjoy it.
Share it. But most of all, thank you for listening and for choosing the Truth Podcast Network. Visit us at www.finnishingwell.com with certified financial planner, Hans Scheil, best-selling author and financial planner helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in Finishing Well, including discussions on managing Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes.
Now let's get started with Finishing Well. Welcome to Finishing Well with Certified Financial Planners, Hans Scheil and Tom Griffith. And today, I bet you're going to be excited when I just tell you that we're going to be talking about how to tax-proof your IRA or your 401k. And there's going to be lots of strategies, but just up front, you know, the real simple one, you may not choose to do this, but it would tax-proof it. It is simply, if you gave it all to God, you know, the IRS would, you know, have nothing to do with it. You know, you could actually just, and a lot of people do that with their IRAs.
They realize that this money is still have a tax liability. Well, you can, you know, upon your death, make that happen. But the idea I wanted to talk about actually was tithing for a minute, to say that when you look inside the word tithe, yes, it has to do with the tenth, and yes, it's a biblical principle, but it has something else that's really cool to me.
It has to do with being a servant, a serving God. And so it's kind of like serving dad. And my dad used to take me fishing in Colorado, and we would catch trout. And how fun it would be when we would catch these trout, and we usually caught a lot, that I love to cook. And so I would wrap these trout in bacon and put them over the charcoal grill, and I mean, you could smell these things for a mile away, and they were delicious. And so as I was picking out the trout that I was going to give my dad, right, like, what trout do you think I picked out, right? Clearly the nicest and best trout I could possibly give him. And do you think that I would possibly, in my wildest dreams, think of serving myself before I gave my dad his fish, right? But it was actually a joy, a huge joy, to give that fish to my dad. And I look at that sometimes when I'm giving the first tenth of what I earn to God, how fun that is to actually serve him.
You know, he helped me, he partnered with me to be able to make this money, and now I get to serve him like I did my dad that trout. And so hearing the idea of tax-proofing, right, it's all about stewardship, right, Hans? And this is a real good idea of being able to use your money wisely. Yeah, and so we're proponents, Tom and I, of sitting down and doing financial planning in your 60s, you know, right around retirement, or even if you're not retired yet, like I'm not, you're not.
Still, when you're going on Medicare, you're approaching all that, to sit down with really all the seven worries and put together a plan. And so we've got a separate section for this 401k, IRA, business, money you haven't paid taxes on yet, emphasis on the yet. Because, you know, Tom, I just want Tom to talk about, he just talks about how most people view their IRA money as all theirs. Yeah, I mean, I think if you went up to anybody, I shouldn't say anybody, if you went up to most people, and you ask them about their IRA, their 401k, their 403b, they have all these different numbers, but money that has not been taxed yet, and you sort of ask them, you know, without prompting them, you know, how much do you have?
What do you have? And they will give you a number, let's just say $100,000. I have $100,000 in my IRA. What they don't realize, that $100,000 is not all their money. The IRS has a lien against that account, you are going to have to pay, you or someone else, if you leave this to somebody, someone is going to have to pay taxes on this money.
And so you can look at it on the sheet of paper, you might get a lot of comfort from it, you might feel really good about this balance that's grown well over the last year, your working life. What we forget is that money is going to get taxed at some point, so we want you to reposition that in your mind, just knowing that someone is going to pay taxes, let's try to get this out in an efficient way, a tax efficient way, intelligently, where we can send the least amount of money we can to the government. Not trying to avoid taxes that we duly owe, just trying to owe less if we can do that in a way that fits within the context of a larger plan. Yeah, and I think what Robbie brought up in the beginning is, one way to short circuit the taxes, or to bypass them, is to give your IRA directly to God.
And one of the ways to do that is through a QCD, which is not the strategy that we're talking about today, but it's certainly one of the strategies to tax proof it. And you have to be 70 and a half, but once you've reached that age, for the rest of your life you can give a significant amount, it's over $100,000 in any given year per person, and most of us don't have enough money to give that much to God all in one year, but the limits are quite high, and so systematically we can help you plan to do your tithing through your IRA, and just completely bypass the taxes. So, and that's not what we're on the show to talk about today, is we're going to be talking about one particular strategy that seems to fit well with people who have decided the IRA, their IRA is not for them. It is their estate plan, and they really are just building it up, trying not to take anything out of it, so that they can ultimately leave it to their adult children. And if that's the case, if that's you, or if part of the money, that's the purpose of it, then I think you really want to listen to what we're talking about, and consider the strategy today on buying life insurance of different types, to then provide a tax-free inheritance to your adult children after you're gone. Yeah, that's the absolute beautiful thing about life insurance that I didn't really understand as a child at all, or you know, even my 30s and 40s, I don't think I got it, that wow, the death benefit on life insurance has no tax liability whatsoever.
I mean, it almost seems like too good to be true, but it just is true, right? Well yeah, and it just, when we first talk about this with some people, and maybe some of the listeners, you're actually thinking this, but I'm 65 years old, I'm 70 years old, I don't need life insurance, because my kids are grown, my house is paid off, and the thing is, is you may not need it the way you needed it when you were 30, but if you're already committed to give this taxable account to your adult children, and it's going to probably grow quite a bit between now and when you pass away, then you're already having a form of life insurance, or certainly an inheritance, so we're just suggesting using life insurance, because it has a tremendous tax advantage, is that it comes to them tax-free. Yeah, I think what we did on this video, so we have a YouTube channel where we release videos that correspond with the radio show, is we've laid out really two examples of how someone could use life insurance as a way to have this tax-free benefit going to their, normally it's kids, but it could be really to any beneficiary that they want to receive this money, and one strategy is using something that does build up some cash value, so this might be for the people who potentially want access to this cash, because what we're doing is we're making distributions out of the IRA to pay the premium on the life insurance policy, that's fundamentally what's happening here, is the first policy builds up the cash value, so you might be able to, if you thought you might need this in the future, you're concerned about potentially needing it, this policy builds up cash value and allows you to access that for yourself prior to your death, so that's nice for some people that are on the fence there. The other policy, we'll get more specifics, but the other policy is really trying to keep the premium as low as possible, not build up any cash value, just have a known death benefit that's going to go to the beneficiaries tax-free, and so there's really different strategies. I do want to make the point that we've, on a lot of other shows, we'll talk about Roth conversions, and Roth conversions is a way to sort of get to the same goal of trying to get the IRS out of the account, pay the taxes now, slowly over time, and get it into something that's tax-free.
The difference between this and a Roth IRA is the Roth IRA is still subject to the market fluctuations, so if you sat here and you've watched the market go down a lot in 2022, we've seen it go up in 23 and then come back a little bit over the last several months, if that really worries you, if that bothers you, if that keeps you up at night, you might be invested too aggressively, you might not need to be subject to market risk. These life insurance policies, both of them, have no market fluctuations, they're not subject to that risk, and so if that is you, if you're worried about the risk, and you want a tax-free benefit going to the kids, a life insurance is a great way to do that. So just for my clarity, I guess, as I'm listening, I guess the strategy you're talking about is, as you're paying these premiums on the life insurance, you are in fact paying some taxes as you're taking out those premiums, but the life insurance itself, the benefit would never be taxed, right? Right, and so we're going to pay these premiums out of the IRA or 401k.
I mean, we're going to pay these out of the pre-tax money, but it's got to get taxed first. So like, the highest premium that we've got here on a $100,000 policy is almost $9,000 a year for 10 years. So this policy, you're going to pay in 90 grand into a $100,000 policy over 10 years.
And you say, well, that sounds expensive. Well, kind of, but that's the whole point, is this policy is designed to have the maximum cash value, and it's designed to have a growing death benefit, and it's really positioned to take advantage of the tax-free death benefit and then the tax-free access to the cash value during your lifetime. So we're just repositioning the money from a pre-tax IRA, paying the tax out of the distribution, taking the net amount, sending it to the life insurance company, which has a growing cash value and a growing death benefit. So as always, we want to remind you that our show is brought to you by Cardinal Guide, cardinalguide.com, and if you go to cardinalguide.com, one of the easy ways to find your way around that website is the Seven Worries tab, and there is a tab that is simply the 401K and IRA tab. And if you go to that tab, you're going to find there's a video on the same subject of tax-proofing your IRA. And in the show notes on that video, you're going to find great details and resources of all kinds on these different policies and different ideas in order to tax-proof your IRAs, as well as all sorts of other information on how to finish well as far as in these years of your retirement. And of course, there you can also find Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. And of course, my favorite part of the site is always the contact page because I'm just a phone guy, right?
A whole lot easier for me just to get them on the phone. So there you can find out how to contact Hans or Tom to find out how this all would work for your particular situation. And so we've got a whole lot more coming on how to tax-proof your IRA and your 401K.
We'll be right back. Investment Advisory Services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents.
Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well, certified financial planners Hans Scheil and Tom Griffith. And today's show, tax-proofing your IRA and 401K.
So we've got a whole lot of meat to put on the bone, right Hans? Well, we do. And so we made a couple of examples that are on the YouTube video. And so it's a little harder on the radio to we're not going to give you as much detail as sitting on the board.
But I would encourage you, if this strategy intrigues you, interests you, it's something you want to learn about, is go find us on YouTube and find the tax-proof your IRA on the YouTube channel. So we showed both extremes here. And they're both whole life policies. They're both on a 65-year-old male. We use the male because male premiums are a little more than female premiums. We also use the standard rate. And the standard rate is kind of like what I am. And I'm 65. You know, it means I've got a few chronic health conditions, but nothing really serious going on. But I'm certainly not going to qualify for the preferred or the select rate.
And they've got a couple of classes. So in other words, it could be if you're in really good health, it could be that your premiums would be less than what we're talking about. And if you're female, your premiums on the higher cost policy are going to be 5 percent less. And on the lower cost policy, they're going to be 15 percent less.
So what are we talking about here? We used a unit of $100,000 of life insurance. So it's certainly not enough with some of the IRAs that we see to insure the whole IRA. So if you wanted to insure like $400,000 IRA, well, then you would just buy four times these amounts of life insurance or $400,000 worth of life insurance. So we can get into the details of that with you one on one if you wanted to give us a call. And we could just talk through this on the phone a bit and tell you the size of your IRA and the amount of insurance that you'd be interested in.
But let's focus on the difference between these two policies. So one of them, the less expensive one, is $3,539 a year. And you're going to pay that premium for life. So just every year, you got a premium. And what we do with a lot of clients is we make a reduction or a distribution from their IRA or 401K.
So we're bringing that balance down. And in this case, we'd probably draw out $5,000, $5,500 out of the IRA, pay taxes with $1,500 to $2,000 of it. And then we'd send the $3,539 to the life insurance company. And we do that every year out into the future until you pass away. I guess the downside of that is you're still paying premiums when you're in your 80s and 90s.
And I have a little concern about that as just making sure that the family, if you weren't capable of looking after your stuff, that this policy is never let to look. That's not lapsed. But that's the least expensive way is about $3,600 a year, $3,500 to $3,600 a year for life.
And I will make the point. That's at the standard rate. If you are extremely healthy, there are rates preferred plus.
Each company has their own language they use for that. But if you get one of those better rates, it's less expensive. If you were to also get rated, because they have these table ratings.
It's going to be table two, table three. The higher the table, the more expensive it is. So there's a range here.
And again, these were run on 65-year-old males. So if you're younger, it's going to be less expensive. If you're older, it's more expensive.
So it really just depends on your specific situation. This gives you an idea of sort of the prices we're looking at there. And on that particular policy, that $3,539 annually, that cost is guaranteed to never increase. That is a fixed number that cannot be changed contractually. It has to stay that level.
And so one way to think of this is almost like a permanent term policy. There's no cash value buildup, so you're not paying any additional money to build that cash value. But we've at least kept that premium guaranteed to never increase into the future.
Okay. So that's the least expensive way to do it. No cash value, pay for life. But it is whole life insurance. Now, if we go over to the other extreme, we've got a whole life policy that is priced to stuff as much money as we can into this thing. And the IRS still calls it a life insurance policy. So in both of these policies, pay $100,000.
You know, if you were to die in the first year, either one of these policies are going to pay exactly the same. They're going to pay out $100,000 based upon just a very small premium. Now, the premium for this more expensive policy or higher cash value policy is almost $9,000 a year.
Let's just call it $9,000 to make it simple to understand. But you only pay it for ten years, which makes sense because we're only talking about $100,000 policy. And over the first ten years, we're talking about stuffing $90,000 into a $100,000 policy. And if you make it to the tenth year, you've paid in all those premiums, your life insurance policy has grown to almost $125,000. So the more money you get in cash value in here, the more the life insurance policy has to grow. But the whole idea of this policy is, number one, is to stop the premiums when you're 75, is to have them all taken care of.
Then the second idea is to have as much cash value as we can create in a policy of $100,000. And it's worth about what you put in at the end of ten years. So in other words, with the interest on your money, you've bought the life insurance over the ten years.
One point I will make on this policy, and this is maybe getting a little too detailed, but how it actually works underlying what's going on is this company is paying dividends on the policy every year. And what it's being used to do is purchase what's called paid-up additions. It's purchasing more insurance in that same policy. That helps build the death benefit. It builds the cash value. So you have this asset that's now growing over time. And then we had mentioned this in the first part of the show, that cash value you still have access to via a loan. I don't want to get into all of the details on that.
That's a different show. But you can access that cash value while you're still alive if you were to need that money. If you don't need it, which most people who are going this route generally don't do this because they probably don't need the money. But if they did, they have access to it. And if you don't need it, the full death benefit goes tax-free to your kids.
Well, yeah. So you raised the clock forward to 85 20 years down the road. You've still paid this same $9,000 premium because the premium stopped after 10 years or $90,000. But your cash value at 85 is $149,000. And your death benefit is $176,000. So, you know, it's a pretty nice tax-free savings account. And like I said, most people just leave it there and then the whole death benefit goes to their heirs tax-free. But if somewhere along the line you decided to create an income out of this, you needed the money to pay for something, it's there. And there's a way to access it without paying any tax on the gains.
It's a pretty sweet arrangement. Yeah, the thing that is exciting to me always about it versus the Roth conversion, which I like that idea as well. But the one thing this really has going for it is that, you know, and I didn't ever really think about it all that much until I started to get this age. But, you know, there is a possibility you could die, right? And so, you know, were you to pass away prior to that 80 or whatever, then, you know, long before you paid all the premiums, you know, your family got the benefit of the money that you were hoping that they would get, you know, plus, you know, you still had the money in the IRA, right, Hans?
Well, yeah. And that, you know, that can be directed to God, the money that's in the IRA, and then making that tax-free. You know, in that situation.
Or that can be stretched out. You know, people end up forgetting the value of the life insurance until somebody actually passes away in the first few years. And then it's just, you know, they're very thankful that they had it. And so that's the cash value policy. And it is really the cash value at the extreme. This policy is designed specifically to have the highest premium during the first 10 years that you can possibly stuff in there. And because it's designed to build the cash value and then have a growing death benefit. The other policy is designed to have whole life and to guarantee, you know, the one that's 35, 39 a year, which is a lot less than 9,000 for the first 10 years. It's designed to have no cash value but yet be a whole life policy that will be in force. I mean, if you die at 98 or you die at 107, it's going to pay out its benefit if you die at 67. I mean, it's all the same benefit for the lowest premium guarantee. One thing that I want to talk about as well is both of these policies have some additional benefits sort of built into the policy. Most modern policies that are being sold today have these as well.
But you'd want to check to make sure. But they have what's called living benefits. These are benefits not accessing the cash value but accessing the death benefit while you're still alive. Specifically, they include what they call a chronic and critical illness benefit. This means if you were to get sick, so the chronic generally might be needing help with two of the six activities of daily living or something to that effect is you're able to pull out some of the death benefit while you're still alive and use that to help maybe pay for that additional cost of care you might be needing. Critical illness, and some of them will have a terminal illness, right? Or this is where you've gotten sick and you might have a life expectancy for two years or less. Each policy has different provisions how they define that. But it's a way that you can access the death benefit while you're alive. Generally, when you might need some additional money to help cover increased costs, either for care or medical expenses or whatever that might look like, it allows you to access that in both of these policies. Well, yeah, and tax-free, I might add. Right. So it has a lot of features, and this policy, the more expensive one, is designed to build in and maximize the tax benefits of the policy while still being life insurance.
Wow, and unfortunately, we've run out of time again before we ran out of show. And I did want to add that my dad, I wish he would have listened to this show prior to it because what he did was he felt like his IRA was meant for an inheritance for his kids. And so my siblings had that tax liability that came with that IRA. And so it's really worth looking into this. In my opinion, if you go to CardinalGuide.com, and there you're going to see the seven worries tab.
Again, we've got this one under IRA and 401K. And there you're going to also see the contact information, how to get up with Hans, how to get up with Tom. Or you can really talk about what you want to do with your estate planning because it fits into that so well as well. And it's got all sorts of neat ways that you can put all these strategies together to give God what he's got coming clearly and certainly give your family what they've got coming.
So fun. So again, go to CardinalGuide.com and click on one of those seven worries tab to get all the information, all the details on what we talked about on the show today. So thanks guys. All right. God bless. Thank you. Thank you.
Thank you. We hope you enjoyed Finishing Well brought to you by CardinalGuide.com. Visit CardinalGuide.com for free downloads of this show or previous shows on topics such as Social Security, Medicare, IRAs, long-term care, life insurance, investments and taxes, as well as Hans' best-selling book, The Complete Cardinal Guide to Planning for and Living in Retirement and The Workbook. Once again, for dozens of free resources, past shows or to get Hans' book, go to CardinalGuide.com. If you have a question, comment or suggestion for future shows, click on the Finishing Well radio show on the website and send us a word. Once again, that's CardinalGuide.com. CardinalGuide.com. This is the Truth Network.
Whisper: medium.en / 2023-11-11 10:27:23 / 2023-11-11 10:54:08 / 27