Hello, once again, I'm Tony kenzi. You're and today we're going to explore a hypothetical possibility for your future retirement, living a tax free life. To be honest, that's not completely realistic. But there are things you can do to limit income taxes in retirement. So far in Module Two, we've talked about growing your pile of money and protecting it along the way. If you follow good investment practices, you can arrive at retirement with a larger pile of money ready to spend.
And the last lesson we encountered five truths that while not critical, help you evaluate the tactical choices you face as you grow your money. None of us are ever going to be completely divorced from the IRS or other tax authorities. As hard as I tried the Internal Revenue Service continues to look over my shoulder. It's a reminder of the refrain about being unable to escape death and taxes. Since the IRS is the agency charged with making us follow the relevant tax rules, their reason for being is to collect enough money from us so the federal government couldn't pay its bills. If you own your own business, you know too well the IRS has an interest in your success, play by the rules and all as well.
Whether you are retired or not, you pay money from your gross income to the IRS. Every year you send an annual report called a tax return, sometimes accompanied by a check. If there's no follow up, audit life goes on normally until next year when the cycle starts over. All of us whether as a business or as individuals are still required to report annually and send a check if necessary. And all of us have an interest in sending less money rather than more money. In this lesson, my message to you is that under some circumstances, a check is not necessary.
Even though a record of it may have to appear in the annual report. In late 2017, Congress introduced a new set of tax rules. It remains to be seen if these changes have a positive or a negative impact on each of us. I have a feeling that the law of unintended consequences will raise its ugly head what that will mean to you is yet to be determined. Successful retirement secrets is not about teaching you how to file your annual report. It's about helping you reach a state called financial freedom, which is more likely to happen if you have fewer taxes to pay.
On one side of the coin is the assertion that it's easier to pay more taxes if you have more money. On the other side, it says why not arrange things such that your taxable income is smaller. As individuals many of us grew up with a mantra that came from our grandparents and before it says that to have a successful life. We need to get an education find a job, buy a house and finish paying for that house as soon as possible. All of which are still valid except for the part about paying off the house more he just soon as possible. If you do have a mortgage is it makes sense to hurry up and pay it off.
Under current tax rules, sending extra payments to the mortgage company reduces what is now your biggest tax write off. Paying off the mortgage as soon as possible provides emotional satisfaction. But it doesn't always make sense. financial perspective until you retired. When not having a mortgage is usually a good thing. What I want you to do is structure your mortgage payments, such that your final payment is within a couple of months from the date you set for retirement.
Remember how in Module One, I said it was important for you to establish a projected date for your retirement. Figuring out how much extra to send every month to make this happen is not rocket science. It spreads the cost out over many months or years so you can arrive at retirement with an extra bonus, no more mortgage payments. As an aside, the new tax rules still allow you to deduct the interest you pay on a home mortgage, but impose new limits beyond which the interest paid is not tax deductible. So what has any of this to do with living a tax free retirement? If you retire with no mortgage payments, your core expenses will go down.
By extension what you now have for discretionary spending will go up a couple that with income that is not taxed as it flows into your spending accounts and you're closer To a tax free retirement, now consider the national debt. In 2008, it was 10.3 trillion. And now 10 years later, it's about 20 trillion. Our congressmen and pundits point to the size of the debt as being critical, and vent about reducing spending on critical elements of our contract with society to get it further down. I argue it's the ratio of debt to the national economy that needs to be better understood, is federal debt too high? Probably.
If it is, we have three options, grow the economy as quickly as possible, raise tax rates and take in more tax revenue, or spend less money. growing the economy is difficult and takes time to keep inflation in check. spending less money is equally difficult since there are countless reasons to keep them where they are, if not more, so. That leaves raising taxes, which if we are to believe the current leaders will trickle down to you and me, but higher tax rates also imply you might have less money. Spend in retirement. Most people retire with money in three buckets as shown in this image 20% in taxable accounts 80% in tax deferred accounts like IRAs and 401, K's and very little or nothing in tax free accounts.
If you accept that tax rates will go up in the future. Do you want your money growing in a taxable account or a tax free account? Here are the four primary tax free alternatives, a Roth IRA, a Roth 401k, municipal bonds and indexed life insurance. Roth accounts are named for whomever it was that introduced legislation to make them possible. They are a good first choice if you qualify. Your taxable income must be less than $186,000 per year if you're married and filing jointly, or 118,000.
If you're single, the maximum you can add in any given year is 5500. Unless you're 5050 years or older, when you can add up to 60 $500 the money going into a Roth account has to be after tax money. In other words, you've already paid income taxes on the 5500. But any earnings or growth in the accumulating account is not taxed. And after you retire and need an income from that bucket of money, it comes out income tax free. The second Roth is a corporate sponsored Roth under IRS code section 401 K, your max annual contribution is 18,500.
If you're not yet 50, and 24,500. If you're 50 or more, the basic rule is the same and that money goes in after tax and tax free when you take it out. A bond is a debt instrument. you lend money to someone and they give you a promise to pay it back at some point in exchange for a commitment to pay you for the use of your money, municipal bonds or debt contracts issued by municipalities. The agreement to pay you for the use of your money is typically a lower rate of interest because the risks default is presumably lower. These days a newly issued missive municipal bond carries an interest rate of about 4%, which is not subject to federal income taxes.
Going back to the lesson where we talked about risk, the danger is that we are moving toward a period of rising interest rates. The downward trend we've received recently enjoyed started in about 1981. And there are many signals that it's bottomed out and is starting back up. What that means is additional risk for your bond portfolio, as the underlying value will shrink as interest rates rise. Now let's look at indexed Universal Life Insurance. This is a relatively new form of permanent life insurance as contrasted with term life insurance.
It's more expensive life insurance than term because it's not priced to disappear before you buy. The insurance company expects it will have to pay a claim when somebody eventually passes. Meanwhile, indexed Universal Life Insurance is the most favored kind on the market these days with some Policies you could live to be 120 before the policy matures, eventually the company is going to hear from someone that the insured has died and that they need to cut a check. With indexed universal life, the accumulating cash reserves are invested such that increases in those reserves are linked to a market index. Whenever you pay premiums to the insurance company, some of that money is credited to your policy which will grow over time. None of the increase is taxable either now or later.
And depending upon how the money gets paid to either you or your beneficiary, it can be structured such that it's not subject to federal income tax, like a Roth account, money goes in after tax. And if it's done properly, you can pay yourself a tax free income from the cash inside the policy. In this respect, it's similar to a Roth IRA. an added advantage is that if you die too soon, there is a death benefit. That's also income tax free. Good tactical decisions about which policy or company to use when buying an index.
Universal life policy is way beyond the scope of this course. Just know that these contracts allow you to participate in the markets with no downside risk. And at some point in the future, you can create a stream of income to support a successful retirement with tax free dollars. The challenge we all face with building tax free income sources, is that it can be hard to ensure your account against market declines. If you use municipal bonds or real bank Roth accounts, you can see the effect. This shows a bucket called future savings which could be a certificate of deposit or municipal bond income.
The bucket leaks in the form of risk if not taxes, and are growing at less than optimal rates. If the internal growth is less than the rate of inflation, once again, you're going broke safely. The full answer in this module is that you probably cannot live a tax free life. But there are steps you can take to legitimately limit the role played by the IRS. As an individual you can explore whether a tactical decision to own a permanent life insurance policy as part of your effort to build your retirement nest egg Make sense? If you are a successful small business owner, I encourage you to go to the resource vault and look for this ebook published by Craig Benson myself.
It describes a financial strategy used by successful small business owners, which causes them to add to their retirement nest egg with business assets taxed at a very low and favorable rate. Couple that with the possibility of using those after tax funds to buy indexed universal life, and you have a real winner. we've now reached the end of module two. In Module Three, we get into an overview and explanation of social security. And when you're ready, let's get started.