Discover a Secret Way to Pay Less Tax on Your 401(k) After You Retire-Financial experts have a little-known strategy to help reduce taxes on your 401(k) withdrawals in retirement. It’s called “variable life insurance.”
Variable Life Insurance: Your Triple-Benefit Solution
Variable life insurance is a smart investment, a safety net, and a tax-saving strategy – all in one. Let’s dive into how it works.
The IRS Tax Break: Section 7702 Loophole
This trick relies on an IRS loophole, found in section 7702 of the tax code. Here’s how it works: you put after-tax money into a policy that gets invested in stocks or bonds, and it grows without being taxed.
Invest and Switch with Tax Advantages
These insurance policies offer both a death benefit for your loved ones and a way to invest your money in the stock market or bonds. The special perk? You can switch your investments tax-free, unlike regular investment accounts.
Grow Your Wealth, Tax-Free
Hold onto the policy for 10-20 years, and if your investments do well, you can pay the same monthly premium while your cash value and death benefit grow.
Tax-Free Retirement Income
The best part for you? Tax-free retirement income. Be careful though; how much you withdraw might affect taxes.
How to Make Tax-Free Withdrawals
You can access part of your cash value without paying income tax. You can take out tax-free withdrawals until you’ve withdrawn the total amount you paid in premiums.
Save on Taxes with Variable Life Insurance
While money from your variable life insurance policy is tax-free up to the premium amount, withdrawals from your 401(k) are taxed. By taking income from your policy, you reduce the amount you need from your 401(k), saving you money in uncertain future tax rates.
Combine with a Roth IRA
Adding a Roth IRA to the mix can reduce your taxable income even more while your investments grow. Just remember, there are limits to how much you can invest in a Roth IRA.
Variable Life Insurance: Tax-Free Retirement Income and More
In summary, variable life insurance can provide tax-free retirement income for you and a tax-free death benefit for your loved ones, but it’s crucial to manage your policy wisely.
Why Does the Government Support Variable Life Insurance?
The government has good reasons to encourage this strategy. It promotes life insurance and eases the burden of future retirement benefit payments.
Costs and Suitability Matter
Keep in mind that variable life insurance isn’t for everyone. It’s a long-term investment that often locks up your money for at least seven years and usually makes sense only with a 10-year or longer horizon. Always consult a licensed advisor or broker before making such investments.
By using this simple IRS trick with variable life insurance, you can potentially reduce your taxes in retirement and secure your financial future.