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  • Barry Boscoe

The Least Understood Tax Shelter

Who would have ever considered life insurance to be a tax shelter? This is not a negative but instead a very positive result. Where can you get an investment that will grow capital gains and income tax deferred, distribute income tax free, and have risk mitigation all under one roof?


Permanent life insurance has the ability to do all three. Let’s explore how this unique instrument which has been around for over 200 years is able to do this.


The tax treatment associated with the following investments or strategies is as follows:


1. Traditional investments: After-Tax Contributions and Taxed Annually on realized gains

2. Stocks, some bonds and real estate: After-Tax Contributions and Taxed Deferred on unrealized gains

3. IRA, 401(k): Pre-Tax Contributions and Taxed Deferred on unrealized gains

4. Roth IRA: After-Tax Contributions and Tax Free

5. Permanent Life Insurance: After-Tax Contributions and Tax Free


The tax treatment of taking distributions from the various investments are as follows:


1. Traditional investments: After-Tax Contributions; 53.10% (CA) on Short Term Capital Gains

2. Stocks, bonds and real estate: After-Tax Contributions; 36.03% (CA) on Long Term Capital Gains

3. IRA, 401(k): Pre-Tax Contributions; 53.10% (CA) on Short Term Capital Gains

4. Roth IRA: Post-Tax Contributions; 0% on Gains

5. Permanent Life Insurance: Post-Tax Contributions; 0% on Gains


The ability to have your assets grow and be distributed tax free is huge. It relieves you of having to try and achieve higher rates of return which in turn allows you to be a little more conservative in your investment strategy and still end up in the same place. Your losses will be lessened with a more conservative approach without harming your overall retirement income.


Risk mitigation or sequence of returns: This refers to the order and timing of poor investment returns and how they impact your retirement savings.


By way of example:


If you earn 50% on your investment and then lose 50%, your average rate of return is 0%, correct?


However, if you start off with an investment of $10,000 and lose 50%, your investment account is now $5,000. If the very next day you earn back 50%, your investment account is now worth $7,500 - a loss of 25%, or a geometric rate of return of negative (13.40%)


As you can see there is a significant difference between an average rate of return and a geometric rate of return which takes into consideration the lost value and is much more accurate. Life insurance will prevent any losses of capital due to market declines thus creating risk mitigation.


So, the bottom line is to begin thinking of ways to create tax free retirement income and at the same time reduce your overall market volatility (and risk of loss) in order to have more retirement income.


If you would like to discuss how to create a tax-free retirement income, please contact me either at 818-342-9950 or you can use my calendar link below to schedule a time that will work best for you. https://calendly.com/brighton-advisory/30-phone-call?month=2022-08

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