How Do I Take Money Out of Tax-Free Investments?

I'm excited to talk to you about becoming financially independent, particularly in your retirement or non-working years. I define financial independence as being able to do what you love with the people you love at the places you love and not having to work to pay for it. Some of you will work the rest of your lives because you love what you do—perhaps you started your own business, or your work feels more like a hobby. Whatever the case, we want you to be able to?decide?if you want to commit to work or be “job-optional”-- free to go on trips and spend time doing what you love. Our clients are all over the map, visiting children and grandchildren, traveling abroad, or simply taking a staycation in their backyard. Today, we'll explore one of the key elements to becoming financially independent.?

?

You cannot achieve financial independence exclusively by having good investments. You must develop a written risk management plan to avoid losing hard-earned assets during market downturns. You need a written healthcare plan to ensure you and your household aren't affected by the number one cause of bankruptcy – chronic illness. You also need a written income plan to guarantee you won't run out of income and that your sources of income will work together seamlessly. A written estate plan will give you assurance that you and your family will be taken care of at the end of life.?

?

The final piece is something I've discussed in the last couple of articles: how to avoid paying taxes in retirement. I grew up in a military home and love my country, but I don't want to pay more taxes than I'm obligated to, and most of my clients would say the same.?

?

We began this series by establishing the importance of having a plan in place to avoid paying too much in taxes during retirement. While healthcare is the number one cause of bankruptcy, taxes are the number one expense in retirement. In the last article, we dove into how to build a foundation for a tax-free retirement by implementing vehicles that can grow tax-free, such as Roth IRAs, life insurance, and municipal bonds. These are essential tools to have in your arsenal, whether you prefer them or not.?

?

Today, I will explain how to withdraw money from your accounts tax-free. An article I read recently referred to this as the "buy, borrow, and die" strategy.

?

First, you must buy assets that you can eventually withdraw money from tax-free and that appreciate in value, which limits your pool. As we've discussed, you can invest in Roth IRAs with tax-free growth, and if you follow the rules (with help from professionals), you may also withdraw your money tax-free.?

?

When selling an appreciated asset, you are typically required to pay capital gains, which are taxes on the growth. Is there a way around these kinds of taxes? We anticipate that interest rates will become more reasonable, and this is an excellent opportunity to save money and secure lower rates. However, it is not an ideal time right now to borrow money due to high interest rates. Investment real estate is a great option for withdrawing money tax-free, but rates are high right now.?You need to wait until rates are low, but paying a low-interest rate is superior to paying capital gains. You can borrow against your real estate and create an income stream.

?

You can also buy stocks on margin and typically borrow up to 30% of the value of your stock. There is a risk, so this shouldn't be your primary strategy. Instead of selling your stock and paying short-term (ordinary income tax, higher brackets) or long-term gains (capital gains, lower brackets), you can borrow against the stocks you own. Borrowing is more cost-efficient than selling and paying the taxes on the gain, and you still own the underlying investment.?

?

Finally, as I've discussed in previous articles, you can gradually move money into life insurance (IRS tax code 7702). Whether you love or hate the idea of life insurance, the truth is that you can design a life insurance policy that is affordable, principal-protected, grows tax-free, and from which you may borrow money tax-free?and?interest-free. Most other vehicles, such as a home equity line of credit, still charge interest against the money you borrow. If you get an early start and build your life insurance over time, you can borrow money tax-free and interest-free against your own assets.?Using the value of a life insurance policy built up over time, you can create a wash loan; pay no interest, access your money tax-free, and settle upon death or earlier.?

You can utilize these tremendous tools, and they're only the tip of the iceberg. There are a variety of tools, vehicles, and strategies our team at Lord and Richards employs every day to help people retire financially independent and pay less taxes; we would love for you to have a tax-free?retirement.?

?

Start by building a solid foundation of income from Social Security. Do not withdraw so much money from your taxable accounts that it will cause Social Security to be taxed. Then, set up additional income streams from tax-free sources and thereby reduce or eliminate your taxes in retirement. It all starts with a Financial Independence Review? with our team of specialists. We would love to help you.