Plan to Not Pay Taxes

Living a Tax Free Life

You do not get to draw tax free income from these strategies until you are 59 1/2 but you do get to accumulate gains on a tax deferred basis until then.  Your assets are basically treated the same as if they are in a tax deferred vehicle until you turn 59 1/2 when your assets and all gains on them magically become tax free.  

While I understand that for many of you this can mean years and even decades before you benefit from this but let’s get some perspective on how powerful this approach is.  The goal is to position yourself for tax free income from 59 1/2 until you leave this earth. According to the US Social Security Administration, men who make it to the age of 60 have a life expectancy of 21.4 years and women who make it to the age of 60 have a life expectancy of 24.4 years.  https://www.ssa.gov/oact/STATS/table4c6.html  As this represents the average, there are many people who will live to 90, 100 and beyond.  

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These life expectancies are for Baby Boomers many of whom live less healthy lives than the coming waves of Generation Xers and Millennials.  For Generation Xers and Millennials, the life expectancy could very well be significantly longer than for the Baby Boomers due to more exercise, less smoking and eating better than previous generations.  

Let’s assume you started to make money in your 20’s.  At the age of 60 you will have generated income as an adult for 30-40 years.  This tax free strategy can be designed to generate tax free income for you for 30-40 years.  Basically these strategies can provide tax free income for you for 1/3 to 1/2 of your adult life assuming you are average to above average.  Think of how much money you have paid or will pay in income taxes between the ages of 20 and 60. Wouldn’t it be great to keep all that for yourself or for your heirs?  What I am advocating here is that you keep all that money for the second half of your adult life.  

Even if you are below average and you die sooner, the Tax Free Strategies that you develop for yourself can be used by your heirs so they can get the benefit of your tax free strategies when they turn 59 1/2.  If your favorite T-shirt reads “I’m Spending My Kids Inheritance” than this may not be for you but most business owners I work with are interested in leaving a legacy and an impact on future generations. Not only do these strategies provide tax free income for your life, they represent one of the best estate planning vehicles available to you today.  

With the current US Estate Tax system exempting over $5.4 million for individuals and $10.8 for couples, most people are not impacted by the estate tax at all.  At the same time your Roth Tax Free Vehicles offer powerful tax planning tools as you can leave these to your heirs and they can benefit from the tax free assets during their lifetime.  While there are a few rules that impact them including Required Minimum Distributions when they achieve 70 years old, effectively they have the ability to benefit from your powerful tax free assets.

Developing your tax free strategy may require patience if you have not already positioned your assets in a Roth Tax Free Vehicle.  Jaguars hide in trees, waiting for some unsuspecting animal to walk below it. Jaguars wait for the perfect moment to pounce on their meal.  This strategy takes a lot of waiting. This strategy takes a lot of patience.  

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In addition to the Roth Tax Free Vehicles, there have been two predominant strategies to achieve tax free results with tax deferred vehicles:  Insurance or Death.

Every life insurance company and life insurance agent promotes the use of cash value policies such as whole life, universal life or whatever else they want to call them.  Many of these policies offer a loan provision where the holder can take out a loan from the cash value of the policy and upon death the loan is paid back using the proceeds of the policy.  Effectively, the loan was “tax free” during life and the insurance proceeds are tax free which renders this an effective tax free strategy using a tax deferred asset.

The death strategy is not beneficial for you as the person doing the dying but provides your beneficiaries with what is referred to as a Step Up in Basis which effectively gives them the appreciation of your taxable assets on a tax free basis.

Using Roth Tax Free Vehicles gives you more flexibility and upside plus you can benefit from them while you are still alive.