In this episode, we discuss three ways IBC can improve your tax situation by strategically paying tax, creating the system to build business income that allows you to reduce tax, and retirement strategies to create more tax-free income. Tune in!
An often overlooked benefit of The Infinite Banking Concept® is the tax efficiency created by becoming your own banker.
In this episode, we discuss three ways IBC can improve your tax situation:
Tune in and learn all about taxes with Infinite Banking!
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- Hello everyone, this is John Montoya.
- And this is John Perrings.
- We are Infinite Banking authorized practitioners, and hosts of "The Fifth Edition."
- Welcome everyone. This is episode 57, "Using IBC to be Tax Efficient." And if we take a look at our wealth over the length of our lifetime, one of the biggest destroyers of wealth is the lost opportunity costs over the course of our life that taxes has on us, it's massive. And so in this episode, we're going to discuss a few dimensions on how to be more efficient with your tax obligations when you've implemented the Infinite Banking Concept. And in that we're going to cover how to pay taxes more efficiently, how to reduce your taxes, and how to get more to use, and enjoy while you're still alive because you've done those things.
- Awesome, well, this will be a good episode because it's going to give you different ideas on how you can better manage your money, because at the end of the day, we work hard to keep as much of our money as possible, but we're lacking in ideas on how we can keep most of what we earn. It's not what you earn, it's what you keep. And so the Infinite Banking strategy really does add a whole nother dimension that for the majority of Americans they're really lacking because they follow the traditional, or what I would say is the typical financial plan, which is outsourcing our capital to other sources, and not really following what we were talking pre-show about, the American spirit of paying the least amount of taxes as possible. Well, here we have a strategy, Infinite Banking, that will allow you to do that so you can keep more of what you take home. So I'm excited to do this episode with you, John. And let's get started.
- Yeah, likewise. And so let's talk about the first one, how to pay taxes more efficiently. And so there are ways you can use IBC as a place to store capital where you can kind of create sort of a virtual escrow fund, right? And, of course, the insurance companies aren't gonna do this for you. This is all personally calculated stuff for your finances, but you can kind of carve out some money for things like property tax, for things like income tax, right? In episode 55, we had an amazing episode with John's wife, where this isn't really a tax necessarily, but healthcare costs, right? All things that leverage the value of our whole life insurance policy to minimize the lost opportunity cost on those expenses. And so if you think about, like, paying your property tax, or your income tax, once you pay those it's gone forever, right? Now you have to save that money again, and pay that money all over again. What if you only had to fund, and save for those expenses one time, and then you could just recycle the use of that money over and over again to pay those things to Uncle Sam, or your state or local tax in the case of your property taxes? What if you only had to do that one time, and then you had that fund that you could reuse over and over and over again?
- Yeah, you just made me think of how so many practitioners, or anyone selling life insurance, they have run on this idea of how many cars can you finance in your lifetime? And look at what you can do if you finance your own cars through your policies. And it just made me think, well, that's certainly one aspect where you could benefit from having an IBC policy to finance cars, but that's something where it's not a given that you're going to finance all your cars through IBC. And for a lot of people, an automobile may be a luxury item. It's not a requirement by any means, but here we have what we're talking specifically about property taxes. If you own your home, there's no way of getting around it. You gotta pay that every single year. Same with your income taxes. You go labor for your money, you're gonna have to pay Uncle Sam income taxes, so there's no getting around it. Well, what's the best way to make sure that the money that you are earning gets additional value? Well, in prior episodes, we've talked about what I call the ninth wonder of the world, uninterrupted compounding interest. The problem with this idea of uninterrupted compounding interest is that where in the heck can you find a place where you can capitalize, and keep that money growing for the rest of your life? Well, IBC is that financial unicorn. We know that we have to pay our property taxes. We know that we have to pay our income taxes. Well, where's the best place to capitalize? Well, we think it's a whole life policy structured so that we can turbocharge that cash value, and then use it for opportunities like this where we know we have a tax bill coming. Well, we've capitalized, we have the ability to borrow against it, keep our money growing, compounding, even though we've paid our taxes, whether that's property taxes or income taxes, but we're still getting the benefit of the compounding effect on our money. And let's not also forget, too, if you're a family person, you're also getting the additional benefit of the death benefit, that extra protection for your family that's just coming along for the ride. And then you add in all the extra benefits that you get with your policy, the disability waiver premium, maybe there's a chronic illness rider, you're getting all this economic value just because you're saving for your property taxes, or your income taxes through your policy. If you don't have an IBC policy, none of this is even possible. You're having to spend even more dollars to get these additional economic benefits by splitting up your dollars and having to save more. This just automatically comes along for the ride. So setting up an IBC policy so that you have, you can use it as an escrow fund just makes your dollars, the money that you earn go even further. And that's what we're talking about here in being more efficient with your tax dollars, you're getting way more bang for your buck.
- Yeah, and you mentioned the uninterrupted compounding. If you ran a future value calculator on the uninterrupted compounding of the money that you give up when you pay taxes, it's insane how much money that would be. And so what we want to look at is how can we minimize those losses. And if you haven't read "Becoming Your Own Banker" you need to read that ASAP if this is of interest to you. And in that book, he talks about flying an airplane, and he talks about you're either flying into a headwind, like flying from New York to San Francisco, or you're flying with a tailwind where you're flying from San Francisco to New York. San Francisco to New York takes about an hour less time because you have that tailwind behind you pushing you along. And that's exactly what we're talking about with all of these recurring expenses through our life. By strategically capitalizing first, and then using the strategies and the capabilities that a whole life insurance provides you, a whole life insurance policy provides you, you can create that tailwind in your life. And so if you haven't done it yet, I actually model this out for you in a module in our online course, which you can get access to at thefifthedition.com, and it's called Recurring Expense Funds. And so I model out how this could work with cars or taxes, and you can see for yourself that if you isolate a single expense, it creates a massive improvement, and a significant tailwind in your financial life if you know how to plan for these things correctly.
- Yeah, and I think you said a key word there, planning. If you're doing IBC, it affords you the ability to think in the future, and present yourself with these opportunities because you are planning. It's when you don't plan where you get stuck, and you don't have the additional benefits that we're talking about you're basically living for the most part every six months to a year at a time. And if you're doing that, this should be a wake-up call that you gotta get away from that. IBC does allow you to better plan out how you're going to utilize your capital, and for tax expenses for what you're talking about there, John, with setting up a reoccurring expense fund. Well, what other place are you gonna find more bang for your buck than with an IBC policy? I honestly can't think of one, but let's go even further than that. Let's talk about creating 1099s, or other business income with an IBC policy.
- Yeah, so there's how can we create this tailwind by being more efficient in how we pay taxes that we owe? How can we actually reduce the amount of taxes that we owe, right? To John's point earlier where there's plenty of legal precedent that there's no obligation to pay more taxes than you owe. And so how do we reduce those? And if we believe in that and we have that spirit, how is our financial life set up to accomplish that? W-2 employees, like regular employees who get W-2 income, they really have very few options to reduce the amount of taxes that they pay. The entities that do have a lot of options are businesses. And so how can we start creating, and how can we create business income for ourself so that it gives our total income picture? Once you create business income, all of your income is now subject to the options that you have because you created that business income to reduce the amount of tax on your total income by having some income come in that's business income, and so this could be a business, it could be rental real estate, it could be lending out there like different types of lending, any of the income that comes in from that, it opens up your accountant, it gives them the option to start actually reducing taxes on your behalf rather than only getting the standard deduction that you get, or only being able to write off the interest payments on your mortgage, or having to get married. Those are really the only options you have as a W-2 employee until you start getting some of that business income coming in.
- Yeah, the IRS tax code is basically set up to benefit people who are in that business owner quadrant. If you read Robert Kiyosaki's "Rich Dad Poor Dad" you come to learn that the people who are W-2 are gonna pay the most taxes. There's just not a whole lot you can do there. Well, with IBC, because you're capitalizing in the best place possible, we call it an opportunity fund. And thinking about how I was able to go out on my own, thinking about Kelly's interview in episode 55, and what she mentioned about how she started her IBC policy as an escrow fund. Well, it later turned for her into an opportunity fund where she had the capital to start her own business. Exactly like what I was able to do when I wanted to venture out on my own, I had the capital to do it. And not only did it free me from the W-2 world, but it also allows me to have greater flexibility, and just how much I have to pay in taxes simply because as a business owner, there are so many more things that I can write off, and having the flexibility, because I have multiple IBC policies at this point, I'm challenged to put it into words, but until you capitalize, and give yourself this opportunity to be your own boss, you're really gonna be challenged to pay what you feel is the proper amount in taxes. I mean, you really have no say if you are W-2. So having an IBC policy that whether you set it up initially as an escrow account, or later to be your opportunity fund, it does allow you to essentially create a bridge where you can create additional streams of income that aren't gonna be taxed the same way as your W-2 wages. And I think that's huge.
- Yeah, and so I'll just say what John just said, again, but add a little more detail. So what he's talking about is, when you accumulate life insurance cash value, so you've now strategically capitalized, what are you gonna buy with that capital? We talked about paying taxes with it. What about buying other income generating assets? So like, I think, John Montoya, his wife, Kelly, myself, we all have stories about how we were able to use life insurance cash value to go out on our own, and start our own businesses. For John and myself, it's in this business, right? But it doesn't even have to be that extreme. You could stay a W-2 employee, like there are a lot of W-2 employees who are making a lot of money out there. They just, unfortunately, don't have much they can do in the tax world. What if you strategically capitalized a whole life insurance policy, and then you used that capital to go out, and buy income generating assets that starts generating 1099 or K-1 income. Now all of a sudden your accountant can start itemizing deductions rather than just taking that standard deduction that you only have access to when you're a W-2 employee. By the way, as an aside, what's one of the most common objections to whole life insurance is that it has a horrible rate of return. It's a bad investment. Meanwhile, what's the rate of return on changing your entire economic future by lowering the amount of taxes that you have, or even being able to change careers? Can you do a rate of return calculation on that? And so I think this kind of vulgar idea of only looking at the rate of return of a life insurance policy is really missing the forest for the trees.
- Yeah, absolutely. And not only that, but it also brings back the point that, if you're capitalizing money for a return on it, meaning chasing rate of return, you're missing the whole idea of a whole life policy because it's not an investment. We talk about this quite a bit. It's a contract and it's a savings vehicle. When utilized properly, it gives you the ability to take advantage of opportunities that you would otherwise miss out on. So the idea of just simply setting up a whole life policy as an investment, completely missing the bigger picture, but to bring us back to what we're talking about, and what I think is really critical, we've talked about this before is the business owner mindset.
- So if you are W-2'd, okay, great, but at the same time, you also still need to take responsibility for your money, take responsibility for your capital. And if you are basically, the type of person who is a W-2 employee, and all you're doing to, quote, unquote, save is put money in your 401 , you do not have a business owner mindset, you have an employee mindset, and you're gonna be.
- Hoping and praying.
- Quite literally chained to your job for the rest of your life. And you're gonna only have really one source of income that you've created for yourself, and it's gonna be 100% taxable with that traditional 401 . And you're gonna be riding the markets up and down until you eventually retire. And then even furthermore, once you do retire, you're still riding that rollercoaster for the rest of your life with no certainty, predictability, any clarity on how much you're going to have, and be able to live off once you do get to retirement. And it all comes back to the fact that you never developed a business owner mindset. And so having an IBC policy, and, hopefully, multiple policies, you're gonna start to develop this business owner mindset muscle in your head because you're accumulating capital, and you're, hopefully, gonna get to this point where you're gonna say, well, how can I be more efficient with this capital? What can I take advantage of in my life where I can get more bang for my buck with this capital, or allow it to be put to use so that we can create multiple streams of income, like what you're talking about with real estate, investing in other businesses. The wealthy people in this world, they don't have just one stream of income, they have multiple streams of income. Well, what allows you to do that? It's first and foremost having access to capital, and then from there multiplying your net worth through multiple streams of income, and owning and controlling multiple assets. Well, that's what IBC is all about.
- So I thought for sure John Montoya was gonna say this, but he didn't, so I'll say it. You should always be in two businesses. Whatever business you're in, doesn't matter if it's W-2, whatever it is, be in that business, no problem, but the other business you should be in is the business of banking, and that's what IBC is all about and allows you to do, so I covered for you.
- I was saving that for you.
- Okay, well, so the final piece of our talk today, we're gonna go into the retirement phase of our life, and how what we're talking about has an effect on that, right? We've talked about retirement quite a bit, but let's talk, let's kinda run that through the tax filter a little. And we have life insurance gives us a lot of options during the retirement phase that allow us to be tax efficient. And at the very worst, if we can't be tax efficient, and actually save money on taxes, it allows us to replace the value of the taxes that we paid for the next generation. So let's just say that right off the top, even if we can't do anything with taxes, we can at least replace all the money that we paid in taxes, and pass that along to the next generation through the tax-free death benefit, but let's talk a little bit about the cash value itself. The cash value itself is a source of tax-free income. So just at the very basic level, we can get tax-free income from a whole life insurance policy. And the use and combination of that with other assets allows us to get more use and enjoyment out of those other assets while we're still alive. And speaking of more use and enjoyment, having the permanent death benefit gives us the ability to use the permission slip concept. And what that means is by having, and I alluded to it a second ago, by having the value of that permanent death benefit be able to replace the value of other assets, it allows us to use and enjoy more of those assets while we're still alive. So here's a couple ways we could do it. One, we could actually offset taxes through the use of charitable donations. What if we had a property that we donated to a charity? By doing so, we would eliminate the capital gains tax on that property, and we would also create a tax offset that could offset taxes in some other asset, like, for example, the 401 that John was just talking about. And by doing the donation, we could actually create an income stream by annuitizing the full value of that property rather than only the post capital gains value, we could annuitize that full value, and create a guaranteed income for the rest of our life. So we reduce the taxes, we created more guaranteed income, and we offset taxes in another asset. So that's just one idea that could be used by just having the presence of a permanent life insurance death benefit. That's just one strategy that could be taken advantage of to reduce taxes in retirement.
- Yeah, and the other one is really just being able to enjoy what you've saved during your lifetime. For so many people that we talk to, and what we see is that they've really set up their retirement so that they're really only having to live off one primary asset, and typically that's their 401 , or IRA, and they go into retirement having to live in what we call scarcity mode, which, basically, if you can envision it, imagine being stuck on a deserted island out in the Pacific, and you've got this huge barrel of water, and you can drink from it to sustain yourself, but because you have no idea how long you're gonna be stuck on that deserted island, you have to take small sips. Well, what is your 401 , or IRA gonna be in retirement if that's all you have? Well, you're gonna have to take sips from that 401 , or IRA, to make sure that you don't run outta money. And so you're constantly gonna be living in this scarcity mode throughout retirement. You're not gonna be able to enjoy it. And that's even if you've done really well for yourself, and you've saved maybe, and I say the word save, you've put the money in there, and maybe it's grown to a couple million dollars, three million, four million, even five million, but what's happening? You're worried about market corrections. You're worried about taking out too much too soon, and you're basically living in scarcity mode. And when you include an IBC whole life policy as a part of your plan, now you have a permission slip to spend down your other assets, and you can actually enjoy your retirement because you have a guaranteed contract, an asset that is guaranteed by the insurance company to perform every single year for the rest of your life. You've got this one asset that allows you to basically spend down all your 401 , spend down your IRA, and you've gotta guarantee that not only do you have an additional surplus fund, but you also have the death benefit to replace that 401 , or IRA, that maybe you also wanted to potentially leave to your beneficiaries, to your kids maybe, well, you just created the perfect permission slip to actually enjoy your retirement because you have an IBC whole life policy, and hopefully multiple policies at that point.
- Yeah, and you could think of it this way. If you own a farm, and this gets into the idea of, like, estate taxes, not all of us are going to be at that level where we'll owe estate taxes, but even if we don't owe estate taxes, and we can replace the value of any kind of tax, or lost asset that has to be paid, if you're a farm owner do you wanna have to give up all your cows to the IRS to pay the tax? Or would you rather just give up a little bit of the milk, right? Or if you're more of bird type of person, here's another analogy for you. If you have a goose that lays golden eggs, do you wanna give away that goose that's laying those golden eggs, or do you just wanna hand over a few eggs? And so both of those analogies are the milk or the eggs that's policy premiums. You can either pay a little bit in premium to cover the full amount, or you just have to give up and pay that full amount, right? And so that's what we're talking about when it comes to this permission slip concept where we're funding the replacement of assets so that we don't have to forego the use of those for future generations, and for yourself while you're still alive.
- Awesome, well, I think that might do it. Any other thoughts you might wanna share, John?
- No, I think that's it. As we say at the end always, head over to thefifthedition.com, and you can get access to our online course where we go through that recurring expense fund model. And you can also book an appointment with us right there on the website for 30 minutes, no cost to you, and you can find out how this could apply in your situation specifically.
- Awesome, well, John, thanks again, and for everyone listening out there, if you haven't already, we definitely would appreciate you leaving us a review, or giving us five stars because that does help us to promote the show, and get it out to a wider audience. If you benefit from listening to what we have to share about IBC, make sure you pass it on, pay it forward. All right everybody, thank you so much. Take care.
- Thanks everyone.