In this episode we share some thoughts on taxes.
In Becoming Your Own Banker, Nelson Nash likens the financial world to flying an airplane. "... you cannot fly an airplane through a vacuum. It must go through an environment!"
If you ever travel by plane, you know that it takes longer to fly west than it does to fly east. This is because flying west, you are flying into a headwind. It takes around 20% longer to fly west than it does to fly east.
In finance, all costs (now and in the future) create a financial headwind. And for most people taxes are the largest drag on our financial lives.
Resources mentioned in this episode:
- Hi everybody. This is John Montoya.
- And this is John Perrings.
- We're authorized Infinite Banking practitioners and hosts of "The Fifth Edition". Episode 45, thinking about taxes with IBC. Well, thank you everyone for joining us for this episode. John Perrings and I wanted to have a discussion about taxes and how it relates to Infinite Banking, and we thought this would be a fun episode to put together to clarify some of the challenges that we all face when it comes to taxes, and really highlight for you listeners why IBC is so important when it comes to the tax ramifications that we all face. What we're gonna discuss in this episode, obviously the tax ramifications of utilizing IBC. We'll also highlight one of Nelson's more common sayings as it relates to taxes, and we'll talk about tax as a hidden inflation, and what you can do to move forward in spite of taxes. So why don't we jump in? So let's start here. A little history on income taxes in the United States. This really isn't taught in schools, but the first income tax only came about during the Civil War, and even then it was probably the most temporary of all tax measures ever created, and the reason why is because Abraham Lincoln, one of our favorite presidents of all time for most people, in order to finance the cost of war, he actually implemented the first ever income tax in United States history. But it was deemed unconstitutional, so it didn't last for very long. Now, that was the first and only income tax in our country's history until the year 1913. Now, for those of you who have studied U.S. history, maybe or maybe not, you might be familiar with why 1913 is a year that lives in infamy. And if you've read "The Creature from Jekyll Island", you will know that in 1913 the Federal Reserve Act was passed. But coincidentally or not, that was also the same year that the IRS was created. There was another law that was passed in March of 1913 which actually created the income tax on a permanent basis. Now, the income tax back then was extremely small, and it was promised it would never increase. Of course, we know government promises aren't really worth much, and for over 100 years plus now we've had a progressive income tax, and it's gone up, up, up, down, up. I mean, who knows where it's gonna be in the future, but one thing's for certain, it's certainly not going away. So IBC is a great way to strategize when you take into account all the things that we need to be aware of in order to create wealth. Well, we have to think about taxes, and because IBC rests on a foundation of whole life insurance, which is really for the benefit of widows and orphans, we get to minimize, reduce, even forego future taxes when we set up an IBC policy the right way. So let's jump into the three ways that we can overcome taxes. John, do you want to hit on those?
- Yeah, I think the most common one is to use through the use of qualified plans, where most of us are kind of taught very early in our careers, I remember sitting down with the HR and benefits person at my first company, and they kind of just put this packet in front of me and said, hey, fill this out and select what you want your 401K stuff to be. So, you know, you get a handful of choices. So you have the ways to either defer tax or make some investments that you don't have to pay tax in the future. So those are your typical 401Ks or your Roth type plans. So those obviously come with a lot of rules and restrictions. Not only is it rules and restrictions, but I would emphasize restrictions, where you can't really touch a lot of that money for a long time, until you turn 60 years old. I would say that's the most well-known tool that we can use to try to mitigate taxes, if we call it that.
- Yeah, and what you mentioned about having to hold it until at least age 59 and a half, age 60, thereabouts, you're putting a lot of trust into politicians that quite frankly don't ever seem to have any one's interests but their own, in terms of getting re-elected, so it's a lot of trust that goes into locking up your money for decades at a time, not knowing even what your tax bracket is gonna be in when you go to withdraw that money. Another way that you could do it is you could buy muni bonds. The problem with muni bonds though, interest rates are so low these days that there's essentially no growth, it can be very illiquid, and I like to point out, look, if you're buying bonds from the government, you're basically encouraging the government to spend, and the government's really not the best allocator of our wealth, right?
- To say the least.
- To say the least. So I wouldn't encourage that type of behavior, not to mention the benefits you ultimately get from owning muni bonds seems to pale in comparison into what would be the third option, or third way that you can overcome taxes, which is to buy an overfund permanent cash value life insurance, AKA IBC whole life. And as Carlos Lara pointed out in his LMR article, which we'll link to in the show notes, no 1099s here, when you overfund a whole life policy, you are basically setting up an account that the IRS knows about, but when funded properly and designed properly, you get to truly overcome taxes not only on the growth, but on the access, and ultimately on the transfer of that death benefit to your beneficiaries, and that, for both of us, I think we'll both agree, that is really the most profound way that you can overcome taxes. I mean, it's why we do what we do and why we're sharing all this with all of you. So just to quickly recap, you can fund a government-qualified retirement account, you can buy muni bonds, or you can buy an overfund permanent cash value life insurance the way that we teach it with IBC whole life. Now, John, I know that you also made a note about real estate. Do you want to touch on that real quick?
- Yeah, and I'll just make one other quick note. I mean, you know, it's like everything comes with strings attached in most cases when you use different types of financial instruments to mitigate taxes, except for life insurance and except for coming up with strategies. But the strategies are always, you're always kind of having to move around and come up with new strategies because we're always trying to figure out what the government wants to reward people, what strategies they like, in order to take advantage of taxes. But I was gonna say real quick about municipal bonds, some of those strings, not only is the government in charge of the money, and it kind of incentivizes them to spend, but depending on the type of situation you're in, it could also affect your social security. So some of the income that comes in through municipal bonds can start to count against you when it comes to your social security. So that's something that could be looked into and discussed as well. But we were talking about real estate, and I think it's an interesting topic. I brought it up before the show, where obviously the interest that you pay for a mortgage is a deductible from your taxes, and then you also get some advantages where you can write off the depreciation of some assets, depending on what your situation is. But then John Montoya brought up a good point about how you do get those things, and I think those are positive things, but then you also have your property taxes that you have to account for. So it's always a little bit of a balancing act of how do those balance out? John Montoya brought up, well, and the property taxes never end. So your depreciation and interest ends at some point, presumably, but the property taxes don't. So I think was an interesting, I hadn't thought of that, and that's an interesting way to think about it.
- Yeah, well we had written it into the notes, three ways to overcome taxes, and I like the idea, as a wealth-building tool, how real estate can really fit in there, but for all of us, when we have to write those checks to the government, whether that's state or federal or even for property taxes, it's always a painful bite, and it's just a reminder that those taxes never go away. So you don't ever truly overcome those taxes. It's just part of the responsibility of owning real estate. So like you said, and you say it a lot, there's always trade offs, and well, there's one. Real quick, I do want to way, full disclosure here, we are not tax professionals, so for any tax advice, you want to make sure that you're seeking out a qualified tax professional. Where we are qualified is with Infinite Banking. Obviously we're IBC authorized practitioners, and that is our area of expertise. So if you're listening to the show and you are looking for expertise on Infinite Banking, well, make sure that you're talking to an IBC authorized practitioner. So just wanted to share that real quick. We are not tax professionals by any means, but this show is important because taxes, it's coming up in a few months, and you should be thinking about how taxes affect your overall portfolio and the planning that you're doing not only this year, but beyond.
- I always find it interesting, because it's like, you know, obviously we're not licensed tax people, but I find a lot of licensed tax people, the only thing they can really deal with is what's already happened, and so a lot of times, they're kind of picking up the pieces of decisions and actions that were already made. Even though we're not "tax professionals", I think we do add some pretty powerful planning features where we're looking ahead. If you have the pieces in place in the future, one of the ways to overcome taxes is through strategy, and if you can identify what some of those strategies could be and set yourself up where you have the options to use those strategies, that can make a really profound difference in the future.
- Yeah, I like that you bring that up too, because for the longest time, my tax professional would always ask me to consider funding a 401K or IRA, and it got to the point where she just stopped asking because she knew my take on it. Sadly, and she's great by the way, other than her advice on retirement planning, which, you know, take it with a grain of salt. She's not a retirement expert, she's just trying to mitigate taxes here and now. But this is the way that I think the majority of tax professionals probably think about taxes, is how to minimize taxes in the current year, and they don't really do any future tax planning. And I see that as being one of the biggest obstacles to making sure that your plan is really tight and cohesive all the way through, and not short-sighted. But it's really challenging because the industry, the tax industry, they're really focused on the here and now. And so it's important to really think about these questions because the chances are your tax professional that you're working with is probably only concerned about how much they can save you in taxes this year, not five, 10, 15 years from now when you go to retire, or longer, depending on your age. So something to keep in mind there.
- Yeah, I think it seems like you're trying to trigger me into going on a rant, John. I'm not falling for it, but what I will say is, before I go on a rant, it's so true. I mean, the typical advice that a lot of people will kind of offer up to kind of prove that they're doing the right thing is max fund your 401K , buy a house and get married. Those are the typical tax saving advice that most people get in their life. It's so short-sighted, where people will bend over backwards to keep themselves from going into a higher tax bracket. And while there is money to be saved there, most people don't realize that tax brackets are last dollar, so it's really only that amount of money that went into the higher tax bracket that you're being taxed the higher amount on. So if you actually run the numbers that way, your accountant keeping you in a lower tax bracket probably didn't save you as much as you think it did, and maybe as much as they thought it did. But I think think long-range, as Nelson Nash said, is some of the best advice you could possibly get, and most of us are really fighting for tax savings scraps over whatever we're allowed to do in the current tax year.
- Well, I don't think we planned it this way, but that's actually a perfect segue for a quote from Nelson's book, and something that Nelson himself would say quite a bit when it comes to taxes, and this is on page 66 of "Becoming Your Own Banker". If you don't have this book, you should definitely order yourself a copy. But here's what Nelson says. "When government creates a problem, read onerous taxation, and then turns around and creates an exception to the problem they created, tax sheltered retirement plans like 401Ks and IRAs, aren't you just a little bit suspicious that you're being manipulated?"
- Yeah, I mean, it's like, you're not gonna do it John, I'm not gonna do it, I'm not gonna go crazy. But it's kind of obvious. It's like, okay, we have this $18,000 limit to fund our tax deferred qualified plans or whatever qualified plans you want to use, and it's like, well, how'd they come up with 18,000? Why is that the number? It's so arbitrary, and it just kind of, it drives me a little bit crazy, where somehow we think that's some kind of great thing where we just have all these completely arbitrary rules. We can't get to it until 59 and a half. That sounds like they calculated something, but that's completely arbitrary. By the way, all the retirement stuff like social security, I think, what's the number? The average lifespan was to age, you know, late 60s or early 70s, and so none of this stuff is really valid anymore in terms of how they calculate anything.
- You just made me think of something with the rules and restrictions with funding a 401K , even an IRA. The government sets limitations on how much money you can put into these accounts, and I'll give an example of an IRA. It has been increasing little by little, but somewhere around 6,000 to maybe as much as 7,000, depending on your age, because they give you an exception there too. If you're beyond 50, you can put a little bit more. But let's say you have multiple IRA accounts, because for a lot of people, they've actually worked one place, then transferred, rolled over their IRA. We end up accumulating multiple IRA accounts. Well, you can only fund up to that maximum, whether it's 6,000 or 7,000 per year into an IRA. That's across all your IRAS, so it doesn't matter how many IRAs you have, you can't fund all of them up to 6,000 per year or 7,000 per year. You can only fund one of them or a portion of each up to that maximum limit. And I want to compare that to IBC policies. One of the more common questions that I'll get is, well, why do I need to start another IBC policy? And the reason why is because when you have an IBC whole life policy designed for your situation, there is going to be a maximum that you can contribute per year, but here's the thing. You can, health permitted, qualify for your second IBC whole life policy, your third IBC whole life policy, and so on, so there is no restriction, other than your health and what the life insurance company will allow ultimately as a death benefit on your life. We talk about that as human life value. There is no restriction like with an IRA that keeps you from putting more money into additional policies. I know for a lot of people, they really try to maximize their 401K contributions, maximize their IRA, and then they're stuck. Now, what else can they do? Well, here's something hiding in plain sight where, if health permitted, you can qualify for it, you max fund your contract for the year. Well, think like a business owner is what Nelson would tell you. He would say, well, if you're running a profitable business, what should you do with that excess profit? Expand your business, right? Open up another IBC policy. Well, in the world of IRAs, you can do it, but they're not going to allow you to fund all your IRAs. Well, this is far superior to any government qualified plan, and you get to fund it ultimately as much as you want, up to the point where the life insurance company's gonna say, hey, we can't give you any more of this stuff. That's a really, really wonderful benefit to IBC that you just can't get anywhere else.
- And on top of the benefits, it's also not arbitrary, where all these rules and regulations around qualified plans and all that stuff, it's like, as I was mentioning earlier, it's just so arbitrary, whereas the limits are hard to reach with life insurance, but the limits with life insurance are the opposite. They are not arbitrary, they're calculated using actuarial math. There's a way to calculate it, how much you should have and how much you can get. So rather than just having somebody's opinion on how they came up with whatever number, $18,000 a year, the life insurance business is the opposite of that.
- I like it, and what I like even more about overfunding a whole life policy too is the tax ramification of it as well, because I know no matter what, whenever I choose to retire, it can be before age 59 and a half, I can access that money tax-free with no restrictions, and that's certainly just another benefit that we get with an IBC whole life plan. The tax consequence of that money, whether we need access to it a couple of months from now, next year, five years, 10 years or whenever, it's completely under our control, and you just can't do that with a tax qualified plan with the government. The big take away for everyone listening is where do you want to warehouse your wealth in order to reduce and avoid taxes legally now and in the future? Compare it to a 401K or IRA, and I think you'll agree that IBC wins hands down.
- And you mentioned business owners. Here's some other strings attached for business owners. If you want to have one of these qualified plans for yourself, well, you have to have it for your employees as well. So talking about typical sort of accountant type planning, by the way, not bashing accountants here. They don't always have the tools, and they're not brought in at the right time to provide the right tools, but they'll say, hey, you should start a qualified plan for your employees, but guess what, you have to fund that qualified plan. If you're a business owner, yeah, the money going to fund your employees' qualified plan might be a deduction, but you're still paying it, and so it's like from day one your starting with a negative net balance because you had to fund all your employees' qualified plans before you could fund your own. It's a lot of strings out there.
- So let's do a quick recap on the tax ramifications of IBC. Here's what we've come up with. When you fund a properly designed IBC policy, you're gonna get tax-free growth, tax-free access via withdrawals up to the amount you contributed, tax-free access via policy loans, and ultimately tax-free transfer of that death benefit to your beneficiaries. The way I would sum it up is once you get that money into a whole life policy, you're never gonna be taxed on it again, and that's pretty powerful.
- And that gets back to the non-arbitrariness of everything, because it's life insurance. So a lot of people look at life insurance as sort of like a tax shelter or something, and it's absolutely not that. It's taxed the way it is because it's insurance, just like you wouldn't get taxed if you got in a car accident and the car insurance company indemnified against your loss on the car. Well, life insurance is the same thing, and so all of these things, the tax-deferred growth, tax-free access, tax-free transfer upon death. I mean, those are all functions of a non-arbitrary way of calculating and offsetting uncertainty.
- And wealthy families, banks and corporations have been utilizing this very unique benefit, written within the IRS tax code, for generations. It's there, section 7702. We would be remiss in talking about taxes and IBC if we didn't mention that portion of the IRS tax code that makes all of this possible. Again, the wealthiest families, the biggest banks in the world, and even corporations have been taking advantage of this IRS tax code to build, grow and transfer wealth. And if these entities, if these wealthy families are doing it, you really ought to be thinking about getting started yourself. I can't say that any more emphatically than that.
- I was gonna add one more thing. I was thinking of maybe adding it to the end, you know, an idea, because is it always about saving tax? For instance, trying to get into a lower tax bracket in retirement and sacrificing income, that's not a great plan just to save some tax. I was thinking about just making a comment on that.
- Well, there's always the comment, too, about nobody plans to be poor in retirement, and essentially what you're doing with a 401K , you're basically planning to be in the lowest tax bracket, and if you achieve that with a 401K , you're not where you want to be.
- You are living on cat food.
- Yeah, I mean that's the type of bankrupt thinking that government incentivizes. You fund your 401K with the hope that when you get to retirement, you're gonna have enough to live off of, but simultaneously you're feeling the pressure of every dollar coming out being taxed as ordinary income, and the goal is obviously to be in the lowest tax bracket possible. Well, who plans to be in the lowest tax bracket? What type of planning is that?
- Because that means you're making, well, the lowest tax bracket is zero, and you have to earn almost no money to get there, so is that what we want?
- Or we have this IBC alternative.
- Right, and the strategies that we've talked about before where, okay, have your 401K . It's fine. Have all of those other investments. But if you have some actuarial products to add to it, it's just gonna create more for you. So it's like, you know, it's kind of a no brainer. Well, I think this wraps up our episode on taxes with IBC. If you have any questions, head over, again, if you haven't heard the announcement, head over to our brand new website, thefifthedition.com. We'll have a link to that Lara-Murphy Report article that we mentioned earlier, as well as "Becoming Your Own Banker". You can find that quote in the book. You can also get a 50% discount on our Whole Life course. It's a soup to nut course on understanding whole life insurance, especially as it relates to Infinite Banking. And feel free to leave us a review. All the reviews help us a lot in terms of reaching and finding new people that might be interested in this, so thanks for joining, everybody.
- Likewise. Thank you everybody. Take care.