Tax Free Income


There’s a reason why CPA Ed Slott, the nation’s leading tax expert (featured on one of the videos in the Resource section of this website), says that taxes are the biggest risk you’ll face in retirement. The reason is in order to cover the skyrocketing debt and obligations like Social Security and Medicare, tax rates must double in order to pay for these benefits. David M Walker, former Comptroller General for the US Government Accountability Office, was recently quoted as saying “based on the current fiscal path, future tax rates will have to double or our country could go bankrupt.”

This means we must be looking for ways to create wealth that is essentially tax free for when we want to use it down the road. This way we don’t get hit with a huge tax bill by deferring taxes until retirement.

There are three main ways you can grow your money tax advantaged (or tax free) to build a tax free retirement income:

The 1st is Municipal Bonds. They’re a form of Government bonds. The good news is that when done properly, they generally grow tax-free, giving you tax-free interest. The downside is they typically offer a low rate-of-return. There are 2 battles we have to win: taxes and rate of return. With bonds you may be winning the tax battle, but not the rate-of-return battle! Also, with multiple municipalities going bankrupt, these may not be as secure as they used to be.

The 2nd option is a Roth IRA or Roth 401K . The good news is that they grow tax-free and you can potentially pull the money out tax-free. The downsides are:

1.) You are restricted on how much you can contribute based on your age and income: Age 49 and under – $5,500. Age 50 and over – $6,500.  In addition, if your income exceeds certain limits ($191,000), you can’t contribute at all!!!

2.)    For both the Roth IRA and the Roth 401K you have to wait until you’re 59 ½ to take out any earnings. If you take your earnings out before, there could be taxes and penalties. Plus ….this is an IRA/401K. Guess who’s in charge of its rules? The Government!

3.)    In order to qualify for money from the Government for college, Medicaid, Medicare and Social Security benefits, one might have to spend down their ROTH to get it. So the Government gives us an advantage in one area, but then takes it away in other areas to make up for it.   

The 3rd option is found in IRS Code 7702. This strategy gives you tax deferred growth, and tax free access to your money…whenever you want it. There are no limits on contributions and no government rules on when you can access your money.

It’s a preferred strategy of the wealthy. In fact, 55% of the owners of this type of asset are the wealthiest 10% in the country. The good news is that virtually anyone can use it, regardless of your wealth level. To find out more about this strategy, check out the Resources section on this website. If you want to discuss the strategy, call me or drop me an email so we can set up a time to meet!

Leave a Reply

Your email address will not be published.