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Tax Deferred or Tax Free?

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Tax- Deferred  Savings  Now ….. and …...Tax  Free  Distributions  Later ….. That Should be Your Goal !

With a non-qualified annuity, the premium and interest can grow tax-deferred under current tax laws. Unlike taxable investments, you don’t pay taxes on annuity interest until you start to withdraw it (that could be 10 – 20 - 30 years from now).  This allows your money to grow faster than in a taxable account, because you earn interest on money that would otherwise have been paid in taxes. This interest is tax deferred …. But could it also be tax free for some of you ? 

You should always be aware of the income tax bracket that you fall within …. If your income and deductions are such that you owe …. “No Income Taxes” …. And ….... If you have any tax deferred accounts, maybe we should look at this situation closer. Some people make the comment to me ….. I haven’t filed a tax return in several years. ….(If that’s the case, then we really need to talk).... contact us

You should always take full advantage of what opportunities the government may give you whenever you get the opportunity. Because tomorrow that opportunity may be gone.

Roth IRA’s can be Tax Free ……

A Roth IRA is a retirement savings account that allows your deposited money to grow tax deferred like a Traditional IRA, without the upfront deduction of your deposit .…”BUT” .… When properly executed provides tax-free distributions when withdrawn from the account. You fund a Roth with after-tax dollars, meaning you've already paid taxes on the money you put into it. In return for no up-front tax break, your money grows and grows tax deferred, and when you withdraw it at retirement, you pay no taxes. That's right - every penny goes straight in your pocket. As with most of these plans, there are annual contribution limits and restrictions that may apply. (Always check with your tax advisor)....more information

What’s the difference in a distribution from a Traditional IRA and a Roth IRA  ?

There are many differences between these accounts, but one of the most talked about is:  When you pay your income taxes !  With a Traditional IRA you usually pay the taxes when you withdraw the money in retirement. At that time you initial deposit as well as all of the tax deferred interest will be considered taxable. With a Roth IRA it's the exact opposite. You pay the taxes on the front end like any other normal account. But the real power of this account is in the back end.

A Roth IRA can grow tax deferred year after year, without causing any taxation ….. And …. When done properly, all distributions on the back end, are tax free.  Remember, in both traditional IRA’s and Roth IRAs, your money grows tax deferred while it's in the account. …. But only the Roth IRA has the ability to offer  “TAX FREE” distributions. (Always check with your tax advisor) ……more information

 What are Roth Conversions ? …..

Roth Conversions are where you take a portion of your IRA or 401(k) and declare it as taxable income when you do the conversion. By doing this, you have caused a taxable event for that year on the amount of money you have chosen to convert to a Roth IRA.. ….. BUT …. When done correctly, from this point on, your Roth IRA account can accumulate and grow in value, without having to worry about any future taxation (under current law). This includes while growing as well as on distribution.  The goal here is to create a tax free environment for this money….. For me …. As well as ….For my beneficiaries. Also, there are no required distributions in a Roth IRA account at age 70 ½ like in a Traditional IRA. As with all of these plans, there are conditions and restrictions that may apply. (Always check with your tax advisor)

Tax-Deferred savings create Tax Free Payouts ……

Here’s a Strategy: Consider using a life insurance to create a death benefit to pay the income taxes on a Roth conversion at death.  Let’s say John (75) is and married to Sue (65). He has a large IRA account and has been taking the “Required Minimum Distributions”, since he turned age 70 ½ . He states, that he does not really need this money, they’re doing fine without it. These distributions are taxable income now ….. But …. How about using the IRA distributions to pay the premiums for a life insurance policy on John’s life (assuming he is insurable).

Let’s assume John dies at age 80 …. Sue is 70 ….. And she is the primary beneficiary … Sue will first do a spousal continuation of the IRA account into her name ….. Then she can do the conversion from a Traditional IRA to a Roth IRA. …… She takes the  “TAX FREE” death benefit", from which the IRA distributions were paying for, and uses that money to pay the taxes on a ROTH CONVERSION.  This has created a tax free environment for Sue and possibly her beneficiaries as well.

Tax Benefits of Life Insurance .......

IRC Section 101(a) provides that death benefits of life insurance are generally income tax free when paid to the listed beneficiary or beneficiaries. 

A policy can pay out to the policy owner before the death of the insured. Cash can be withdrawn from the policy tax free -- in most cases -- up to the adjusted cost basis (FIFO - First in, First out - of the amount you have paid into the policy) under IRC Section 72(e)(5). Any withdrawals will reduce the policy’s cash value.  

A policy can pay out tax-free cash to the policy owner in the form of policy loans. Loans will also reduce the policy’s cash value and may reduce the death benefit.

Tax-free cash value withdrawals or loans are currently not subject to the 3.8% passive income tax under the Affordable Care Act (ACA). Also, tax-free withdrawals or loans are not considered as income for purposes of calculating income taxes on Social Security retirement benefits. And cash value life insurance is not considered to be a countable asset on the FAFSA application for financial aid at public colleges. 

Growth of policy cash values in excess of the cost basis (the amount you paid into it) are typically income tax deferred while they remain in the policy.

There are certain terms, contribution limits and restrictions that apply. (Always check with your insurance professional and tax advisor)


If we can position your money so that we can keep volatility off  the money ….And …. We can keep taxes off  the money ….. And  …. If we can potentially take advantage of some of the volatility issues we might  face, ……. Wouldn’t  we be in a better financial position to increase your financial wealth and wellbeing ? 

Our key financial objective is to find the most cost-effective and tax-efficient way to pay for life’s expenses and then transfer your assets to your heirs. Contact us via email for more information or call to speak to a professional at 704.542.0447.


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