Helping clients get to a zero percent tax bracket in retirement

Cash value life insurance has a role to play in helping clients get to a zero percent tax bracket in retirement and the author of "The Power of Zero" outlined the process during a session at the National Association of Insurance and Financial Advisors Apex conference.

David McKnight is a financial advisor and best-selling author. He described the steps to get clients to a zero percent tax bracket.

The first step is to convince clients that their income taxes in retirement are likely to be higher than they are today.

Clients keep retirement funds in three buckets – taxable, tax-deferred and tax-free, he said. “In a rising tax rate environment, there is a mathematically perfect amount of money to keep in the taxable and tax-deferred buckets.”

For the taxable bucket, the amount is equal to six months of basic living expenses.

For the tax-deferred bucket, the balance must be low enough that required minimum distributions in retirement are equal to or less than the client’s standard deduction but also low enough that they don’t cause Social Security to be taxed. He said that balance is about $450,000 for most married couples and about half that amount for most single individuals.

The next step, McKnight said, is that anything above and beyond the ideal balance must be shifted to the tax-free bucket. “You want to do that slowly enough not to rise into a tax bracket that gives you heartburn but quickly enough to get the heavy lifting done before tax rates go up,” he said.

McKnight said that up to this point in the client conversation, life insurance has not been discussed. He said that a portion of the client’s shift in allocation can be put toward cash value life insurance.

Clients often balk at buying cash value life insurance because of what they have read online from financial personalities such as Dave Ramsey and Suze Ormond. McKnight suggested that advisors talk to clients about ways to use permanent life insurance to fund long-term care as one way to have them consider the purchase.

McKnight listed six different ways that clients can generate tax-free income in retirement.

1. Roth IRA
2. Roth 401(k)
3. Cash value life insurance
4. RMDs that are offset by the client’s standard deduction.
5. Roth conversions.
6. Social Security if the client can keep their income low enough.

“Every single one of these tax-free streams of income does something different,” he said. But he said the one he likes best is RMDs offset by the client’s standard deduction, and described them as “the holy grail of retirement planning” because they are tax advantaged twice – when the client puts funds in the retirement plan and if they can offset the standard deduction when the time comes to file income taxes.

 

© Entire contents copyright 2024 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.