99: Maximizing Tax Benefits: A Primer to Whole Life, ROTH, and Bonds

099 Maximizing Tax Benefits: A Primer to Whole Life, ROTH, and Bonds

[00:00:00] Hello, everyone. I'm John Montoya, and I'm John Perrings. We're authorized Infinite Banking Practitioners and hosts of the Strategic Whole Life Podcast.

John Montoya: Hello, and welcome to Strategic Whole Life, formerly The Fifth Edition podcast. This is episode 99.

In this episode, I'm going to be discussing the triple tax exempt status of whole life policies, how rare the status is, and Really how it compares to other places for money.

So first thing, for those of you wondering what triple tax exempt status means, it is a way of describing an investment, usually a municipal bond, where the interest payments are exempt from taxes at the municipal, state, and federal levels. If you're like me, and you can appreciate paying the least amount of taxes as possible you'll want to take a listen because I'm going to talk about the pros and cons of quite a few different places where you can [00:01:00] park money and enjoy some tax breaks.

Now, I really want to hammer home one particular point. There's really, Only three financial vehicles that even can offer the triple tax advantage, the triple tax trifecta. And it's it's these three number one, you have your Roth IRA. As mentioned, number two, you can own municipal bonds and the third and last place where you can get the triple tax exempt status is a permanent life insurance policy like a whole life.

Also to a universal, just to be fair but we focus on whole life policies. For the Infinite Banking Concept and whole life policies in general, because they're the only ones built on bedrock. We talk a lot about that on the show. And if you've listened to previous episodes, you know exactly what I'm talking about.

We want [00:02:00] guarantees and only a, Whole life policy actually has guarantees on the cash value and the death benefit all the way through. Alright, so let's discuss the pros and cons to each a Roth IRA definitely some pros that we all can appreciate. The tax-free growth tax-free distribution after age 59 and a half.

You do have to put your money in jail for a set period of time. Although you do get, visits, you can actually withdraw the contribution basis that you contribute to your Roth IRA. So that's nice. But any gains, they pretty much got to stay in there until Age 59 and a half, and after that point, you can access tax free.

So that is a nice benefit that the government gives you on your own money. And if if you happen to make too much money though You're not going to be able to contribute. Getting into [00:03:00] the negatives on a Roth IRA number one, your contributions are limited. So the IRS is gonna determine too much of a good thing in this case.

And they're going to say here's the cap. And it does increase a little bit with inflation almost every year, but there is a cap on it. And once you reach that cap, then you can't. And if you happen to make too much money you're out of luck. You can't contribute to it. It is potentially a nice place to park.

Additional money. But just know it is a government qualified account and there's gonna be some strings attached to it, but the tax-free growth and tax-free distribution that's that's definitely very favorable. Um, another negative, which I. I joked about a bit here, but just want to make sure it wasn't missed.

It is the limited liquidity. If you open up an, a Roth IRA and you're in your twenties, just keep in [00:04:00] mind that's close to 40 years that, that money's going to sit in your account. And it's going to basically be under lock and key except for the contribution basis. Just something to keep in mind it's really important that you have liquid assets elsewhere.

You don't want to Have this be the only place where you're putting money away because at the end of the day, you don't want to be cash poor. And although this is a nice account to have definitely, you gotta weigh it in with everything else that you're doing. The next, Financial vehicle I want to touch on that has the triple tax exempt status are muni bonds.

Now the way this works is in order for cities to be able to fund their operations, they will Sell bonds and these bonds can be bought out on the free market. If you're not familiar you can probably open up [00:05:00] a brokerage account and there's going to be. I'm guessing thousands of offerings, and you can pick and choose which one floats your boat.

But what you're doing there is you are basically buying a fixed debt instrument. That is created by a local government maybe a city that's close to you or a city that you live in. And that is one way that you can really choose to invest locally. And the risk that comes along with it though, is that if you're.

Municipality does not do a good job of balancing its books. They can go bankrupt. It does happen. And it probably has happened more frequently than you would like to know, but all the same, you always have to weigh all your risks. And if the city doesn't take in enough revenue.

IE taxes, then it's going to be an issue. So you have to make sure that when you invest in muni bonds, because you're interested [00:06:00] in having a yield that is tax exempt you have to make sure that you weigh the pros and cons in doing so. They tend to be also very conservative in nature.

So the yield, while it's not going to be as great as some other fixed debt instruments, maybe like corporate bonds, it's that tax advantage that that gives it a boost. So if you're in the higher tax brackets, a muni bond can be more attractive to you. But again, you got to weigh the risk of bond default. and that risk is entirely on you. Some pros and cons there for you to consider.

The last financial vehicle that I'll touch on that just happens to be what we specialize in here on the show and talking about most and that is permanentwhole life insurance. And like the Roth IRA you're going to get tax [00:07:00] advantage growth on this asset. And you're also going to be able to access that money tax free.

Now, one of the ways that I teach this and how to access money from a whole life policy is that there's the sad way, the dumb way and the smart way, the sad way, obviously this is a life insurance policy at the end of the day. So if you. So that's the sad way. The dumb way is to say if you're going to pass with a policy in force what's going to happen is your beneficiaries or are going to receive that death benefit and it's going to be depending on your state, a state tax free but it's also going to be income tax free.

So that's the sad way. The dumb way to access money from these policies is to physically withdraw it. And I typically give an example of withdrawing your money from a 401K or withdrawing money from, let's say a money market account or savings account. That money that you withdraw, you're physically removing it.

from that account. And you're [00:08:00] going to have to pay taxes on it if you do that. So the smart way is to take a policy loan and you can do that at any year. So unlike the Roth IRA where you have to wait until age 59 and a half with your whole life policies, you could take a policy loan really at any time.

Whatever your available cash value is, you're pretty much going to be able to, depending on the insurance company and how long you've had your policy the rough numbers on it, you're going to be able to borrow somewhere between 82 to as high as I've seen it as high as 99 percent of your available cash value on a tax free basis.

A lot of a lot of liquidity there. Available to you at any time and the name of the game when we talk about whole life policies, you want to be in control of your money. You want to be in control of your assets. This is definitely a positive about whole life policies because it is a contract where, you know, that [00:09:00] you always have first right.

To that money. And you don't have to ask for permission. In fact, it's only, two questions from the insurance company. How much of your available cash value would you like and which checking account should they send it to? That's it. Actually springs to mind something that came up this morning, a conversation with a client of mine who has a, 401K And I bring this up because he was under the impression that he could if he left his employment, he was thinking about leaving his employment he could roll that money over to an IRA.

And because of his age, he could be able to access that money. But when he talked to the HR department, the benefits department. He found out because he had been there with the current company for six years, there was actually a service agreement that tied up his money for 10 years of service.

or until a later age, and the long and [00:10:00] the short of it is that even if he left his current employment he wouldn't be eligible for a rollover to an IRA, and he couldn't touch that money for at least another four years, or until a certain age, and It was just painful to hear because, at the end of the day, it's his money.

And actually, I take that back. It's not his money. That's part of the rules of the game. When you tie up that money with the government, it's it's really under it's under lock and key with the government and the custodian, the 401k administrator, and they make the rules. You have a claim on that money, but ultimately that's not your money until you Can actually physically withdraw it and move it someplace else.

 Just gets back to why it's so important to have at a minimum, at least one whole life policy, in my opinion within your overall financial plan, because you never want to have assets, but be unable to get to them. Life throws so many curve balls [00:11:00] that You want to be prepared for anything that comes along.

So, getting back to the triple tax trifecta here tax free growth, tax free access, and then The legacy that you leave behind if that's important to you hopefully that is it's also going to be tax free to your beneficiaries with that death benefits. So a lot of great benefits.

Now I'm focusing on the positives here, but to be fair, I should start to mention some of the negatives of whole life and yes some negatives. The number one. This is going to be quite obvious to you, but a negative to whole life insurance is that it's not accessible to everyone. We say on the show that not everyone can buy whole life insurance. You have to qualify for it. And that's true both medically. You have to be in good health but it's also financially. So I recently had a call from someone [00:12:00] who is receiving disability benefits and both with that financial issue and the health issues that prompted the receiving of those said disability benefits.

Immediately I I knew that he was going to be uninsurable and we had a little bit further conversation and sure enough just found out enough from what I need to know on my side to to let him know that this wasn't going to be an option. As great as a whole life policy is and all the reasons that you would want one as part of your financial plan to be the Of that said financial plan not everyone can medically and financially qualify for it.

It is definitely I don't like to think of it this way, but it's exclusive. And this is a club that you definitely want to be part of. So you want to make sure that you don't delay when you are in good health. You. Prioritize your health and you prioritize [00:13:00] locking in your human life value.

Whatever income you make a year, multiply that by how many years you're going to be in the workforce. That's really how much life insurance you should have. If you have dependents, if you're married, you got kids, you're not thinking about just yourself. But if you happen to be single. Maybe you do have other people who are counting on you and they could be your beneficiary.

And there are reasons to have life insurance, even if you're single. You just want to make sure that you're. Again, prioritizing what you want to accomplish. And what, once you do a little bit more research and you understand all the benefits with whole life solving for the banking function with infinite banking, you're going to start to realize that it really pays to have no pun intended this banking system working for you.

Let's see, what is another negative that I can think of? So I have one [00:14:00] this is in regards to just having a whole life policy. Now, hopefully this is not the case for any listeners out there, if you already have a whole life policy, but if all you do is just pay premium. That's a great thing because it means that you're building Capital in a triple tax advantage vehicle you're going to struggle over a long period of time over your lifetime to potentially keep up with inflation.

Now, when inflation is low for a long period of time, all right, these whole life policies they are going to perform very well, but the thing that we can never take for granted is the, What's been called the exorbitant privilege that we have here in the United States, where we get to print money in the form of fiat dollars.

And we also have the fractional reserve banking system that [00:15:00] creates new money. By borrowing it into existence, so there, there's two ways that money is created here in the US. And if we have times of high inflation and they are prolonged times of high inflation, like what happened in the 70s if all you're doing is contributing to a whole life policy.

You're not securing enough assets that can keep up or even outpace inflation. So a whole life policy shouldn't be your entire plan. And that is the absolute truth. It is the bedrock of a foundation. But it is not an entire plan. So for those of you who maybe come to the show and wanting to learn more about whole life, if you're sitting on a lot of cash value, just keep in mind that you should be thinking about how to deploy at least a portion of it.

Now, I always say, I like to have 50 percent of [00:16:00] available cash value. At all times, and the reasons are a few one I do want to retire someday and retire in the sense that I can pay for all my living expenses and still enjoy what I enjoy doing, which is, talking to all of you and helping you to learn more about whole life policies.

I honestly See myself doing that for her as long as I can draw a breath, but, um, , you want to have the ability to have cash value. A to retire on, but you never know when life happens and you need money for medical expenses or on the positive side, when opportunity and investment opportunity comes along.

And if a bank isn't able to lend to you in the traditional manner. You have this secondary option and maybe it's your primary option. Either way, it's always best to have multiple options when it comes to to, to having [00:17:00] the ability to take loans. And whether that's from your traditional bank or for your family banking system that, that's something to be considered.

And certainly we have our own thoughts on, What's best, but the most important takeaway is that it's important to have options when it comes to being able to borrow and get access to capital and your whole life policy gives you that. And it gives you that ability without having to ask for permission without having to verify your assets, your income, your credit worthiness.

So you want to make sure that you have. Access to capital. Yeah. You don't want to deploy all your capital chasing. Shiny objects that potentially could ruin you because at the end of the day, every investment that you make will always carry risk. So don't go whole hog and bet the whole farm with all your cash values, what I'm trying to say.[00:18:00]

All right. That's going to wrap it up. for this episode. So I hope you enjoyed it. If you're enjoying the show, definitely, we do want to request that you give us a great review five star review, wherever you listen to your podcast that would be greatly appreciated by myself and my co host John Perrings.

We appreciate every single one of you and we enjoy reading your emails too. When they come in, when you have questions let us know what's on your mind. You never know your question might be what we talk about next. So thanks for listening and hope to continue to add value to your knowledge base on whole life and we'll catch you on the next episode.

All right, everyone take care.