We don’t know with any kind of certainty what tax rates will be in the future, which means that planning your finances into retirement can be both stressful and intimidating, but it doesn’t have to be. This week, John and April discuss tax diversification and how a wide range of investments now will afford you more choices later in life.
April says, “The main thing that we want our clients to have is more options when it gets to retirement, not less; we don't want you to be painted into a corner.”
Together, John and April have over 50 years of combined experience in helping clients plan for retirement and they use that knowledge this week to shed light on the importance of tax diversification in your planning process.
They speak in detail about:
Tax deferred accounts, taxable accounts, and tax favored accounts
Tax planning strategies— where should you be saving your money?
The impact of taxes on retirement income
Adapting to tax and market changes
And more
Listen now…
Transcript:
April Schoen: Hello everyone. Good afternoon. Thank you for joining us today as we're going to be talking about tax diversification in retirement. My name is April Schoen and I am joined on the call today with John Curry. John is the author of Preparing for a Secure Retirement. Say hello, John.
John Curry: Hey folks, glad to be with you.
April: I'm excited about today's topic, John. I know we've had a lot of feedback so far with people being interested in the webinar and so I'm excited for us to go through everything that we have today. Before I get started, though, before we get started,
John: I'm looking forward to it also because this is a timely topic in light of the presidential election coming up soon as people started about taxes. So this is gonna be good.
April: A small little thing like the presidential election, right?
John: Correct.
April: Small changes there. Yeah, so I think we'll get into that and talk about how that can go with taxes, too and some changes we might see there. So we'll kind of go through all that together. Before we get into the meat of today's conversation, a couple of things I want to point out. One, we are recording today's webinar so we should have a replay for you available. We've had to kind of change up how we do our recording.
So just so you know, it may take one to two weeks for us to have that replay available on our website. But as soon as we have the replay available, we'll be sure to send out a link so everyone has a copy of that. The next thing I would say too, is just make sure if you haven't already grabbed a piece of paper and a pen, like I have here, because we're going to be going through a lot of information. And we're really going to be going through some strategies on tax planning.
So you may want to jot down some notes, you may have a question, or you may have something that says you know what, I really want to make sure that I go through this with John and April when we're on the phone. So just have that handy for you in case you need to take notes or have some questions you want to talk about later. So today, we're gonna be talking about tax diversification in retirement.
I do want to tell you though, a little bit about us and kind of who we are. So John and I are both advisors with North Florida Financial, and North Florida has, is headquartered in Tallahassee and they've been in business for about 50 years. We have locations now from Jacksonville all the way to Louisiana, and down to Tampa and Orlando. So we've seen a lot of growth. John has been in the financial services business since 1975. In fact, John, I meant to tell you the other day, congratulations, because you just hit 45 years.
John: That's correct. September 13. That's right.
April: So great accomplishment. So congratulations to you on that. I've been in financial services about 10 years. So I was with that previous firm before North Florida for about four and then came over to North Florida and I've been working with John ever since for about six and a half years. So time flies when you're having fun, right?
John: Absolutely. And if you're having fun, life is good.
April: Right. And taxes, I mean, this is tax diversification, retirement planning. These are things that we talk about with clients on a weekly basis, a daily basis, even. I know for you, you know, you've really focused most of your career on helping people when it gets to retirement and talking about social security and when should they take social security. Healthcare choices, right? So what are they going to do about health care, retirement, Medicare, required minimum distributions?
There were some changes last year with required minimum distributions and when you have to start taking money out of retirement accounts, which obviously impacts your taxes because as you know, when people, when you hit now 72, used to be 70, and you start taking money out those retirement accounts, you're gonna, you might get hit with a big tax bill.
So we're going to talk about that a little bit today, too and some things that you can do ahead of time to put yourself in a better position. Very good. I wanted to say too, John, you and I didn't get a chance to chat about this but we had several people, a lot of people reply to the email yesterday that went out asking about questions and what's their most important concern that they have when it comes to retirement or when it comes to financial planning?
And there were definitely some common themes. So I just kind of want to go through these for a few minutes. And I know we're going to kind of get through this today. There were lots of questions about health care in retirement, which I know we're going to, we have a Medicare webinar that we're probably going to do maybe in November, so just kind of be on the lookout for that.
We'll cover more about health care in retirement. But there were some questions about the best ways to have retirement accounts and invested to have sound investments, to have money that's going to last throughout your entire retirement. Very important. Talking about how to adapt to tax and market changes, we're definitely going to hit that today. And then there were some questions too, about just the best way to optimize withdrawals when it comes to taxes. So all great comments, very common themes there.
John: Let me jump in just a moment, what I'm going to be doing folks, at the end of our webinar is I'm going to do a case study and I'm going to be set, I'm going to walk you through some of the things I haven't done, when I talk you through it, I'm gonna walk you through some of the things applies to the material that we'll be covering today because some of the things that you're talking about writing an article, are the reasons why I have found one as inaccurate.
I believe that eating my own cooking. I'm giving advice, I need to be doing it myself. So what I'm gonna do today is walk you through, I'm gonna keep it kind of neutral so I don't get into too much detail about products. But I do think it's important that you hear, so please stay with us. And I'm gonna about 10 minutes and tie it together based on what I've done and what other people do and what my team and staff do. So just wanted to throw that in there.
April: Great. Thank you. It's a good segue. So what are we going to be talking about today? We're going to be talking about the different types of retirement investment accounts, we're going to go through half the tax status. So we're talking about tax-deferred, taxable and tax-favored accounts. We're going to talk about some tax planning strategies. As John mentioned, going through a case study, he's going to use himself as an example. And then we're also going to talk about how to use Roth IRAs and permanent life insurance when it comes to retirement planning.
I know some of you may have to jump off the car early because that does happen. I know a lot of you are joining us on your lunch hour. So if you do have to jump off early, I did want to go ahead and give you our contact information. We would recommend those of you on the call, those of you listening to a replay to schedule a time to speak with John, myself, anyone on our team. It would be about a 25 to 30-minute phone appointment.
And this would really just be an opportunity to talk about any goals, concerns you have about retirement planning. And then also, we can share with you a little bit more about our planning process and how we help clients. So John, the best number to be able to call the office to get a phone appointment with him is to call our main office number at 850-562-3000. That's 850-562-3000. And then you can call that number to get on my calendar as well. Or you can call me directly at 850-544-8464. All right, John, are we ready to roll up our sleeves and get to work?
John: Let's go to work. I always love doing these webinars because my view is and you know this was nice that I talked about it. How do we create value? And I'm convinced that by educating people and letting them know about possible dangers, as well as opportunities for creating value. So let's do a little value creation here.
April: Let's do it. Okay, so before we do get into the meat of today's presentation we do have some disclosures to go through with you. I won't bore you by reading this all to you. You all can sure read this yourself. But the main thing I want to point out here, the main point is that John and I are not CPAs or attorneys, so we cannot offer you tax or legal advice. And we do recommend that you consult your tax or legal advice regarding your own financial situation. I love this quote by Benjamin Franklin, I know you do too, John. But in this world, nothing can be said to be certain except death and taxes. Isn't that the truth?
So we're going to be definitely talking a lot about taxes today. So while we don't always know what tax rates will be in the future, what tax rates are going to be when you retire, that's why we believe it's so important for tax diversification. That's why we believe in tax diversification. So what does tax diversification even mean? It means that you have investments, that you have savings in a wide range of taxable accounts.
So maybe you have money in tax-deferred vehicles, like we're going to talk about, or tax-favored vehicles or taxable accounts. And by having money in different types of investments and retirement accounts, it's going to give you more options when it gets to retirement. And that's really the main thing that we want our clients to have is more options when it gets to retirement, not less. We don't want you to be painted into a corner. So we're going to walk through all three of those today and how they affect you from a tax planning standpoint.
So we're first going to talk about tax-deferred accounts. Now, tax-deferred accounts are the most common approach to retirement planning. I really want you to think here about a 401K or a 403B or a 457 Plan. Those are what we consider traditional retirement accounts. So with these, they're tax-deferred and you put money into them on a pre-tax basis. So you put money in today, you've not paid tax on it, it's gonna grow tax-deferred but when you go to take money out in the future, it's going to be 100% taxable at ordinary income rates.
Very important to know that. So while it's the most traditional route for retirement planning, it's not the most efficient when it comes to tax planning. So we're going to talk about that in a few minutes. But really, when it comes to tax-deferred accounts, there's two types. There's pre-tax, and there's post-tax. What that means is you've got tax-deferred vehicles that you put money in today that you haven't paid tax on, again, think that 401K, 403B, 457. It tax-deferred, and then when you go to take money out, it's all taxable. So that's contributions made with pre-tax dollars.
They are also tax-deferred accounts that you make with after-tax dollars. So you pay the tax today, you contribute to the account. Now, examples of these would be a non-deductible IRA and also non-qualified annuities. So here, you pay tax today, you don't pay while it's growing, the gains are tax-deferred. But when you go to take money out, it's going to again be most of it will be 100% taxable because the gains have to come out first. Very important there. And it'll be taxed at ordinary income rates.
So two types when it comes to tax-deferred. The next type of account we talked about are taxable. Now I call these taxed as you go. Most people think of them as like a regular investment account, money that you have in a money market or a CD, these would be considered taxable because you put money in today with after-tax dollars but you may have to pay tax while it's growing. These are the accounts that you get a 1099 on every year.
So some examples here would be a money market, a CD, mutual funds, stocks, bonds, and then also real estate rentals would qualify for this as well. It's kind of interesting. You know, John, we talk about this some time with taxable accounts because we get a question about from you like, Well, my account was down, like, let's say in a year like 2018 when their stock portfolio was down, but they still had to pay taxes. So it's kind of interesting, right? Like my account's down, I didn't take any money, I didn't get to enjoy any income but that tax bill still comes in..
John: Correct. That's not fun. Are you gonna explain why that happens?
Why Do We Get Tax Bills When Our Investments Lose Value?
April: Yeah. So I mean, we do get that question from people a lot. So there's a couple things that can happen in the account to create that. There can be interest payments that are made, which would be taxable dividends which are paid into the account. You know, you can have dividends reinvested. So you didn't receive the money, but you still have to pay tax like you did.
And there also could be some capital gain realizations as well from stock portfolios increasing or for the change in a portfolio. You know, if you've got an account that's actively managed and they're in there buying and selling stocks for you, well, that's gonna spit off some capital gain distributions as well. So just important to know that, but we call those taxed as you go. We could probably spend an entire webinar just talking about those types of accounts.
Next, is tax-favored. We're going to be spending most of our time talking about these. So tax-favored accounts, these are accounts that you put money in today with after-tax dollars, they grow tax-deferred and then when you go to take money out in the future, it comes out tax-free. So examples of tax-favored accounts are municipal bonds, Roth IRAs, 529 plans, and then cash value life insurance.
So we're going to be spending some time talking about those today. So again, the way tax-favored vehicles work is you pay tax today, you don't pay tax while it's growing and then in the future, when you can take money out, it comes out tax-free. The most important thing I want to point out here is with tax-favored accounts, you want to make sure that they're structured properly because you can run into some issues if they're not. Now we're going to get into some tax planning strategies. And so when it comes to where should you be saving your money, should I be using tax-deferred?
Should I be using taxable? Or should I be using tax-favored accounts? It comes down to what do you think that your taxes will be when you retire? So let me kind of give you some examples here. If you think that taxes will be higher when you get to retirement, then you should use more tax-favored accounts today. So that means you pay the tax today, they're going to grow tax-deferred, and then you get to have tax free income in retirement. So again, you're kind of biting the bullet today instead of deferring it to the future. So if you think you're going to have higher taxes in the future, you want to use tax-favored vehicles.
Now, let's talk about the opposite. What if you think that you'll have lower taxes in retirement? Well, if you think you'll be paying less taxes in the future, less taxes in retirement, then you should be using more tax-deferred vehicles like a 401K, a 403B, a 457. That way, you get the tax deduction today, but just remember that you're going to have to pay taxes on 100% of the withdrawal when you get to retirement.
So, John, I thought here, we could talk a little bit about what do we see in retirement planning because the majority of what we do on a weekly and daily basis is helping people when it comes to retirement planning and helping them pull together all their retirement income sources and really looking at what is their income going to look like in retirement? And so do we find that people pay less taxes or the same or more taxes in retirement? That's a question for you.
John: Most of the people we work with are paying the same or higher. Many people thought they were going to retire in a lower tax bracket and all of a sudden they say, whoops, what's happening? And by the way, this is a good point to make here. We don't want people to have less income in retirement. Most of the time people come to us, they say, Well, it looks like I'm going to retire and have about 50% or 60% of my pre-retirement earnings.
And I like that those questions. I've been asking this question for 45 years. Why wouldn't you want more money in retirement? Why do you want to take a pay cut? So why don't we do this? And for past 35 years, I really focus on this. Why don't we see first what your resources will provide you? You might be shocked that you have the same income or even higher in retirement.
And most people, as you know, they will they don't believe us until we illustrate it with our retirement reversals and they're like, holy cow, I'm better off than I thought. And that usually makes them understand, I will not be paying less taxes. I think I'll be in the same bracket or higher. Now we do find people who end up where they're structured or the way they quit working along the way, they are in a lower tax bracket. That is not very often.
April: Right. It's not the, it's not what we see most of the time. So here's another question for you too, John. And that is what do you think's going to happen with tax rates? So it's not just income, right? So we can have a conversation about what's your income going to be in retirement? Is your income going to be the same, higher or less? But then what about tax rates in general?
Tax Rates Throughout American History
John: Well, you gave a disclosure upfront. We have to tell everybody that we're not CPAs or tax attorneys. But when I was getting my master's degree in financial services, we had one entire course, not a class, one entire course on income taxes and the history of tax. And it's really fascinating. And our, I'm kind of a geek about this, our income tax in 1913 with a passage of the 16th amendment.
And if you go back and look at history, there wasn't an income tax, they all paid for the Civil War, but the US Supreme Court struck it down and said it was unconstitutional it went away. But if you take a look at the tax history, in 1913, the top bracket was 7%. 7%. And the newspaper articles then said temporary tax, and it was temporary. For three years it was 7%. The fourth year, the top bracket jumped all the way to 15%. Then we have something called wars, World War I, World War II, but in between, we had the Great Depression.
Top bracket during the Great Depression was only 25%. And, you know, I just had a thought. Tn the future we should do a webinar just on tax history and tax planning and encourage folks to back to their CPA or tax attorney and work on it. But for our purposes, I'll fast forward and talk about the top bracket, the 94%, top bracket 94%, and then get down to 70 and then later down to 50%.
And then 1980s, President Reagan pounded Congress so hard and said, hey, we got to reduce taxes. And they dropped the top bracket down to 28%. Now, what's interesting about this is even though the tax rates went down, very few of us paid the most income taxes. Why? Because they were controlling the levers and they took away some things that we use to be able to get it up, such as your interest on a car loan, your credit card interest was deductible back then. They took that away. It pays out. So just because we look at tax rates, it doesn't mean that you're gonna be paying less tax.
In fact, you may find that you're in a lower tax bracket but because of the nature of the investments you have, that you're paying the same tax are higher than you were before. And if you look at today, the top bracket is 37%. Where is it going? I believe, I'll be 68 in December, I believe that during my lifetime that I'm going to see tax rates back up to 50%, maybe even 60%. I hope I'm wrong. But if you look at all the spendings going on, good intentions, a lot of people need help out there but you can't just keep spending money without finding a way to get that money back.
You got to finance it. So if you look at history, every time there's been wars, tax rates went up. Things get good, come down, then they go back up again. So again, well, I don't claim to be an expert in this because I don't do taxes every day. I don't even do my own tax return. I have a CTA do that. But I am fascinated about how can we find ways to reduce taxes? because every dollar we save in tax is $1 you get to keep. Either spend it, save it or invest it. That's probably not what you wanted but that's those are my thoughts.
April: Oh, that's perfect. Yeah, I mean, it goes right back to what we're saying. It's not just what's your income going to be, but what our tax rates gonna be. And I agree with you. You can't convince me that tax rates will be lower in the future. I just don't see how they can be. So if that's the case, then we've got to start looking at some more tax-favored vehicles now while tax rates are low. You know, we know what tax rates are now and we know they're not expected to change until about 2025 right now. So you've got next year or five years that you can really start to take advantage of these tax-favored accounts.
John: Let me just add one more thing here. I hear people literally every day that I see clients for talk to them on the telephone, I'm getting this more and more. What do you think's gonna happen with the economy depending upon his elected president? And I like to answer this was, why are you asking?
Are you worried about your money? Are you worried about what's gonna happen? They go, yes. So what are you doing to manage your personal economy? You can't control the global economy, you can't control the US economy, state economy or even the local economy, but you can take action to control yours. And taxes is part of it. That's your biggest expense, tax coming out of the paycheck. Or when you do quarterly estimates. So I like to tell people, I don't know what each party can do or will do regarding taxes.
I can tell you this. I do remember that George Bush number one campaigned, he says no new taxes. Read my lips, no new taxes. And then he had to raise the tax rates because the economy needed more tax. So when I see all these ads from both candidates, I'm kind of like, yeah, you know what? If you need to raise taxes, you're going do it no matter if it's Democrats or Republicans. So I tell people quit watching that stuff. Work on your own.
April: Right. Work on your personal economy. Okay, John, let's switch gears a little bit. I want to talk a little bit more about these different types of accounts and how they're taxed. So again, you're gonna see here, we've got taxable, tax-deferred and tax-favored. The only account out of those three that you're going to get a 1099 from every year is the taxable accounts. I guess that you even get those on like your money market, CDs, you know, you're going to get your 1099 on those too. So same thing there. You do you have to pay tax on the gains and they're not tax-deferred.
Now that tax-deferred accounts, you don't have to pay tax while it's growing, you don't have to pay tax on the gains until you start to pull it out. But as soon as you make a withdraw, you do have to pay tax on that. And then the tax-favored, you do not get a 1099. You don't have to pay on the gains. And then as long as it's structured properly, you don't have to, you don't have any taxes when the money comes out either a retirement income. So just kind of want to go through some details on those three types of accounts.
Now, when it comes to retirement planning, the most common, like we talked about earlier, is people tend to use 401Ks, 403Bs, 457s, maybe they have a pension. Those are the most common approaches to retirement planning. But we have a list here. There's a whole, there's other alternatives out there for you when it comes to retirement planning. So you've got CDs, mutual funds, you've got regular IRAs, Muni Bonds. And the two that we're going to focus on today are ones that tend to be overlooked when it comes to retirement planning, and that is Roth IRAs and permanent life insurance.
Now, when we look at each one of these categories, we want to pay attention to the contributions. Do you, is it pre-tax or post-tax? On the growth side of things, are a taxable, non-taxable or tax-deferred? And then most important to me is on the income side, how is the tax going to be treated when you need to start taking income from this account? Like I said, we're gonna really do a dive into Roth IRAs and private life insurance. Kind of funny, john, about Roth IRAs, I'm meeting with a client that has a, she's a new client and she has an advisor elsewhere.
And she came to us because she came to one of our webinars and we were talking about Roth IRAs. And she said to me that her other advisor would not talk to her about Roth IRAs. I just kept telling her, you don't need it, you don't need it, you don't need it, don't worry about it. But she wasn't what do they mean? I don't know why they would say that. She just wanted to have a conversation and be educated about what her options were. And we find that people just, other advisors just don't talk about these things.
John: Well, part of it is because it takes work. I mean, we just had a situation where Jay and I were helping a client. Asked a question that took us off track and we agreed as to how we would handle it. We did our research, came back and helped that client. But in 45 years, I've never refused to help a person be educated because every time I do that, April, that knowledge is now in my brain and I'm able to use that to create value for other people. So I don't look at that as being wasted time and shame on the advisors. But that's okay because that person didn't do their job, now you have a new client.
April: That's right, yeah. And I said, I told her up front, I said, look, I may come to the same conclusion, you know, we may look at your plan and say, No, we don't think that you need this. But I'm going to explain to you why and I'm going to look, I'm going to show it to you. At the end of the day, it's your plan, not mine so I'm gonna show you what it looks like and you get to decide.
John: I think we have an obligation, you know, I've talked about this a lot, we have an obligation to share with you and find out number one, what do you want. I'm not going to, I'm going to be like a medical doctor, I'm not going to write a prescription for something that I know is not going to help you. If it's going to hurt you, I know I'm not gonna write the prescription. I'm going to listen and use that metaphor of a medical doctor and I'm gonna listen to what's going on. And then I'm going to recommend the right plan of action based on my knowledge about you and the products or strategies involved.
But I think that all the time, you should be told the good, the bad and the ugly of everything, whether it be our financial planning process we do, our retirement planning process. I tell people, I'd go to Ronald Reagan, and President Reagan, I love his line. Trust, but verify. Trust but verify. Make us verify. We'll make you verify. You tell me something, I'll say show me. That's what we do for clients. Look at everything.
The Impact of Taxes on Retirement Money
April: Good. Well, let's do a deep dive. Let's talk about some examples of when it comes to taxes and the impact of taxes on retirement money. So we're going to look at two different options here. The first option we're going to look at is if you take 100% of your withdrawal, in this case, we're looking at $100,000, from a, one of those tax-deferred vehicles we talked about like a 401k a 403B or 457.
These were accounts that were made with pre-tax contributions. What does it look like from a tax standpoint if you take $100,000 out of those types of accounts? So in this case, we're assuming someone might be in the 32% tax bracket so they pay 32% in taxes and they have a net withdrawal, a net income of 68,000. So now we're going to contrast that by saying what if you again, had tax diversification and not all of your assets are in those traditional retirement accounts, but you have true tax diversification?
And what if you took half of the money from those tax-deferred vehicles and you took half of it from a tax-favored vehicle like whole life insurance or a Roth IRA? What does that look like? So again, 50,000, from the 401K, 50,000 from tax-favored vehicles, you now only have to pay 16,000 in taxes. So you have a net income of 84,000. You save 16,000 in taxes by just having different vehicles for planning. That's the impact of having tax diversification.
Let's dig into Roth IRAs first and then we'll talk about the permanent life insurance. I do find sometimes that Roth IRAs are overlooked or they're used as like a small percentage of someone's overall portfolio. They kind of, it's like, we had some clients a couple weeks ago. Remember, John, they said, Yeah, it sounds like a good idea like 15 years ago, but then we never really did anything with it. So they just like set it up and didn't do anything with the Roth IRAs.
John: Well, let's talk about the real reason that most people will not do a conversion from a regular IRA to a Roth. It sounds good. It sounds great at a social event, having a glass of wine and talking about it, then all of a sudden, when it comes time to write that check to pay the taxes to switch it over, that's when people go, Ummm, they'll get cold feet. I'm thinking of a situation we had with rather large Ira and guy was insisting on making the change.
But once we showed him the numbers he said I'm not paying that much in taxes. Not in one fell swoop anyway. But later in life, somebody's gonna pay tax, either he will, his wife will, ultimately or his children. Eventually, somebody's gonna pay the tax. So that's one of the biggest reasons is I think I'm going to be deferring the tax. He thinks I'm saving taxes. You're not saving taxes, you're simply deferring to the future.
Roth IRAs and Life Insurance as an Investment
April: Yeah, let's kind of focus on the Roth IRAs, when we're looking at doing a Roth conversion, as you pointed out there, there's a couple things that we have to pay attention to. You know, how much tax are you going to have to pay today to do that conversion? How long will it take in the Roth IRA for you to recoup your taxes? So a lot of that comes down to when are you gonna need money from that account? Do you have time for it to grow and make up the difference from paying the taxes off today? Can you do it over several years, so it's not one big chunk?
So there's a lot of different things when it comes to doing some Roth conversions that we can look at with clients. But Roth IRAs, like I said, they're tax-favored, you put money in today with after-tax dollars, you're not taxed on them while they're growing and then as long as it's structured properly, you're going to have tax free income later. You can have a wide range of investment vehicles. You know, I know for us, with our broker-dealer, we pretty much have all types of investments available for us. And the Roth IRA is just how an account is titled, you know, the Roth IRA or traditional IRA.
And that doesn't really impact your ability when it comes from like an investment standpoint. One of things that I like about Roth IRAs is there's no required minimum distribution. So the IRS isn't telling you when you have to take money from these accounts. You're not forced to take an RMD if you don't need it. And then it also passes tax-free to your beneficiaries as well. So some really good characteristics of Roth IRAs. And we'd be happy to go through more about that in detail with anyone on the call on a one on one basis.
Now, I'm going to talk about life insurance, about life insurance and how it can help you from a retirement planning standpoint. So I'm sure most of you are familiar with life insurance and how it provides a tax-free benefit to your beneficiaries upon your passing, which can help your family, can help your business upon your passing. But one of the things you may not realize is how it can help you from a wealth-building strategy, a wealth-building point. And so we're going to kind of walk through that with you today, especially when it comes to the tax planning side of things.
So life insurance is considered a social good. It's a benefit to society. And so because of that, it has very special tax benefits that is not available on other investments. So the death benefit comes in tax-free to your beneficiaries. The cash value in the policy grows tax-deferred. That cash value is liquid and if you need that cash value for retirement income, it can come back to you tax-free. And that's all because life insurance is considered a social good, and therefore it has these special tax benefits. There are some other benefits with it as well.
Again, most people are pretty familiar with how life insurance has the death benefit that's going to protect your family or your business but you may not be aware of some of the other benefits with life insurance or some of the living benefits. So the asset, the cash value that's growing in that policy, it can be a key component to your overall portfolio, your overall strategy.
Let me give you an example. So in March this year, March of 2020, when the S&P was down 30 to 35%, that cash values in my life insurance policy were not down. In fact, they never have a bad day and they only go up. The cash values are not correlated to the stock market at all. So it complements very well what you may have when it comes to investments in retirement accounts. It complements the stock portion of your portfolio very well.
John: I'll make a comment there, when you're my age, April, you'll appreciate that even more because I have people around me who ask me constantly, How can you be so calm and not be worried about the stock market all the time? Because I have a lot of money in the whole life cash value policies owned.
And later I'll talk about that more but it serves as a buffer for the market. I look at it as being like a bond portfolio with extra benefits. And I don't have all the risks of the bonds because bonds do have a risk also. That's another topic in the future on investments. But I promise you, you fast forward about 30 years, you'll be looking back and saying, Wow, the old guy was right. I do appreciate it now.
April: That's right. No, I was just talking to someone yesterday, and we were talking about the different types of life insurance. And you're really looking at two ends of the spectrum. You know, you've got term insurance and whole life. And so I gave her my example. You know, I have term insurance to protect my family. You know, I'm married, I have two small boys, they're four and seven years old.
And so if something happens to me tomorrow, I want to make sure that they're taken care of. And when I say that, I don't mean that my husband just gets to pay off the mortgage. I mean, I want financially, life to be the same for them. And that's very important to me. So I have term insurance in place to take care of that. My whole life policies, that's wealth-building, that's my, that's a savings vehicle that I use in conjunction with my other, my stock portfolios that I have.
Again, one is not better than the other, they complement each other very well. And I think once you kind of, we don't have definitely enough time to go through all of that today but once you kind of see it, I think it makes sense for most people. Alright, let's kind of go through this, the life insurance, they have guarantees, they've got dividends that help increase the cash value of the death benefit and then they also have some other living benefits as well. There's no RMDs on the life insurance just like with Roth IRAs.
There's creditor protection. I can tell you that for Florida, we have maximum creditor protection on cash values from lawsuits or creditors. That's not true for every state. Some states have a limit on it. And then there's also depending on the state that you're in, you can have what's called a long term care writer. And we do have that available in Florida as well. So know that they're available.
John: We should point out that we are licensed in several states. We have classes all across the country. So that's why we have to put in there depending upon the state because we have clients all over so we have to check with the state you live in to see what can I do.
April: Right, right. Exactly. Yes, I know I'm in like eight different states. I think, John, you're in, 15.
John: I'm not sure. I just know that I'm having to add one every now and then because of people calling us from another state or somebody who needs help. So, have a hard time keeping up with.
April: So good. Okay. So I want to just, you know, kind of recap here. We've got these different types of tax accounts that we talked about. Tax-deferred, taxable and tax-favored. So, John, I thought this would be a good opportunity for you to kind of go through the case study that we were talking about those types of accounts.
Big Picture Financial Planning
John: All right, good. Well, I'm gonna attempt to do this in about 10 minutes so we can actually not keep everybody a full hour. Let's just start with where you were just talking about life insurance. When I was younger, like you, I wanted life insurance in place to take care of my family. So I wanted a lot of term insurance. Our philosophy is, especially for talking with families that are still in the growth mode or building, they get young children, that they should get all the life insurance that they can get. If it's all term insurance, that's fine.
You get all the protection you can. In today's environment with COVID proves that point. Our clients who have large amounts of term life insurance on them or their children or grandchildren, they sleep better. Not because that person could die. That could happen anytime. I have a heart-shaped pillow sitting over here on a little stand in my office, looking at it right now, to remind me about my heart surgery back in 2008, July 10, 2008. That's to remind me that I could die at any moment.
The person across from me could. But also have the heart big enough to talk about issues that people don't want to talk about. No normal well-adjusted person wants to talk about dying, okay? But if we don't talk about dying and what we want to happen when we die, we're gonna leave behind a mess. A mess. And we need to have that planned out. So the life insurance will take care of our families now, take care of any debts when we die but I'm going to focus on it from the standpoint of what it does for me today.
If I wanted to, I could flip the switch, turn the cash values into additional retirement income. And I can do it in a manner where most if not all of it would be zero tax. Zero. So here's what I've had. Over the years, I had plans in place that should I become totally disabled and not able to work, then the premiums would be waived by the insurance company because I have something that's called waiver premium on the policies that came off of at 65. So I had a savings plan that would be spelled completely if I couldn’t work.
Builds up cash. Didn't pay $1 tax on that money as it grew. And my death benefit grew. And I have policies now that in retirement if I wanted to, I could stop making payments. I continue to pay the premiums because the cash value is growing much greater than what I pay in. I have the policies on me but also family members, ex-wife, daughter, son, grandchildren.
So why would I do that? Because it allows me to put money somewhere and avoid the tax because it's tax-favored. And I'm creating something that will benefit people long after I'm dead and gone. Long after I'm dead and gone. And another practical reason is in 2012, our son had a terrible accident, he was beat up very badly in that accident. And for a long time, he would not have been eligible to buy life insurance. So every time that he has what's called an insurer ability option come up, I exercise that. I do it myself. I own the policy and I do that.
So that's where the life insurance kicks in. And some people think, Well, you know, I don't want to buy life insurance because it's not the best place to put my money. Keep an open mind and look at it as part of the overall plan, you may change your mind. Then I happen to like annuities. I love annuities. I have two non-qualified annuities. I've got one, non-qualified, means non-retirement. So it's not tied to a tax-deductible like an IRA. I have those because I want what they do, okay?
Forget about the name for a minute. One is invested in the S&P 500. And I have protection on the downside. So as the market goes down, which it will, then on the anniversary, the chair of the company will look at that and say whoops, you lost money. We're going to make it whole. At the same time, it has what we call a trigger. And if the S&P 500 is flat or positive, and I'm sure they, a certain percentage, as we're recording this, happens to be 12 and a quarter.
So that's one plan I have. I look at that as an investment account with protections. I don't have taxes on it, so I take the money out and I have protection on the downside. I do have a cap on the top. If the market does 30% I won't get 30% on that one. But that's the, that's what I have to do if I want the downside protection. Then I have another annuity that's designed to give me income whenever I want it. I don't know when I'll take it. I may never take it. I may leave that money behind for children and grandchildren.
That's another taxpayer's account in the sense that it's growing tax-deferred and on that one when I do take income, approximately 80% of the income will not be taxed until I've recovered all my money. Now, that's a function of tax law. More complicated than we have time to go through explaining. But it provides a way to have income and the majority of it is not even taxed. And then I have a Roth IRA. I have an IRA, I converted it to a Roth. I finally bit the bullet myself and said Okay, I know got to pay tax on this thing, get it done.
The likelihood of me spending the money in that Roth is very slim. So that's another bucket of money, though, that if I want additional income, I have it. And you've heard me talk about this for almost seven years we've been working together, my view is real simple. Whatever I put my money in, here's what I expect. I think clients feel the same way. I want to protect my money. I don't wanna lose it. I don't want to pay somebody a fee to lose my money. I want growth on my money and I want income at some point. At least the income option.
And that's the way I look at my plan and that's what we look at for clients. Every client is different. Every client has a different mindset. And it's their money. Even if I don't agree with them on something I'll say I don't agree with you but as long as it's not illegal or unethical and get me fired or get me a fine from the securities regulators, I'll help you do it. But if I know it's hurting you, I refuse to do it. I just lost a situation where I could have done some business and could have made a nice commission.
I said no. I don't think it's appropriate destroying something that's already working for you. I refuse to do it. Go back to the other guy who gave you the advice to do that without knowing all of your information. And he said well, I'm not doing that. Well, I'm not doing it for you. And he allowed me to show him where all this fit and he kept it in place. He made a good decision there. But I think, and also savings, my savings accounts, I'm getting paid basically nothing on that at the bank.
And what little bit of interest I do earn, I get the installs or the 1099. I have to report that and pay tax on it this year. And then, of course, the non-retirement investment accounts. So that is what I've done from the standpoint of saving money over the years. And I have one regret, one. I wish I'd put even more money into life insurance. And I hear that so many times from other clients. Now I hear people say well, am I too old to get it? You know they may die of health issues. Well, that could be. And I will tell you right now that my life insurance policies are the most important investment I have.
Even though they're not technically investments, they are because I've used the cash values for the automobiles, office equipment over the years, used it for down payment and closing costs on a house when the market was down back in 1994. I'm thinking of a physician who called me one time in a panic. Hey, I need money and I got to have the fast. Banks are not loaning me money because it was highly leveraged. We were able to use this policy as collateral at the bank, they gave him what he needed. And I can tell you so many stories about that. I need to write a book on that. You know, I'm working on my second book. You know that, right?
April: I do.
John: There might be a third one. But anyway, those are the things that I've done, April. I hope that it helps people understand a little bit. And if you think it's appropriate, sometime in the future, we'll create another webinar and go deeper on that because that's interesting. But folks, the webinars we're doing are a result of what we're hearing from clients. And then April, she pushes me. Hey, let's do another webinar. Let's get another one. And we got two coming up that we're going to be talking about the economy. And I'm taking great, those are my ideas, all those, okay?
April: Yeah. You have credit for this.
John: But we're a good team here. And our focus is how do we create value. And I hope that everyone feels that they got value today and will take advantage of having a chat with us over the phone or come in if they want to meet face to face but start with a phone call. And, anything else you want to cover? I've covered pretty much what I want to cover.
April: That was good. John. I appreciate you covering that. I think it's very important. You know, I think what is, what I took away from that the most, right? Is having a strategy and having a plan. And we talk about this all the time with clients that it's not a product, right? It's not the widget, it's not the thing that you have. It's how does it all work together. And that's why it's so important to have a strategy and a plan in place and to look at all of these things, to look at taxes to look at retirement income. To talk about health care as well.
John: One quick thought there I just thought of. I enjoy playing chess with my grandson. And one day we were talking about the chess pieces and the chess that we had at the property was chips. And it made me just think just now about playing a game of chess. You could have old beat up chess pieces, I could have solid gold pieces. We have that same gameboard. Is the fact that matter is beautiful and pretty and yours are ugly, is that gonna make me perform better?
Not at all. It comes down to strategy. Who can see the moves ahead. So in the game of chess, the board has to be set up, certain rules to follow. It's the same thing with your financial planning. There are certain rules and regulations we have to follow because of tax laws, things like that. But if we understand those and we understand how the board works and the rules of the game, it doesn't matter if I have the prettiest pieces.
I could have the most ugly pieces on the planet, hell, you could break the head off of the knight and as long as we know that is the knight position, who cares? It's what you do with products. And hopefully, that came out loud and clear today that it's not about going out and that it's the best product. You could get products anywhere, it comes down to strategy first. And that's why we tell people plan first, then go look for products.
April: That's right. If you do the planning correct, then the product becomes very clear. But you gotta do the planning first. Well, everyone, we want to say thank you for taking time out of your schedule to join us today talking about tax diversification in retirement. I know that taxes are not always the funnest topic, but we try to keep it lively.
Again, if you're on the call, if you're listening to a replay, I would recommend that we schedule a time for a 25 to 30-minute phone appointment. And you can do that by reaching out to our office. The mainline for our office is 850-544-8464. So again, was going to say thank you for joining us and hope you guys have a great afternoon. Thanks, John.
John: Thank you. It was a pleasure.
Voiceover: If you'd like to know more about John Curry's services, you can request a complimentary information package by visiting johnhcurry.com/podcast. Again, that is johnhcurry.com/podcast. Or you can call us office at 850-562-3000. Again, that is 850-562-3000. John H Curry, chartered life underwriter, chartered financial consultant, accredited estate planner, masters in science and financial services, certified in long term care, registered representative and financial advisor at Park Avenue Securities LLC.
Securities products and services and advisory services are offered through Park Avenue Securities, a registered broker-dealer and investment advisor. Park Avenue Securities is a wholly-owned subsidiary of Guardian. North Florida Financial Corporation is not an affiliate or subsidiary of Park Avenue Securities. Park Avenue Securities is a member of FINRA and SIPC. This material is intended for general public use.
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Whole life insurance policies contain an important savings element known as cash value. The cash value depends upon the type of product, the face amount, the time in force and length and amount of premium payments. Cash value accrued over the years in your life insurance policy will be an asset at your disposal that you may withdraw or borrow from to assist you in financing a life event, or even help supplement your income during retirement. The withdrawals you make or any outstanding loans or loan interest you have will then simply be accounted for in the payout of your policy’s death benefit. Some whole life policies do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.
2020-108939 Expires 9/2022