How to Pay Zero Retirement Taxes Legally

Have you ever considered the potentially devastating impact of taxes in retirement? Most people have not because they assume they will pay less in taxes when they retire than they do during their working years. But many retirees have found this is not the case.

Conventional wisdom says, “Maximize your contributions to tax-deferred plans. Your money compounds without being reduced by taxes, and you’ll end up with more money during retirement.” like much conventional wisdom about personal finance, it’s not true.

The Society of Actuaries says if the tax rates are the same, “It doesn’t make any difference whether [the taxes] are taken away from you at the beginning (tax-exempt) or at the end (tax-deferred). It’s the same fraction of your money that is left to you.”

But most people look at their savings and think it’s all theirs. You may have forgotten you’ll owe Uncle Sam the taxes he let you defer all those years – on every penny you’ve put in and every penny of growth.

Most forms of retirement income are taxed. Unfortunately, tax-deferred retirement accounts such as a 401(k), IRA, or 403(b) can be like sitting on a tax time bomb. The common assumption that people will pay less in taxes when they retire doesn’t pan out for many retirees.

There was a time when older Americans received a lot of tax breaks, but no more. Congress and state and local governments are far more likely to increase taxes on retirees than to reduce them. “Governments at all levels know that older Americans are where the money is,” says Bob Carlson, editor of Retirement Watch. “Governments need money, and they have no choice but to find ways to impose [taxes] on older individuals.”

Taxes are already one of the three largest expenses for retirees, and they are likely to increase in coming years. It’s practically guaranteed, due to the ballooning national debt – which recently passed $22 trillion – and growing government expenditures as more people retire.

There are two main reasons many Americans are paying higher taxes in retirement than they did when they were working: Required Minimum Distributions (RMDs) mandate that retirees start drawing money from tax-deferred accounts around age 70 ½ – whether they want to or not. This often pushes them into a higher tax bracket.

RMDs and income from other sources can also end up forcing retirees to pay taxes on a large portion of their Social Security benefits. RMDs can trigger taxes of up to 85 percent of your Social Security benefits. Financial planners and CPAs are seeing some retirees’ tax rates double or more because of this.

How can people avoid the tax time bomb? One sure way is with the wealth building strategy known as Bank On Yourself. This savings method utilizes a specialized form of high cash value dividend-paying whole life insurance to save for retirement, without any unhappy tax surprises.

How is this possible?

• It uses after-tax money, which grows tax-deferred and can be accessed tax-free under current tax law.
• Withdrawals are not subject to RMDs that can push people into a higher tax bracket.
• The IRS does not count income from this method when determining how much taxes people pay on Social Security income. Income from these plans also won’t increase Medicare premiums, unlike IRA distributions and tax-exempt bond income

If, like most folks, you believe tax rates will go higher in the long term, you can eliminate unpleasant surprises by paying taxes up front. Then the money in your retirement savings can be truly yours to keep.

About the Author: Pamela Yellen is founder of Bank On Yourself, a financial investigator, and the author of two New York Times best-selling books, including her latest, “The Bank On Yourself Revolution: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future.” Pamela investigated more than 450 financial strategies seeking an alternative to the risk and volatility of stocks and other investments, which led her to a time-tested, predictable method of growing wealth now used by more than 500,000 Americans.