If you are married and make a combined income of $176,000 or more you can’t contribute to a Roth IRA. So where do the doctors, attorneys, dentists and business owners get tax breaks on their hard earned income when planning for retirement?
One option that the IRS offers is the SEP-IRA. This is for self-employed business owners only, which eliminates those professionals who are employees of a larger firm. The SEP-IRA allows a business owner to defer the tax on up to 25% of their income with a max of $49,000/year in 2009. The income tax is deferred until the time of withdrawal. So, not only do you defer the tax but you also defer the tax payment.
The Benefit: Tax deferred growth of your money.
The Cost: Tax deferred liability on your growth!
Do you know what tax bracket you’ll be in when you retire? Do you know the government tax rates that will be imposed at that time? No? Well that might cost you! Imagine paying 35%-40% income tax in the future when you could have paid 25%-30% today. Sound like a benefit to you? Tax rates and brackets are variables that we don’t control and the possibility of this scenario is very real for high income professionals and business owners.
When planning for retirement many people are told that they should expect to be in a lower tax bracket because they will be earning less. Don’t count on this. It’s a poor mentality and terrible financial approach. It’s like striving to lose! In addition it gives people a false sense of security that their income will be sufficient. But retirement should be the time to live out some dreams and travel the world. In addition, it will also be the time when health care and long-term care costs begin to mount and tax deductions are minimal. The dependents are long gone and the home has been paid for.
Instead of hoping we’ll be in a lower tax bracket we need to plan our finances so that there is no tax bracket. At a minimum we want to reduce the tax burden we face. The good news is that we can control where we place our money. Ideally, professionals and business owners want:
- Tax Deferred Growth
- Tax Free Distributions
- No Limits on Contributions
- No Adjusted Gross Income Limitations
- Full Access, Use and Control of Their Money
- Competitive Internal Rates of Return
- Safety/Guarantees
- Unlimited Investment Options
What vehicle provides all of these and more? Participating Whole Life Insurance. In addition to the benefits listed above, there are numerous estate and business planning uses for life insurance. Partnerships use life insurance to fund buy-sell agreements. Corporations use life insurance to pay benefits and attract top personnel to their companies. It’s not just for protecting your loved ones in the event of a sudden death.
When planning for retirement, planning for your business or planning your estate it’s important to remember the benefits of participating whole life insurance. It’s so much more than death protection.
Scott Storace
Tags: guarantee, life insurance, tax benefits, tax-free, whole life
