http://www.time.com/time/magazine/article/0,9171,947414,00.html
…Before long, the combined pressures of inflation and the changing U.S. demographics will force the problem of supporting the retired into the forefront of the nation’s social concerns.
http://www.time.com/time/magazine/article/0,9171,1122017,00.html
…received the benefit payments until October 1990, when the check bounced. A corporate-takeover artist, later sent to prison for ripping off a pension fund and other financial improprieties, had stripped down the business and forced it into the U.S. bankruptcy court. There the obligation was erased, thanks to congressional legislation that gives employers the right to walk away from agreements with their employees.
Wisdom is the compass by which man is to steer across the sea of life…Wisdom reminds you that the more you know, the less you fear. Wisdom proclaims that what’s right isn’t
always popular, and what’s popular is rarely right. - John Hagee
Here are a few examples of common actions and their downstream (macroeconomic) effects. This is not intended to be complete or to be an in depth analysis; but, to show examples of how unseen effects of a financial action can change the end result.
| Action | Characteristics | Reaction |
| 401k, IRA, or similar plan as primary savings. | Taxes and penalties lock up your money. | Dependence on credit cards, car loans or other loans. |
Result: We are consumers our entire lives with the constant need for money. When our money is needed, but locked up, we are forced to use borrowed money. The interest paid on borrowed money is typically greater than interest earned by savings and investments. The end result is a net loss; or, at best, very minimal net gains.
| Action | Characteristics | Reaction |
| Mutual Funds, CD’s, etc.: “compounding” the growth. | The compounding balance generates ever increasing (compounding) 1099s. | The income tax compounds too. |
Result: Money must be taken out of pocket or out of the investment to pay the every increasing income tax. As the account compounds, the reportable growth compounds, so the tax “compounds”. It is an even increasing additional out of pocket cost that takes away cash that could be kept invested. The tax paid, PLUS the lost growth on the tax paid (lost opportunity cost), is an added cost of the investment. The true rate of return is half or less than what is “seen” on paper. See “Lost Opportunity Cost” and “Not What They Seem” for an eye opening analysis.
| Action | Characteristics | Reaction |
| Pre-pay your mortgage. | 1. The interest deduction reduces with each extra payment. 2. The future home value Is based on market value not on equity. |
1. Income taxes increase each ear. 2. There is zero growth on money paid into a mortgage. |
Result: To know if a financial action is truly profitable all of the effects must be seen and measured. Yes, there is interest saved by prepayment which is a primary reason for doing it. However, there is also interest lost because of the zero growth on the money paid into the mortgage. That money COULD HAVE been invested for growth and be used to pay off the mortgage even faster. Because it was not, there are lost interest earnings. The combined effects of increased income tax, lost growth on the income tax paid, and lost growth on the money prepaid into the mortgage makes this a NET NEGATIVE action. A free personal analysis of how this is specific to you is available upon request.
The Denver Business Journal - February 10, 2006
by Jason Maples
Most individuals are unaware of a little-known tax code that’s available to all investors regardless of their income or net worth.
The internal code section for this tax break is IRC 7702. One of its components refers to the tax-advantaged growth of the cash value inside of a life insurance policy. If properly structured, an individual has the opportunity to both grow their investment money and access their money (before or after age 59½) without ever paying taxes on the gains.
However, the IRS puts limits on contributions to life insurance policies because it realizes the tax benefits of the contracts.
So how can you take advantage of tax code 7702?
The code section discusses the fact that as part of a permanent life insurance contract, the cash value grows without tax (whether it’s whole life, universal life or variable life). In all such contracts, the insured pays a premium. Part of that premium pays for the death benefits associated with the contract and the rest is invested into the cash value of the policy.
Depending on the policy type, that cash value may be invested conservatively by the insurance company, or it may be invested in a variety of sub-accounts, from stock accounts to bond accounts (similar to choices offered in a 401(k) plan).
In addition to the basic premium required by the contract, additional dollars may be deposited; all would be attributed to the cash value (the investment portion of the contract). There are IRS limits to the amount that can be added (based on age and amount of insurance) because Congress is aware of the tax-advantaged nature of the product. However, these limits tend to be much greater than the base premium.
For example, the premium for $500,000 of variable life insurance on a 40-year-old male (healthy nonsmoker) is $5,000 a year. Without violating the tax code, that same individual could invest an additional $17,000 in the contract ($22,000 total) — all of which is attributed to the investment side of the contract.
Those dollars grow without tax under 7702. This maximum amount of $22,000 can be invested every year, regardless of age, income or net worth.
The specifics of taking money out of the contract tax-free are as follows:
Since after-tax money is used to pay the premiums, the first dollars that are pulled from the contract are tax-free because they’re considered to be return-of-premium money. Subsequently, the appreciation in the cash value (the portion exceeding the basis) may be accessed by taking a loan from the policy.
Different types of contracts have a variety of loan charges — typically as high as 8 percent. Many of the newer-generation contracts, however, offer something called “wash loans,” which means that the net cost to borrow money is effectively 0 percent.
These favorable loan provisions can be attractive when compared to regular taxable investments, in which investors typically pay either capital gains tax at 15 percent or ordinary income tax at a maximum rate of 35 percent, plus Colorado state tax.
Who takes advantage of this code?
The typical profile of individuals who use insurance as an investment are ones who are maximizing their 401(k)s or IRAs, not eligible for Roth IRAs because of income limits and are looking for places to invest money where they won’t be subject to additional taxation.
Open up any Fortune 500 prospectus to the executive compensation section and you’ll often find references to “split dollar policies” or “deferred compensation plans” — both of which usually use life insurance as the funding vehicle.
For investors investigating the use of 7702, look for the following characteristics in a policy in order to maximize your investment: Start with a highly rated life insurance company and look for a contract with low internal costs, a number of investment options and competitive loan provisions.
The traditional financial industry teaches people to save as much money as possible in products such as 401Ks and IRAs in order to defer the payment of taxes until you begin withdrawals. At the root of this strategy we find the differences between accumulation and utilization. The accumulation theory of retirement planning is based on the assumptions that not only will you NOT find more productive uses for your money now, but at some point in the future you will also stop producing and live off of your accumulated currency. Deferral in the Consumer Condition amounts to nothing more than avoiding consequences. Utilization comes from an opposite paradigm and teaches us to cultivate the habit of always looking for ways to produce more value and to never stop being a Producer.