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Thayer Partners Blog

Tax Free Retirement Strategies for the Rich

[fa icon="calendar"] Nov 14, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

Tax-Free-Retirement-Strategies-for-the-Rich-1.jpgIn the 1940s, high income earners who made more than $200,000 a year faced marginal federal income tax rates of over 90%. And, until as recently as 1980, the highest marginal tax rate was 70%.There’s no telling whether or not federal income tax rates will be higher in the future, but, with the country’s national debt currently sitting at $9 trillion, it wouldn’t be at all surprising if the government raised taxes significantly.

If you’re a high income earner and believe that taxes might be higher in the future, don’t take the risk. You should consider using tax free retirement strategies in order to protect your retirement from a potential rise in taxes.

These tax free retirement strategies for the rich go beyond the usual retirement strategies to help you keep more of your hard-earned money in retirement.

ROTH Conversions

In the past, there was a strict income limit that determined eligibility to convert funds to a ROTH IRA. Upper income taxpayers who made more than $100,000 were not eligible to make conversions. In addition, those earning $122,000 or more, or $179,000 for married joint filers, weren’t allowed to contribute to a ROTH IRA at all. Thus, high income earners were precluded from benefiting from a ROTH IRA.

In 2010, however, the rules were modified and the income cap was removed, allowing high income earners to also take advantage of ROTH conversions.

When you invest in a simple or traditional IRA, you put in pre-tax dollars. You benefit at the time of contribution through a lower tax bill. You aren’t taxed until distribution.

However, now that the income cap has been removed, if you want to build a tax free retirement, you should convert your IRA to a ROTH IRA instead. This will allow you to pay the taxes for the distributions up front, rather than during retirement. If you believe that income taxes might rise in the future, it’s best to pay less in taxes now, than more later.

When using ROTH conversions, the best option is to convert your funds over multiple years in order to stagger the tax bill and avoid being bumped to a higher tax bracket. It’s also best to pay the taxes outside of the IRA to keep as much in the ROTH IRA as possible.

Supersize Your ROTH

For higher income earners with excess cash flow, a ROTH can be the ideal strategy for building tax-free income in retirement—it can help you supersize your ROTH IRA.To supersize your ROTH, you would roll over your pre-tax 401k deferrals and earnings into your traditional IRA, assuming your 401K plan allows for an “in-service rollover.”Once deposited in your traditional IRA, you would roll over your after-tax contributions to a ROTH IRA and pay taxes from cash held outside your IRA.

The Turbo or Super ROTH

Indexed universal life insurance is often known as a “Turbo ROTH” or a “Super ROTH” because it shares many of the characteristics of a ROTH 401k—after-tax money goes in and tax-free money comes out—yet there are no IRS contribution caps to 401Ks and IRAs, so you can contribute as much as you want to your Super ROTH. Using an indexed universal life insurance policy as a tax shelter is a great way to avoid taxes in retirement, particularly if you’ve maxed out your 401k and IRA contributions.

This policy will protect your loved ones through a death benefit, which is great on its own, but it will also allow you to build cash value during your lifetime. You can earn interest on your premiums, which are linked to the performance of an underlying index. Then, through policy loans, you can tap into this cash value buildup as a tax-free source of income in retirement. You’ll have no IRS restrictions, reporting, or filings, either.

How Much Do I Need to Retire?

Topics: Retirement

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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