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Tax-Free and Tax Advantaged Strategies
Episode 13429th August 2023 • Freedom Nation Podcast • Jeff Kikel
00:00:00 00:55:37

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What if I told you that you could limit or even completely eliminate your taxes? What if you could achieve a low or no-tax income situation without breaking any laws? In this episode, we're talking about achieving a no-tax income situation, and we're using the big guns - five vehicles that can help you accomplish this.

Starting with real estate investing, we break down the four ways to make money in this area and why it's crucial to find properties with positive cash flow. We'll also share our thoughts on commercial real estate and spoiler alert, it's not our favorite. We then take you through the advantages of Roth IRA and Roth 401k accounts, and why going hand-in-hand with the government on tax-advantaged vehicles isn't always the best route.

The conversation gets even more intriguing as we discuss the concept of creating a family bank and the role of cash value life insurance in savings. We tell you why the mantra 'buy term and invest the rest' may not be the best advice and how you can use tax-free and low-tax saving strategies to create your own version of Walt Disney's world-renowned project. So, are you ready to make your money work smarter for you? Tune in, take notes, and let's talk taxes!

About Jeff: 

Jeff spent the early part of his career working for others. Jeff had started 5 businesses that failed before he had his first success. Since that time he has learned the principles of a successful business and has been able to build and grow multiple seven-figure businesses. Jeff lives in the Austin area and is actively working in his community and supporting the growth of small businesses. He is a board member of the Incubator.Edu program at Vista Ridge High School and is on the board of directors of the Leander Educational Excellence Foundation

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FN Intro/Outro:

Welcome to the Freedom Nation podcast with Jeff Kikel. On this show, Jeff shares his expertise in financial and retirement planning from a different perspective, planning for your Freedom Day, which is the first day that you wake up and have enough income or assets and do not have to go to work that day. Learn how to calculate what you need, how to generate income sources, and listen to interviews from others who've done it themselves, get ready to experience your own Freedom Day.

Jeff Kikel:

And low Freedom Nation. It's Jeff here, once again with the freedom nation podcast. And I am super excited today to share with you one of the things that I am most passionate about when it comes to Freedom Day. And it's become more and more I think important to look at ways to limit or, you know, as much as possible, eliminate taxes, and making sure you stay in a tax low tax or no tax situation when it comes to income. The reason for this is, the less tax you pay, that means the less assets you have to actually accumulate over time if you're not having to pay taxes. So there's a few strategies and vehicles that you can use to do that. So today, we're gonna go over five vehicles. We will do this both in the podcast here and I'm also recording this to be on our YouTube channel. So if you want some of the visuals that I'll go over during different sections, you can also go to our YouTube channel, it's just Freedom Day with Jeff kichel que el and you can check these things out on the channel. I'll also include a link to the playlist for these on in the show notes for the the audio portion of this on the podcast. So let's get started. I'm looking forward to really sharing you with you some of these ideas and some of these ideas. If you follow some of the the Dave Ramsey's of the world and the the Suze Orman's, some of these will be things that they would just tell you, Oh, they're the most horrible things ever shouldn't do these. But I'm going to explain to you why and when and how you would use these, you don't have to, I'm not requiring you to this doesn't mean that if you don't do this, you're doing something wrong, it's just you're going to want to figure out what's going to be the most effective way for you what's going to be the thing that helps you the most over time. So let's get started with my personal favorite of a tax advantaged investments not tax free. But it's really tax advantaged, and that is real estate investing. There are some key key key benefits when it comes to real estate investing. And we're talking real estate investing, you know, in this case, it can be residential real estate that you're doing, or you can do commercial, I typically am not a fan of commercial just because I've not gotten into it. I've done mostly residential real estate investing. And it's worked extraordinarily well for me over time. So let's talk a little bit about real estate and we need to I think before we get started talking about some of the tax advantages, we want to break down the four ways that you can make money when it comes to real estate. So the first way is income, of course cashflow so you know you have a let's say a mortgage on a property you've put down a down payment. So you know that downpayment is your assets that you've put into the deal then you have a mortgage on the property so that you know you can leverage and get the most property you possibly can. And then you get a renter into your property that renter hopefully you've done this right and I would not do any real estate deal where I didn't have positive cash flow I'm sorry, I'm just not doing it. You know, people will argue the point with me well, you know, I can I can raise you know, rates or I can raise, you know, I can get somebody in there have negative cash flow and then all I am is one rent raise away from being positive cashflow. Yes, but you're also one rent raise away from the taxes on the property going up. And now all of a sudden you're in the negative again, so I would not get myself into any any deal. And there are 1000s of possible real estate deals out there. You need to keep looking until you can get one that has a positive cash flow. So off my high horse, let me jump off that box of my soapbox and get into the four ways that you make money when it comes to real estate. So the first one is income, whatever income you know, whatever's above whatever you're paying out and expenses and mortgage, that's positive cash

Jeff Kikel:

cashflow, and that is income. So you make money on that income. So that's one way to make money. The second way is somebody is paying you a check every month for their rent, you're applying that towards your mortgage, and your mortgage is the balance of that is going down over time. So that is what's called amortization. So over time, your value of your mortgage, the principal on that will go down. Now, how a mortgage works, is, in the early years of a mortgage, it's mostly interest that you're getting paid, or that you're paying on your mortgage, as it gets closer to about mid time. So let's say it's a 30 year mortgage, you're getting out there and around 12 to 15 years, then more and more of that payment that's coming in is principal, or is the payment you're making is principal. So that means that your principal will go down farther in the later years, you can do a 15 year mortgage or something like that, to make that acceleration happen much faster, you also could theoretically apply some of the positive cash flow that you're making towards that I'm not a big fan of that I just kind of let that ride however it works on my properties. The next way you make money is depreciation. So remember, in the first situation, you had a positive cash flow. So let's say I have a mortgage of $1,000, I'm able to rent my property for 1400 or $1,500. I have positive cash flow after any other expenses of let's say $400 a month. Well, that's profit. To me, that is positive cashflow. Well, depreciation is simply the fact that a property the IRS lets you deduct a portion of the value of your property every single year, because the property is depreciating every year, you know, it's getting used up, it's getting older, it's going to require repairs at some point in time. So the IRS allows you to recapture that cost every year, buy a portion. So it might be over 26 years might be over 30 years, could be faster than that on certain parts of depreciation on the property. But the advantage to this is, the more you depreciate that property down, it can eliminate, it can eliminate the the earnings that you make. This is not something that actually comes out of your pocket, it just comes out it's a tax calculation. And that could make your interest or your positive cash flow be either tax free or pretty dang close at that point, by using the depreciation of your property over the time that you hold it. The last way that you make money on real estate, this is the one that most people the only one most people think of, because they watch all the shows on TV. And you know, it's really boring to talk about long term holds the properties, but you've got the flipper shows and everything else, where you know, they buy a property for $30,000. You know, they put $20,000 work in, sell it for $80,000. And that profit that they keep is you know their profit in those cases. So it's the appreciation of the property. Well, the challenge with that is in their case, the appreciation of the property is 100% taxable to them. And in most cases, it's a short term, it's a short term capital gains. So that's treated as ordinary income, and they won't really recapture enough depreciation for them to offset that. So typically, they're paying a lot of tax on those flips, which they don't tell you about on TV, they just focus on how much money they made, or how much they made on their sale. So those are the four ways that you make money on real estate, how the tax advantages happen in real estate. Well, first off, we talked about depreciation, that's number one, being able to depreciate a piece of property over time. So as long as you hold it, a portion of that, let's say, you know, let's say it's $100,000, you divide that by 26. You know, that's going to be how much you get to take off each year from your taxes, that will eliminate some kind of gain that you have on the other side.

Jeff Kikel:

It is a wonderful vehicle depreciation is one of the greatest vehicles for real estate investing. And this is one of the problems I have with all the people that talk about, well take, you know, get your 401 K and turn it into a self directed IRA and then dump the money into you know, or or invest in real estate. Well, the problem is, you're investing in real estate, you don't get to capture the depreciation at that point. And then when you decide to start taking the money out, you're paying 100% tax on that money that came out of your 401k if it was pre tax, there is no dip depreciation or anything like that. So it's not exactly the best place to invest in real estate from because you lose a lot of the tax advantages of investing in real estate. But real estate's best invested in outside of retirement accounts, because there's a ton of benefits. The other benefit of investing in real estate is the ability to do what's called a 1031 exchange. So all of this is funky, all these numbers and all that. But let's talk about what a 1031 exchange is. So a 1031 exchange is the ability for you to take a property. So let's, let's give you an example. You and I buy a property and it's worth $300,000. Today, we buy a rental property, we put our money into it, and over the next five to seven years, that property appreciates $100,000. So it goes from 300,000 to $400,000, in the next five years, so we've made $100,000 on our property. Now, remember, we've got appreciation, but we've also got amortization. So let's say we had a $250,000 loan on the property when we started. And we've amortize that down over five to seven years. And so now, we not only have you know, the property that's worth, at the beginning, 300,000, we put in, let's say 50. So it's worth 300,000. Now we have $100,000 Gain on our property, and we decide to sell it for $400,000. Now, if we were just to take the money, that $100,000 that we made, is going to be considered a capital gains. So we're not even going to think about the amortization at this point, we're just going to say the capital gain. So we've now made $100,000, that is a long term capital gain. So in most cases, depending on how much money you make, it's 20% capital gains tax or less depending on how much you make, but you're most likely going to pay some kind of tax. However, there is a rule, and it's called 1030. Law, the laws 1031. And the IRS retires section 130 1031. And that IRS 1031 section allows us to say, I'm going to find a like kind property within 60 days, so that when I sell this, I want to take my profit and I want to roll that into 123. However many properties I can buy for that extra money, that is my profit, I can buy that without paying taxes on the capital gain. And now I might own two properties or three properties, instead of the one that I owned before. Because I grew the value of my property, I grew my equity in the property. So that is a tax free exchange. And throughout the time that I'm a real estate investor, I can continue to do that very thing, I can continue to invest in other properties that are a like kind property if I sell one of my other properties. So that's a strategy that we've used in our own personal investing where, you know, we might have started with one property as with a partner. And you know, once that's grown, once we get to the point where we're ready to move on from that property, then we've turned that into two properties, and then later into four properties. And we'll continue to do that. And we're doing that across multiple partnerships that we have with other investors, and they're happy, we're happy. We're all growing our wealth together, but we're able to postpone paying the taxes on that until we eventually sell the properties and we don't do anything. For us. We intend to go as long as we can. That's the way that we're growing our wealth. And that's the way we build our income over time. Leveraging depreciation in 1031 exchanges. Now a couple other things that help reduce taxes, you know, and this depends on the state that you're in. But in your you know, if you have some deductible expenses, you also get mortgage interest deductions. So you know, on your properties, you can get a mortgage interest or deduction. If it's your personal property, then it's going to fall under your personal taxes. And if you're not able to amortize above whatever the standard deduction is, this is a moot point. And if you live in states where the rules say, okay, that gets cut off at 10 grand, wow, it's not gonna really help you much but it can help a little bit from that perspective. The last piece of the pie when it comes to real estate is really more of your personal real estate. And that is that you get A capital gains tax exclusion of federal capital gains, it's the exclusion on your personal property on your primary residence. So you can exclude up to $250,000 as an individual, or $500,000 of a married couple of capital gain when you sell your property. So you know, if you're saving money over time, and are you you know, been under property a long time to get ready to retire, or you reach a point where you want to start downsizing your home, up to $500,000, for a married couple can be excluded. Now, this includes any work that you do on your property over time, specifically, things, you know, let's say you put in a new kitchen and you put in a bathroom, you do anything like that, you need to be saving the receipts, because that's gonna count as improvements on your property. And you'll get to recapture those, at the end of the time whenever you sell your property. So this is important to maintain these kinds of records, when you do any kind of improvements on your home, I would highly recommend that you scan those, instead of putting them in a folder someplace, scan them, upload them into a cloud drive, and have those records there. You'll hear a little bit about this later on some other strategies I have of how to maintain those records. Throughout times, just make sure you kind of keep them in a tax record folder, so that when you sell your property, you've got those that you can work with. So that is real estate, real estate's one of my favorite ways to do all of this. So now let's talk about Roth IRAs and Roth 401. K accounts. So the Roth IRA was created late 1990s, such thing as 1999, the person who created it was the the senior senator from Delaware, Representative Roth. So that's where this came from. And the Roth IRA is a vehicle that allows you, as an as a taxpayer, to put money away. Now the current strategy, or the the current amount that you can put in is $7,500 per year into a Roth IRA. Now, if you are over the age of 50, there's a ketchup contributions an extra $1,000, that you can do into the Roth at that time. So that's, it's a wonderful savings vehicle. Here's my belief, when it comes to tax advantaged vehicles set up by the government, I do not like to make the government my partner. So there's always the argument of Well, should I put my money in pre tax, or should I put it into a Roth, here's my take on it. And this is my personal belief, you can think differently. The government allows you to put money into a, a traditional IRA, if you're eligible for it if you if your income is or if you don't have a retirement plan, you can put in that same $7,500 and get a tax deduction from it. The problem is, it's only a small amount, and the government, you know, will give you let's say, if you put the full $7,500 in, and you are in the normal tax bracket for everybody, that's only going to get you about a $1,200 tax savings every year. However, when you decide to retire and you start pulling money out, the government is still your partner, now they've been a partner with you. And they've partnered with you to say, well, you know, we'll give you for every $7,500 you put in, you get $1,200 back. However, when you start taking this money back, we want 25% of everything you're taking out. So now after I've spent all this time building up my assets in either a traditional 401 K, or a traditional IRA, the government is your partner and they give you nothing in return. They're your partner and they want 25% or more of your tax money when you start taking that out. Now the argument is well, but I won't be taking out as much as you know, I won't be paying taxes as high of a rate as I do. Now, when I'm earning an income. Maybe maybe not. Most people need that amount of money

Jeff Kikel:

over time, and so they're going to need a pretty good portion of what they're earning today. So if you're taking that amount out, the government saying hey, hand me 25% of that, and I'll take that and go buy a you know, $300,000 hammer or something.

Jeff Kikel:

The difference is with the Roth IRA, think of it as a farmer, would you rather pay tax on the seed? Or would you rather pay it on the whole crop? So with a Roth IRA, it's always after tax money. So you're putting in money after tax. So you've paid that, let's say $1,200 Extra, that you would have put in or that you would have gotten a benefit from. However, over the next 30 years ish, you grow your Roth IRA to several 100,000, maybe a million dollars, and you're not going to pay tax on that money ever again. So your crop that you've grown for the 30 years, or 20 years, or however many years it is, your crop, is protected from taxes. Now, the Roth IRA, the Roth 401, K, can be invested in virtually anything, specifically, it's usually mutual funds might be some individual stocks and bonds, it could be invested in, and things like gold, you cannot put anything inside of an IRA or a Roth or a traditional Roth 401k, let's say through your employer, you're not going to get to invest in anything like collectibles, or life insurance or anything along those lines. But you're gonna get to invest in stock market assets, including options inside the Roth, whether it's 401k, whether it's a Roth IRA, and you're going to get the benefit of growing that money over time tax free, which means that for two equal people, let's say they both saved $100,000. Or let's say they saved a million dollars into their 401 K accounts. And one is in a Roth one is in a traditional 401k. And they decide to start taking out $50,000 a year, which is a safe rate of return, which you can take out of a traditional type of vehicle like that, well, if they both Withdraw $50,000, remember, in the traditional case, because I got my money at the front end off of my taxes while I was earning money. Now, for the person that's taking out $50,000 from a traditional account, you're gonna have to take some money out of that, and it might be 15 or 20%, of whatever you're taking out, that's going to go to pay taxes, because you've not paid taxes on that money at this point. Now, for the other person who has the same $50,000 coming out, they put a million dollars into, or they've grown a million dollars into a Roth IRA or 401 K, they're going to get to pocket $50,000, they're not going to have capital gains tax, they're not going to have tax at all, they're not going to have income tax on that money. So that means that they didn't even really need to, for them to net the same as that person with the traditional retirement account, they didn't even have to have as much money, they could have $850,000 and still be able to net net the same as someone else. So it's less work to get there if you're doing it on a tax free basis. The other part with Roth accounts is there are no RMDs registered or required minimum distributions. So if you have a traditional 401 K, or a traditional IRA, at age 72, that's up from 70 and a half. So 72 and a half now, this rule was changed at the beginning of the pandemic, by the the Trump tax cuts, they made the ability to postpone required minimum distributions to age 72 and a half. Well, at age 72 and a half, the government says, Alright, you've had that money hidden for long enough from us, we want a part of that. And you have to begin taking out a portion of those dollars that are in your Roth or they're inside your traditional accounts every year up until the point you die. And there's a federal calculation that you use to figure out how much that is per year. Well, in the case of Roth's, whether it's a Roth 401 K, or it's a Roth IRA, you do not have to do right or required minimum distributions. So let's say you had enough income outside from real estate or other investments that are passive income, and you're sitting there going well, I don't need any more income. I can just leave the money in my Roth forever or use it only occasionally to pull money out for big dollar things. I need to buy a car I'm going to take a trip something like that. I want to give a gift to my my kids or my grandkids. Well, I can just do that as a withdrawal and not pay taxes on that money and continue to grow it from there. It's also an interesting vehicle to use. If let's say grandparents are above the age of 59 and a half, which you can withdraw from my Roth tax free without paying any penalties, you, grandparents could use this to pay for a child, you know, one of their grandchildren's college out of there and not have to pay taxes on that, if they have a large enough account to be able to do that. I think it's a wonderful vehicle to do that. If you've got if you've been saving in a Roth. Now, let's say it's later in life, you've worked a couple jobs. So you've, you know, had a couple 401k Is that you've built up over the years. And you know, you're sitting there looking at, okay, well, I've got all this traditional money. And I really don't want to pay taxes on this when I get to retirement. So what's my solution? Well, any IRA is going to have a cap as far as how much money you can put into it. So like we said, it's $7,500. Or if you're over 50 and a half, you get a little extra money that you can put in per year, that's the max that you can put in. However, if you have a traditional 401k, or maybe you had a traditional 401k, that you rolled over to a traditional IRA, you do have an unlimited ability to convert those dollars from a taxable account to or from a tax deferred account, to a Roth account. So that allows you inside there every year, you can do this all in one lump sum. So let's say you had $100,000, and a an old 401k, it's sitting in an IRA account, a traditional IRA account, you can convert all of that in one year, regardless of age, so it doesn't matter, you're not going to pay a tax penalty, you're just going to pay taxes on those dollars. So I put it there, I do $100,000, assuming I had no other income for the year, I'm gonna pay anywhere from about 18 to 20% in taxes to convert that to a Roth IRA. Now, from that point forward, that money is now tax free, so all the earnings on it, are completely tax free. So this is one of the things that I work with clients all the time on. And it was not something I used to do, until I really started to dig into what I saw, were some of the challenges of people going into retirement and having to pay taxes. And you know, it just made no sense to me. And it made a lot of sense to do conversions of assets from traditional to Roth. So it's something that we do on a regular basis with our clients, we manage that. And you know, if you can't afford to take the hit all in one year, let's say you're in a really high tax bracket, you can spread it out over five, five to 10 years and get that all converted over. And then now you're rolling forward. The only instances where I don't recommend people doing this is if it's later on in life, let's say you you didn't retire early, you kind of stayed continuing to work, you get into your 60s, and you're like, Okay, early 60s, you're probably going to retire by 66, there's not enough years left at that point for you to convert, and then make up that difference in the tax free world, you're just gonna have to take too much of a tax hit up front. So I'm not a big fan of doing it when you're in your 60s, unless you're not going to use that money. Let's say you build another passive source of income, you build a real estate portfolio that adequately covers your expenses. And you're looking at this Roth IRA, or you're looking at your IRA as well, this will be money, fun money to use down the road, go ahead, that's a great time convert this thing over, then you don't have RMDs down the road, you don't have to take money out, you can just take it out whenever you want. And it's much much better from a tax standpoint at that point. So that is Ross. And I think it's a wonderful vehicle. I think it's one of those things that everybody should consider doing. The beauty of it is you also have tons of investment choices in those vehicles. You know, if you've got old 401 K's, I would be converting over to IRAs and then hopefully converting into Roth IRAs where you've got more choices or investments you can do and really diversifying your portfolios out a little bit more. Now, here's where we'll get into some of the more controversial topics that I'm going to talk about today. Well, there'll be two controversial topics that if you hear a Dave Ramsey or you hear a Suze Orman, they're going to tell you this is the stupidest idea ever. That can't be done. It's a horrible investment choice. Well, it is if you have no other savings vehicle If you are somebody who is saving, you know, you make a decent amount of income, and you're not even maxing out your Roth IRAs, at this point, you're not even saving $7,500 into your Roth IRAs, this is probably not the best vehicle for you. But if you are a good saver, and you're looking at different ways of expanding out your savings, and different ways of building wealth, a strategy that you can use is what's called a family bank. Now, there's other versions of this, there's the infinite banking, there is bank on yourself, there's a ton of different strategies, all basically doing the exact same thing. I call it a family bank, because I kind of liked the concept of saying that I own my own family bank. This is where you would use cash value life insurance, as a savings vehicle and use it for the purposes of building wealth in your family. Now, let's talk a little bit about insurance. Before we get started, there are two types of life insurance, you have what's called term insurance, and you have cash value insurance, and there's a multitude of different ways on the cash value side. So term is pretty straightforward and simple. It is pure insurance. So let's say I am 30 years old today, I want to make sure that you know, I haven't saved enough wealth at this point. So if I die, my family's up Creek, my kids don't go to college, my spouse is in financial trouble at that point, because I have not amassed the amount of money that I needed for retirement, or for college or whatever. Wonderful thing, there's a old term by term and invest the rest. It has been my experience 30 years in the investment industry that in most cases, it is buy term and buy a TV at the same time, people have a very difficult time saving and saving consistently over a 30 year period of time. So if you are somebody that is massively disciplined about savings, then buy term and invest the rest is probably the best vehicle, most likely, you're going to be better off than somebody that does this route over the long run. But I'm just seeing way too much experiences of this. The other part is if I'm 30 years old today, typically the maximum term insurance policy I can buy is 30 years. So that means that my term insurance policy, which is locked in, I can lock it in for 30 years. But after 30 years, my term insurance policy, that term runs out and it becomes annually renewable. And all of a sudden, my life insurance that I might have been paying 20 or $30 a month for for the last 30 years goes to $1,000 and then 1500, then 2003 1005 1000, then 10,000 over time as I get older, because it's annually renewable after that point. So what's my solution? Well, I'm 60 years old, my insurance is run out, I've only got to annual renewable at this point, my only solution is well, or my cost effective solution is well, I better go ahead and buy, you know, get another term policy for let's say another 15 years long enough for me to finish out my wealth savings for retirement. Well, the challenge with that is I'm now 60. So it's going to cost me a lot more money to get a term policy at that point. And I might not qualify, I might have some kind of health issue, I might have had cancer or some kind of heart condition or got diabetes. And I might not be insurable at that point. So I'm kind of up a creek, if I reached the, you know, the end of my term, and I need a longer with that. Many, many of you, I can't tell you how many people come to me and I have run out of their insurance at that point. So for those that think by term and invest the rest, if you are massively disciplined, and you save correctly, and you do everything right, and you don't go get stupid and make stupid investments in your investment portfolios, you might be okay. But for most of us mere mortals, we do some kind of stupid stuff during our investing career or we stop saving because you know, kids are going to college or something like that. And we haven't amass the wealth we need and we get ourselves into a really tough situation when we're in our late 50s, early 60s Because we kind of followed the rules that everybody else made and you know, I don't I'll tell you lies on here. I've just seen it way too many times. And I don't want people to get into that situation. So where does a Family Bank come into play? Well, a Family Bank is a, it's specially designed life insurance. It's either whole life, or universal life, or some version of one of the two of those. All of cash value life is is just simply this, the cost of insurance, let's say when you're 30, might be 10 $20 a month, when you hit, like we talked about, you hit your 60s, that may all of a sudden be to $300 a month. Okay. So what happens with cash value life insurance is when you start, it's a level premium, and it's a level premium for the rest of your life. So it might start at 150 or $200 a month, you're paying $20 a month for the life insurance component, the rest of that money is in a savings component called cash value, that in the case of whole life, is earning a guaranteed rate of return. And if you're with the right kind of company, it's called a mutual insurer, you are also earning dividends. So as the insurance company makes profits, they pay dividends to the shareholder or the the owners of policies, because as a whole life insurance owner of a mutual insurer, which is effectively a nonprofit, it is the mutual insurer is owned by its policyholders. So as the insurance company makes profits, they pay those profits off in the form of dividends to their policyholders. So now that cash value is in there, I'm only using let's say, out of my $150, I'm only using 20. So $130 is in that cash value account, which is now earning interest, and it's earning dividends on top of that. And that keeps compounding over time. Now, every year might, you know, the next year, it might be $21 or $20.50, for the cost of insurance, I'm still putting in that $150. And I'm building that wealth over time that I will need when I hit my 60s. And I you know, I'm putting in, let's say still $150. But my insurance is costing me 200. Well, that's coming out of that cash value that I've been building on for years. So that's the basic strategy for life insurance. And most people that do a whole life policy or a universal life policy. They do that strictly as, hey, I need a million dollars of insurance, what does it cost me to do this? In the case of a family bank, it is a specially designed insurance policy. So in the case of a family bank, what we're doing is saying the exact opposite of what I say in the other situation, I say, You know what, I've got $10,000 A year extra that, you know, I'm putting $7,500 into my my IRA, and I have an extra $10,000. Now I could put it to my 401k, I could put it into a taxable investment vehicle brokerage account. Or I could apply that money that $10,000 to an insurance policy and grow that wealth without paying taxes. So I pay taxes upfront, it's after tax, now I put this into an insurance policy, yes, I'm gonna put a little bit into the policy of the premium reserve, which is going to pay the premium. But the bulk of that money is going to stay in that cash value account and earn interest.

Jeff Kikel:

The difference in this strategy is what I'm saying is I want to put $10,000 in, and I want to have the minimum amount of insurance that I possibly can get. So instead of having a million dollar policy, I want to get the smallest possible policy, maybe it's 500,000, maybe it's 250,000, whatever it is for the amount that I want to put in so that I can keep the insurance costs to an absolute minimum. Now if I need more insurance, I can always buy a term policy on top of this to cover anything in between there, but I am looking for the maximum amount that I can put in with the least amount of insurance cost. Now that limit that we calculate is what's called the mech limit, the modified endowment contract limit. So let's go back in a little bit of history and talk about the MEK. So the MEK started as during the 1980s there was a lot of brokerage firms on Wall Street that I started to use insurance platforms as savings vehicles for rich people. So basically back then as a rich person, I could come into an insurance company and say, I'm going to give you a million dollars, the insurance company would take that in as a premium and write a million dollar insurance policy against that. So they have no risk at all.

Jeff Kikel:

The insurance policy would grow in value that that rich person's policy or that person who was putting money into the policy that would grow over a, you know, however many year period of time, and then they were able to withdraw money out of that policy tax free. So it was a policy, it was something that was used by Wall Street and some very rich people to make lots of money, the government wised up in 1987. And said, and we're not doing this anymore, we're not allowing you to do this. So insurance companies, you have to take some risk and rich people, you can't just take you know, a million dollars and dump it in. So they created what's called tephra. So that is it was a law that said that you can only put in a maximum amount over a seven year period, seven equal payments, that would max out what a policy would be. And so that's what's called the TEFRA limit. That's what determines how much we can put in per year, the maximum amount, and that maximum amount, if we go over that by $1, that becomes what's called a modified endowment contract. And that means every procede coming out of that insurance policy is taxable. So you don't want to do that there are a couple strategies where we would, but we're not going to do that. So we're going to build this over time. So we've talked about whole life. Universal Life is something very similar. It is a vehicle that builds cash value, but there's different types of investments, or what are called separate accounts that can be inside of a universal life policy. One of the unique things about a universal life policy is you can have different premiums that you put in over time, that can be more or less, one of the things you always want to do is you want to keep analyzing that policy, because if you put in too little over time, it might not be enough to keep the policy alive later on in life. Now, how do we use this as a family bad, so we could redirect funds into this policy, and build assets up over time. Now, when we decide at some point, let's say we decide to pay for our kids college, we can use this as a college funding vehicle. Because you can take withdrawals and loans from that cash value account. And you could use that as a vehicle to pay for college for your kids. And it's a tax free vehicle to pay for college. So now, okay, kids are done college is paid for, you could do what I would do and say Alright, kids, you got free college, we're going to put money back into the family bank now. So you're going to instead of paying the government, you're going to pay the Family Bank back for the loans we use to pay for your college. All right. Some people might say, well, I don't want to hurt little Johnny, I want them to go off tax the debt free, okay, fine. That means somebody's going to have to pay back the Family Bank, which means that's probably you, or you just don't pay it back. But you have less of a bank to work with banks don't make money if you don't keep bringing money back into. Now we get towards retirement. Now, you know, one of the things I always tell people is you can get loans for college, you can get loans for retirement, well, you could take a loan from the Family Bank, and start to use that as a tax free income source every year out of the family bank that grandma and or that mom and dad can use to fund their retirement when they die. This is a life insurance policy. And that life insurance policy proceeds whatever's left of the death benefit minus the loans goes to the family at that point. So that's a tax free transfer of wealth for the family. So if you do this, right, and you continue to fly, you know, make sure that that family bank is paid off. You know, it's a great way for a family to kind of transfer wealth for generations. This can be used to fund multiple generations of college and everything else, even when, let's say the you know, mom and dad die, that money can then be used to continue to fund this. It could be used to do this one more time with the you know, the next generation of kids can fund their family banks and then this can continue to be a vehicle that goes on over and over and over over time. It's a wonderful estate planning vehicle as well. Well, alright, let's talk about the last two strategies here. Now this next strategy is very, very, very similar to the Family Bank, the difference is it's a little bit more of a sophisticated strategy. And it requires you to have a little bit more assets to begin with a family bank can be started with relatively meager amounts, it may take a little longer to fund, but it can be built up over time. This strategy is what's called premium finance. I work with a company that does this, where they've kind of advanced the strategy even different from what I the way I learned it. But basically, what premium finance is, it's very similar to the strategy we talked about before. The difference is, let's say somebody has a couple $100,000, right now, they can say, you know, what, I just want to fund as much as I can right off the gate. So I want to fund $100,000, for the first two years into an insurance policy, or combination of insurance policies. Well, what happens is you have cash value and those insurance policies, that cash value is what's considered a tier one asset. And what that means is, if a bank is looking at you, they consider cash. And they consider cash value of life insurance, a what they call a tier one asset, basically a riskless asset for them, and they are more than willing to, to loan money for that it allows them as a bank, to diversify some of their assets, they've been doing this for 150 years or more. Banks have been loaning money towards insurance policies, or the cash value of insurance policies. This was actually a strategy that Walt Disney used to help fund his Walt Disney World project where he couldn't get financing from a bank to build something in the middle of a swamp, he was able to, and he had been saving and building cash value in his life insurance policies that he was able to get alone, versus those policies so that he could fund the, you know, initial amounts of capital that it required to start developing out Disney World. And of course, we know how that and after that, you know, he, he, if you build it, they will come. I was there in the first year of Disney World. So I mean, I'm one of those who was in there in the first year and the 50th. Year, and it was really fun. But it wouldn't have been there had had Walt not had that money. So what you would do in these cases is you'd fund that policy. So maybe I take my $200,000 over two years, fund that into the policy. So that's the only contribution I'm going to make towards this policy. So whatever the TEFRA limit is, whatever the death benefit is, that might be, you know, a million million to something like that of the death benefit. Now, I'm gonna go to the insurance policy insurance company or the bank, and year three, and I'm going to say, Hey, I've got, let's say, $180,000 of cash value, at this point, with a little bit of premium reserve in the policy, what are you willing to loan me most banks will loan you any, anywhere between 90 and 95%, at really, really low rates, because they know it's riskless to them. And it's a way for them to diversify, diversify their book of loans. So they'll typically loan at really low rates. And the idea behind that is you're going to take those that loan from them, and you're going to use that and apply it towards your, your, you know, your policy for that next year. And then the same thing, you'd go back the next year, you'd use that as applying it towards your premium and then your premium reserve that's in there and building your cash value. So yes, of course, you've got a loan against that. But the idea is, the interest on the loan is very low, you're earning more on the policy over time, that net net, you're building wealth, and your contribution is limited to that original $200,000. And that's it. So the longer you do this strategy, the higher and higher the total return of the return on investment is for you. And at some point in the future and this is really the key to these type of plans is at some point in the future you're gonna flip the switch on and turn this into a tax free income stream for the rest of your life. Or be did this early in life and yet kids you might be able to use this to pay for college. Then after they go to college mom and dad yet a nice vacation income stream coming in every year off of this policy, and you're able to manage risk better, you're able to manage taxes better And it's really a strategy that can be used well, if you're the right kind of person, and not everybody is right for this, you need to find somebody that understands how to do this, and make sure that it's right for you. The last vehicle, and this has been long when we're talking about this, but the last vehicle that we'll talk about is the health savings account. Now, this is something that people look at as well, I get this health savings account through work, and I put some money in and then I use it to pay for my you know, out of pocket costs of health care and everything else, well, you're missing out on the power of this incredible tax savings vehicle. And by just utilizing it in a slightly different way, it can be something that one pays for health care later in life is very tax advantaged, and you have the ability to really truly grow this into a another piece of wealth that you wouldn't have thought about. So health savings account under the current laws, allows you to save up to three $850 for an individual $7,750. So even more than a Roth IRA for the family. It is 100% tax deductible. So this is like a pre tax IRA or pre tax 401 K, you get that as a tax deduction up front. The difference here is when it comes out the back and you use it for qualified medical expenses, which is a very wide category of things. It is tax free. So it is one of the only triple tax free vehicles, so tax free on the front end, tax free wallet is inside and tax free on the end if you're using it for qualified medical expenses. Now what do most people do wrong with this, they put money into an HSA account, they just leave it in there. It's earning like next to nothing rate of return. But what you can do with HSA accounts. There are many HSA accounts out there that have a savings and investment component, you can convert that balance of your HSA into an investment account and invest in mutual funds, invest in ETFs, whatever they allow you to do inside there, you can invest and grow those dollars over time. And the strategy that I use, and the strategy I would encourage you to use is I cashflow most of my out of pocket health care costs. You know, my wife and I don't really have any major health issues. We don't take major prescriptions, anything like that. So you know, our medical expenses are typically less than $1,000 per year, we just cashflow that out of pocket, we keep the receipts for every single thing we do that would be a qualified medical expense. So Google qualified medical expenses, HSA and learn what can be done, save the receipts for every single thing you do, scan it with your phone, upload it to a Google Drive, or some kind of cloud drive, and keep every single one of those things for the rest of your life. And then once you hit retirement age, now you can actually use this to either pay for your medical costs when you leave your employer, you can use that really at any time during that time period to withdraw, because you have qualified medical expenses that you had in previous years that you haven't applied that to. And you can now apply those because you've got the records to keep when it comes to that. So the HSA is another amazing vehicle for this that I don't think very few people. I know I've been to many industry conferences, and they've talked about this for years as being this amazing vehicle. But so few people are using it as a tax free or low tax free, low tax investing strategy. So I hope this show although it was long, I hope it was helpful for you to learn as much as you could about all these different strategies for tax free and low tax savings. If you're listening to this on any of the podcast channels, if you want to go back and see some of the visuals with this, go over to our our comp companion youtube channel at Freedom Day with Jeff Kikko que el that's in the show notes as well go there, you can actually watch these over that with the visuals so you can kind of reset this in wherever you're listening to this or watching it make sure that you hit that little subscribe button, hit the up button and say thanks or you know, hit that up button and say Hey, we love you for for doing this kind of stuff and sharing this information with you. So thanks a lot. I truly appreciate you listening in. I know it was a long show but I hope this was very helpful for you to start planning out your future when it comes to tax free invest thing. So thanks a lot and we will see you back here the very next time.




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