In this episode we share some thoughts on taxes.

In Becoming Your Own Banker, Nelson Nash likens the financial world to flying an airplane. "... you cannot fly an airplane through a vacuum. It must go through an environment!"

If you ever travel by plane, you know that it takes longer to fly west than it does to fly east. This is because flying west, you are flying into a headwind. It takes around 20% longer to fly west than it does to fly east.

In finance, all costs (now and in the future) create a financial headwind. And for most people taxes are the largest drag on our financial lives.

Let's discuss!

Resources mentioned in this episode:

An IBC® Tax Strategy Part 1

An IBC® Tax Strategy Part 2

An IBC® Tax Strategy Part 3

- Hi everybody.

This is John Montoya.

- And this is John Perrings.

- We're authorized Infinite Banking practitioners

and hosts of "The Fifth Edition".

(gentle music)

Episode 45, thinking about taxes with IBC.

Well, thank you everyone for joining us for this episode.

John Perrings and I wanted to have a discussion about taxes

and how it relates to Infinite Banking,

and we thought this would be a fun episode to put together

to clarify some of the challenges that we all face

when it comes to taxes, and really highlight

for you listeners why IBC is so important

when it comes to the tax ramifications that we all face.

What we're gonna discuss in this episode,

obviously the tax ramifications of utilizing IBC.

We'll also highlight one of Nelson's more common sayings

as it relates to taxes, and we'll talk about tax

as a hidden inflation, and what you can do

to move forward in spite of taxes.

So why don't we jump in?

So let's start here.

A little history on income taxes in the United States.

This really isn't taught in schools,

but the first income tax only came about

during the Civil War, and even then it was probably

the most temporary of all tax measures ever created,

and the reason why is because Abraham Lincoln,

one of our favorite presidents of all time for most people,

in order to finance the cost of war, he actually implemented

the first ever income tax in United States history.

But it was deemed unconstitutional,

so it didn't last for very long.

Now, that was the first and only income tax

in our country's history until the year 1913.

Now, for those of you who have studied U.S. history,

maybe or maybe not, you might be familiar with

why 1913 is a year that lives in infamy.

And if you've read "The Creature from Jekyll Island",

you will know that in 1913

the Federal Reserve Act was passed.

But coincidentally or not, that was also the same year

that the IRS was created.

There was another law that was passed in March of 1913

which actually created the income tax on a permanent basis.

Now, the income tax back then was extremely small,

and it was promised it would never increase.

Of course, we know government promises

aren't really worth much, and for over 100 years plus now

we've had a progressive income tax,

and it's gone up, up, up, down, up.

I mean, who knows where it's gonna be in the future,

but one thing's for certain, it's certainly not going away.

So IBC is a great way to strategize

when you take into account all the things

that we need to be aware of in order to create wealth.

Well, we have to think about taxes, and because IBC rests

on a foundation of whole life insurance,

which is really for the benefit of widows and orphans,

we get to minimize, reduce, even forego future taxes

when we set up an IBC policy the right way.

So let's jump into the three ways

that we can overcome taxes.

John, do you want to hit on those?

- Yeah, I think the most common one is to use

through the use of qualified plans,

where most of us are kind of taught

very early in our careers, I remember sitting down

with the HR and benefits person at my first company,

and they kind of just put this packet in front of me

and said, hey, fill this out

and select what you want your 401(K) stuff to be.

So, you know, you get a handful of choices.

So you have the ways to either defer tax

or make some investments that you don't have

to pay tax in the future.

So those are your typical 401(K)s or your Roth type plans.

So those obviously come with a lot

of rules and restrictions.

Not only is it rules and restrictions,

but I would emphasize restrictions,

where you can't really touch a lot of that money

for a long time, until you turn 60 years old.

I would say that's the most well-known tool that we can use

to try to mitigate taxes, if we call it that.

- Yeah, and what you mentioned about having to hold it

until at least age 59 and a half, age 60, thereabouts,

you're putting a lot of trust into politicians

that quite frankly don't ever seem to have

any one's interests but their own,

in terms of getting re-elected,

so it's a lot of trust that goes into locking up your money

for decades at a time, not knowing even

what your tax bracket is gonna be in

when you go to withdraw that money.

Another way that you could do it

is you could buy muni bonds.

The problem with muni bonds though,

interest rates are so low these days

that there's essentially no growth, it can be very illiquid,

and I like to point out, look, if you're buying bonds

from the government, you're basically encouraging

the government to spend, and the government's

really not the best allocator of our wealth, right?

- To say the least.

- To say the least.

So I wouldn't encourage that type of behavior,

not to mention the benefits you ultimately get

from owning muni bonds seems to pale in comparison

into what would be the third option,

or third way that you can overcome taxes,

which is to buy an overfund permanent cash value

life insurance, AKA IBC whole life.

And as Carlos Lara pointed out in his LMR article,

which we'll link to in the show notes, no 1099s here,

when you overfund a whole life policy,

you are basically setting up an account

that the IRS knows about, but when funded properly

and designed properly, you get to truly overcome taxes

not only on the growth, but on the access,

and ultimately on the transfer of that death benefit

to your beneficiaries, and that, for both of us,

I think we'll both agree, that is really

the most profound way that you can overcome taxes.

I mean, it's why we do what we do

and why we're sharing all this with all of you.

So just to quickly recap, you can fund

a government-qualified retirement account,

you can buy muni bonds, or you can buy

an overfund permanent cash value life insurance

the way that we teach it with IBC whole life.

Now, John, I know that you also made a note

about real estate.

Do you want to touch on that real quick?

- Yeah, and I'll just make one other quick note.

I mean, you know, it's like everything comes

with strings attached in most cases

when you use different types of financial instruments

to mitigate taxes, except for life insurance

and except for coming up with strategies.

But the strategies are always,

you're always kind of having to move around

and come up with new strategies

because we're always trying to figure out

what the government wants to reward people,

what strategies they like,

in order to take advantage of taxes.

But I was gonna say real quick about municipal bonds,

some of those strings, not only is the government

in charge of the money, and it kind of incentivizes them

to spend, but depending on the type of situation you're in,

it could also affect your social security.

So some of the income that comes in through municipal bonds

can start to count against you when it comes

to your social security.

So that's something that could be looked into

and discussed as well.

But we were talking about real estate,

and I think it's an interesting topic.

I brought it up before the show,

where obviously the interest that you pay for a mortgage

is a deductible from your taxes,

and then you also get some advantages

where you can write off the depreciation of some assets,

depending on what your situation is.

But then John Montoya brought up a good point

about how you do get those things,

and I think those are positive things,

but then you also have your property taxes

that you have to account for.

So it's always a little bit of a balancing act

of how do those balance out?

John Montoya brought up, well,

and the property taxes never end.

So your depreciation and interest ends at some point,

presumably, but the property taxes don't.

So I think was an interesting, I hadn't thought of that,

and that's an interesting way to think about it.

- Yeah, well we had written it into the notes,

three ways to overcome taxes, and I like the idea,

as a wealth-building tool, how real estate

can really fit in there, but for all of us,

when we have to write those checks to the government,

whether that's state or federal

or even for property taxes, it's always a painful bite,

and it's just a reminder that those taxes never go away.

So you don't ever truly overcome those taxes.

It's just part of the responsibility of owning real estate.

So like you said, and you say it a lot,

there's always trade offs, and well, there's one.

Real quick, I do want to way, full disclosure here,

we are not tax professionals, so for any tax advice,

you want to make sure that you're seeking out

a qualified tax professional.

Where we are qualified is with Infinite Banking.

Obviously we're IBC authorized practitioners,

and that is our area of expertise.

So if you're listening to the show

and you are looking for expertise on Infinite Banking,

well, make sure that you're talking to

an IBC authorized practitioner.

So just wanted to share that real quick.

We are not tax professionals by any means,

but this show is important because taxes,

it's coming up in a few months,

and you should be thinking about how taxes

affect your overall portfolio and the planning

that you're doing not only this year, but beyond.

- I always find it interesting, because it's like,

you know, obviously we're not licensed tax people,

but I find a lot of licensed tax people,

the only thing they can really deal with

is what's already happened, and so a lot of times,

they're kind of picking up the pieces

of decisions and actions that were already made.

Even though we're not "tax professionals",

I think we do add some pretty powerful planning features

where we're looking ahead.

If you have the pieces in place in the future,

one of the ways to overcome taxes is through strategy,

and if you can identify what some of those strategies

could be and set yourself up

where you have the options to use those strategies,

that can make a really profound difference in the future.

- Yeah, I like that you bring that up too,

because for the longest time, my tax professional

would always ask me to consider funding a 401(K) or IRA,

and it got to the point where she just stopped asking

because she knew my take on it.

Sadly, and she's great by the way,

other than her advice on retirement planning,

which, you know, take it with a grain of salt.

She's not a retirement expert,

she's just trying to mitigate taxes here and now.

But this is the way that I think the majority

of tax professionals probably think about taxes,

is how to minimize taxes in the current year,

and they don't really do any future tax planning.

And I see that as being one of the biggest obstacles

to making sure that your plan is really tight

and cohesive all the way through, and not short-sighted.

But it's really challenging because the industry,

the tax industry, they're really focused

on the here and now.

And so it's important to really think about these questions

because the chances are your tax professional

that you're working with is probably only concerned

about how much they can save you in taxes this year,

not five, 10, 15 years from now when you go to retire,

or longer, depending on your age.

So something to keep in mind there.

- Yeah, I think it seems like you're trying

to trigger me into going on a rant, John.

I'm not falling for it, but what I will say is,

before I go on a rant, it's so true.

I mean, the typical advice that a lot of people

will kind of offer up to kind of prove

that they're doing the right thing is

max fund your 401(K), buy a house and get married.

Those are the typical tax saving advice

that most people get in their life.

It's so short-sighted, where people will bend over backwards

to keep themselves from going into a higher tax bracket.

And while there is money to be saved there,

most people don't realize that tax brackets are last dollar,

so it's really only that amount of money

that went into the higher tax bracket

that you're being taxed the higher amount on.

So if you actually run the numbers that way,

your accountant keeping you in a lower tax bracket

probably didn't save you as much as you think it did,

and maybe as much as they thought it did.

But I think think long-range, as Nelson Nash said,

is some of the best advice you could possibly get,

and most of us are really fighting for tax savings scraps

over whatever we're allowed to do in the current tax year.

- Well, I don't think we planned it this way,

but that's actually a perfect segue

for a quote from Nelson's book,

and something that Nelson himself would say quite a bit

when it comes to taxes, and this is on page 66

of "Becoming Your Own Banker".

If you don't have this book, you should definitely

order yourself a copy.

But here's what Nelson says.

"When government creates a problem, read onerous taxation,

and then turns around and creates an exception

to the problem they created, tax sheltered retirement plans

like 401(K)s and IRAs, aren't you just

a little bit suspicious that you're being manipulated?"

- Yeah, I mean, it's like, you're not gonna do it John,

I'm not gonna do it, I'm not gonna go crazy.

But it's kind of obvious.

It's like, okay, we have this $18,000 limit

to fund our tax deferred qualified plans

or whatever qualified plans you want to use,

and it's like, well, how'd they come up with 18,000?

Why is that the number?

It's so arbitrary, and it just kind of,

it drives me a little bit crazy,

where somehow we think that's some kind of great thing

where we just have all these completely arbitrary rules.

We can't get to it until 59 and a half.

That sounds like they calculated something,

but that's completely arbitrary.

By the way, all the retirement stuff like social security,

I think, what's the number?

The average lifespan was to age, you know,

late 60s or early 70s, and so none of this stuff

is really valid anymore in terms

of how they calculate anything.

- You just made me think of something with the rules

and restrictions with funding a 401(K), even an IRA.

The government sets limitations on how much money

you can put into these accounts,

and I'll give an example of an IRA.

It has been increasing little by little,

but somewhere around 6,000 to maybe as much as 7,000,

depending on your age, because they give you

an exception there too.

If you're beyond 50, you can put a little bit more.

But let's say you have multiple IRA accounts,

because for a lot of people, they've actually

worked one place, then transferred,

rolled over their IRA.

We end up accumulating multiple IRA accounts.

Well, you can only fund up to that maximum,

whether it's 6,000 or 7,000 per year into an IRA.

That's across all your IRAS, so it doesn't matter

how many IRAs you have, you can't fund all of them

up to 6,000 per year or 7,000 per year.

You can only fund one of them or a portion of each

up to that maximum limit.

And I want to compare that to IBC policies.

One of the more common questions that I'll get is,

well, why do I need to start another IBC policy?

And the reason why is because when you have

an IBC whole life policy designed for your situation,

there is going to be a maximum that you can contribute

per year, but here's the thing.

You can, health permitted, qualify for your second

IBC whole life policy, your third IBC whole life policy,

and so on, so there is no restriction,

other than your health and what the life insurance company

will allow ultimately as a death benefit on your life.

We talk about that as human life value.

There is no restriction like with an IRA that keeps you

from putting more money into additional policies.

I know for a lot of people, they really try to maximize

their 401(K) contributions, maximize their IRA,

and then they're stuck.

Now, what else can they do?

Well, here's something hiding in plain sight where,

if health permitted, you can qualify for it,

you max fund your contract for the year.

Well, think like a business owner

is what Nelson would tell you.

He would say, well, if you're running a profitable business,

what should you do with that excess profit?

Expand your business, right?

Open up another IBC policy.

Well, in the world of IRAs, you can do it,

but they're not going to allow you to fund all your IRAs.

Well, this is far superior to any government qualified plan,

and you get to fund it ultimately as much as you want,

up to the point where the life insurance company's

gonna say, hey, we can't give you any more of this stuff.

That's a really, really wonderful benefit to IBC

that you just can't get anywhere else.

- And on top of the benefits, it's also not arbitrary,

where all these rules and regulations

around qualified plans and all that stuff,

it's like, as I was mentioning earlier,

it's just so arbitrary, whereas the limits are hard to reach

with life insurance, but the limits with life insurance

are the opposite.

They are not arbitrary, they're calculated

using actuarial math.

There's a way to calculate it, how much you should have

and how much you can get.

So rather than just having somebody's opinion

on how they came up with whatever number, $18,000 a year,

the life insurance business is the opposite of that.

- I like it, and what I like even more

about overfunding a whole life policy too

is the tax ramification of it as well,

because I know no matter what, whenever I choose to retire,

it can be before age 59 and a half,

I can access that money tax-free with no restrictions,

and that's certainly just another benefit that we get

with an IBC whole life plan.

The tax consequence of that money,

whether we need access to it a couple of months from now,

next year, five years, 10 years or whenever,

it's completely under our control,

and you just can't do that with a tax qualified plan

with the government.

The big take away for everyone listening

is where do you want to warehouse your wealth

in order to reduce and avoid taxes legally

now and in the future?

Compare it to a 401(K) IRA, and I think you'll agree

that IBC wins hands down.

- And you mentioned business owners.

Here's some other strings attached for business owners.

If you want to have one of these qualified plans

for yourself, well, you have to have it

for your employees as well.

So talking about typical sort of accountant type planning,

by the way, not bashing accountants here.

They don't always have the tools,

and they're not brought in at the right time

to provide the right tools, but they'll say,

hey, you should start a qualified plan for your employees,

but guess what, you have to fund that qualified plan.

If you're a business owner, yeah, the money going

to fund your employees' qualified plan might be a deduction,

but you're still paying it, and so it's like from day one

your starting with a negative net balance

because you had to fund all your employees' qualified plans

before you could fund your own.

It's a lot of strings out there.

- So let's do a quick recap on the tax ramifications of IBC.

Here's what we've come up with.

When you fund a properly designed IBC policy,

you're gonna get tax-free growth,

tax-free access via withdrawals

up to the amount you contributed,

tax-free access via policy loans,

and ultimately tax-free transfer of that death benefit

to your beneficiaries.

The way I would sum it up is once you get that money

into a whole life policy, you're never gonna be

taxed on it again, and that's pretty powerful.

- And that gets back to the non-arbitrariness of everything,

because it's life insurance.

So a lot of people look at life insurance

as sort of like a tax shelter or something,

and it's absolutely not that.

It's taxed the way it is because it's insurance,

just like you wouldn't get taxed

if you got in a car accident and the car insurance company

indemnified against your loss on the car.

Well, life insurance is the same thing,

and so all of these things, the tax-deferred growth,

tax-free access, tax-free transfer upon death.

I mean, those are all functions of a non-arbitrary way

of calculating and offsetting uncertainty.

- And wealthy families, banks and corporations

have been utilizing this very unique benefit,

written within the IRS tax code, for generations.

It's there, section 7702.

We would be remiss in talking about taxes and IBC

if we didn't mention that portion of the IRS tax code

that makes all of this possible.

Again, the wealthiest families,

the biggest banks in the world, and even corporations

have been taking advantage of this IRS tax code

to build, grow and transfer wealth.

And if these entities, if these wealthy families

are doing it, you really ought to be thinking about

getting started yourself.

I can't say that any more emphatically than that.

- I was gonna add one more thing.

I was thinking of maybe adding it to the end,

you know, an idea, because is it always about saving tax?

For instance, trying to get into a lower tax bracket

in retirement and sacrificing income,

that's not a great plan just to save some tax.

I was thinking about just making a comment on that.

- Well, there's always the comment, too,

about nobody plans to be poor in retirement,

and essentially what you're doing with a 401(K),

you're basically planning to be in the lowest tax bracket,

and if you achieve that with a 401(K),

you're not where you want to be.

- You are living on cat food.

- Yeah, I mean that's the type of bankrupt thinking

that government incentivizes.

You fund your 401(K) with the hope

that when you get to retirement, you're gonna have

enough to live off of, but simultaneously

you're feeling the pressure of every dollar coming out

being taxed as ordinary income,

and the goal is obviously to be

in the lowest tax bracket possible.

Well, who plans to be in the lowest tax bracket?

What type of planning is that?

- Because that means you're making,

well, the lowest tax bracket is zero,

and you have to earn almost no money to get there,

so is that what we want?

- Or we have this IBC alternative.

- Right, and the strategies that we've talked about before

where, okay, have your 401(K).

It's fine.

Have all of those other investments.

But if you have some actuarial products to add to it,

it's just gonna create more for you.

So it's like, you know, it's kind of a no brainer.

Well, I think this wraps up our episode on taxes with IBC.

If you have any questions, head over, again,

if you haven't heard the announcement,

head over to our brand new website, thefifthedition.com.

We'll have a link to that Lara-Murphy Report article

that we mentioned earlier, as well as

"Becoming Your Own Banker".

You can find that quote in the book.

You can also get a 50% discount on our Whole Life course.

It's a soup to nut course on understanding

whole life insurance, especially as it relates

to Infinite Banking.

And feel free to leave us a review.

All the reviews help us a lot

in terms of reaching and finding new people

that might be interested in this,

so thanks for joining, everybody.

- Likewise.

Thank you everybody.