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ARE YOU TAKING ADVANTAGE OF THE TAX FREE ZONE?

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Picture8Remember the “good old days”  when after-dinner  discussion on Sunday revolved around sports, food, family, and finances? Food was all about the just-eaten meal, sports covered Mickey Mantle vs. Willie Mays, family was about that one annoying relative, and I distinctly remember finances being about smart men putting their money in Municipal Bonds.  As an adult I realize why. Because Municipal Bonds were safe and they were tax free, and setting up an option for tax free income was a smart thing to do in those days.

Somehow, that philosophy of establishing tax free income  became less popular as declining bond values were replaced with the lure of  unlimited upside growth  from the stock market. Slowly and for a variety of reasons, no one really talks about Municipal Bonds Picture9anymore and that moved the conversation away   from talking about tax free income and safety.

However, in an environment of high personal income and capital gains taxes, the importance of tax free income can never be overstated. The more tax free income you can derive, the lower you can drive your tax bracket, and  although wealth managers  convince people that they will be in a lower tax bracket when they retire, the
reality is  that we really will not be in a different tax bracket if we are expecting $150,000 or more of  retirement income. So the question I ask when working with a new  client is “How much money do you have in the tax free zone?”

The tax free zone is where assets grow and are distributed tax free. Municipal Bonds are in that zone, so are Roth IRAs as well as Life Insurance.  As a planner, I use life insurance almost exclusively when planning tax free growth and income. It is a far more flexible asset because it does not have the limits of a Roth IRA nor the low interest rate callability of a municipal bond.

Picture10What if we could target the cash value build up (as best as one can target when determining future values) so that the cash withdrawals from the tax free insurance can be withdrawn to pay future taxes on retirement income, which are usually high? What impact would that have?

Furthermore, if we believe that the stock market will keep growing, would it not be a  good idea to hedge our stock market investment from negative growth?

We found three extraordinary outcomes when we started putting people in the tax free zone:

 First, a well planned out insurance contract can end up paying the income tax on retirement income at a huge discount and withdrawal streams can last longer because of their tax free nature. When you do not pay taxes on income, you do not have to withdraw as much money from retirement accounts.

Second, by creating tax free income, we were able to keep incomes high and tax brackets lower. This was an extraordinary reality; taking the tax money you did not pay the government in the form of a tax deduction, start your tax free account creating future tax free income while lowering your tax bracket.

Third, we were able to hedge against loss.

Based on these results, Goldwater Financial created ” Planning in the Tax Free Zone” which takes a deep look at how our clients grow their money and what the tax outcome will be. We are creating tax deductions through pension contributions and using the tax savings to start alternative insurance programs that will create tax free income in the future. All of these tax reduction ideas are folded into the Tax Free Zone style of planning.  If this type of planning intrigues you, then contact us at  617-527-9736 to learn more.

 


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