What Is The Cash Value
Your life insurance policys premium payment is invested in a tax-deferred, investment-like savings component called the policys cash value. The precise quantity that goes into savings is determined by your policy and the cash-value accounts growth over time.
After youve kept the cash value for a certain length of time, or after it accumulates a specific amount, you can withdraw money from it or take out a loan against it to receive tax-free income in retirement.
Ii Wealth Maximization Goal
If building a huge retirement corpus before you retire is your goal you need something which:
a. Allows you to invest aggressivelyb. Has active portfolio management optionsc. Offers long-term holding option
Invest 4G from Canara HSBC Life Insurance Company is one such plan. The plan also offers bonus additions for long-term investors.
How Much Do I Need To Save For Retirement
If youre wondering how much you need to save for retirement, there is no right answer, as it differs from one person to another. Moreover, while a specific savings amount might be sufficient for you, it might come close to nothing for the next person. However, there are some aspects that you can evaluate to figure out how much you should save for your retirement years, which are:
- It goes without saying that the earlier you start saving, the better. Therefore, start by considering your age when you start saving. For instance, if you are 30 years old and investing around 20-30% of your monthly income, you will be able to save sufficient funds.
- Next, evaluate your monthly expenses, credit card bills, EMIs, and other daily expenditure so you can get by with your savings comfortably during retirement.
- When it comes to retirement planning and savings, it is also vital to consider all your long-term investments, as it will give you a clear idea of how much savings will be sufficient once you retire.
- Lastly, think about the lifestyle you wish to lead post-retirement. For instance, if you plan on travelling/exploring new countries after retirement, you might need a larger savings fund. However, if you wish to stay indoors and spend time with your loved ones, you can get by with less. Regardless, it is crucial to have sufficient financial backup for emergencies.
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Consider Maxing Out Other Vehicles First
This doesnt mean that no one should consider funding their retirement through life insurance. Vistica suggests that if youre already maxing out other retirement vehicles such as 401s and IRAs and have a life insurance need, you might be a good fit.
But Im not a big fan of using life insurance to help fund retirement, he says. Life insurance should first be viewed as a way to protect your family or business if something were to happen to you.
If youre older and have a high net worth, youll reap the most tax savings from life insurance withdrawals, although as Buerger notes, Tax savings are still tax savings.
If you dont need life insurance yet and havent reached your peak earnings, youll get a better deal with a Roth IRA. And if youre not contributing the maximum to your 401 and IRA, consider working these into your budget before branching into life insurance.
About the author:Alice Holbrook joined NerdWallet in 2013 and is an editor on the home/mortgages team. Her work has been featured by USA Today, MarketWatch, Newsweek and The Washington Post.Read more
Creative Retirement Tax Strategies
The number of effective tax-saving strategies is only limited by your creativity. There are more effective strategies, but I believe these are the 6 most effective that almost anyone can do.
Your goal is to receive the cash flow you need for your desired retirement lifestyle, while paying the least possible tax on it.
You can effectively decide your own taxable income. You can plan to be in low tax brackets, avoid the clawbacks, and possibly qualify for GIS.
You have many tools to use in creating strategies. Your tools include your mix of RRSPs and TFSAs, deciding how much to withdraw from your RRIF, TFSA and investments each year, investing tax-efficiently for deferred capital gains or dividends, using tax-efficient withdrawal strategies such as SWPs, using T-SWPS to defer capital gains, deferring CPP and/or OAS to age 70, starting CPP early at age 60, deciding on the best time to convert your RRSP to RRIF, accessing your home equity, contributing to your RRSP or cashing in some RRSP before you retire, and the 8-Year GIS Strategy.
If you had a salary all your life, you may have had limited tax deductions or tax saving strategies. When you retire, it is completely different. You have many options, especially if you plan for them before you retire.
This article originally appeared in the January 2018 issue of the Canadian MoneySaver .
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Things To Consider When Buying A Lirp
When using a LIRP investment as a retirement income tool, there are some things that youll need to consider. First, youll want to give the plan several years usually at least ten to fifteen to grow.
Also, you have to be careful not to overfund a LIRP policy and have it become what is referred to as a modified endowment contract or a MEC. A MEC is a life insurance contract that is essentially changed when the cumulative premiums that have been paid into the plan during the first seven years of the policy are more than the amount thats needed to provide a paid-up policy based on seven statutorily defined level annual premiums.
These plans are what the IRS deems as being too cash value-rich and if it is established that a policy is a MEC, then it will no longer be allowed to have favorable income tax treatment.
Another thing to note here is that, even though some policies might not be tax-deductible, there might come situations where the beneficiary is taxed on some or even all proceeds. That generally happens when the beneficiary decides to hold the cash value policy after their death. Tax-free death benefit applies to accounts that are paid out immediately after death.
On a similar note, accelerated benefit riders pay interest while theyre alive.
Different Type Of Pension Plans
There are different types of pension plans that you can choose to multiply your savings. Very importantly, before choosing an appropriate type of pension plan, you must first prioritize your financial goals.
According to your long-term financial goal, you can choose one of the types of pension plans given below:
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Tax Benefits In Retirement Plans
When you invest in a retirement plan, you get tax benefits in many different ways. They are –
- Tax Rebate Under Section 80ccc: If you pay a premium for an annuity plan, you can get a tax refund of up to INR 1.5 lakhs a year under Section 80C of the Indian Income Tax Act.
- Tax Rebate Under Section 80d: Some riders, like the critical illness rider, give you more tax breaks under Section 80D. Attaching these riders to your retirement insurance policy gives you tax breaks under Section 80D because it includes a health insurance component.
- Tax-Free Death Benefit: If you die during the policy’s accumulation phase, your beneficiaries will receive a death benefit. This won’t cost you anything in taxes because, in India, all life insurance payouts, especially those made after the policyholder dies, are tax-free. If you die during the policy’s accumulation phase, your beneficiaries will get a death benefit. This won’t cost you anything in taxes because, in India, all life insurance payouts, especially those made after the policyholder dies, are tax-free. The pension annuity you get when your pension vests is, however, subject to taxation at your marginal rate.
Defer Converting Your Rrsp To Do The 8
You can get up to $10,500/year of Guaranteed Income Supplement tax-free from age 65 to 72, if you have no taxable income other than OAS. You can still receive non-taxable income, such as from your TFSA or investments.
This is a cool strategy if you have enough in your TFSA or non-registered investments to give you income for these 8 years. You could plan for this by cashing in some RRSP before you turn 65 to maximize your TFSA or build up non-registered investments.
You could also get income by withdrawing from a secured credit line on your home during these 8 years.
To qualify, you could delay converting your RRSP to an RRIF until the end of the year you turn 71. You can also delay starting your CPP until age 70.
You could also make a large RRSP contribution before age 65 and defer the deduction until you need it during these 8 years to give you the maximum GIS.
At age 72, you have to start withdrawing from your RRIF, but you will still receive GIS for one more year since it is based on the prior years income. You will likely lose some or all of your GIS after that.
Deferring CPP to age 70 means you get 42% more CPP for the rest of your life. Delaying converting your RRSP gives it an extra 8 years to grow, during which time it could nearly double.
The 8-Year GIS Strategy can mean you have a much more comfortable retirement after age 71.
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How Insurance Can Create Tax
Ive got some good friends who are insurance advisers. If theres one thing they have in common, its that theyre persistent. Maybe youve heard the story about the executive who met with an insurance adviser. You ought to feel privileged that Ive agreed to meet you today, the executive said. So far today, Ive had my assistant turn away eight insurance salespeople, he continued. Yes, I know, the adviser replied, Im all of them.
Insurance advisers often get a bad rap because they tend to be so persistent. But Ive always believed that insurance can be an effective tool so be kind to your insurance adviser. Today, I want to share an idea involving insurance that can provide a tax-free source of cash flow in retirement.
Many people are lamenting the performance of their investment portfolios this year. The concept Im going to share can provide cash flow in retirement without subjecting your retirement savings to the volatility of the markets. Im not suggesting that traditional investments should be abandoned, but you might want to supplement your current retirement savings with this insurance-based strategy.
Now, this couple is investing $100,000 annually in the strategy, for 10 years. Thats the amount of their insurance premiums. While thats a pretty big figure for most, well use it for the sake of simplicity you can adjust for your own situation.
Is A Lirp A Good Investment
A LIRP is the best life insurance policy and retirement plan youve never heard of . Other than a ROTH IRA, theres arguably no better investment for retirement.
Even compared to a ROTH, LIRP has many advantages and an argument can be made that this cash value life insurance is a better option.
Weve already touched on some of the advantages of permanent life insurance policies above but here are a few more bullet points.
Permanent Life Insurance Policies Can Help
- Avoid Potential Tax Consequences As permanent life insurance policies, LIRPs can help retirees avoid taxes on future withdrawals without jeopardizing their growth potential or liquidity. LIRPs allows for the tax-deferred build-up of cash value.
- Avoid Market Risks LIRPs can provide an alternative investment strategy for retirees whod like to mitigate market risks without sacrificing the growth potential or liquidity of their retirement accounts.
- Be More Financially Flexible Besides offering certain tax advantages, LIRPs also provide portfolio diversification features that can allow retirees considerably more flexibility over their investments.
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I Regular Income After Retirement
Regular income post-retirement means you need a safe investment option, which can:
a) Guarantee a long-term income streamb)Life cover or income continuity for the spouse after your death
Guaranteed Income4Life and Smart Future Income from Canara HSBC Life Insurance Company are two such plans. You can invest up to 10 years before you need the income to start.
Life Insurance Retirement Plans Vs 401s & Iras
Regardless of the life insurance policy, your retirement should still be funded through a dedicated retirement account like a 401 or an IRA. Cash-value life insurance has fewer investment alternatives and lower rates of return when compared to a 401 or IRA.
|Contributions are not tax-deductible|
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Eligibility Criteria For Pension Plans
There is an age requirement to meet when buying pension plans in India, much like every other investment plan. A pension plan can be purchased for someone who has reached the age of 18. A maximum age limit for purchasing a Pension Plan also exists. Most insurance providers have set the maximum age limit at 65-75 years old.
Convert To A Roth Ira Or Life Insurance
Tax-savvy investors want to pay as little income tax as possible. Converting to a Roth IRA allows you to make smart tax moves that will save money in the long run.
Converting to a Roth IRA will guarantee that you will owe no additional income tax on the converted funds and any money those funds will earn before you withdraw them during retirement. The balance in your portfolio will be what you can tap in retirement, and you won’t have to calculate an after-tax balance.
OK, so, we have a good argument on why we should do a Roth conversion on our qualified money, but why would we use life insurance as an alternative? And not just any life insurance policy will work well for this specific use. We need a type of policy specifically designed for this purpose. Life insurance policies are built differently, although in all cases the tax-free death benefit is the central focus and feature. The following is a list of reasons to consider a fixed-index universal life insurance policy as a Roth IRA conversion alternative.
Self-completing death benefit: This is an insurance product, and ultimately, the thing you are insuring is of utmost importance. If you die too soon, this provision will help protect the ones you love.
Zero tax: Distributions from the cash value of the life insurance policy are taxed the same as a Roth IRA but without the 5 year wait. Distributions can be made by withdrawals up to the cost basis or you can take a policy loan tax-free at any time for any reason.
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What Is Retirement Planning
The process of deciding your income goals for life post retirement, as well as the actions and decisions required to meet those goals, is known as retirement planning. Identifying sources of revenue, estimating costs, putting in place a savings plan, and controlling assets and risk are all part of retirement planning.
Your retirement plans can begin at any time, but it is most effective if you incorporate them into your financial planning at an earlier life stage. That is the most effective way to ensure a comfortable, stable, and enjoyable retirement.
Can You Fund An Early Retirement With Life Insurance
There are several ways to fund an early retirement, and life insurance is just one of them.
With permanent life insurance, you can take loans or withdrawals at any age, and there are no taxes due unless your withdrawals exceed your basis, which is, generally, the amount youve paid into the policy. However, other strategies, such as a Roth IRA or taxable brokerage account, allow you to withdraw funds before age 59 ½, and they dont require you to pay interest to access your money or keep funds in reserve to avoid a policy lapse.
For example, with Roth IRAs, you can withdraw your regular contributions at any time with no taxes or penalties. If you have money in pre-tax retirement accounts, you can establish a series of substantially equal periodic payments, also known as 72 payments, to avoid early withdrawal penalties. Alternatively, if your employer offers a 457 plan, you might be able to take withdrawals with no early withdrawal penalty.
Your taxable holdings generally are available at any time, and if you take long-term capital gains, the tax implications might be acceptable. Explore your options with a CPA because tax laws periodically change, and mistakes can be expensive.
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How Does This Strategy Work
Instead of drawing income from investments that are fully or partially taxed during retirement, your clients can help keep their tax bracket down by integrating distributions from cash value life insurance into the mix. By purchasing life insurance, your clients can protect their families and potentially build policy cash values. At retirement, they can take tax-free loans or withdrawals from the cash value to supplement their retirement income, thus helping to minimize their taxes.
Who Should Invest In Retirement & Pension Plans
Simply put, if you see financial security as a crucial part of your future, you should begin retirement planning and invest in a pension plan. Of course, since each person has a unique financial profile, the details of it may differ. However, anyone who meets the following points of reference should consider investing in the best pension schemes in India.
- You want to ensure that your partner has a financially stable life while you are away.
- You want to set up a fund to cover potential high healthcare expenses.
- You want to keep your current lifestyle after you retire.
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