What is the largest item in your monthly budget?
If you said, "my mortgage" or "my grocery bill" you'd most likely be wrong. The correct answer for the vast majority of Americans is "my tax bill!"
By the time you finish with your Federal and State returns, property taxes, sales taxes, hotel taxes, phone taxes, cigarette and liquor taxes, etc. you've really forked over a hefty sum to our benevolent governors.
Is there anything you can do to soften this tax burden? Yes! I have written in the past about the three main vehicles used for sheltering investment growth from future taxation: (1) Municipal Bonds, (2) Roth IRA's, and (3) Life Insurance. In this case study I want to take a look at the beauty of life insurance as a tax-shelter.
"Wait a minute, Larry! I have a great tax-deferred, employer sponsored 401-k. I know that this money is not taxed, and it will grow that way. I don't have to pay taxes on this money until I retire. So there...", you might say.
But hold on there, buckaroo. Here's what the government doesn't want you to know: Tax qualified plans don't avoid taxation. They just delay it. And eventually that tax bill will be worse...much worse.
Let's suppose you put away $100 a month into your 401-k for 30 years. Assume you earn an average of 10%. You'll end up with a little over $226,000. Using a conservative 20% tax rate, you will have saved $7200 in taxes over those years. Sounds good, huh?
Now you retire and begin drawing on the money. At the same 20% rate you'll now owe more than $45,000 in taxes. At a 40% tax rate you'd owe more than $90,000! Reducing taxes was your goal. How well did you do? You will have effectively spent $90,000 to save $7,000.