Tax-Free Retirement Made Simple


A Look at the Options for Tax-Free Retirement Income

By Charlie Matejowsky, CIC, LUTCF

Living in a time when our national debt is over 18 trillion dollars is frightening. There are only two ways to get rid of that debt—either cut spending or increase taxes. When was the last time that Congress truly cut spending? (I don’t remember either!) With a high probability that income taxes will rise in the future, it becomes even more frightening to consider retirement planning.

When you consider that most of the retirement plans—whether corporate or individual—will require you to pay income tax when you take a distribution, you have every reason to be frightened. Wouldn’t it be nice to have some retirement money on which you did not have to pay taxes? Believe it or not, it can be done.

Actually, there are three sources of tax-free retirement income: 1) municipal bonds, 2) Roth IRAs, and 3) cash value life insurance.

It is true that municipal bonds gains are received tax-free, but a little-known fact is that they do count as provisional (threshold) income, which can mean that up to 85% of your Social Security benefit could be taxed. These bonds are grouped with other substantial income including wages, interest, dividends, pensions, IRA distributions, CDs, money market funds, U.S. treasuries, mortgage certificates, capital gains, tax-free bonds, and even your Social Security benefits.

If you are single, Social Security income is taxed when your threshold income exceeds $25,000. For income of $25,000 to $34,000, up to 50% is taxed. Over $34,000, up to 85% of Social Security income is taxed.

If you are married and filing jointly, Social Security income is taxed when your threshold exceeds $32,000. For income of $32,000 to $44,000, up to 50% is taxed. Over $44,000, up to 85% of Social Security income is taxed. ( is an excellent website for folks wishing to learn about their Social Security benefits.)

It is also true that Roth IRAs can be received income taxfree and they do not count as provisional income, hence they do not make one’s Social Security benefit taxable. They do, however, carry some rules and guidelines that make them ineligible for some people. These include:

  1. A contributor must earn compensation in the year in which they contribute.
  2. Income cannot exceed certain levels (in 2016 single filers can make full Roth IRA contributions if their income is below $132,000 and married couples filing a joint return can make full Roth IRA contributions if their income is below $184,000).
  3. The maximum contribution for 2016 is $5,500 ($6,500 if 50 or older by the end of the year).
  4. Contributions are non-deductible and qualified distributions are not included in gross income. To be a tax-free qualified distribution; a) the distribution must occur more than 5 years after the first contribution to the Roth IRA; AND b) the individual most be at least 59½ years old.

( is also an excellent website for folks wishing to learn about all of the Roth IRA rules and guidelines.)

This leaves cash value life insurance as the simplest form of tax-free retirement money.

The Internal Revenue Service turns 103 years old in 2016 and, from the beginning, life insurance, because of its intrinsic value to families and business, has been afforded benefits that are not totally available with other retirement income sources. Life Insurance, of course, provides valuable death benefit protection. If one is looking to secure their retirement years, it may be time to consider the tax advantages and growth potential of life insurance.

A properly designed cash value life insurance policy can provide:

  • Death benefit protection
  • No contribution limits—unlike 401(k)s, traditional IRAs, or Roth IRAs
  • Tax-deferred cash value growth
  • Supplemental retirement income through tax-advantaged loans and/or withdrawals (actually, you don’t have to wait until retirement to access the cash value)
  • Cash flow that will not increase your overall tax expense of government programs like Social Security and Medicare

Examine the chart below to see how life insurance can fill the gaps of a retirement portfolio.

(Click to view larger image.)

Looking at the taxes for qualified plans versus life insurance really puts things in perspective:

Top Income Tax Rates for 2016
Top Rate
Taxable IRS & Roth Conversions
Short-Term Capital Gains
Long-Term Capital Gains
Interest Income
Qualified Dividend Income
Qualified Roth Distribution
Life Insurance Loans and Withdrawals (FIFO)
  • 2016: top tax bracket also adds 3.8% surtax to investment income

I ask again: wouldn’t it be nice to have some retirement funds on which you don’t have to pay income tax? Well here they are! Consider a Roth IRA or a life insurance policy to fund your retirement.

Learn More, Earn More

Life & Benefits Essentials

Attend a CIC Life & Health Institute to learn more about life insurance and annuities in retirement planning. The CISR Life & Health Essentials Course offers a more basic approach to these subjects. Life & Benefits Essentials, available from The National Alliance Research Academy, is another excellent resource for information on life insurance and retirement planning.

Charlie Matejowsky, CIC, LUTCF, is Vice-President of financial services for Van Dyke, Rankin & Co. in Brenham, TX. His brand is “Retirement Repairman” and he serves both group and individual clients for life and health insurance. Charlie has over 30 years of insurance experience, plus 15 years as a classroom teacher and football coach. He is also a CIC mentor, and Ruble and CIC National Faculty member.

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