This is a follow up to a previous post, How to Legally and Ethically Stop Paying Income Tax, about the importance of getting all income into a tax-free environment. This post will discuss how to make all qualified money tax-free.
Let’s say you have $100,000 in an IRA, or an old 401(k) that you control. You are much younger than age 59 ½ years and you are in a 20 percent tax bracket. The goal here is to not pay 10 percent penalty for early distribution.
The IRS rule on this stipulates that all tax-deferred accounts are locked into the investment until the money “matures.” Typically money in these accounts matures when the investor turns age 59½. Any and all funds taken out of thee accounts prior to their maturity date are subject to 10 percent prematurity fees in addition to any income tax incurred by the withdrawal. Section 72(t) essentially allows investors to forgo the 10 percent fee by making a series of substantially equal periodic payments.
Here is an example in plain English: Using the 72(t) rule, a person age 52 with $100,000 can withdraw $3,981 each year until age 59.5 and not pay the 10 percent penalty. The money can be spent on anything you wish. If you want, use some of this money to pay the income tax on this $3,981.
Other ways you could spend this money?
- Deposit into a whole life insurance policy and keep it in a tax-free environment for the rest of your life. This money can be used over and over again as needed.
- Pay down debt and save interest expense.
- Invest this money and attempt to make more.
Whatever you want to use this money for, at least it isn’t compounding your income tax for the future. In future blogs I will show how to properly structure a whole life insurance policy to maximize its benefit to you while living.