Is Tax-free Retirement Really Possible?

With so many options for retirement these days, it is easy to become overwhelmed.  From 401Ks and  SEP IRA’s to annuities and life insurance, the options seem endless.  In my quest for knowledge about which of the various retirement options might be right for me, I stumbled across a very interesting book by author Patrick Kelly, Tax-Free Retirement.  Is this guy for real? I mean come on, you know what they say, the only two things in life that are certain are death and taxes.  Honestly, I was skeptical; I had a hard time believing, as Kelly claimed, that one could actually retire without having to pay ANY taxes. However, my curiosity overcame me and I bought the book.

Tax-Free Retirement was both interesting and informative; so much so that I read it in one day.  Here is the premise:  Kelly urges investors to put their money into IUL’s.  What is an IUL?  Indexed Universal Life Insurance.  Basically, it’s a life insurance policy with a low risk investment account attached.  Low risk you say?  Yes, and here’s why: money is not directly invested into the stock market, but earns money based on an index that follows the market.  Since your money is not actually in the stock market, you can never lose it.  However, at the same time, your money will not earn as much interest in an IUL, because the lower interest rate is used to off set any losses in a market downturn, therefore ensuring that no money in the IUL is ever lost.

So where does the tax free part come in?  Well, unlike a 401k, the money you invest in the IUL is after tax dollars, not tax deferred. One of the typical selling points of 401ks is that the investor gets a tax break on the money he contributes.  Kelly emphasizes that what most people don’t realize, is you pay significantly more taxes on the back end due to 1.) compound interest that has helped your money grow, and 2.) people at retirement age generally have less deductions (ie. no mortgage/no dependents) to offset the taxes they now have to pay on their 401k withdrawals. 

When you decide to access the money you take out a tax free loan, as loans do not incur taxes since they are not true income.   These loans are fully accessible with no age or usage restrictions after only 10 years, unlike a 401k which has restrictions and penalties if the money is accessed prior to age 59 1/2, as Kelly repeatedly points out. 
Curious as to just how much money you might be looking at? IUL companies have illustration software that will show you, based on your age, how much money you invest annually, and how many years you will need to access the funds during retirement, approximately how much money you can loan to yourself tax free.  “What about paying the money back?” you’re probably thinking. “It’s not really tax free retirement if you have to worry about repaying the loan”.  Well, here’s where the life insurance part comes in.  You never actually have to pay the money back in your lifetime, because when you die the life insurance policy pays back all of the money you borrowed, any interest you accrued, AND pays you a death benefit (as does a typical life insurance policy).  Not a bad deal in my opinion.