Episode 15: Taxes in Retirement- Look Before You LIRP!
In this 4-part series on taxes in retirement we have been highlighting the concepts of Author David McKnight’s best-selling book titled “The Power of Zero.” If you read that book, many of you were probably the least familiar with the LIRP.
The LIRP is a retirement tool that merits a thorough screening. It’s often sold as an end all, be all perfect retirement tool. For some it works well and for others it makes no sense whatsoever (in my humble opinion.)
On todays show, we’re going to do a deep dive on this retirement tool, explain the basics, go over some of the things to look for and some of the things to avoid when thinking about adding this as part of your overall retirement income strategy.
Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you’re a client I can’t give you advice because I don’t know you. Think of this as helpful hints and education only! And please, before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser.
(2:00) Practical Planning Segment: Today we are taking a deeper look at the retirement planning tool commonly referred to the LIRP, which stands for the Life Insurance Retirement Plan.
As a follow up to the book titled The Power of Zero, the author David McKnight wrote, “Look before you LIRP.” Again, I think he did a really good job of explaining this tool and highlighting the pros and cons of these products and what to really look for before you purchase one of these. McKnight talks about that if you decide the LIRP makes sense for your retirement income plan you must really think of this a long-term arrangement! In the book he actually compares this to a marriage!”
Just like a marriage, you shouldn’t rush into it blindly or haphazardly. The LIRP is a long-term proposition so in short you must do your due diligence and LOOK before you LIRP!
(4:00) Let’s go over some of the pros of the LIRP:
On the surface, it may sound like the perfect retirement tool. However, as I mentioned many times, it may make sense a part of an overall income plan along with your 401k or IRA, the Roth IRA, ROTH IRA conversions… all working together in retirement to get close to a zero percent tax bracket!
(10:30) Some important things to look for IF someone thinks adding this tool makes sense as part of their plan:
(13:30) Now that you have your list you can start looking at all the options available. The main differentiating characteristics of LIRPS is how the accumulation (growth of the account) grows over time. There are essentially 3 different options:
(18:00) All 3 options have one or more of the essential qualities, all 3 may help you get to the 0% tax bracket. But only ONE has all 4 of the essential characteristics I mentioned earlier. It is called indexed universal life or IUL for short. There are many companies that offer these but within each of these, there are other important things to consider. Such as:
(21:30) Let’s go over the basics of how a LIRP can work as part of your overall income plan; the basic idea is you are using life insurance for funding tax free income withdrawals in the future rather than using life insurance for the death benefit. You are essentially turning the traditional idea of life insurance on its head.
Your goal is to grow the cash value of the policy as much as possible in a safe and productive way, keeping fees low by purchasing as little life insurance as possible.
I mentioned earlier the IRS requires you to buy a certain amount if Life Insurance based on the amount of your premium payments. A minimum Death Benefit (DB) if you will. You can’t fund a life insurance policy with a zero Death Benefit, the IRS will not allow that.
On the flip side, the higher the Death Benefit, the higher the fees in the policy. The DB is what the insurance charges fees for and the higher it is the more fees you pay. Remember, one of the characteristics of the ideal LIRP is low fees, so we need to keep the DB as low as possible.
(24:00) The amount of the DB will be determined by how much you want to put into the LIRP each year. There is no contribution limit. So, when you initially set up the LIRP you designate how much you want to invest each year. The Insurance company will then determine the minimum DB required by IRS guidelines.
Full disclosure… I personally have a LIRP as part of my overall plan and many of our clients have them as well.
(31:30) If all goes well with the plan, then you can possibly create 4 tax free streams of income:
Next week we will go over some of the popular myths regarding LIRPS and well finish up our conversation of doing your best to create a tax-free retirement!
(35:30) Coaching segment: This week’s coaching segment is to order the book by David McKnight titled LOOK before your LIRP. (https://www.lookbeforeyoulirp.com/)
I want you to read the book and come up with some questions for a future show on the LIRP. Our next series after we finish up next week’s episode will be another Q&A series; here are a few ways to send us your questions!
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