Turn every dollar of your investment income into tax-free income.
The term “tax-free” always has a nice ring to it. The higher the income tax rate, the nicer the ring. Previously, the maximum federal income tax rate was 35 percent, and that was bad enough. At 39.6 percent, the current rate has created a flurry of activity among high-income earners to legally avoid paying it.
And there is an additional surtax on passive investment income that can bite you for another 3.8 percent. Plus, your home state may impose an additional income tax. Some, like Nevada and Florida, have no income tax, while others charge killer rates: New York at 8.82 percent, California at 9.3 percent and Hawaii at 11 percent. So, if you have a large amount of investment income, your tax burden can range from a low of 42.4 percent to as high as 53.4 percent.
That is a worthy target to make tax-free. How? Private placement life insurance (PPLI). With a PPLI, you put after-tax dollars to work in the form of an insurance premium. There are two components to a PPLI account—one is a tax-deferred investment, and the other is an insurance benefit.
Let’s review how your wealth accumulation is impacted by a taxable vs. tax-free scenario. The following example was created by Lewis Schiff, an Austin, Texas, lawyer:
Joe, 45, owns a PPLI policy and will pay $2.5 million a year in premiums for five years. The assumed rate of return is 10 percent (net of investment/management fees), taxed as ordinary income at 40 percent (including federal and state taxes). This table illustrates the results: