Do you remember the headlines from last year? Because of an information leak in June, we saw that the richest people in the world — people with hundreds of billions of dollars —had paid very little income tax.
Many were outraged that the two richest men on the planet (Jeff Bezos and Elon Musk) were paying very, very little in taxes. They assumed that there was a crazy tax loophole being utilized and that they had discovered complicated strategies to avoid their tax burden.
But the truth is: what they did was actually very simple.
Okay, imagine with me that you were able to create a multi-trillion-dollar company from scratch and build it up into on of the biggest and most powerful companies on the planet. That would be fun, right?
Admittedly, that part probably wasn’t simple.
By doing that, they accumulated a massive amount of wealth in the form of stock that they owned in their own company.
When the time came to receive income, they had a choice:
Were they going to receive income in the form of a salary like the rest of us? If they did that, they'd get taxed at a 50% income tax rate, or maybe even 60%, depending on what state they lived in.
If they took a salary, they were going to lose more than half of that to taxes.
They chose not to do that.
The other way that they could take their income was in the form of stock options.
They both chose that option.
So, as they built their wealth, their net worth was completely tied to the stocks that they owned and the stock options that they'd take as compensation.
As that stock grew, they weren't being taxed on it because they weren't actually selling the positions.
As the law still stands today, they will never get taxed on this wealth unless they actually sell.
So, why would they sell it?
Instead, they simply go to the bank, ask the bank for a loan, borrow from that bank, and use their stock, their holdings, and their options that they have as collateral to secure that loan.
They might pay 2% to borrow that money rather than paying 15% or 50% in the form of income tax. That’s how they’re getting their money completely tax-free. It's very simple. There are no tax loopholes.
Now, let’s transition and I’ll show you exactly what you can do in order to get a similar result without having billions at your disposal:
There are three different ways you can orchestrate a similar plan.
In fact, you might already be building wealth in these areas to get tax-free income in some form for today or for your retirement years.
The first way is pretty common, and you may have already done this:
First, you have to purchase a home.
Second, you have to build up equity through principal payments and the asset growth itself.
Then, when you need some money, you go to the bank and get a reverse mortgage.
You use your house as collateral, you borrow from a bank, and they give you income from the equity on your home completely tax-free. This is something that millions of Americans do every single year.
Please note that there are some downsides to going this route. It's not actually that simple. For one thing, if you're too young to do a reverse mortgage, you actually have to qualify for a loan. If you’re in a spot where you really need money the most, you might not be able to qualify for a loan. So, there's a limitation on the liquidity of that plan.
There are also some other downsides to reverse mortgages, it seems that there are always strings attached somehow, and many people are just scared about what could happen because they’re tying this to their home, so they don’t pursue this option.
The second way that you can get tax-free income is through regular investment accounts, similar to the way Bezos and Musk did.
You first have to fund and buy some sort of investments, whether they’re mutual funds, stocks, or bonds, you have to buy something.
When these accounts grow, they might be taxed, or they might not be taxed. It just depends on what type of investment you have. But it must be a non-qualified account, as you can only do this with nonqualified accounts.
Then, it's simple. Once you want that money, instead of selling those investments that might have gained a substantial amount of growth over a period of time, instead of cashing them out and paying taxes, you just simply go and borrow money from the investment company on margin and get a tax-free loan. This loan gives you access to cash and does not require any taxes to be paid on that money. Super simple, right?
Many people are in a position where they can do this right now.
But again, there are some downsides.
There's the inherent risk in the investments themselves. Also, the amount you can borrow is limited because these investments can go down if the stock market crashes, and then you can suddenly have a margin call, where you’d have to pay that money back right away.
Going this route is not for everybody simply because of the level of risk involved in this type of transaction.
The third way that you can do this, and this is accessible to almost anybody, is through cash value life insurance.
Cash-value life insurance, specifically indexed universal life insurance (IUL) is a way that anybody can get started with tax-free income.
I first started my IUL in 2001. That was twenty years ago, wasn’t it? Time flies! I've been able to build up quite a bit of wealth inside one of these policies.
The key is it must be maximum funded.
What this means is that this is not your normal insurance policy, this is not the normal policy that you go out and buy. It has to be specifically designed with the intent of doing exactly what we're talking about. It has to have the minimum amount of death benefit, so the costs are as low as possible, and you have to pay the maximum premium every single year so that you can build up wealth inside one of these vehicles.
By doing this, you grow your money completely tax-free.
I started my policy in 2001 with $165 a month payment and a 180K death benefit, this was the minimum at the time. My goal was to create a tax-free liquid savings that I could eventually use for tax free income.
Once I had wealth built up inside of that account, I was able to use the policy to build wealth outside of the account.
For example, in 2009, while stocks were down as much as 70%, I used a loan from my policy to purchase financial stock. I took out a loan and the insurance company charged me 5% to use their money tax-free. I used the tax-free loan to the purchase stocks.
Four years later, I sold those stocks for over 100% gain.
This allowed me to put the money I used to buy the stocks back into the policy and then we were back on track with our long-term tax-free retirement income goals as well. This money was loaned to us at 5% and we earned 7.5%, this gave us a spread of 2.5% on that transaction while, at the same time, we earned over 100% on our financial stocks.
From there we transferred the policy in 2014 to a different company. This was a tax-free transfer- to a new company in 2014 due to new indexes that had much higher earnings potential – these are the same ones we are using today. We also needed a new policy because our incomes had increased and we wanted to increase our monthly deposit/premiums to $1,000 per month.
If we fund $1,000 a month from 37 to age 65 and with an assumed rate of return @7% we are looking forward to a $102,239 annual tax-free income.
That being said, if we deposit a total of $387,000 over 45 years (age 24 to 65), we’ll have over $1M in tax free cash values at age 65. We can then use that to receive a $102,000 tax free income to age 91 (life expectancy). That produces a total of over $2.5M in tax free income and STILL has a Death benefit of over $700k tax free for our family, charity, children, and grandchildren.
I've never paid a dime of taxes on any of the wealth that I've grown within my insurance policy.
When it comes time to access the money, I can do it completely tax-free. It's simple. You use your cash value as collateral, you borrow money from an insurance company, and the money you borrow is totally tax-free.
We've talked about the way that Jeff Bezos and Elon Musk did it to a scale and scope that none of us probably can ever achieve, but I've also shown you ways that you can do it yourself. But there's a common theme in all of these: you first have to build up wealth.
Some of these paths are easier than others.
The insurance policy is the easiest because it requires the least amount of capital, but you first have to build wealth. Once you build that wealth, the second thing that you have to do is you have to be able to use it as collateral. You have to be able to use that asset as collateral. As long as you can do that, whether you're Jeff Bezos or Elon Musk, or whether you have one of these types of accounts, including an insurance policy, then you can collateralize it, and you can borrow against it, and you can get income completely tax-free.
If you have any questions at all, reach out! We're here to see you thrive no matter what the future holds!